Nighmare on Wall Street

Much to the shock of the global investors community, the much anticipated US$700 billion bailout plan was rejected by a 2 to 1 decision in the US Congress meeting yesterday. It immediately brought Wall Street to its worst single day point drop in history, with Dow Jones Industrial crashing by 7% (780 points) overnight!

That means there is still no potential sustainable solution to the prolonged financial and credit crisis currently experienced by the U.S plus its contagious effects experienced particularly in Europe.

So why the bailout plan did not get through?

The defeat of the rescue package represented a perfect collision of the forces of modern politics - a fast-moving Internet campaign, vulnerable incumbents, a weakened and unpopular president, and a roiling presidential campaign.

Based on poll, the American public appears to reject the plan as well. Perhaps, this is one scenario where few people really want to do it, given the presently politically sensitive timing!

The vote also represented an extraordinary rejection of Bush, who personally called wavering lawmakers and delivered a last-ditch public appeal Monday morning, as well as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Taking public funds to bailout failed financial institutions is indeed unpopular and perhaps against the principles of a free market but given the circumstances, it is perhaps justifiable to save the ship or else everyone may drown!

So it remains to be seen what is in store next. One thing is for sure, credit will be further tightened and more financial institutions and possibly companies (who are deprived credits) will start to fall if the financial crisis is not rectified in a speedy manner.

Yesterday's crash had also effectively wiped off US$1.2 trillion from the market in one day!

Do follow the video below for further reaction to the rejection of the bailout plan.

More Bailouts!

Below is a list of the latest bailouts from the financial shores. The only difference this time is that it has extended beyond the U.S financial shores...

1. Facing insolvency, U.S. Wachovia sold its banking operations to Citigroup, which took an immediate US$42 billion loss, slashed its dividend and said it will seek to raise US$10 billion in equity to offset the loss. The transaction was brokered by the Federal Deposit Insurance Corporation (FDIC), which received US$12 billion of warrants in Citi in exchange for insuring the bank's losses won't exceed US$42 billion.
2. The Belgium government bought 49% of Fortis, Belgium's largest bank; the Netherlands and Luxembourg also participated in the deal. Fortis' near-death experience hit Hong Kong insurer Ping An, which owns a stake in the company.
3. UK regulators seized Bradford & Bingley, a large real estate financing company.
4. Hypo Real Estate, Germany's second-biggest commercial-real estate lender, received a 35 billion euro loan guarantee to prevent its insolvency.
5. Iceland bought 75% of Glitnir Bank, the nation's third-largest bank.
   

Saving Private Investment Bankers

Shortly after the AIG bailout, US Federal Reserve came up with another strategic move by allowing both struggling investment bankers Goldman Sachs and Morgan Stanley to convert to commercial bank holding companies. The move allows both companies broader access to borrow federal money and the ability to build a stable base of banking deposits.

However, they will now be scrutinized under Federal Reserve, which imposes a much tighter regulation, compared to the present Securities and Exchange Commission.

The move is to prevent further financial crisis experienced by the collapsed former investment bankers Bear Stearns, Merrill Lynch and Lehman Brothers.

Shortly after the event, savvy investment guru Warren Buffett's Bershire Hathaway is investing USD5billion in Goldman Sachs.

Time to follow the footstep of Warren Buffett?

Is It Time To Get Optimistic?

Another eventful day! Just when the global market sentiment had appeared to reach rock bottom where doomsayers largely outnumbered optimists, global financial markets have suddenly embarked on a quick turnaround and appeared to have taken express rides to the north pole! Dow up 4% overnight, followed by key Asian markets like Hong Kong and Shanghai indexes with both registering more than 9% up, while Singapore, Taiwan and India markets registering more than 5% up!

Malaysia's KLCI market has not been left alone either with a decent 3.4% up, despite the continued political uncertainties!

What trigger this latest fresh bit of optimism? Haven't we just sensed the market heartbeat from the latest AIG bailout by the US Government that had literally leave many people fearing for the next victim?

The latest "incentives" this time come from not one but multiple sources. First and foremost, following AIG's bailout and Lehman Brother's collapse, perhaps served as a good wakeup call on the US Government, somebody finally realized that perhaps the approach to tackling the financial issues weren't systematic enough, thus rendering the need for one. The idea of RTC (Resolution Trust Corp) type solution emerged.

So what is RTC? Think of it as a mechanism to get the doubtful or bad loans off the hook of financial institutions so that these guys have some breathing space to continue their business survival. After all, the argument is that troubled assets don't become more valuable over time; they become less valuable!

Great idea, but who will absorb these bad loans and who funds it? Well, it has to be Government's funding (in another words, public money!), of course! Thereafter, the idea is to get the RTC entity to gradually sell off the restructured loans as the market improves. Auction of collaterals as the market improves is another way to salvaging these bad debts.

