Some Thoughts On LCL

Got some comments on Update On LCL

stormillionaire said...

• So what's your view on this Moola?. TA's call or CIMB's outlook? They're night and day.

Hello,

Do understand I am not an investment advisor. Ok?

And I have no idea whether a stock price would go up or down.

What I can do is, I can chat and offer you some flawed views on certain issues.

As it is, for LCL.

Fact it, it's last quarterly earnings it reported massive losses. That is a fact.

It reported its audited earnings late. That is a fact.

It's main cash cow is Dubai. That is a fact.

Dubai home prices has crashed some 41% for the first 3 months of the year. That is a fact. (see Dubai's House Prices Drop 41% In Q1!! )

Would the property crash in Dubai have a huge impact on LCL? Take a look at CIMB's own report (second picture) and figure out how much Dubai means to LCL.

Why is Dubai important?

This is LCL's last reported quarterly earnings: Quarterly rpt on consolidated results for the financial period ended 31/12/2008

It reported net quarterly losses of 17.389 million.

It's main customers, from Dubai, is being hit by a property crash. Needless to say, this would be bad for LCL's business.

Here is a screen shot of their balance sheet taken from the quarterly earnings notes.

Have a look at where I had inserted arrows.

1. Inventory is blown up compared to a year ago.
2. Trade receivables is blown up too.
3. Amount due from customers for contracts work is up.
4. Their own cash - depleting.
5. Their borrowings had sky rocketed.

Now, I would wonder.

I always do wonder.

Since their main customers from Dubai is having a property crash, isn't this exactly why the amount due from their customers is sky rocketing? Well I would ass-u-me and guess that LCL's customers is having problem with payment.

And then look at the trade receivables.

Huge amount.

Concern always is if the trade receivables goes bad, the company would have to declare them as bad debts, which means it would have to end up as losses.

Inventory build up is no good either.

Assumption, if the inventory is for renovation work for their customers, then there is a possibility these inventory might not be ok for other customers. Dubai 'used' (can I use this word?) to be a city of extremely high luxury. So there is always a chance that other customers might not want these inventory. (This is called assessing the business risk, yes?)

The last two issues.

Massive concerns.

Depleting cash and the fact that LCL has massive borrowings. Total cash of only 14.3 million versus total group borrowings of 379 million does not sound like a healthy company at all. And when you consider that their main business model (renovation work in Dubai) has a huge question mark hanging over it, then the risk multiplies.

ps: another issue for consideration. LCL had a rights issue proposal all drawn up. But according to an announcement in March, see here, LCL managed to get an extension of this proposal to Aug 2009. I would perhaps ask why the rights issue was postponed. No one interested?

These would be my flawed concerns on this company. Hope this help as a second opinion.

Update On LCL

Posted last Friday: Warning Sign On LCL As It Misses Deadline To Submit Audited Reports!

Yesterday on the Financial Edge: TA cuts LCL to sell, values IFO outfit at 35 sen

• TA Securities views LCL Corp Bhd’s failure to submit its audited financial statements ended Dec 31, 2008 before April 30, 2009 which violated listing requirements as a negative surprise.
  
  The research house, which downgraded LCL to a sell at 57 sen from a buy, now values LCL at 35 sen from 82 sen previously, based on the revised three times CY09 earnings per share. .
  
  The interior fit-out (IFO) company now has less than three months to submit the audited financial statements before Bursa Malaysia suspends the trading of LCL shares. Also, LCL will be delisted if it fails to submit the audited financial statements within six months from now.
  
  TA Securities said LCL’s management attributed this negative surprise to a stock verification issue in Dubai, which has prolonged the audit process.
  
  “We understand that there is no payment issue or any conflicts in the method used to recognise VO (variation order) claims. In 4Q08, LCL reported an increase in inventories of 19% quarter-on-quarter and 38% year-on-year respectively to RM34 million.
  
  “This was nothing unusual given the increased amount of works in Dubai. Hence, we do not expect LCL to take too long to publish its audited financial statement unless a much more complicated issue arises,” TA said in a research report yesterday.
  
  Nevertheless, TA reckoned that LCL would be fined for failure to furnish audited financial statements on time. In the past, Bursa Malaysia has fined various companies from RM2,000 to RM72,000 for late submission of audited accounts.
  
  TA maintained its FY2009-2010 earnings projections given that the fine is expected to be immaterial.
  
  “However, until the audited FY2008 financial statements are being audited, we raise the discount attached to the construction sector (10 times) now from 30% to 70% to factor in the risk of misrepresentation of FY2008 financial performance,” said the research firm.
  
  LCL fell three sen to close at 54.5 sen yesterday.
  
  This article appeared in The Edge Financial Daily, May 5, 2009.

Nothing is mentioned about the property plunge in Dubai. :D

I just received a copy of CIMB research report on LCL just now.

This is what they wrote.

• 
  
  
  

Capital Dynamics Tan Teng Boo Now Claims That Markets Have Bottom Few Months Ago!

Last month, I made a couple of postings on iCapital's quarterly earnings.

My issue was clear and simple.

