Who's Watching Your Back in Stock Market?

Who's got your back on Wall Street? Who protects you from con games in the stock market and swindling stock brokers? A complicated regulatory structure is in place that watches out for individual investors.

How well this system works is sometimes subject to debate; however, it works for the vast majority of investors. Although when we read about market specialist firms at the New York Stock Exchange paying $240 million plus in fines for trading their interests over ours, it is hard to see how the system is protecting us.

If you read about mutual firm executives, trading after the market closes for their own accounts (a big no-no) or a stockbroker trading an elderly person's retirement account away, it makes you wonder where the watchdogs are.

Highly Regulated

Nevertheless, the securities industry is one of the most highly regulated businesses in the United States.

The U.S. Congress is at the top of the heap. It created most of the structure and it passes major laws that affect how the industry operates. It also authorizes budgets for the Securities and Exchange Commission and other agencies involved in regulatory duties.

The SEC is the top regulatory agency responsible for overseeing the securities industry. It registers new securities and handles all the filings that public companies must make, such as annual and quarterly reports.

The SEC

The SEC also oversees all of the stock exchanges and any organization connected with the selling of securities. It also has a strong anti-fraud unit that monitors advertising and marketing to make sure companies comply with strict rules concerning the sale of securities.

At the next level is the Financial Industry Regulatory Authority (FINRA). It was created in 2007 when the National Association of Securities Dealers merged with the regulatory functions of the New York Stock Exchange. This is an industry self-regulatory body that is responsible for policing the securities industry.

FINRA set standards for stockbrokers and other industry professionals and licenses them after comprehensive examinations.

No Toothless Dog

FINRA is not a toothless group. They have the ability to fine individuals and organizations for unethical behavior and can revoke licenses.

The organization is usually the place customers can take complaints of behavior they feel in unethical or illegal. FINRA also monitors trading activities of member firms to detect illegal trading patterns and other illegal activity.

The individual exchanges also have sophisticated regulatory oversight functions within their own operations. These include monitoring trades and other steps to see that the customer gets a fair deal.

Individual States

Individual states also have securities divisions, although they are usually not as sophisticated as FINRA. Often they handle complaints and register securities that will be sold within the boundaries of the state, although this will vary from state to state.

The final step of protection is at the brokerage level. Each firm is required to keep certain records and perform certain checks and audits of the operation to make sure their brokers are operating within acceptable legal and ethical guidelines.

Conclusion

Does all of this regulation guarantee that you won't get ripped off? No, but you can feel reasonably comfortable that if you use some common sense about who you do business with, you won't get burned.

STOCKS Trading Basics

Trading stocks. You hear that phrase all the time, although it really is wrong � you don't trade stocks like baseball cards (I'll trade you 100 IBMs for 100 Intels).

Trade = Buy or Sell

To "trade" means to buy and sell in the jargon of the financial markets. How a system that can accommodate one billion shares trading in a single day works is a mystery to most people. No doubt, our financial markets are marvels of technological efficiency.

Yet, they still must handle your order for 100 shares of Acme Kumquats with the same care and documentation as my order of 100,000 shares of MegaCorp.

You don't need to know all of the technical details of how you buy and sell stocks, however it is important to have a basic understanding of how the markets work. If you want to dig deeper, there are links to articles explaining the technical side of the markets.

Two Basic Methods

There are two basic ways exchanges execute a trade:

• On the exchange floor
• Electronically

There is a strong push to move more trading to the networks and off the trading floors, however this push is meeting with some resistance. Most markets, most notably the NASDAQ, trade stocks electronically. The futures' markets trade in person on the floor of several exchanges, but that's a different topic.

Exchange floor

Trading on the floor of the New York Stock Exchange (the NYSE) is the image most people have thanks to television and the movies of how the market works. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. It could not look any more chaotic.

Yet, at the end of the day, the markets workout all the trades and get ready for the next day. Here is a step-by-step walk through the execution of a simple trade on the NYSE.

1. You tell your broker to buy 100 shares of Acme Kumquats at market.
2. Your broker's order department sends the order to their floor clerk on the exchange.
3. The floor clerk alerts one of the firm's floor traders who finds another floor trader willing to sell 100 shares of Acme Kumquats. This is easier than is sounds, because the floor trader knows which floor traders make markets in particular stocks.
4. The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice in the mail.

Of course, this example was a simple trade, complex trades and large blocks of stocks involve considerable more detail.

Electronically

In this fast moving world, some are wondering how long a human-based system like the NYSE can continue to provide the level of service necessary. The NYSE handles a small percentage of its volume electronically, while the rival NASDAQ is completely electronic.

The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. While this system lacks the romantic and exciting images of the NYSE floor, it is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading.

For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of online investing by putting you one step closer to the market.

You still need a broker to handle your trades � individuals don't have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.

Conclusion

What does this all mean to you? If the system works, and it does most of the time, all of this will be hidden from you, however if something goes wrong it's important to have an idea of what's going on behind the scenes.

Day Trading Stock Markets

Stock markets trade the shares of individual companies (such as Wal-mart, and British Telecom), and as there are many different companies, there are also many different stocks available for trading.

Stocks are traded via stock exchanges (such as the New York Stock E xchange (NYSE) in the US, and the London Stock Exchange (LSE) in Europe), and the same stock is often traded on several different exchanges at the same time. Most day trading brokerages allow traders to choose an exchange, or to have their order automatically routed to the exchange that offers the best available price at the time (Interactive Brokers' automatic routing is known as IB SMART).

The type of trading that most people are familiar with, is buying stock, waiting for its value to increase, and then selling the stock to take their profit (known as buy and hold trading). Day traders also want to make a profit when a stock's value is decreasing, so they need to be able to sell a stock, wait for its value to decrease, and then buy the stock back at a lower price (known as shorting a stock). Approximately 50% of stocks can be shorted (sold first), with the remaining stocks only available for long trades (buying first), because their liquidity (number of shares available) is too low to support shorting.

Stock markets trade the actual stocks (rather than contracts), but they still have contract specifications that provide the information that is needed to trade each stock. This information includes the stock symbol (such as MMM for 3M), the available exchanges (such as the NYSE, and PHLX (Philadelphia Stock Exchange)), the minimum price movement (usually 0.01), and the order size increment (usually 100 shares).

Suitability for Day Trading

Stock markets offer a wide variety of choice (many different companies), and many stocks can be traded both long (buying first) and short (selling first). The margin requirements for stock markets vary depending upon the current value of the stock. As an example, Interactive Brokers' margin requirements for a stock with a current value of $100 would be :

• Initial and Maintenance Margin - Long : $2,500 (25% of the trade's value) / Short : $3,000 (30% of the trade's value)
• Overnight Maintenance Margin - $5,000 (50% of the trade's value)

In general, stock markets are a good choice for day trading, but there is a big problem with stock markets that makes them not suitable for beginning day traders. The US SEC (Securities and Exchange Commission) has placed restrictions on the day trading of US stocks, by requiring that day traders deposit at least $25,000 in cash or securities (stock, options, futures contracts) with their brokerage. This means that beginning day traders need to have at least $25,000 in their day trading account if they want to day trade US stock markets. Further information is available in the day trading restrictions article. Note that these restrictions only apply to US stock markets, and do not apply to European and Asian stock markets, so European and Asian stock markets are suitable for beginning day traders.

In conclusion, if you have enough equity (cash, stocks, options, and futures contracts) in your day trading account, stock markets would be a good choice for day trading. If you do decide to day trade the stock markets, make sure that you choose stocks that have high enough volume (number of shares traded) and volatility (range of movement) to meet your trading systems requirements.

You Can Still Find Winning Stocks

The best approach to solving many problems is the simplest one, yet some situations seem beyond human understanding.

When we face a problem like the economic and stock meltdown of 2008, the answer must be so complicated that no one can possibly know the answer.

In a macro sense, that's probably correct. The challenges facing our country are huge. It is understandable the people want the problem defined and corrected.

Unfortunately, the economy and the stock market are so big and so complicated that boiling the issues down to a single problem is impossible.

So, what's a stock investor to do?

One answer is to liquidate and put the cash under your mattress until things seem normal again. Of course, the best time to do that would have been many months ago before the market tanked.

If you still need the potential return stocks can offer and don't want to wait out the bear market, you need a strategy that helps you pick winning stocks from the rubble.

There are many advanced trading practices that may help you trade you way to profits. However, most investors have neither the time nor expertise to succeed as an active trader.

