Will The Great Wall Withstand The Economic Storm?

China warned its economic downturn was deepening with the spread of the global financial crisis, raising the possibility of job losses and social unrest in the world’s most populous nation.

The warnings from the country’s top planner came shortly after China’s central bank slashed interest rates by the biggest margin in 11 years to protect its economy from the worst global downturn in decades.

China’s economy has been hit by a sharp drop in demand for its exports, due to a severe economic slowdown ignited by the U.S. financial crisis. This quarter is expected to be its worst in three years.

The State Information Centre, a government think-tank, forecast annual growth would slow to 8% this quarter from 9% in the third quarter, still a respectable figure but a far cry from blistering double-digit growth rates recorded in the past five years.

With factories closing by the thousands, slowing growth may undermine the stability that the ruling Chinese Government craves for its 1.3 billion people. Excessive bankruptcies and production cuts may lead to massive unemployment and social unrest.

A severe slowdown in China's economy will further dampen the hopes of Asian economies' battle against the severity of recession. 

Has Calm Been Finally Restored?

Stocks rallied worldwide this week after China cut borrowing costs by the most in 11 years and the Federal Reserve’s pledge to buy $600 billion of debt sent mortgage rates down by the most in at least seven years.

On the other hand, Citigroup has jumped 87% since the U.S. government injected $20 billion of capital into the bank at the start of the week and guaranteed $306 billion of its mortgages and other troubled loans.

More than $30 trillion has been wiped off the value of global equities this year as credit losses and writedowns approached $1 trillion in the worst financial crisis since the Great Depression.

The question remains, have we reached the bottom?

Past year's trend tells us that we should not get overly optimistic yet, as any signs of recovery could well be merely a bear trap!

Here is one of the key observation I made, that is, Down Jones Industrial Index is still trading within a bearish descending triangle. It is now at a critical cross road, that is, the next few days or weeks could potentially derail again all the positive development that has been established over the last one week! Technically speaking, the signs are pointing to a likely major bottom again!

I am holding on the same view until it proves me otherwise...

Happy Thanksgiving!

It's ironic that the general mood could be down, unemployment rate at a high, consumer confidence at the lowest and Americans are preparing to face the challenges of a recession (I supposed already in one for many but technically not by official measurement)....Anyway, it's a day for thanksgiving! What a great moment for the families and friends to get together and share a joyous moment! How about sharing some thoughts?

To all Americans, I wish you all a Happy Thanksgiving!

No Such Thing As "Too BIg To Fall"

In the eyes of the world, Citibank was "once upon a time", solid like a rock. That was true, until the current financial crisis! Exactly 11 years ago, when Asia was at the peak of its financial crisis, many people were either contemplating or switching their life savings from local banks to international foreign bankers. Among the beneficiary was Citibank. In their minds then, western foreign banks were supposedly the "safe heaven", highly regulated and possessed a solid financial framework.

How times have changed! The once giant Citigroup who owns Citibank is now in financial trouble, no thanks to the billions of dollars of exposure to sub-prime and it's related toxic securities! Many people were initially holding on to the believes that they were too big to fall, just as we initially thought so on the likes of giant Lehman Brothers, AIG, Morgan Stanley, etc.

From the height of more than $50 a share in 2007, the stock price of Citigroup has plummeted to less than $4 last Friday! Alarm bells were ringing aloud as they were desperately seeking either a financial bailout from the U.S. Government or faced the possibility of being taken over or the worst possible outcome of bankcruptcy!

As expected, the U.S. Government could not afford to let them down, as this would have severe repercussions on U.S. businesses and consumers. A financial lifeline of $20 billion (in addition to the $25 billion extended earlier), coupled with U.S. Government's guarantee of up to $306billion. The plan announced calls for Citigroup to obtain US$27bil of capital by issuing preferred shares, which carry a special 8% dividend. Citigroup agreed to absorb the first US$29bil of losses on the US$306bil portfolio, plus 10% of additional losses, for a maximum total exposure of US$56.7bil. On the other hand, dividend distribution for equity shares will be reduced to only 1% for three years, unless the company obtains consent from three federal agencies, being the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

Without the aid, Citigroup, along with many other corporate giants, would have fallen, irregardless of size!