I was reading it's quarterly earnings notes and I found the earnings notes lacking because the closed end fund gave a rather shockingly brief market outlook and of course the lack of disclosure was another issue.

These were the postings made.

1. A Quick Look At iCapital's Quarterly Earnings
2. iCapital.Biz Lack Of Disclosure In Their Quarterly Earnings
3. iCapital.Biz Lack Of Disclosure In Their Quarterly Earnings II
4. iCapital.Biz Lack Of Disclosure In Their Quarterly Earnings III
5. A Quick Look At iCapital's Annual Report 2008
6. iCapital's Investment In Axiata
7. iCapial And Their Potential 12 Million Ringgit Paper Losss In Axiata

And why was the earnings note shockingly brief?

Well when a potential investor or a minority shareholder of the fund reads the earnings notes, surely the would want to learn more about the current prospect of their investment.

Now since iCapital is a closed end fund, it's only right, in my flawed opinion that they give a proper account of their views on the current markets, right?

For example, if the fund reckons that the market would be in the doldrums, upon reading such market assessment, perhaps the minority investor has the option of remaining as an investor of the fund or the investor might want to cash out.

And this is what the company has to say LAST MONTH in their earning notes.

• Although the stock market remains depressed, as a value investor, iCapital.Biz Berhad with its Fund Manager and Investment Adviser will continue to seek stocks that are attractively priced.

Today, on Business Times, there is an article. 'Stock stampede coming and it's no bull'

• Managing director Tan Teng Boo believes that stock markets have bottomed "a few months ago" and that the global economy is on course to a V-shaped recovery.

Huh??????

Ok, so a month ago, Mr.Tan's iCapital remarks in iCapital.Biz earnings notes that stock market remains depressed. (see screen shot)

Now, he goes on media and proudly proclaims that stock markets have bottomed a few months ago?????

Well... how lah?

Still the same old same old eh?

LOL!

• 'Stock stampede coming and it's no bull'
  
  By Adeline Paul Raj Published: 2009/05/06
  
  A major bull run is under way in global stock markets, says the Capital Dynamics group, a fund manager with one of the most optimistic views of the market yet.
  
  Managing director Tan Teng Boo believes that stock markets have bottomed "a few months ago" and that the global economy is on course to a V-shaped recovery.
  
  "The global stock markets are on a major bullish reversal," he told reporters yesterday at the launch of a global unit trust fund.
  
  Economic data in almost every part of the world, including the US, is beginning to look much more positive, he said. Yet, investor sentiment has continued to remain negative.
  
  "I've never seen so much pessimism in my life. I want to go on the record as being bullish, amid pessimism," he remarked.
  
  Tan emphasised that this is not a bear market rally that the world is seeing. With economic fundamentals improving, global fund management firms will realise that if they don't start investing soon, they'll be under-performing the market.
  
  They then start to panic-buy, he said, and this sets the stage for sustainable market rally.
  
  "The current stock market rally will be sustained by the institutional lemmings which are still loaded with cash and the banking giants which have too much hoarded liquidity," he said.
  
  The same will happen in Malaysia, but here, there is the complicating factor of political uncertainty in certain states, he said.
  
  "Politically, Malaysia is still in a very uncertain phase, but what will help the stock market is the global economic recovery," he added.
  
  He thinks the Kuala Lumpur Composite Index (KLCI) will likely test the 1,400 to 1,500 point level within the next two to three years.
  
  The KLCI closed at 1008.87 yesterday, down by 0.49 point on profit-taking activity after three days of strong gains.
  
  Capital Dynamics has been on a stock-shopping spree over the last few months, Tan said. It owns shares in KL Kepong, Keppel Corp, Parkson, Tesco and Bank of East Asia, among others.
  
  The group's recently-opened Australian office Capital Dynamics (Australia) Ltd will manage the iCapital International Value Fund that was launched yesterday.
  
  This is a global open-ended fund denominated in the Australian dollar, meant for retail investors here and Down Under.
  
  Tan said the fund, which will be invested in value stocks in 42 markets, is targetting an annual return of between 15 per cent and 20 per cent. The minimum initial investment is A$20,000 (A$1 = RM3.00).
  
  Capital Group also has offices in Malaysia and Singapore.
  
  On the global financial crisis, Tan said the severe economic contraction can be almost entirely blamed on the collapse of US investment bank Lehman Brothers last September.
  
  "Without the policy flip-flop of the previous US administration in not rescuing Lehman, it would have been pretty much 'business as usual' for us," he remarked.
  

Is Sell In May And Go Away An Unwise Option This Year?

In case you did not noticed, the markets had rallied globally.

And it's now May. And come May, it's usually Sell In May And Go Away.

On CNBC: What Pullback? Stock Rally Still Has Legs, Strategists Believe

• But several strategists say in notes that they see stocks still moving higher. Citigroup's stock strategist Tobias Levkovich warns the market's naysayers could be proven wrong, and this could be an above-average bear market rally.
  
  The rally gained strength on Monday amid optimism about the US economy. The S&P 500 rose 3.4 percent to 907, above the key 903 level, which put it in positive territory for the year for the first time. The Dow finished up 2.6 percent at 8426. The S&P financial sector was 10 percent higher and was the best performing group.
  