While it is tempting to look for exotic or "out of the box" solutions, the answer for many investors is to focus on the basics.

The starting point for finding potential winners in a sea of losers is looking at certain key indicators. These are the most important:

• Low debt for the industry and lower than its peers
• High cash reserves for the industry and higher than its peers
• Positive earnings (or a very small loss) for the industry and better than its peers
• Will benefit in the early stages of an economic recovery

The last point may be the hardest to nail down, since it involves a certain amount of subjectivity.

For example, a non-financial company closely tied to the housing market may not participate in the early rebound. Why, because by there will be a large stock of product (houses) on the market. This inventory must be worked through before much of the non-financial housing market will rebound.

Companies that sell home furnishings, appliances and so on will see some benefit as new owners buy homes out of the unsold inventory.

You can probably think of companies that will benefit when the economy turns. Check those against the first three bullet points above and this is your starting place.

No one knows when we can expect an economic turn around. The truth is parts of the economy will rebound sooner than other parts. Look for companies that can take advantage of the rebound and there you'll find your future winners.

Dow Chemical's profit drops 97% but tops expectations

When is a 97% drop in profit not necessarily a bad thing? Well, when the company still manages to top expectations of course. This unlikely scenario has unfolded for Michigan-based chemical firm Dow Chemical (NYSE: DOW).

Let's deal with the 97% profit drop first. This massive fall was triggered by falling sales, job cuts and the company's acquisition of Rohm & Haas, a specialty chemicals firm that Dow took over.

Despite the drop, Dow earned $24 million, or three cents per share in the first quarter. A year ago, Dow earned 99 cents per share -- there's your 97% drop. Sales fell as well, coming in at $9.09 billion. Excluding items, Dow earned 12 cents per share. As for expectations, the Street was calling for a quarterly loss of 21 cents per share and revenue of $11.69 billion.

Let's see if the stronger-than-anticipated earnings will boost the shares enough to topple intermediate-term resistance from their 20-week moving average. The stock has rallied during the past eight weeks only to come face to face with this resistance. Will this earnings announcement be enough to push the stock higher?

If the shares can power higher, there is plenty of room to run before the next potential resistance. Dow's 50-week moving average is dropping through the 21 region, which is the next potential resistance. The last time Dow managed to close a week atop this resistance was mid-May 2008. Let's see if May 2009 can be as fortuitous for Dow, this morning's announcement is a good start.

SEE MY STOCKS

DOW down less than 10points. Many still very anxious about the stress-test. The swine-flu compound the uncertainties. It is the best to be sideline at the moment and wait for things to be stablised before we think of going in again? We shall see ...

KLCI might be seeing 950 today? The 1000-level thoughts have been forgotten. Just last week we were talking about a possible to KLCI breaching its psychological 1000-level, but as the thing turn out to be, we are seeing more fears than positiveness. Hence, most probably we are talking about 950-level, 900-level and below .. abandoning the 4-digits optimistic figures.

Aviation vs Swine-flu

In Asia, Hong Kong's Cathay Pacific (0293.HK), which bore the brunt of the SARS crisis in 2003, closed down 0.95 percent after sharp earlier falls, and Air China (0753.HK) fell 7 percent.
Stone Lin, an airline ****yst with Yuanta Securities in Taiwan, said the flu outbreak could dim hopes for summer travel.

"The summer months of July-September are typically the peak season for most airlines, with most bookings beginning right now," the ****yst said.

"With sentiment so weak, and worsened by the swine flu issue, it's unlikely anyone is going to go rushing to book holidays or corporate travel, which means the second half of this year won't be pretty for most airlines," he added.

IATA, which represents 230 carriers, said airlines could lose $4.7 billion this year before any impact from swine flu.

But Michael O'Leary, the head of leading European low-cost airline Ryanair (RYA.I), sounded a contrarian note.

"Are we going to die from swine flu? No. Are we in danger of SARS? No. Foot and mouth disease? No. Will it affect people flying short-haul flights around Europe this summer? Thankfully, no," he said.

TWO HEADWINDS

During the SARS outbreak, which began in China, airline traffic in Asia halved, and airline stocks tumbled 25 percent or more.

Most industry watchers, however, said it was still too early to say how big the swine flu risk could be to airlines this time.

"The overall situation is weaker now ... because there are two headwinds the airline industry is facing: one is the global recession and now this outbreak of swine flu," said Daphne Roth, ****yst at ABN Amro private bank.

But she added the current situation was also different from SARS, as information about the illness is coming out faster.

"There is a lot of fear out there right now and I think we've got to see if it gets much worse or the same or better over the next few weeks," said Clay Jones, chief executive of Rockwell Collins (COL.N), a U.S. supplier of parts to Boeing Co (BA.N) and EADS (EAD.PA) unit Airbus.

"If Mexico stays the center of attention, I'm not overly concerned," Jones added. "If it spreads widely in the United States, obviously that's a much different situation."

(Writing by Tim Hepher in Paris, Doug Young in Taipei and Karen Jacobs in Atlanta; additional reporting by Reuters bureaus across the world; editing by Will Waterman, Patrick Fitzgibbons and Steve Orlofsky)

8.55 am : I m still with a conviction to clear my LionInd as I 'accidentally' bought at 0.91(10k units) yesterday. I did not expect it to be done THAT low level. In fact, it went down all the way to 0.885!! I was at dental-clinic, paying money to get the drilling-pain. Ouch!

9.15 am : KLCI losing another 10points ... at 955 now. After seeing off 950, will it be back to 930 level this week? LionInd in RED, at 0.895 now. Well, queueing at 0.875 hmm ...

9.25 am : LionInd sold at 0.915 moments ago. Done with it. The net loss about RM1k playing with it. Hmm ...

WHERE IS THE BEST STOCKS?The mind is a truly miraculous machine. But it also has its flaws.

The mind is a truly miraculous machine. But it also has its flaws.

One of the most astounding "tricks" the human brain pulls off is giving each one of us the impression of seamless and complete reality. Very few people go around complaining about the giant, gaping holes in their visual spectrum � or in their memories. And yet the gaping holes are there.

The reason you never notice these holes (and why I don't notice them either) is because your brain "fills in the gaps" automatically. Much of what you see, and even more of what you remember, is actually a product of your imagination... an uncanny reconstructed version of events, based on your brain's split-second calculations of what the holes should be filled with.

This filling in of holes is a good thing, not a bad thing, and the mind is incredibly good at what it does. Whether we realize it or not � and mostly we don't � the brain pulls off amazing feats every day. Like assessing a negotiable gap in traffic, for instance, while merging onto a busy highway at 65 miles per hour. No robot on Earth can do that... yet we routinely do it while sipping hot coffee and fiddling with the radio.

 

The trouble comes when we forget that perception and reality are not the same thing. Arien Mack, an expert on cognitive psychology, observes that "Most people have the impression that they simply see what is there and do so merely by opening their eyes and looking." But all too often � and especially in markets � this really isn't the case at all.

The Invisible Gorilla

A famous experiment by a group of Harvard psychologists shows just how big the "holes" in human perception can be, especially when we are concentrating hard on a task.

As part of the experiment, the test subjects (who had no idea what was actually being tested) were shown a video. The video showed a group of basketball players, some of them in white uniforms and some of them in black uniforms, passing a basketball back and forth. The test subjects were also given a specific task � count the number of passes made by the team of white uniforms or the team of black uniforms.

So far, so good, right? Just a mental math exercise, really. Keep track of where the basketball is going and tally up the results. But here is where the experiment gets interesting.

In the middle of the video, while the teams are passing the basketball around, one of two things happened. Either a woman with an umbrella would walk into the center of the action, or, even more oddly, a person in a gorilla costume would do the same thing. In either case, the intruder � either the umbrella woman or the gorilla � would stay visible for roughly five seconds.

In truth, the Harvard psychologists didn't really care how many times the basketball was passed around or how well the test subjects could count. The task was a red herring, a simple means of getting the test subjects to concentrate.

The real answer the experimenters wanted answered was, How many of the test subjects would notice the woman with the umbrella? Better yet, How many of them would notice the gorilla?

"Did I notice the What?"

After the video finished, the psychologists asked the subjects if they noticed anything peculiar about what they just watched. This is where we see how just how powerfully tunnel vision can affect the brain.

Thirty-five percent of test subjects missed the woman with the umbrella. They just didn't see her at all. A whopping fifty-six percent failed to notice the gorilla.