Similar RTC solution was in fact set up in the late 1980s to restructure the underwater mortgages held by nearly 750 insolvent savings and loan institutions.

Tracking back to the 1997 Asian financial crisis, the same RTC type approach was in fact adopted by Malaysia to effectively saved Malaysia's financial institutions from going insolvent during the peak of the crisis. The entity was then called the National Asset Fund or Danaharta. The entity was finally dissolved in 2005 after successfully completed the disposal of assets.

Given that the above approach worked well for Malaysia, I have no doubt that given the right planning and execution, it should work well for U.S too. Nonetheless, it has to be mentioned that U.S possesses a much more sophisticated financial market. So much more thought process will have to be put in place for it to function effectively.

Bear in mind the market is responding to a conceptual idea that has yet to be crystalized, let alone the results!

One of the other sources of optimisms being UK (later emulated by US) decision to temporarily ban equity short-selling activity on the financial sector. Financial equity short selling has been blamed by many for the recent sharp downfall of financial stocks.

Finally, China's decision to exempt stamp duty payment on stocks trading has intensified hungry traders and investors to re-enter the market with a vengeance! Remarkably, Shanghai's stock market even hit limit up! However, in my view this could well be a short term knee jerk reaction. Fundamentally nothing has changed.

The world still depend on a permanent recovery on U.S situation!

When Nothing Else Matters, Gold Does!

Gold has long been perceived by many to be a long term investment safe heaven. Some even think that the timing in buying gold is not important, as the metal always tend to appreciate in value over time, especially when all else fails.

Yesterday was a classic example where the price of gold shot up by a whopping 10% in one day, due to investors switching to this piece of classic metal as a result of the worsening global investment climate triggered by the worsening US Financial crisis and credit crunch! A number of high profile takeovers and bankruptcies in the U.S. have certainly caught the attention of global investors in terms of guessing which financial institution may be the next to fall from grace! So instead of putting up with the risks, the theme of yesterday's sentiment appeared to be "liquidate first, decide later". Which explains why global markets (led by Down Jones) had another free fall yesterday.

Nevertheless, bear in mind that the price of gold has fallen by around 25% from mid July 2008 to about USD740/ounce recently. It is no coincidence that gold prices dipped after the recent major correction of crude oil prices and the recent appreciation of US Dollars. For the smart investors, many had exited gold upon the anticipation on crude oil movement. Who says timing is not important?




Some analysts even claim that yesterday's rise could potentially spell another major bullish trend for the price of gold. If you believe in this prediction, perhaps it's right time to buy gold again?

Are You Exposed To AIG Insurance?

Following the troubled American International Group's (AIG) rescue plan by the US Government, sentiment against AIG has grown in Asia for the past two days, particularly in countries such as Singapore, Taiwan, Hong Kong and South Korea. A number of policy holders were seen asking for policy cancellations, in view of the company's current financial turmoil and fearful of potential losses from another potential bankruptcy.

The fears were understandable, given that the bailout from US Government will not guarantee its survival.

Bear in mind that early redemption values for insurance policies are often undesirable and come with high "costs". In some cases, the policy holder may also suffer "financial losses" due to early termination.

In Malaysia, the company is known as American International Assurance (AIA), a wholly owned subsidiary of AIG.

For the full story, please click this link.

Temporary Sight of Financial Relief for AIG

A temporary sight of relief for the financial markets for now, at the very least, following US Government's decision to bailout AIG with up to USD85bilion two-year loan rescue package. The US government will get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points.

The loan is secured by AIG's assets, including its profitable insurance businesses, giving the US Government some protection even if markets continue to sink. And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

The decision marks a quick reversal from US Government's earlier stand on their refusal to bailout Lehman Brothers.

Could Lehman Brothers Avoided Bankruptcy?

Just as I mentioned recently the worst ain't over for the US financial credit crisis, despite Fannie's rescue package, global financial markets were absolutely rocked by the news that one of the largest US investment bankers, Lehman Brothers, have filed for bankruptcy! This seems to be the only available alternative for Lehman as they could not find a white knight rescuer and the US Government's reluctance to bail them out after series of recent bailing out events.

Lehman Brother's financial position is in such a terrible state that their market capitalization was only USD60billion as at the end of August against their assets of USD600billion! Having so little capital meant that a further small decline in assets would wipe out the value of the company!

Questions were raised about Lehman's viability and why they did not initiate a rescue plan much earlier? Considering the earlier actions of the likes of Bear Stearn (acquired by JP Morgan), Fannie and Freddie, and the latest acquisition of Merrill Lynch by Bank of America (for USD50billion stocks deal)

The Chapter 11 filing represents the end of a proud 158-year-old company that survived world wars and the Asian financial crisis but could not survive the global credit crunch!