  Goldman Sachs strategists said they see progress on a number of economic fronts and are now boosting their exposure to cyclical stocks. Laszlo Birinyi says, if you look at history, it looks like the market's still moving higher.
  
  Citigroup's Levkovich, chief U.S. equities strategist, said the investment community is "almost shocked" by the near 30 percent rise in the S&P 500 since early March.
  
  He said the case is building for a second half recovery, and many investors are ignoring the fundamentals. Since early March, financials have risen 74 percent; cyclical consumer discretionary have jumped 46 percent; industrials gained 44 percent and materials are up 41 percent. Meanwhile, the defensive sectors are underperforming.
  
  Levkovich said a few metrics have encouraged him, including the prospects for a likely earnings recovery for late 2009 and 2010, and an improvement in bank lending standards, likely by late 2009. Another positive is a likely moderation in inventory reduction, which would create a production pickup and that would help earnings.
  
  Also, a higher stock market could also boost consumer confidence. For that reason, the market has a good chance of seeing a better-than-average bear market rally.
  
  The average one-year bear market rally off of the bottom has risen more than 43 percent and it's likely, there is still room to go higher. Another factor is that there are lots of investors who missed the moves and are sitting with large cash hordes.
  
  Laszlo Biriniy says the market's 53-day gain and 10 percent move above the 50-day moving average are second only to the market's performance in 1933. He also says in a note that the net advances over the past 10 days are the third strongest ever, but he sees a case for even more gains.
  
  For instance, only 29 percent of the S&P 500 are above their 200-day moving average. But the most stunning indicator he mentioned was that the number of days to the first correction in previous bull runs is 194 days, and we are only at day 53. One factor that takes away from his thesis is that almost half of the S& P are now up 50 percent from their 52-week lows.
  
  Goldman stock strategists, meanwhile, boosted their exposure to cyclicals because of signs of improvement in several key areas. The strategists say corporate access to credit is improving, housing is showing signs of stabilization and there is a decline in the write downs and provision at financial firms.
  
  They also said that the patterns in previous bear market bottoms would support a heavier cyclical tilt. They acknowledge that they are late to buying cyclicals, but they said they knew that would be the case because the market tends to punish early rotations into cyclicals. Their year end target is 940 on the S&P.
  
  And finally, I talked to Brown Brothers Harriman's Brian Rauscher, a long-time bear who turned bullish in early March. He was concerned last month that the market could be showing signs of moving too far, too fast. But today, I asked him in an email if he's still thinks the market will go higher. He answered: "May have take a deep breath to get through 900 (a day or so), but this market is moving higher.."

On Bloomberg News: ‘Sell in May, Go Away’ Unwise This Year, UBS Says

• May 4 (Bloomberg) -- U.S. investors should stick with stocks and ignore the axiom of “sell in May and go away,” according to David Bianco, UBS AG’s chief equity strategist.
  
  “Hold on for further gains in May,” Bianco wrote in a report dated May 1. Seasonal patterns are “a weak force” by comparison with the economy, which is showing “clear signs of improvement,” the report said.
  
  The CHART OF THE DAY shows the average monthly returns for the Standard & Poor’s 500 Index since 1950. For May through October, the figure is less than 1 percent each month. Averages for November through April exceed 1 percent in every month but February.
  
  Data on initial claims for jobless benefits, manufacturing and consumer confidence justify the gains in stocks since March, Bianco wrote. “Reduced risk of bank nationalization” is in the market’s favor as well, he added. The S&P 500 rose 30 percent from its March 9 low through the end of last week.
  
  Bianco stood by a projection that the index will surpass 900 by the end of this month. The index hasn’t closed above this threshold since Jan. 8. He also repeated a year-end estimate of 1,100, leaving him tied with JPMorgan Chase & Co.’s Thomas J. Lee for the most optimistic view among 11 strategists in a Bloomberg News survey.
  
  The figures in the chart were compiled by Plexus Asset Management and cited in a report by John Mauldin, president of Millennium Wave Advisors LLC, whose outlook on stocks differed from Bianco’s.
  
  “There are times when you should be cautious and times when you should throw caution to the wind,” Mauldin wrote in the May 1 edition of the weekly newsletter, Thoughts from the Frontline. “I think this is the former.”

Well here is the link to John Mauldin's weekend editorial, Sell in May and Go Away ( Subscription is required. Hey, it's free. )

Here is a snippet of what John wrote. ( I strongly suggest you read the whole editorial! :D )

• The point is that it is more important to get the general direction right than to be right on the specifics. In August of 2006 I was seeing a modest recession in the future. As time went on, I became increasingly bearish. But whether it was to be a mild recession or a major one, the advice would have been the same. You do not want to get caught long the market before a recession.
  
  Today, there are those who say the stock market will start rising six months before the economy does. And maybe it will. I don't know. The predisposition of this market is down. Valuations are not at a level that has spawned major bull markets in the past. At the beginning of real bull markets, volume is strong and rising. Now it is weak (modest at best) and shows no real sign of becoming strong, especially going into summer.
  