When asked specifically of those who missed it, "Did you see anyone walk across the screen," the answer was no. Complete puzzlement. When asked point blank, "Did you notice the gorilla," they thought the question was a joke. Typical answer: "The what?"

Keep in mind, though, that the results were very different for those asked to count the passes versus those simply asked to watch a random video. It was specifically the group of test subjects who were busy tracking the basketball who missed the woman and the gorilla.

The act of sheer concentration required to tally the movements of the ball, and to keep track of the black and white uniforms, was enough to completely block out the perception of a man in ape suit, standing there, plain as day, for a full five seconds.

Market Blindness

The same type of "inattentional blindness" can happen in markets. In fact it happens all the time. The dangerous part of this equation comes from the fact that we don't register our lack of perception. We go on assuming that we see everything � not realizing that our brains have gotten overly focused on one small part of the picture, sometimes to such a degree that a gorilla could be standing in front of us and we wouldn't even notice.

Take the great housing bubble and bust for example. In primate analogy terms, the housing bubble wasn't so much a gorilla as full-blown King Kong. In hindsight, it would seem impossible to have missed such a thing. How could the country, and the world, have missed all the glaring signs?

We are harsh on the dirty tactics of Wall Street in these pages � and deservedly so � but the investment bankers missed it too. Bear Stearns and Lehman Brothers and the like would never have loaded up on toxic subprime paper to the degree that they did if they had had any inkling of what was coming. There is a difference between rampant greed and suicidal tendencies.

Or think of the millions of real estate investors who followed housing over a cliff. Why did they do it? Why did no one step back and say "whoa, wait a second" when we started seeing chest-beating gorilla phenomena pop up like "condoflip.com," complete with the charming slogan "bubbles are for bathtubs?"

The explanation for the bubble is multi-faceted � some of it having to do with concepts like greed, social peer pressure, internal corruption, lax monetary policy, and so on. But I also suspect that mass "tunnel vision" played a very big role.

To see what I mean, go back to the video experiment for a second. Imagine that you were one of the test subjects asked to count the basketball passes. Then further imagine that, with every additional pass that you counted, a big chunk of money would be added to your bank account.

Now your motivation to keep track of the basketball is even more powerful, because you perceive yourself as getting richer with every pass. If someone tried to bother you or disrupt your concentration in this state, you might even be tempted to snarl at them. "Leave me alone dammit, I'm making money here!" What are the chances you would have seen the gorilla in that scenario? Very slim.

 

Trading Takeaways

The first takeaway here is pretty obvious � beware of tunnel vision in markets.

You may think you're seeing everything, because that is precisely the impression that your functional human brain is supposed to deliver. But if you're too dialed in to just one small part of the picture, a gorilla could just about walk up and tap you on the shoulder and you might not even notice it.

The bigger takeaway is that invisible gorillas can help you make money... if you can get good at spotting them before the crowd does.

The crowd is epically bad at anything having to do with deep analysis or insight. This is because the majority of participants in the market crowd are "flying on automatic pilot to the land of groupthink," to use an old Doug Casey phrase, and another big chunk are passive and not really possessed with the drive to figure out what's going on. That leaves only a small handful of market participants to do the real thinking and observing.

And thus, when a gorilla walks into the room, most of the time the crowd won't notice it. They'll just keep pushing on in the general direction they were already going, or otherwise ignore the big opportunity � or the big risk � that the gorilla represents. This concept is very powerful because the crowd is not always wrong... but by definition, the crowd is wrong at major market turning points.

So how to get better at spotting gorillas? Work on "defocusing" your eyes every once in a while, as Taipan Daily reader LBT mentioned earlier this week. Take the time to step back and think about the big questions every so often. Brush up on market history. Look at long term charts as well as daily charts. Jointly exercise your creative and analytical side � make them play together. Ask yourself, What could I be missing? What have I been too biased or harried or distracted to see?

If you do this regularly, and work on it and get good at it, you'll get better at spotting gorillas as a natural habit � not just in markets but in day-to-day life, where unexpected insights have a special power of their own. In markets specifically, the reward for cultivating this open-minded habit is discovery of the occasional insight that could save you a heck of a lot of money... or make you a truckload of money... or both at the same time.

MK Land's Pretty Oversold

Judging from my recent postings, readers may think I am into speculative stocks. Not really, but when the timing is right, certain stocks are worth a ride. These stocks, including Talam, are not your buy and hold kind of stocks, but owing to the confluence of certain important factors, they make decent rides. The other stock that I have mentioned last week which I like is MK Land. Following the high profile, high flying reputation in the last few years, MK Land has had to tone itself down to work down some pressing debt issues. MK Land has taken a backseat while working through that over the last 12 months.

The timing to exit some non strategic businesses is welcomed but prices could be depressed, thus its better to take time. Still, its better to exit the hotels, resorts, nursing college and biscuits businesses. The stock has been walloped so bad. If funding was a bit looser, the owner would be dying to privatise the company. The current share price is still below 30sen. The RNAV is RM1.80!!!!!!!! I suspect if the controlling shareholders have no problem with "over-leveraging already", they would have taken the company private. Seriously, 40-50 sen is a no brainer, now that it has sold off some pieces of land, and should be exiting some non-core businesses soon.

If we wait for everything to fall into place, you would be entering MK Land at 50 sen.

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The principal activities of MKLAND are those of investment holding and the provision of management services. The principal activities of the subsidiaries are property development and property investment, operator of hotel, golf and country club, resort and theme park, provision of educational services and investment holding.

The more notable property project is the Damansara Perdana township project. The project consists of 962 condominium units, 269 units of serviced apartments and 107 units of shops and office suites. The township is strategically located along the Leburaya Damansara Puchong and the Sprint Highway. It is also adjacent to IKEA and Tesco. In addition, MKLAND's flagship project is the RM3 bn Bukit Merah Laketown development in Perak. It consists of a range of resort facilities such as the Marina Village, Waterpark, Eco Park, and the Bukit Merah Lake.

Malaysian Rating Corporation Bhd (MARC) has maintained MK Land Holdings Bhd's BBB+ rated RM60 million outstanding bonds on MARCWatch Negative. The company was first placed on MARCWatch Negative on May 7, 2008 due to liquidity concerns following the deferrment of scheduled payments to build up its sinking fund account.

MK Land has since met the timeline to place RM30 million into the sinking fund account before August 25, 2008 and Tranche 1 bonds has been fully repaid. The company's liquidity position has remained strained despite moderate improvement in profitability measures for the six months ending Dec 31, 2008.

To address its upcoming final redemption of the rated bonds in September 2009 of RM60 million, the company had announced on Jan 20, the disposal of 23 acres of land located in Damansara Perdana in Petaling Jaya, Selangor.

For the first half of financial year ended Dec 31, 2008, the company had recorded a pre-tax profit of RM18.2 million, erasing a pre-tax loss of RM16.8 million previously, due to improved sales of development properties.

However, it registered negative net cash from operations of RM2.3 million Its cash and bank balances and deposits with licenses banks remained at RM29 million relative to short-term borrowing of RM300.2 million which includes the outstanding bonds and RM137.9 million of bank overdrafts.

MK Land's revenue increased 82.3% to RM124.6 million for the six months ended Dec 31, 2008, from RM68.4 million a year earlier. It returned the company to the black with a net profit of RM10.1 million or 0.84 sen a share from a loss of RM18.3 million previously. While the profit was boosted by other operating income of about RM8.9 million, the management pointed out that property sales have improved since last July, which was the start of the company's current financial year ending June 30, 2009 (FY09), despite the difficult market condition.

"We achieved total sales of RM150 million to date (within seven months since July last year) which is significantly higher than the sales recorded in the corresponding period in FY08," said Mustapha Kamal. According to him, sales for the quarter ended Sept 30 last year amounted to RM59.3 million. The numbers had remained steady in the quarter ended Dec 31, 2008, with sales of RM60.5 million. Meanwhile, "in-hand sales" since the start of the year amounted to RM30.4 million.

Mustapha Kamal stressed that the RM150 million sales came mainly from projects such as the Armanee condominium and Metropolitan Square, not low-cost housing projects that have low or zero margin. Thus, when these sales translate into revenue, it will contribute decent profits to the group. On another note, Mustapha Kamal said he had no choice but to acquire a 9.2-hectare land in Petaling Jaya from MK Land for RM150 million cash last month. He said that MK Land, which was looking to raise funds, couldn't find a buyer who would offer a fair price for the land.