Perhaps if Lehman had reacted earlier on their foreseeable problems and bite the bullets, the outcome could have been a lot different!

Next up, a possible collapse of insurance giant American International Group (AIG) could be on the cards, as they are seeking USD40b financing from US Federal Reserve!

Also watch out for the development of Citigroup, Bank of New York, Japan’s Aozora Bank Ltd and Mizuho Financial Group as these were among the top unsecured creditors to Lehman. Their financial position could be seriously damaged by the bankruptcy.

For the record, Dow Jones responded with more than 4% free fall on Monday!

The Power Saga Continues

Just barely 3 months after the Malaysia Government imposed a windfall profit levy on Malaysia's Independent Power Producers (IPP), the Government has reversed gear again. Perhaps realizing the damage done in the previous policy, the windfall profit levy has been scrapped going forward. However, the one-time payment is still in force.

Recall that after the imposition of the tax levy, the decision had been severely criticised and Malaysia's bond market had been severely bashed, due to the power sector being the largest issuer of bond fund in the country. In addition, sourcing for new bond funds had been made extremely difficult recently due to the downward rating of Malaysia's bond market.

The latest twist has a negative effect on Malaysia's national utility company, Tenaga Nasional Bhd, as it has to continue bearing the increase in energy costs in the country. Moreover, the expected power reform between Tenaga and IPPs have thrown into more uncertainties. As it stands, the share price of Tenaga has corrected by almost 9% today in the KL Stock Market. However, this should be a positive rerating move for the Malaysia bond market.

The Government is expected to release its master energy blueprint this year to further reform the energy sector in this long power saga.

Sack The Prime Minister For Cooking

In a very bizarre twist of event, Thailand’s Prime Minister, Samak Sundaravej, was forced to resign Tuesday along with his Cabinet after the Constitutional Court ruled that he had broken a conflict-of-interest law by hosting TV cooking shows while in office. However, the Court also ruled that Samak’s Cabinet will remain in a caretaker position until a new administration is installed.

Samak, who has cooked for visiting leaders before, hosted a popular TV cooking show called “Tasting and Complaining’’ for seven years before becoming prime minister earlier in 2008. He continued to make several appearances after taking office, thus breaking a constitutional prohibition on private employment while in office.

This event happened amidst the country's on-going political turmoil and declaration of the state of emergency just last week.

Thai stock market has crashed by more than 24% this year. On top of that, investors and tourists are shunning this country for fear of political unrest and streets demonstrations.

For the full story, please click this link.

Fannie and Freddie, Your Time Is Up!

Fannie Mae and Freddie Mac are the two largest mortgage companies in the US, controlling about USD5.4 trillion worth of mortgage backed securities! In a real anti-free market move, the US Government decided to takeover both ailing companies, in a move to safeguard further losses and thus further cripple US financial economy. Talk about US being a strong advocaat of free trade and market economy! This is another classic case of using American taxpayers' money to bailout companies that have committed wrongdoings in managing public funds!

It is widely expected the current leaders of both companies will also be removed.

Following yesterday's decision, Asian stock markets have responded with major rallies, such as Hong Kong's 4.3%, Singapore's 4.77%, South Korea and Taiwan's more than 5% rally! The exceptions are China and Malaysia. China is beset by concerns of a domestic credit crunch as giant public offerings sap up liquidity. Malaysia's lack of market movement is due to continued uncertain political uncertainties.

Both US and Europe stock markets are expected to respond positively to this move today.

However, in my view this is only a technical rebound. It does not mean the worse is over.

For more detailed breaking news on this takeover, please play the You Tube video below:

Where To Trade Futures Crude Palm Oil In US Dollar

Today I come across a local newspaper headline tagged as "US Dollar Crude Palm Oil Futures (FUPO) In For Exciting Debut". So I did a google search on this topic and the results indicated that there was hardly any mention or coverage about this so called "exciting debut"! Incidentally, i found out that today (Friday) marks the first day of listing! Talk about best kept "secret", Malaysia sure knows best! Where are the promotions and publicity? I doubt if even a handful of people knew about this! Or may be it is meant for foreigners only, after all it is to be traded in US Dollars?

Whatever that is, the availability of such mechanism makes sense, as US Dollar is a global denomination whereas Malaysian Ringgit is still not tradeable offshore. So it is a lot more convenient for traders as they need not convert USD to Ringgit and subject themselves to foreign exchange risk.

Before this, crude palm oil futures can only be traded in Ringgit denomination in Malaysia. Malaysia is presently the second largest crude palm oil exporter in the world after Indonesia.