  Further, this rally has all the earmarks of a major short squeeze. Regulators have recently (and correctly) been enforcing short selling rules that require stock to be delivered and settled on short trades. This may be a one-time event. When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market.
  
  Corporate earnings are likely to go even lower, as consumer spending is likely to get weaker in the coming months. Capacity utilization is at its lowest point since they began tracking it. The National Federation of Business says a recent survey shows none of the responders plans to raise prices, which is not a sign of business strength.
  
  Banks are not yet lending, and the past quarter's positive performance was mostly accounting gimmicks. Citigroup, for instance, said they made $1.6 billion. They did this by booking a one-time gain of $2.7 billion, because the value of Citigroup bonds have fallen (!), giving them the theoretical possibility of buying back their debt at a discount. And with consumer and credit card loans showing more weakness, Citi decided to REDUCE its loan loss reserves, allowing it to show another $1.3 billion in profit. And then there was the profit of $400 million from the new mark-to-market rules, which allowed them to produce a profit on "impaired assets." Without all these games, there would have been a loss of $2.8 billion.
  
  Maybe this time it's different. But when I survey the economic landscape, I see lots of opportunity for disappointments and missed targets. And bear market rallies are killed by disappointments and missed expectations.
  
  To be long this market going into summer you need to be brave or have very serious stops on your portfolio. I think the possibility of missed expectations at the end of the second quarter is high. It could be ugly.

Jesse wrote some interesting notes too. SP Futures Hourly Chart Update at 2:30 PM

• The market will let us know which one it is reasonably soon. Try not to outguess it if you value your portfolio. This is still a "trader's market.
  
  "Our key short term indicators have not yet delivered a SELL signal.

Regarding the bank lending. Here's another excellent editorial on China and its loan growth issue. Distortions in the Chinese lending environment. Do give it a read for a more balanced view. :D

Mobius Says Emerging Markets Base Building For Next Bull Market!

On Bloomberg News: Emerging-Market Stocks May ‘Break Out’ by Year-End, Mobius Says

• May 4 (Bloomberg) -- Emerging-market stocks may “break out” into a bull market at the end of the year as falling interest rates and easing inflation make equities more attractive, Templeton Asset Management Ltd.’s Mark Mobius said.
  
  Mobius reiterated that emerging markets are “building a base” for the next rally. Chrysler LLC’s bankruptcy filing and other “short-term risks” may hold back the rally, while speculators may bet stocks will fall, he said.
  
  “We are at the base building period for the next bull market,” Mobius, who helps oversee $20 billion in emerging- market assets at San Mateo, California-based Templeton, said yesterday in an interview in Bali, Indonesia, where he’s attending a conference. “What I see happening is perhaps this continuing till the end of the year, and then a break out.”
  
  Developing markets made up all 10 of the best-performing stock indexes in 2009, led by Peru and China. The MSCI Emerging Markets Index has jumped 17 percent this year, compared with a 2.6 percent retreat in the MSCI World Index.
  
  Since Mobius said on March 23 that the base for the rally is being built, the emerging-market gauge rose 20 percent, outpacing the global measure’s 13 percent advance.
  
  Government stimulus programs from the U.S. to China have prompted Federal Reserve Chairman Ben S. Bernanke to say there’s evidence of “green shoots” in some markets. Reports on consumer confidence and manufacturing in the world’s largest economy last week spurred optimism the worst of the recession may be over.
  
  Growth Outlook
  
  The International Monetary Fund, the Washington-based lender with 185 member nations, said last month the world economy may shrink 1.3 percent this year, compared with its January prediction of 0.5 percent growth.
  
  Short sellers are increasing bets against developing-nation stocks by the most since March 2007, a signal the biggest rally in 16 years may fizzle as profits plunge.
  
  Short interest in the iShares MSCI Emerging Markets Index fund, which tracks equities in 23 developing nations, climbed 51 percent in March, the biggest jump in two years, according to New York Stock Exchange data compiled by Bloomberg. The growth in short sales, where investors borrow stock and sell it on the expectation prices will fall, marks a shift from the last three rebounds in emerging-market stocks. In those cases, traders closed out their bets.
  
  Chrysler, based in Auburn Hills, Michigan, is the latest U.S. company to file for bankruptcy after a group of 20 secured lenders rejected an offer by the government that would have paid them $2.25 billion for $6.9 billion of debt, or 33 cents on the dollar.
  
  ‘Green Shoots’
  
  “There are green shoots in the American economy,” Mobius said. “Some companies will declare lower earnings but there are still companies posting rising earnings.”
  
  BNP Paribas Asset Management was also upbeat about the recovery of emerging-market stocks, saying shares in Brazil, Russia, India and China present the best combination for a recovery in economic growth amid continued volatility.
  
  The investment firm turned positive on Russia in March and now holds more shares in the four so-called BRIC markets than benchmark indexes suggest, Martial Godet, who helps oversee the equivalent of $44 billion of assets as Paris-based head of investment management for new markets at BNP Paribas, said in an April 30 interview in Singapore. He said he expects the “outperformance” of the four markets to continue.
  