According to him, MK Land needed the cash flow to kick-start or resume work on certain projects in order to generate the revenue and to avoid delaying the delivery of certain projects, which will result in the company paying "late ascertained damages".

"I have to sell my privately owned properties before I could pay the RM150 million to MK Land," he said. MK Land will use proceeds from the land sale to generate more cash flow in order to help repay a RM60 million bond due in September. The bond is deemed to be the last hurdle for MK Land, the management said, as the group's remaining RM445 million borrowings are essentially project financing, which will only be redeemed as and when the company sells and develops the projects in stages.

He is confident that MK Land is on the path to recovery. He said the company has several projects in the pipeline, in locations such as Damansara Perdana, Damansara Damai, and Jelapang, Ipoh.These projects have obtained the necessary approvals from the authorities and involve 5,639 units of properties with a combined gross development value (GDV) of RM4.1 billion. Depending on the economic situation, the GDV of these projects could be realised within three to five years.

China, the Fed and Financial MADness Revisited

Well, they did it. They pulled out the big guns � and caught the world by surprise.

The Financial Times called it "shock and awe," further adding that "Federal Reserve plan stuns investors."

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A Seeking Alpha contributor suggested that "Helicopter Ben" (as in Ben Bernanke, the Chairman of the Federal Reserve) should have his nickname changed to "ICBM Ben," as in Inter-Continental Ballistic Missile.

MarketWatch elected to play it straight in their headlines: "Treasury yields drop most since 1987," they said, following that up with "Dollar plunges after Fed says it will buy Treasuries."

Not only did the dollar plunge, but gold moved sharply higher at the same time on Wednesday � thus breaking the remarkably odd coupling that had persisted these past few months.

In addition to its role as an inflation barometer, gold is a form of crisis insurance. Meanwhile U.S. government bonds (which one must pay for with dollars) are a form of deflation insurance.

And so, when gold and the dollar are rising simultaneously, the global economy is in a world of hurt. To see gold and the greenback break apart now � like two temporarily fused magnets returning to opposite polarity � thus might well note the end of the global deflation trade.

Wall Street's Shameful Secret Revealed

Did you know Wall Street has a "dirty little secret" that keeps THEM rich and YOU poor? Inside this Special Exposé, you'll hear from a fed-up former insider who wants to help YOU even the score with a guaranteed chance at 371% gains by May 1, 2009. Read on for all the details…

A week ago, we noted that something like this could happen. Those who expected deflation to persist had forgotten that "the Fed has not gone crazy yet" (See March 13 piece, Is Gold on "Deflationary Death Watch"?).

We can also dial back a little further, to the January 7 Taipan Daily titled, "Don't Stay Short Treasuries � Short the Dollar Instead," and find this little nugget:

If the Fed intervenes to support treasuries (in order to keep interest rates low), they will do so at the expense of the greenback. The Fed has to print dollars, or otherwise release dollars, in order to buy USTs in the open market.

And so they did. As bonds soared, the dollar crashed. To defeat the deflationary Mothra once and for all, Ben Bernanke has sounded the Godzilla call.

Solving a Mystery

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I'll admit, Bernanke had me fooled for a bit. He fooled a lot of people with his dormancy. Though the Fed hinted at buying treasuries in December of 2008, enough time had passed that it looked like they wouldn't do it after all.

In Macro Trader (my trading service), the Fed's bold move caught us by surprise � as it caught most everyone by surprise � but fortunately we were already short the dollar and long hard assets (including oil and gold) via various instruments when the big announcement went down. (We are still making hay from those positions, and just yesterday booked 92% half profits on our bearish dollar play.)

So why did the Fed decide to go for the gusto (and trash the dollar in the process)? Why now, this week? What follows is an excerpt from the "Weekly Briefing" I send out on Thursdays to Macro Trader members:

Let's be clear, this move was a total shock. "Nobody expected such explicit stuff," portfolio manager Joseph Balestrino said. "It's good news for markets but bad news because it means the other stuff isn't working. Things are terrible by the Fed's own admission."

But if things were terrible, why had stocks been rallying? After all, markets had seemed to be improving on their own before the Fed's big move.

The banks had already rallied hard... stocks were already going back up... and the Consumer Price Index rose in February by the highest amount in seven months.

So it was exceedingly strange for the Fed to engage in this "shock and awe" treasury buying exercise after so many signs of improvement had already been coming in.

There are a few theories as to why the Fed acted out of the blue, stunning investors the way they did:

1) Ben Bernanke knows something truly awful about the banks that no one else does... yet... and decided to get ahead of the curve by buying up USTs now.

2) The Fed was afraid that public outrage at the AIG bonuses had become so strong that no more bailout money would be forthcoming from Congress. Buying treasuries thus became the alternative.

3) Foreign purchases of U.S. Treasuries were starting to dry up, and the lack of buyers for future treasury issues looked ominous.

Of those three options, we can only guess which is right of course... but my vote is for number three.

Debt watchers who pay attention to the supply and demand flow for treasuries note that recent numbers looked "horrible." Economist and blogger Brad Setser further noted this week that "foreign demand for long-term Treasuries has faded."

This makes sense. The global exporters no longer have huge trade surpluses to recycle back into U.S. Treasury bonds. Newly optimistic investors are buying fewer Treasury bonds. China is electing to spend its cash horde in different spots around the globe, going on a natural resource buying spree, and has less money for Treasury bonds anyway now that it isn't exporting as much.

And so, the Fed may well have felt the need to preemptively position itself as a buyer of last resort for treasuries BEFORE something really ugly happened.

Financial MADness

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So that's my guess... the Fed chose to act aggressively, at what seemed to be an odd time, because they feared the bottom was about to fall of the U.S. government bond market.

Sort of a perverse logic, really. Things were looking so weak in Treasury land, emergency actions led to a short-term boost of colossal strength.

China may have had a role to play in the Fed's actions too. Is it a coincidence that just last week, Chinese Premier Wen Jiabao voiced that he was "very worried" about the safety of China's UST holdings?

To explore that angle, let's go way, WAY back now � all the way to May 2005.

Nearly four years ago, I wrote a piece for the Daily Reckoning called "Financial MADness." (You can still pull that piece up here.) What follows is the relevant excerpt. (Note too that four years on, the $600 billion figure has morphed into $1.9 trillion or so, an estimated two-thirds of that being U.S. treasuries.)

As of year-end 2004, China had more than $600 billion in U.S. dollar reserves. That is a sum that could effectively tear the financial plumbing system apart if it were unceremoniously dumped on the markets. With such massive pressure, in a compressed period of time, the pipes would surely burst. Of course, this would be fiscal suicide for the dumpers as well, which is precisely why such a move is not feared. China's own economy would be sucked into the vortex too, so why would the Chinese put a gun to their own heads?

The theme that applies here is the doctrine of mutually assured destruction, or MAD � but of the financial sort, rather than the nuclear.

A product of the 1950s, the doctrine of MAD essentially states that two parties with the capacity to destroy each other will recognize the folly of hostilities. We liquidate the Soviet Union, they liquidate us and nobody wins. So peace is assured, right? Wrong. The flaw in the theory comes in the form of a question: What happens if one side or the other is thrown into political turmoil, or if the reins are taken over by madmen with nothing to lose?

A Communist Party leadership on the edge of collapse would make a last-ditch bid for stability by any means necessary, which in turn would make it willing to contemplate the financial-Armageddon option, as a form of extreme blackmail, if its hand were forced. If the mandarins feared implosion, they would have the means to not just ask for extraordinary coordination from the United States and Japan, but to demand it… on pain of catastrophic consequences if they were allowed to fall.

But is this a point in favor of the optimists or the pessimists? Obviously, it's not a pleasant thought to imagine a breakdown in China's economy sparking massive civil unrest, in turn leading to a "hot war" with Taiwan as a means of distraction and a catalyst for unifying nationalism, which by extension draws in the United States and sets the stage for the grand finale: the financial equivalent of a hydrogen bomb going off as hostilities escalate out of control.

Fun stuff eh? That whole line of thought was basically back-burnered for four years, as the good times rolled on and China's economy powered along with it.

But now, the seats at the top of China's leadership pyramid are starting to look shaky again. The doctrine of Financial MADness has become newly relevant � as the Fed's unprecedented intervention in the treasury market may have shown.