Stock exchange regulator Bursa Malaysia has apparently engaged several market makers to ensure encouraging trades on the FUPO. Market makers are usually brokerages and banks that accept risks by quoting both buy and sell prices in futures contracts, hoping to make a profit on the turn or the bid/offer spread.

The contract unit will be 10 tonne and the minimum price fluctuation will be USD 0.25 per metric tonne. Daily price limit is 10% above or below the settlement prices of the preceding business day.

Speculative position limit will be 500 contracts net long or net short for spot month, 5,000 contracts for any single contracts except for the spot month and 8,000 contracts for all contracts months combined.

This is a cash settled contract which does not involve physical delivery of the underlying CPO. Trading can be done via the direct market access, a supposedly zero-touch electronic trading solution that enables real-time execution of trade orders. Big foreign institutions can bypass a dealer to key in orders themselves and thus, pay less brokerage fees.

For more information on FUPO, click this link posted in Bursa Malaysia.

For more independent reviews, check out this blog posted by S Dali.

Currency Depreciation: A Fine Line Between Poorer and Richer

From 1997 (the year of Asian financial crisis) to 2005, my country's currency (Ringgit) had depreciated by around 50% against the US Dollar! That effectively more or less dented my pocket's purchasing power by half, and that's a very huge quantum! Not only imported goods were more expensive, it also increased the cost of travel and doing business overseas!

In 2005, the Government finally decided to do the "right" thing by floating Ringgit against a basket of global currencies, thereby allowing the currency to gradually adjust itself against global forces (to a certain extent) and as such, the currency has gradually appreciated in value (against US Dollar) from the exchange rate of 3.8 (to every dollar) in the year 2005 to around 3.1 at the beginning of 2008, aided by the weakening US Dollar due to US financial crisis. That effectively "enriched" my purchasing power by closed to 20% whenever i travel to countries where US Dollar is commonly used or accepted, or buying imported goods. Things were looking rosy as the projection by some authorities was that it could touch 3.0 by year-end and even better in 2009!

However, how things have changed for the worse, within just over a period of five months! First it was the political uncertainties, followed by the Government's infamous decision to levy 30% windfall tax on the Power Industry and the latest decision by again the Government to increase public expenditure for year 2009 to sustain the country's economic growth amidst economic slowdown, which ultimately lead to the dumping of Malaysia Ringgit and the outflow of foreign funds! The currency has now effectively depreciated half way between 3.8 and 3.1, and the outlook is not looking good until the foreseeable future!

In the midst of current high inflation and economic slowdown, a depreciating currency is like adding salt to the wounds!

Ironically, it's certainly a good wake-up call for me personally that perhaps it's time for me to work harder to earn more US Dollar instead of Ringgit, so that i can salvage my financial position from a "poorer" to a "richer" state!

Thankfully, the internet has provided me the ideal platform to do just that!

Budget 2009: What It Means For You?

As always, there were bundles of expectations on Malaysia's Budget 2009 which was released last Friday evening. As it turned out, it was a budget for the people in general and the measures were meant to contain inflation and accelerate economic growth. So, what is in store for you as an individual living in Malaysia? Here are some quick key takeaways of the goodies for individuals in general:

1. reduction in personal income tax rate from 28% to 27% for top tax bracket and from 13% to 12% for middle income groups with tax bracket at RM35,000-50,000;
2. increase in tax rebate from RM350 to RM400 per person for those with
taxable income of RM35,000 and below;
3. the eligibility criteria of monthly household income for welfare assistance is
raised to RM720/month from RM400/month;
4. all interest income from savings for individuals will be tax-exempted;
5. childcare allowances of up to RM2,400 per year for employees will be
exempted from tax;
6. travel allowances of up to RM2,400 per year for employees will be exempted from tax;
7. Household with monthly electricity bill of RM20 or less to be exempted from payment from 1st Oct 2008 to end 2009;
8. Fifty percent (50%) exemption on stamp duty for loan agreements for real estate properties valued below RM250,000 (USD75k). Current stamp duty rate is o.5%. This actually translates to a maximum savings of only RM625! Question is, will this be good enough to spur the medium to low cost property market?

Perhaps the only benefit from an investor's standpoint, is the long awaited change on the tax structure for Malaysia Real Estate Investment Trusts (REITs) - tax rate on dividend received by individuals will be reduced from 15% to 10%. For foreign institutional investors, tax rates on dividend received will be reduced from 20% to 10%. These measures will enhance the competitiveness of Malaysia REITs vis a vis regional countries such as Singapore and Hong Kong. However, do not celebrate too soon, as Malaysia still has a lot to do to boost its overall size and attractiveness of REITs. Cutting taxes is only one of the many incentives needed.

So, are these budget measures good enough for you? What do you think?

For the complete list of budget measures, please click this link.