  Even after the rebound this year, the emerging-market index is valued at 1.58 times book value, lower than its five-year average of 2.1 times. Based on estimated earnings, the measure has a multiple of 13 times.
  
  ‘Pretty Cheap’
  
  “If you look at price-to-book value, you see that it’s below the average that we’ve seen for a number of years,” Mobius said. “We are not buying stocks that have a price- earnings ratio of over 10, by and large, with some exceptions, and we look at a five year time frame. Looking five years out, things look pretty cheap.”
  
  Hong Kong-listed Chinese companies will be the best bet when the emerging markets embark on the bull market, with companies that supply commodities and cater to consumers benefiting the most, Mobius said. He also favors shares in Turkey, South Africa and Brazil, he added.

Warren Buffett Says Companies Should Borrow Less!!

On Star Business: What is the most important lesson from financial crisis?

• Published: Monday May 4, 2009 MYT 8:50:00 AM
  What is the most important lesson from financial crisis?
  
  OMAHA, Nebraska: Billionaires Warren Buffett and Charlie Munger said Sunday the most important lessons of the recent financial turmoil are that companies should borrow less and build a system of severe disincentives for failure.
  
  Berkshire Hathaway Inc.'s top two executives offered that frank assessment of businesses' role in the current recession at a news conference held a day after 35,000 attended the company's annual meeting in Omaha.
  
  The two men also said most of the nation's biggest banks are not too big to fail, but consumers shouldn't be worried about bank failures because of the protections built into the system.
  
  Buffett said having severe disincentives for failure and proper incentives for success is key to ensuring large financial institutions are run well.
  
  He said people didn't become more greedy in the last decade, but the system allowed people to take advantage of it.
  
  "I think the most important lesson is the world needs a whole lot less leverage," said Buffett, who is Berkshire's 78-year-old chief executive and chairman.
  
  In speaking of disincentives, Buffett suggested that if an executive would be shot if the company fails, then the company would definitely borrow more carefully.
  
  Buffett said Fannie Mae and Freddie Mac show that intense regulation can't prevent problems because those mortgage finance firms were some of the most regulated companies before government seized control of them amid mounting mortgage losses.
  
  But Buffett said assigning blame for the economic mess doesn't make a ton of sense because so many people made mistakes.
  
  "I think that virtually everyone associated with the financial world contributed to it," Buffett said.
  
  Munger, Berkshire's 85-year-old vice chairman, said a combination of factors caused the financial mess.
  
  He said the nation tolerated way too much debt, immorality and stupidity, and now it's paying the price.
  
  "We have failed big-time on multiple fronts," Munger said.
  
  He said gross immorality persisted in the consumer credit and derivatives businesses, and many people were taken advantage of.
  
  Then the accounting profession failed to catch problems and tolerated too much foolishness, Munger said.
  
  He said accounting rules that allow companies to report huge profit just before failing doesn't make sense.
  
  "We do not need insane accounting that rewards people that can't handle the temptation," Munger said.
  
  But it still might be hard to get Congress to pass sensible rules for investment banks and derivatives, Munger said, because of the amount of lobbying investment banks have done.
  
  "We're going to have a hell of a time getting this fixed the way it should be fixed," Munger said.
  
  Buffett said he's not sure how the government will handle the results of the stress tests officials are conducting on the 19 largest U.S. banks, but he doesn't think the government should rule out the failure of most of the banks.
  
  "These 19 banks are not too big to fail," Buffett said.
  
  "You can make a deal for any but the top four on the list."
  
  To prove his point Buffett pointed to the examples of Wachovia and Washington Mutual banks, which both failed in the past year and were sold to competitors.
  
  The stress tests are supposed to determine which banks would need more cash if the economy weakens further.
  
  Federal Reserve officials have said the banks will be required to keep extra capital on hand in case losses escalate, which means some banks would be forced to raise money.
  
  Buffett said consumers should worry about bank failures because the Federal Deposit Insurance Corp. is there to protect them with the resources it collects by charging banks fees, so taxpayers don't pay when the FDIC rescues banks.
  
  "I'm not worried at all about a run on the banks," said Buffett, whose company holds large stakes in Wells Fargo & Co., US Bancorp, M&T Bank, Bank of America and Sun Trusts Banks
  
  Given the age of Buffett and Munger, there is always speculation on who might replace them.
  
  Buffett said Sunday that investors would know if either had health problems.
  
  "If I know of anything serious - or anything that might be interpreted as serious - health problems, Berkshire would disclose it," Buffett said.
  
  "We don't want rumors flying around."
  
  But Munger joked there might be a high threshold for disclosing anything about his health: "In my case, I'm so nearly dead anyway that it's a minor detail."
  
  Both Munger and Buffett said they feel great.
  
  Berkshire's Class A stock lost 32 percent in 2008, and Berkshire's book value - assets minus liabilities - declined 9.6 percent, to $70,530 per share.
  
  That was the biggest drop in book value under Buffett and only the second time its book value has declined.
  