Bicycles and Tables

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Meanwhile, global markets are showing clear signs of recovery � for now � but China's ability to maintain stability and growth has become an open question. Minxin Pei, an associate with the Carnegie Endowment for International Peace, wonders openly whether China's Communist Party will "survive" the crisis.

Until recently, most leading China watchers thought the Chinese Communist Party (CCP) had become remarkably resilient... Because of the global economic crisis, however, Beijing is in trouble. The problems are numerous: China's exports are plummeting, tens of millions of migrant laborers have lost their jobs, millions of college graduates cannot find employment, industrial overcapacity is threatening deflation, and the once red-hot real estate sector has nose-dived. The country's faltering growth is posing the hardest test yet to the CCP's resilience.

As financial blogger David Merkel has observed, there is a difference between "table stability" and "bicycle stability." Table stability implies a solid situation in the absence of change. Bicycle stability implies that things have to keep moving forward.

A table, in other words, can just sit there. But as soon as the bicycle stops, it falls over. In China's case, one might say it's the bicycle factories that have to keep moving forward... lest the whole social order fall over as millions of angry Chinese protest against the permanent disappearance of their jobs.

Why the U.S. government is ready to hand you a check for $62,881…

On January 15th, Congress revealed the contents of a highly secret document that's about to change the face of American energy.

Page 88 of this 258-page draft gives the details of a $160 billion mega-deal that looks to launch a wave of payouts for as much as $62,881.

The problem is… almost no one knows how to collect the payments.

Intriguing Maneuvers

Make no mistake � Beijing still sits on a mountain of cash. More than half a trillion bucks' worth of stimulus is wending its way into the system, and there is plenty more dough where that came from in the form of Chinese reserves.

Whether those cash reserves will be enough to keep China growing is the real question. The possibility that it won't be enough is what keeps the mandarins awake at night... and possibly leaning hard on the Fed.

Your humble editor wonders, too, whether China's recent commodity-buying spree and the Fed's treasury-buying binge could have a secret hidden connection. Consider this nugget from The Washington Post:

Chinese companies have been on a shopping spree in the past month, snapping up tens of billions of dollars' worth of key assets in Iran, Brazil, Russia, Venezuela, Australia and France in a global fire sale set off by the financial crisis.

The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth.

Could it be that China knew in advance the Fed was going to step in and buy Treasuries � a friendly "heads up" from one government to another, or even a negotiated arrangement of sorts?

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Could it further be that Chinese officials knew the dollar would crash on such Fed actions... a crash telegraphed to them but few others... and thus decided to step up their hard asset buying BEFORE the big event, with the foreknowledge that commodities were set to catch a bid?

Hmm...

However complex this web of intrigue might be, the charts at least are fairly straightforward. With the dollar folding like a cheap tent, China writing fat checks around the globe, and major commodities like oil and copper working out a clear bottoming process, hard assets look like an easy buy.

 

Transportation � Silly PR Stunt and PKFZ Scandal Revisit

Isn't it both funny and laughable to read how the prime minister opted the cheap-skate method of doing their PR stunt? The sleepy former PM may have left us for good to enjoy his forever honey-moon period but I bet everyone can still recall how he took a ride on LRT in an attempt to score some political and PR points. Now you've the new PM who did the same thing and it would be foolish to think such a stunt would do him any good. The next question that comes to your mind � doesn't the PM has a better PR team to rebuild his public approval rating? The fact remains that no matter how many times the PM took the ride on public transportation systems and how hard the government-controlled media spinned the story as if the PM was a superhero Superman, the people are simply too sick and tired of the silliness of the whole stunt.
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People still remember how the PM (was deputy PM then) took the easy way out by telling the average-Joes to bite the bullet and change their lifestyle when the government increased the fuel hike not many moons ago. Frankly do you really need to show how silly you are by taking public transport just to conclude that the system sucks? Didn't the new PM promised to deliver a better public transportation from billions of ringgit of savings resulting from the fuel hike back then? Stop beating around the bush and put the right people to study and improve the public transportation once and for all.
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Sure, the new PM's latest attempt to bring back the lost confidence in the business sector by abolishing the 30% bumiputra equity policy from 27 sub-sector were on the right path but why stop there? What's holding back from abolishing the controversial and obsolete NEP (New Economic Policy)? Of course people are still wondering if this is another short-term political ploy as the present government is known for flip-flop in its policies. There's no guarantee that one fine day they would suddenly reinstate the 30% bumiputra equity again and you can't do a single damn thing about it, not with the judicial pillar totally under executive's control.

It's too early to say if the new administration's intention is genuine but besides giving away the carrot in the form of increasing foreign ownership, the government should probably look into the cancerous corruption at its backyard. You can only do so much for so long by sweeping all the corruptions accusations under the carpet. And why did the Transport Minister Ong Tee Keat suddenly burst into anger that TheEdge Weekly published the infamous PKFZ (Port Klang Free Zone) scandal revealing that the cost has just ballooned to RM8 billion from its original RM2.3 billion. People were puzzling why a person (Ong Tee Keat) who was seen as a clean politician is trying to prolong the release of the audit findings by independent auditors PricewaterhouseCoopers (PwC) on the scandal.
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Like it or not the perception is that the PKFZ scandal was tainted with corruption from the very beginning � from former MCA President Ling Liong Sik to Ong's predecessor Chan Kong Choy. Ong may have thought that the PKFZ was quite a straight-forward project without much hanky-panky elements and hence his big promise to reveal all but soon after he became the President of MCA he began to realize how huge the scandal is. He must be kicking himself for opened his big mouth with the promise to tell all about the PKFZ scandal. And since Ong Tee Keat refused to acknowledge or deny that the scandal is now costing RM8 billion, people would think what was reported by TheEdge is correct. Unless Ong is serious about suing the weekly publisher the MCA President would be seen as tainted as well. It seems Ong is buying time hoping the PKFZ could attract more investment and as such could neutralize the irregularities in the scandal.

News Highlights (27.04.2009)