  But Buffett always measure's the company's book value performance in relation to the S&P 500, which fell 37 percent in 2008, so he's not bothered by stock price fluctuations.
  
  "We don't consider it our worst year by miles," Buffett said Sunday.
  
  Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms.
  
  Berkshire also has major investments in such companies as Coca-Cola Co. and Burlington Northern Santa Fe Corp.
  

Charlie Munger Calls For 100% Ban On CDS

On Bloomberg: Berkshire’s Munger Favors ‘100% Ban’ on Credit Swaps

• By Betty Liu, Shannon D. Harrington and Erik Holm
  
  May 1 (Bloomberg) -- Berkshire Hathaway Inc. Vice Chairman Charles Munger said he supports an outright ban of credit- default swaps to prevent speculators from profiting on the failure of companies.
  
  “If I were the governor of the world, I would eliminate it entirely -- 100 percent,” Munger said in a Bloomberg Television interview today. “That’s the best solution. It isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”
  
  Munger, second in command at Omaha, Nebraska-based Berkshire behind billionaire Chairman Warren Buffett, has long decried some of Wall Street’s tactics as short-sighted. He said in a Washington Post opinion column in February that the U.S. government must expand regulation to prevent the excesses that caused the current fiscal crisis, and said credit-default swaps were partly to blame.
  
  Munger, 85, and Buffett have touted a buy-and-hold strategy of investing in undervalued firms as a more reliable way to profit from financial markets. The two have at times departed from that approach, and Berkshire began selling credit-default swaps on individual companies in 2008. The firm backed $4 billion in debt of 42 corporations as of Dec. 31, Buffett, 78, said in a February letter to shareholders.
  
  ‘Stupid Policy’
  
  “The national policy that allowed the derivative markets to develop as they did was a stupid policy and we think the derivative markets as they evolved have done more public damage than public benefit,” Munger said. “That said, if they exist and they are legal and some opportunity therein is presented to us that we think makes sense to the shareholders of Berkshire, we would seize that opportunity.”
  
  Berkshire is scheduled to hold its annual shareholder meeting tomorrow.
  
  Credit-default swaps “play an important role in the growth and function of our nation’s and the global economy,” Robert Pickel, chief executive officer of the International Swaps and Derivatives Association, said in a statement. ISDA, which sets rules for the market, published a survey of the world’s 500 largest companies last month that found 76 percent of financial firms and 20 percent of all companies used credit swaps.
  
  “Amidst the current financial turmoil, the CDS market has performed well, remained liquid and is providing an important price signaling function,” Pickel said.
  
  ‘Grease the Skids’
  
  The proliferation of credit-default swaps in the portfolios of debt investors and banks can eliminate incentives lenders have to keep companies out of bankruptcy, according to academics including Henry Hu, a law professor at the University of Texas in Austin, who testified before Congress in October on the so- called debt decoupling created by derivatives.
  
  Creditors that have hedged themselves “might well want its borrower to go into bankruptcy and have incentives to use its control rights to help grease the skids,” Hu told the House Committee on Agriculture, which oversees the Commodity Futures Trading Commission.
  
  Credit-default swaps, which are used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
  
  “The whole mass of incentives created is quite counterproductive,” Munger said. Buyers of the swaps get a “vested interest in the destruction of some business.”
  
  High Yield, High Risk
  
  Berkshire also used credit derivatives to bet on indexes of 100 companies with high-yield, high-risk debt, and the company paid losses of $542 million on premium revenue of $3.4 billion, Buffett wrote in February. The contracts caused an accounting liability of $3 billion as of Dec. 31, Buffett said.
  
  “In last year’s letter, I told you I expected these contracts to show a profit at expiration,” Buffett said. “Now, with the recession deepening at a rapid rate, the possibility of an eventual loss has increased.”
  
  Credit swaps guaranteeing mortgage-linked debt led to the near failure of Berkshire competitor American International Group Inc. last year when the insurer was unable to post collateral as the assets plunged. AIG has received four U.S. bailouts valued at $182.5 billion.
  
  Collateral Damage
  
  Buffett said his firm is unlikely expand the sale of swaps tied to individual companies because would-be counterparties demand collateral if the underlying assets decline “and we will not enter into such an arrangement.”
  
  At least 32 companies as of March 12 had more credit swap protection outstanding on their bonds than actual bonds, according to a March 27 research note by Christopher Garman, chief executive officer of Garman Research LLC in Orinda, California.
  
  “Simply put, there may be less forbearance in store for stressed companies where credit-default swaps notional greatly outstrips the deliverable bond,” he wrote. “Hedges may have entirely taken out the default risk.”
  
  Credit-default swaps dealers, including JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc, have taken steps at the behest of regulators to improve transparency in the market, where there were at least $27.5 trillion in contracts outstanding as of April 24, according to the Depository Trust & Clearing Corp., which runs a central registry that captures most trades.
  
  $2.5 Trillion
  
  After subtracting trades that offset each other, banks, hedge funds and other asset managers have bought protection on a net $2.5 trillion in debt using the privately negotiated contracts.
  
  Dealers and investors last month created a committee to govern key decisions for the market, such as when the contracts can be settled and what securities are covered by the derivatives. The committee for the first time brought into the decision-making process investors that weren’t among Wall Street dealers.
  
  House Agriculture Committee Chairman Collin Peterson in January circulated a draft bill that would have banned credit swaps trading unless investors owned the underlying bonds. The bill that passed the Minnesota Democrat’s committee the following month stopped short of an outright ban, though it would allow the CFTC to suspend trading in the market, if needed, to protect investors. The bill has not been taken up by the full House of Representatives.
  
  U.S. Treasury Secretary Timothy Geithner, who in his past post as president of the Federal Reserve Bank of New York pushed dealers to curb the potential for systemic risks from the market, told Congress in March that a ban such as Peterson had proposed “is not necessary and wouldn’t help fundamentally.”
  

Warning Sign On LCL As It Misses Deadline To Submit Audited Reports!

Hmm.. on Star Business LCL misses deadline to submit report

• Friday May 1, 2009
  
  LCL misses deadline to submit report
  
  PETALING JAYA: LCL Corp Bhd missed yesterday’s deadline to furnish its audited financial statements for the financial year ended Dec 31, 2008.
  
  The company informed Bursa Malaysia yesterday the report was at “finalisation stage” and that “the company is working closely with the auditors to finalise the audit expeditiously.”
  
  “LCL will submit its audited financial statements 2008 as soon as the audit is completed,” it added.
  
  Under listing regulations, LCL had to submit the report not more than four months after the end of its financial year, which was on or before Apr 30.
  
  Companies that fail to submit their financial reports on time face suspension or delisting, according to Bursa rules.

Huge worry sign.

Here's why. Let's go back in time. 28th January 2009: LCL down 20% on credit tightening woes

• KUALA LUMPUR: LCL Corp’s share price fell as much as 20.3% or 10.5 sen to a low of 41 sen in mid-morning on Wednesday on concerns about the impact on its projects in Dubai arising from tightening of credit facilities.
  
  Its share price opened at 51 sen, down 0.5 sen from last Friday’s close. At 11.30am, its share price was down five sen to 46.5 sen. It was the second most active with 4.42 million shares done.
  
  LCL Corp’s Dubai chief executive officer Hakim Asmaun was quoted as saying the group needed government support to weather the global economic slowdown. The current economic slowdown was disrupting the group’s plans as local banks were tightening their credit facilities.
  
  Hakim was also quoted as saying the group needed the Malaysian government’s support and added that five to six big Malaysian companies in Dubai were also affected by the tightening of credit facilities.
  
  CIMB Equities Research said LCL Corp was not alone in facing a liquidity squeeze. Local banks had been under fire recently for pulling credit lines on listed and private companies as they took a cautious view amidst the global slowdown.
  
  “Local banks need to understand that the interior-fit-out (IFO) business remains a viable business in Middle East, even in Dubai.
  
  That said, IFO companies must have established and credible clients who are good paymasters,” it said.
  
  The research house had lowered its target price at RM1.95. It was maintaining its earnings forecasts for now while noting that there is downside to our numbers if there are delays in the announcement of new projects or if the credit squeeze does not ease.
  
  “However, our target price is reduced from RM2.35 to RM1.95 as we widen the discount to the construction sector’s 11 times P/E target from 40% to 50%, in line with WCT’s target valuation. The large discount reflects LCL’s small market cap and worries about the Middle East,” it said.
  
  CIMB Research said LCL remained an outperform on the potential re-rating catalysts of success in landing major IFO contracts in other countries, probably Abu Dhabi or Singapore first; listing of its Dubai operations and trough price-to-earnings and price-to-book value valuations. Furthermore, dividend yields are almost 10%.

Now Dubai is a worry. See Dubai's House Prices Drop 41% In Q1!! ( also No Longer The Same Dubai As Global Economic Crisis Hits Dubai Hard. )

The next following day, 29 January 2009 LCL sees no potential impact from credit tightening

• PETALING JAYA: Interior fit-out (IFO) works provider LCL Corp Bhd, whose shares have been slipping on concerns over funding problems arising from tighter credit facilities, says it sees no potential impact on any of its projects.
  
  The company said its Dubai operations chief operating officer Abdul Hakim Asmaun was misquoted in an earlier report as saying the group needed government support to weather the global economic slowdown.
  
  “Hakim was speaking in his capacity as a member of the Malaysia Business Council and was talking about Malaysian companies in general and not referring to LCL,” chief operations officer Michael Tan said in a statement to StarBiz yesterday.
  
  He added that LCL’s credit facilities were in the form of project financing and were secured during the award stage of the contracts.
  
  “It (the loan) is non-revolving and will be retired gradually towards the last stage of IFO works as the project progresses.
  
  “Therefore, banks tightening their credit facilities is not an issue as the repayment is secured against the assignment of contract proceeds whereby the banks will receive payment directly from the customers,” Tan said.
  
  Yesterday, LCL’s shares fell 5.5 sen, or 11%, to 46 sen, an all-time low.
  