Axiata Group Bhd (AXIATA MK, Hold, TP: RM1.77) has paid the remaining RM2bn of the RM4bn owed to Telekom Malaysia Bhd (T MK, Hold, TP: RM2.74) arising from the demerger exercise. The second payment, together with interest earned of RM68m, represents the full settlement from Axiata to TM. The initial RM2bn was paid a month ahead of schedule earlier this month. (Starbiz)
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Axiata Group Bhd's (AXIATA MK, Hold, TP: RM1.77) Indonesian unit, PT Excelcomindo Pratama tbk (XL), may undertake either a rights issue or a convertible bond to fund its capex, which is reported to be 700bn rupiah (RM237.6 m), said Axiata president and group CEO Datuk Seri Jamaludin Ibrahim. He said the appropriate capital structure to fund XL's growth will be decided next month. Earlier, Axiata had to scrap plans to sale 7,000 communication towers, which was supposed to have raised US$700mn for XL, due to regulatory changes in Indonesia, as well as the global financial crisis. (Malaysian Reserve)
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Several government-linked companies (GLCs) have emerged as interested parties to take up the reins at Ramunia Holdings Bhd, sources say. Heading the pack is Sime Darby Bhd (SIME MK, Buy, TP: RM6.40), which is said to be keen on wrapping up a deal with Ramunia. If all goes as planned, an announcement on the matter may be made within the next 2 weeks. Another GLC, UMW Holdings Bhd (UMWH MK, Hold, TP: RM5.70), which is one of the interested parties, is however believed to have dropped out of the talks and is now said to be looking to sub-contract O&G fabrication jobs to Ramunia. It is not certain whether Sime Darby' plan entails coming into Ramunia as a passive shareholder, or if it would involve a change in management of Ramunia. Sime Darby had expressed interest in coming to Ramunia as a shareholder back in 2006, but pulled out from negotiations following the commencement of the mega-merger of the Permodalan Nasional Bhd companies - Sime Darby, Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd. (The Edge)
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YTL Power International Bhd (YTLP MK, Buy, TP: RM2.93) has resubmitted a proposal for the 450MW Bibiyana power plant project in Bangladesh, that is being re-tendered for the second time within a year. The utility submitted a bid for Bibiyana power plant project in 2007 but was disqualified at the final stage of the bidding process. Apart from YTL Power, Ranhill Bhd has also submitted a pre qualification bid. Bangladeshi news reports say the evaluation committee headed by the Power Cell will commence its review this Sunday and qualification will be announced within the next two or three weeks, with the final round of bidding in May. The winning bid is expected to be announced by June. Power Cell is a unit set up by the Bangladesh' Ministry of Power, Energy and Mineral Resources to carry forward the power sector reforms activities in Bangladesh. (BT)
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Glomac Bhd (GLMC MK, Hold, TP: RM0.62) may expand its ongoing 440ha Bandar Saujana Utama township project in Sg Buloh, Selangor, as demand soars. The RM1.3bn township, which is 80% developed, is focused on providing affordable homes priced from RM230,000 to RM400,000. Corporate communications director Fara Eliza Tan Sri FD Mansor said Glomac has offers from banks, landowners and receivers, to buy 40ha to 200ha of land, surrounding the township. "We are considering the offers. This is a matured township and there is soaring demand for properties. The township has attracted civil servants, who are not severely affected by the recent economic downturn," Fara said. She said the 400ha Universiti Teknologi Mara (UiTM) in Puncak Alam would be a catalyst for further growth at the township. (BT)
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Socotherm SpA, the Italian provider of pipe coatings for Eni SpA and Exxon Mobil Corp, has denied reports that its main stakeholder was preparing to give up part of its stake to Wah Seong Corp Bhd (WSC MK, Hold, TP: RM1.13). Last Wednesday, a piece of Italian news said Zeno Soave, Socotherm' largest shareholder, is ready to cut his 60% stake in the company as part of a possible partnership with Wah Seong. "The news was incorrect," Socotherm said, adding that Wah Seong had previously proposed taking up a stake in the company. Socotherm said it was proposed informally during an arbitration proceeding, started last December, over their Malaysian joint venture. (BT)
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Prime Minister Datuk Seri Najib Razak will announce the liberalisation measures for the financial sector today. This will be his second announcement on the country's market liberalisation plan following the measures announced for 27 sub-sectors in the services industry on Wednesday last week. (Malaysian Reserve)
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The Government is to make a comprehensive decision on the issuance of approved permits (AP), Deputy Minister of International Trade and Industry Datuk Mukhriz Mahathir said yesterday. The approach would include doing away with the current policy of issuing APs or imposing levy or tax on AP holders. A final decision on the issue will be announced once cabinet approval is obtained. (Financial Daily)
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Bank Negara Malaysia is set to lift the cap on foreign equity participation in the insurance sector as it kick-starts the last phase of the 10-year Financial Sector Masterplan. Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz met with insurance and takaful officials last week to inform them of some of the upcoming liberalisation measures. She did not disclose details of the plan, but hinted that new licences, namely for takaful operation, may be on the cards, an industry source said. Currently, existing foreign shareholders can increase their stake in a local insurance company up to a maximum of 49% - the maximum allowable under Malaysia' foreign investment rules. New foreign insurance companies can also enter the industry but they can s
only buy up to 30% of a locally incorporated insurance company. The source said the lifting of the foreign equity barrier applies to both conventional and takaful operations. But there' a catch. The new player will have to help facilitate the Malaysian entity to expand overseas. (BT)
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The Nomad Group Bhd's wholly owned subsidiary, The Nomad Residencies Sdn Bhd, is buying a 100% equity stake in City Centre Hotel Sdn Bhd (CCH) from Pulai Springs Bhd for RM47.3m. CCH is involved in the operation and management of hotels, and owns the Novotel Kuala Lumpur City Centre and the land on which the hotel is constructed. Novotel is a 28- storey building comprising of 274 rooms and 17 conference suites, restaurants, lounges, pool, and other amenities. Nomad Group said the proposed acquisition would provide synergy and expand its hospitality business. (Malaysian Reserve)
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Unisem says its equipment capacity utilisation has increased to 50% now from 40% in January, as demand has started picking up since last month. Unisem's production utilisation averaged about 75% in the first three quarters ended Sept 30 before it saw a sharp contraction in the fourth quarter. According to the group, the March demand was higher than January and February combined. The factory in Chengdu, China, was at optimum utilisation (90-100%) now from 50% earlier this year. The Chengdu factory is key to Unisem's performance where 60% or 70% of the output is for the Chinese domestic market. (Starbiz)
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Iskandar Malaysia will be receiving RM1.7bn worth of investments following the signing of a memorandum of understanding (MoU) between UK-based Lenstar Investments Ltd and Maestro Development Sdn Bhd. Under the MoU signed in Johor Bahru last Saturday, both parties will form a joint venture to acquire 142.13ha of land in Bandar Bistari Perdana, owned by Redez Properties Sdn Bhd, in Mukim Plentong. Lenstar's managing director, Mohammad Munir Malik said among the developments to be carried would be the construction of a specialist medical centre. Other developments include constructing a higher education centre and business centre. Development of the area is expected to start in 3 months' time. (Malaysian Reserve)
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Eastern Pacific Industrial Corp Bhd (EPIC) hopes to secure half of the RM200m worth of fabrication works it has submitted bids for via subsidiary EPIC Mushtari Engineering Sdn Bhd (Mushtari) this year. Managing director and chief executive officer Ramli Shahul Hameed said Mushtari is bidding for jobs from, among others, Shell in Brunei, ExxonMobil and Carigali Hess. He said this is the first time Mushtari will bid for jobs on its own, as previously it only participated as a sub- contractor for oil companies. (BT)
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INVESTMENT RESEARCH
Global
Stocks rallied Friday after Ford, Microsoft and American Express reported results that met or topped analysts' expectations. The Nasdaq ended higher for its 7th week in a row, while the Dow and S&P 500 ended the week slightly lower after six straight weeks of gains. The Dow Jones industrial average added 1.50% (+119.23 pts, close 8,076.29). The Standard & Poor' 500 index climbed 1.68% (+14.31 pts, close 866.23) and the Nasdaq composite gained 2.55% (42.08 pts, close 1,694.29). In currency trading, the dollar fell versus the euro and the yen. U.S. light crude oil for June delivery rose $1.94 to $51.56 a barrel on the New York Mercantile Exchange. (CNNmoney)
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The U.S. economy will continue to contract "for some time to come," said Lawrence Summers, director of the White House National Economic Council. "I expect the economy will continue to decline," with "sharp declines in employment for quite some time this year," Summers said yesterday. Summers said the economy will pick up as manufacturers rebuild depleted inventories and consumers replace aging cars. "These imbalances can't continue forever," he said. "When they are repaired they will be a source of impetus for the economy." Summers said the Obama administration is "on a path toward containment and toward building a path toward expansion," he said, adding that "even sharp plans take time" to work, perhaps six months or
more. (Bloomberg)
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Financial regulators may force many of the largest U.S. banks to raise new capital or conserve extra cash after accounting for assets held off their balance sheets. The Federal Reserve yesterday released the methods used in stress tests on the 19 largest U.S. banks, which incorporated an accounting proposal that would bring about $900bn onto lenders' books. The accounting change suggests most of the 19 will need to take some action to buttress their capital, analysts said. Stronger banks may keep dividend payments low or apply retained earnings, with others selling new shares to make up the amounts, they said. (Bloomberg)
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Treasury 10-year notes fell, pushing yields above 3% for the first time since the Federal Reserve announced a plan to buy U.S. debt, as investors focused on $101bn in note auctions next week. The benchmark 10-year security dropped for the fifth straight week as record U.S. debt sales overshadowed the buyback program the Fed unveiled on March 18 to drive down consumer borrowing rates. The 30-year bond yield rose to the highest since Nov. 20, while the gap between yields on two- and 10-year Treasuries approached the widest since November as investors demanded greater compensation to lend to government for longer periods. (Bloomberg)
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People's Bank of China Governor Zhou Xiaochuan said China's current-account surplus "'will no longer be a serious problem" as the country's economic-stimulus plan stokes domestic demand. China's current-account surplus rose 15% to US$426bn last year, the State Administration of Foreign Exchange reported last week. Economists say China's current- account surplus and the U.S. current-account deficit must shrink in order to put the global economy on a path to sustainable growth. The global economic slowdown is curbing demand for imports in the U.S. and causing Chinese exports to fall. The U.S. current-account deficit narrowed to US$132.8bn in 4Q08, reflecting a smaller gap in trade of goods. (Bloomberg)
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Taiwan and China signed agreements on financial cooperation on Sunday, expanding air links across the Taiwan Strait and jointly fighting crime, in a move to improve further trade and economic relations. Representatives of Taiwan' semiofficial Straits Exchange Foundation and its Chinese counterpart, the Association for Relations Across the Taiwan Straits, signed the agreements in the third round of formal negotiations between Taiwan and China since Taiwan' Ma Ying-jeou administration came to power in May 2008, on a pledge to improve Taiwan' flagging economy through better relations with China. (WSJ)
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The International Monetary Fund raised its estimate for how much fiscal stimulus governments are injecting in an effort to fight the worst global recession since World War II. The Washington-based lender said yesterday that the Group of 20 industrial and developing countries had committed to spending increases and tax cuts totalling 2% of their gross domestic product this year and 1.5% next year. That marks an increase from last month's estimates of 1.8% for 2009 and 1.3% for 2010. IMF Managing Director Dominique Strauss-Kahn said Saturday that the current budget plans "may be enough" as long as policy makers can cleanse banks' balance sheets. The new estimates come after countries including Japan, South Korea and Russia announced new rescue packages for their economies. The biggest effect from the measures may come toward the end of this year, an IMF official said on condition of anonymity. (Bloomberg)
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The International Monetary Fund is considering selling bonds to several developing countries to raise money to combat the global economic slump. China and Brazil are among a handful of nations that have expressed interest in purchasing the securities, which would give member states a different way to contribute to the Washington-based fund. The IMF has never before issued bonds. The IMF is seeking more cash to finance loans and aid to member countries during worst economic slump in the fund's 64-year history. (Bloomberg)
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Governments and central banks need to boost demand through increased spending and interest-rate cuts to prevent deflation from becoming entrenched, the United Nations Conference on Trade and Development said. A "sharp contraction" in industrial output in developed nations and declines in the costs of commodities and other goods means an "absolute fall of the price level" is not likely to be avoided, Supachai Panitchpakdi, secretary general of the group, said. "The critical question is whether this marks only a temporary corrective drop or whether it is the beginning of a longer period of deflation," he said. "The most important task is to break the spiral of falling asset prices and demand and to revive the financial sector's ability to provide credit for productive investment to stimulate real economic growth." Supachai said capacity utilization at "historic lows" and rising unemployment will prevent wage inflation for some time, he said. "Fears that too much money or rising government deficits could reignite inflation appear unjustified and could be misleading." (Bloomberg)
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The OPEC and 13 Asian countries called for greater oversight of oil and other commodity markets to prevent a surge in prices after the global economy recovers from the recession. Ministers participating in an energy roundtable in Tokyo sought limits on positions in the OTC trades and said excessive oil price movements were undesirable. They also called for continuous investment to boost energy supplies. (Starbiz)
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China's Stealth Abandonment of the Dollar Has Begun (Part Two)