  Currently, about 75% of LCL’s business is derived from Dubai. Tan said the group was looking to diversify into other countries in the Middle East, namely Abu Dhabi, Bahrain and Qatar.
  
  “We strongly believe that these countries are good markets as they have some of the highest oil reserves in the world.
  
  “They also have a very good track record in terms of GDP (gross domestic product) growth in the past five years,” he said.
  
  On the outlook for the IFO business in the Middle East amid the current economic climate, Tan said: “There is no doubt the Middle East is also affected by the global economic situation. However, our projects are still progressing, albeit at a slightly slower pace.
  
  “Even though there is a slowdown in construction, IFO comes in at the very end of a project and we strongly believe that our clients will not forfeit the entire project so close to completion.”
  
  Closer to home, Tan said the group was looking to expand its IFO business into Singapore.
  
  “We are currently actively bidding for projects in Singapore and one of our main targeted projects is the Singapore Marina Bay Sands Integrated Resort.
  
  “With Singapore being so close to home, the mobilisation cost will be much more effective and we can also accommodate our current workforce should downsizing of operations in the Middle East be required,” he said.
  
  Tan said the group was adopting a cautious approach in taking on new projects.
  
  “We are more selective about whom we work with and we are negotiating for better conditions with enhanced payment terms as a measure to mitigate risks,” he said.
  
  LCL currently had an outstanding order book of RM454mil which would last the group another year, Tan said.

The next day on the Financial Edge.

• 30-01-2009: Foreign hands suspected in LCL selldown
  by Tony C H Goh
  
  KUALA LUMPUR: The selldown of more than six million shares that pushed LCL Corp Bhd shares to an all-time low of 46 sen on Wednesday, following reports that the company was facing financing problems and turned to the government for assistance, was probably the work of foreign institutional investors.
  
  Foreign shareholdings in the company stood at 13% before the selldown, and some of the largest foreign investors include JP Morgan Co Ltd, NT Assets Co and Morgan Stanley Co Ltd, said LCL chief operating officer Michael Tan.
  
  The selldown by the foreigners is said to be related to a report earlier this week that LCL is seeking government assistance to help overcome tightening credit conditions in implementing its projects in the Middle East. Since then, the company had refuted the report and clarified that its financing for projects was intact and they needed no government assistance.
  
  After clearing the air over its credit lines, LCL's priority is now geared towards managing its borrowing levels besides eyeing new markets in the Middle East and around this region to secure additional contracts
  
  According to Tan, going forward, LCL would also be mindful of the interest of its stakeholders and was working on reducing its gearing levels to ensure a healthy balance sheet.
  
  Tan added that LCL is in the midst of securing new contracts in Abu Dhabi and Singapore's Marina Bay Integrated Resort project worth S$46 million (RM110 million), expected to be finalised by next month.
  
  "In addition, we are also hopeful of securing the Dubai Metro-Green line (the second underground Metro line in Dubai) worth RM600 million, and the Al-Reem Island in Abu Dhabi valued at RM15 million to RM20 million.
  
  "We are also bidding on smaller scale projects, worth about RM5 million to RM10 million locally. In total, we are tendering for more than RM1 billion worth of projects both locally and around this region," Tan told The Edge Financial Daily yesterday.
  
  Tan said LCL is working on reducing its gearing level due to the deferment of its proposed rights issue that was supposed to raise RM70 million and bring its gearing level to below 1.5 times from more than two currently.
  
  "Some of the options that we are exploring is the possibility of foreign equity partnership or strategic alliance with developers and property players based in the Middle East. This is to enable us to secure jobs without incurring high borrowings," he said
  
  LCL, which specialises in the interior-fit out (IFO) industry, had outstanding projects worth about RM1.15 billion as of Nov 8, 2008. Among the ongoing projects that will keep the group busy until the end of the year are the Dubai Metro-Red Line, consisting of 14 stations worth RM312.6 million and a RM33 million contract from Bank Negara Malaysia.
  
  Projects in the Middle East, in particular Dubai, are affected by poor sentiment rather than actual credit issue, so there are still plenty of jobs available in the region, Tan said. He clarified that every project undertaken by the company has its own financiers, and all the funding arrangements were actually finalised in Malaysia.
  
  Clarifying the report citing an LCL official in Dubai stating that they sought government assistance to complete the projects, Tan said that the company official was speaking in his capacity as a member of the Malaysia Business Council, during a dialogue in Dubai about Malaysian companies in general, and was not referring to LCL.
  
  "All the bank borrowings for our projects have been secured, and cooperation from banks is still good, as the company is not facing any problem in securing additional funds to finance its future projects," said Tan.

A month later, LCL reported its earnings: Quarterly rpt on consolidated results for the financial period ended 31/12/2008.

LCL reported losses of over 17 million for the quarter!!

It makes you wonder about the sell down a month earlier, eh?

Anyway, in that quarterly earnings, classic investment warning flags were all over the place. Massive debts and the surge in trade receivables to more than 300 million is a massive worry.

And today LCL has missed the deadline to submit its audited financial statements for the financial year ended Dec 31, 2008!

Caveat!