China's Stealth Abandonment of the Dollar Has Begun (Part Two)

In part two of our "stealth abandonment of the dollar" series, Justice explains the three peripheral actions China has taken to accelerate the greenback's demise.

In part one of this two-part series we talked about China's not-so-little "problem": a paper mountain of U.S. dollar reserves in excess of $1.3 trillion (out of some $1.9 trillion total). We also laid out China's two-part goal of 1) getting shed of U.S. dollar exposure and 2) hastening the end of the greenback's reign.

It should be emphasized, again, that China is thinking longer term here. In the West we are more used to short-term thinking on the part of our leaders. This is, in part, due to a flaw in the system of representative democracy. Politicians are always thinking of the next election � never more than a few years away � and hardly if ever beyond that. This leads to a constant stream of easy promises, a tendency to put off hard choices, and an almost stubborn refusal to think clearly and soberly about the future.

From the "long game" perspective, the near-term ups and downs of the dollar don't matter as much. To get a sense of China's perspective, it might make sense to look at charts of the US Dollar Index from a weekly or monthly perspective, rather than a daily one.

But with that said, the game is definitely afoot. Here are the three "peripheral actions" (see part one) China is taking to bring about the dollar's demise, each bigger than the last.

Peripheral Action #1: Speaking to Those With Ears to Hear

China's recent rhetoric on the dollar has been a curious mix of strength and weakness, boldness and timidity.

On the one hand, a key Chinese official, central bank governor Zhou Xiaochuan, stated flat out in recent weeks that the dollar should be replaced as the world's reserve currency. On the other hand, when pressed on the matter, China waved off concerns of fiat currency regime change, calling the statement simply a matter of "academic opinion" put forth in essay form for discussion.

Chinese Premier Wen Jiabao has also appeared alternately hard and soft. "We have lent a huge amount of money to the U.S.," Mr. Wen said in March. "Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried."

There are mixed signals here. At times China has seemed to hold the whip hand, and at other times China has played the role of anxious creditor subject to the whims of its massive debtor client.

I suspect the mix of tones is deliberate. By sounding sometimes strong and sometimes weak, China is presenting a sort of Rorschach ink blot � a muddled message that biased listeners can resolve to their liking. Those who want to believe China is strong on the dollar question have evidence to support that idea. So, too, do those who believe the opposite.

Meanwhile, the very fact that a conversation is being held is a subtle victory. One might say a whisper campaign against the dollar has begun, and China (with a touch of help from Russia) has begun probing for ways to keep the conversation going... and perhaps even gradually turn up the volume.

This is how a delicate campaign begins, especially when the ultimate idea (replacing the dollar as world reserve currency) is so bold. You test the waters at first... get people thinking... use subtle channels to get your message to those with ears to hear, being careful not to pressure those for whom it's still too early to hear.

As the stakes get higher, this low-level background chatter should increase. By the time there is widespread and serious talk of "what to do about the dollar," if China's mission is accomplished, it will feel like the subject is not new or taboo, but had already been on the table for quite some time. And those who heard China's message early on will be prepared.

TEH : A brilliant game plan, if that is what China has in mind.

Peripheral Action #2: Quietly Circulating the Yuan

China's second course of action is more substantial. But because the details are a little too complex for the average layman to grasp, the media has all but ignored the implications.

Here is the gist from Bloomberg, as reported some three weeks ago:

China's leaders... are making it easier for trading partners and consumers to do business in yuan. The People's Bank of China has agreed to provide 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency swaps. More such arrangements are being planned so importers can avoid paying for Chinese goods with dollars, the central bank said. In Hong Kong, which has pegged the currency to its U.S. counterpart since 1983, stores from Park'n Shop supermarkets to jewelers accept yuan.

The Chinese yuan is not yet what's known as a "convertible" currency. In other words, the yuan is not yet freely tradable on the open market. Currency traders can't buy or sell yuan in the same manner as dollars, Swiss francs or euros.

TEH : I have shared with JL recently about what I read regarding China moves to use the 'currency swaps' and making yuan 'more tradable'. This is only to point why I thinking that China is really up to something 'big'. US is aware of it but ... it is a clash of strategies now. We shall see China's next move. Also, China has been very 'quiet' in UN and such ... but recently China DARE to voice out their 'displeasure'. Time is here for China to dominate ... the crisis becoming an opportunity for China to grow ... into economy power house.

Over time, this status will change. Beijing has long placed trading restrictions on the yuan as a measure of protection for the home market. But now, through various "currency swap" agreements, China is looking to end the role of the U.S. dollar as transactionary middleman in various trading partner transactions.

Part of the role of a world reserve currency is to grease the wheels of commerce by acting as an acceptable medium between two countries. If Argentina wanted to trade with Israel, for example, there might be a currency problem � while Argentina has little need for Israeli shekels, Israel probably has even less need for Argentine pesos. Enter the dollar. If both countries agree to do their trading in U.S. dollars, the problem is solved. This is so because, in theory at least, the world's reserve currency is universally useful and desirable.

With these new currency swaps, China is in effect saying to its major trading partners, "You know what? How about we dispense with this intermediary dollar stuff? We'll agree in advance to do a swap � providing you a line of credit of sorts � so that you can pay for your Chinese imports in Chinese yuan. And in turn, when China imports your products � beef, grain, natural resources or what have you � we'll pay you in your local currency too. No greenbacks necessary."

This "stealth action" has quite a long ways to go. The amounts involved are still very small in the context of global trade, and there are a lot of kinks to be worked out.

But in a way that's the point. Challenging the world's reserve currency � truly challenging it in the logistical sense, not just with rhetoric � is not something you just pull off in a fortnight. This is how "change at the periphery" works... small, seemingly innocuous, below-the-radar type developments that gather momentum and force over time.

Peripheral Action #3: Embracing the Industrial Inflation Hedge

A week or so ago I wrote the following in these pages

A very important question is whether the rally in copper is real. Because "Dr. Copper" is known as the metal with a PhD in economics, a lot of people look to copper as a global barometer of economic activity. I am coming around to the view that Dr. Copper's message may well indeed be for real... but that the good doctor is more likely predicting the imminent return of inflation as opposed to renewed economic prosperity.

In hindsight, I think that assessment has turned out to be more or less correct � but with a twist. As Ambrose Pritchard with the UK Telegraph reported last week, China has been buying copper like crazy:

Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
"I wish I could just get back to where I was!"

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This is big news. The hybrid car element is further intriguing given Warren Buffett's 10% investment in Chinese hybrid car maker BYD, and the fact that China's auto sales recently surpassed U.S. auto sales for the third month in a row.

But the bigger picture aspect of China as major league buyer, storer and horder of base metals is this. When paper can't be trusted and precious metals markets are too small, raw materials are the way to go. This "industrial inflation hedge" concept could catch on like wildfire in the coming years.

It just makes sense. Gold and silver will do very well in an environment of global currency debasement and serious inflation problems � exactly the type of world we're headed for. But the trouble with precious metals for countries like China has always been their relative lack of size. China alone could drive the price of gold up to many thousands of dollars per ounce, simply by attempting to ratchet up its percentage of gold holdings from one percent of reserves to some large multiple of that.

Raw materials, on the other hand, are far more abundant, and ultimately more pragmatically useful too, in terms of being plugged in to the demand equation. Hard assets like copper and nickel and zinc are immune to the whims of the printing press, and China will need all those metals and more, in substantial quantities, to build out the vision of economic prosperity it holds for the coming years. And what better time to stock up than in the quiet period before a stimulus- and debt-fueled inflation tsunami returns?

TEH : If you read these, you will agree that US market has NOT bottom-out. Seriously, think of it LOGICALLY ... can US continue to exert their SUPER-power over all the global contries. China certainly rebelling at the moment. Russia has always not been on US side. US allies, UK and France are being hurt badly at the moment ... Can they save themselves? Euro still in deep-s*it and US are to be blamed. US too large to collapse?

There is still more to the story... which is wholly to be expected, as it is a very BIG story... but that's enough for now. In the short run, just remain aware that investing and trading are two different things, and thus the time to begin accumulating hard assets from a long-term investment point of view is not necessarily the time to trade them. There could be periods in the near future where the dollar looks quite strong and hard assets again look weak � but remember, this is the short game, not the long game.

In many ways I expect the second half of 2009 to prove tricky and challenging for buyers of hard assets. But the dynamics of the long game seem clearer by the day, and China's embrace of the industrial inflation hedge concept (along with other peripheral measures to get shed of the dollar) will play a large role. We will be trading and investing accordingly.

TEH : For trading opportunities, US-market could give us huge gains. But, if we are going to invest in US-stocks, we have to listen to the direction of China's Sun Tze strategies in place ... no one will dare to dis-miss the power of China, the emerging market. I m definitely on China's mission side. Perhaps, I m a chinese?

China's Stealth Abandonment of the Dollar Has Begun (Part One)

China's Stealth Abandonment of the Dollar Has Begun (Part One)

China wants to get shed of its excess dollar reserves � and to eventually see the dollar replaced as the world's reserve currency � but in its deep ambition China must tread carefully. The great game has begun...

"If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy."� Yu Yongding, influential Chinese economist, citing John Maynard Keynes

A quick note relating to Friday's Taipan Daily, "The Last Western Country Where Banker isn't a Cussword."

TD reader from down under Roger K. writes, There is another western country where banks are also doing well, that is Australia. The banks here have similar stringent regulation and conservative management... and Australia is a western country and we speak english - well sort of...

Good on ya Roger. (An Aussie expression, for those unaware.) I should have thought to include Australia in my mental checklist of Western countries.

When I took a semester at Macquarie Uni in Sydney (back in the late 1990s), there was a lively debate taking place as to whether Australia should consider itself a part of the West or a part of Asia. Perhaps I subconsciously resolved the question in favor of the latter. As it so happens, the Australian dollar is one of the six currencies represented in the Ultra Resource Index CD*, so all's well that ends well.

China is well aware of its little "problem" � that is to say, the problem of what to do with $1.3 trillion worth of U.S. dollar reserves. (China's total reserves are pegged at just under $2 trillion. Roughly two-thirds of that sits in dollar-denominated assets.)

Nor is it an easy problem to solve. In many respects the United States has China over a barrel. There is no way China can credibly threaten to dump its dollar holdings over the side en masse, as such would be an act of financial self-destruction. This "gotcha" situation gives Uncle Sam a certain degree of freedom to be as abusive as he likes when it comes to the printing press.

TEH : I have read many of such analysis regarding China "outburst" on USD. But, China is NOT sitting still and you could see China is 'up to something' big. I m still following closely the "Sun Tze" art of war applied in China at the moment ... a very interesting way of economic-war.

But hold on, that's not quite accurate. If things get desperate enough in Beijing, the mandarins can, in fact, threaten America with a full-scale dollar blowout. They can put the gun to their own heads, so to speak, and in so doing put it to Uncle Sam's head too. (For more along this line, see the March 20 Taipan Daily essay, "China, the Fed and Financial MADness revisited.")

Of course, that action is only palatable as a last-ditch resort. Playing the madman requires a certain air of desperation, a certain loss of face at home... and no doubt the mandarins would prefer avoiding that indignity if they can.

Something has to be done about the dollar situation regardless. And as we try to handicap the moves, we have to remember that China is very comfortable playing the long game. While U.S. politicians are content to play checkers, in other words, China prefers to play chess. Or, to make the analogy more apt, perhaps China prefers to play "Go" � an ancient game involving the placement of black and white stones that is, in its own way, even more subtle and complex than chess.

Change at the Periphery

The first tactical concept China seems to be embracing is "change at the periphery." If you cannot challenge your opponent bluntly and head on, then you do so obliquely and from the side. You undertake a series of quiet, subtle maneuvers � perhaps so subtle that your opponent does not notice them at first � and slowly build strength in that fashion.

This process of change at the periphery is related to a powerful concept from the theory of evolution known as "punctuated equilibrium." I gave a talk on this subject (as it relates to markets) in New Orleans in 2006.

A key thrust of the punctuated equilibrium idea is that, despite what many assume, the center does not actually evolve or change. Instead, the center remains relatively stable, while interesting things happen out on the fringes (the periphery). These fringe-area happenings are mostly inconsequential... little bubbles of experimentation that come and go.

But then, given enough time, something happens. One of those fringe happenings out on the edge catches on. Something new and powerful takes place at the periphery. This new model or idea or experiment or whatever it is � the precise technical term doesn't matter � begins to catch on.

The source of peripheral change then begins to compound in force and impact, reaching a stage where it grows and expands rapidly. And then, seemingly out of nowhere, the dominance of the old center is challenged.

As mentioned before, the old center does not actually change or evolve. Instead it is challenged and eventually dominated � perhaps dominated out of existence � by a new center that quietly grew in the shadows, out on the fringes, while few were paying attention.

TEH : This is a very interesting concept, which certainly came from a scientific-brain. Nevertheless, I fully enjoyed and do believe such evolvements are possible.

One Shovel at a Time

This roadmap of "change at the periphery" is the path China must take to free itself from the heavy yoke of excess dollar reserves. The mountain is too big to be moved all at once. And so, instead, China must figure out how to move the mountain quietly and in stages... one shovelful of earth at a time.

At the same time, China is obviously thinking of power on the geopolitical stage. It is not just enough to get shed of overwhelming greenback exposure � that is only half the goal.
The other half of the goal is finding ways to accelerate the twilight of the dollar as the world's reserve currency, in such a manner that Beijing's power can wax as Washington's wanes, without disturbing the existing order of things so much as to bring the current system crashing down on everyone's head. This, too, is a delicate business.

And so China must start small, and proceed with caution. But there is a time factor here too... the longer Beijing waits to carry out a strategic plan of action, the greater the risk that large stores of Chinese wealth could evaporate through the ongoing process of dollar debasement. There is no element of leisure here. In many ways time is of the essence, and this requires certain movements to be perhaps a little less subtle and a little more blunt than the mandarins would ideally prefer.

So that's the setup... tomorrow I will tell you about the three key "peripheral actions" China has recently undertaken, and show you how these actions could have dramatic impact on our trading and investing strategies in the years ahead.