On the flip side, i trust my local bankers more than anyone else!

Protect Growth To Avoid Recession

In line with global interest rate trend, Malaysia's central bank cut its key overnight policy rate (OPR) by 25 basis points to 3.25% at its final rate-setting for the year on Monday as a preemptive measure to avoid a severe economic downturn due to the global economic slowdown and credit crunch. This is also to ensure that domestic demand does not decelerate too quickly.

The central bank said the ceiling and floor rates for the OPR are correspondingly reduced to 3.50% and 3.00% respectively, and reduced Statutory Reserve Requirement to 3.5% from 4.0%, with effect from December 1st, 2008. Lowering statutory reserve requirement will lower cost of funds for banks, thus increases liquidity for lending. The rate change is the first since April 2006.

The Central Bank also hinted that there may be more rates reduction going forward, depending upon the state of the economy, particularly in 2009.

Although inflation for the month October was reported to be 7.6%, inflation is expected to come off sharply moving forward. As such, greater focus will be spent on protecting economic growth instead of fighting inflation.

Good news for both consumers and businesses as loan rates are expected to fall!

Be Prepared For More Thunder Storm...

Just when many people were expecting the worst of the U.S. financial crisis was probably over, another thunder started brewing when U.S. automotive sector requested for a US$25billion bailout package. Finally, the storm arrived yesterday when U.S Congress reacted negatively to the bailout package, followed by Citigroup reported to be in deep financial trouble, whereby Citigroup lost a quarter of its value in one day and Wall Street tumbled more than 5% overnight! Worst still, Dow Jones Industrial Index had overtaken the previous low of 7,882 recorded on 10th Oct 2008 to a low of 7,552, thus pointing to another potential major bear run! Some analysts are expecting the Dow to possibly fall as much as to the level of 6,500!

This could well be another bad news for the rest of global financial markets!

So far we have not quite seen the impact of the crisis trickling down to the other industries but the signs are surely there, starting with the auto sector!

Be prepared for more thunder storms ahead, as more corporate earnings downgrade and fallouts are expected to happen down the road!

On the other hand, Asian markets generally rose today against all odds after the initial knee-jerk reaction to Dow's drop overnight. There were news reported that China may come up with another stimulus package to support its growth. Positive news it may be (if true) but i am afraid the real problem lies else where in the west!

Light At The End of Tunnel?

U.S. Federal Reserve policy makers now predict the U.S. economy will contract until the middle of 2009, according to the minutes of their October's FOMC meeting released yesterday. Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.

This effectively increased the odds that the Fed will cut its benchmark interest rate again next month.

Deflation, is now a significant concern. Deflation refers to a prolonged decline in prices, which hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times. Looking at Japan as an example, the country has suffered from deflation and economic stagnation for more than a decade. Question is, will U.S. suffer the same fate too? On the other hand, there isn't a lot more room to maneuver given that benchmark interest rate is already at 1%.

What about the USD700billion bailout plan?

Does anyone see light at the end of tunnel yet? Personally, i have not!

It's Time To Think About The Future

A piece of advice for investors who have little time to monitor market's daily movement, don't know much about technical analysis, but appreciate long term value and can look beyond the present crisis....

Buy low, sell high...Sure, it sounded simple but in reality, no one can truly predict when is the low or lowest! So, instead of trying to time the market at perfection and fear for losing the plot, let's look at an alternative approach where you can better manage risks and emotions.

For many, it is often hard to think about the world in the next five years from now. It is even harder to think about things that have yet to happen. Still, decisions with your investments should depend on future potential instead of what is happening now and in the past.

A long-term perspective means looking at the potential for your asset in the next five-years. If so, then don’t panic if you have not exited the market earlier and your portfolio is down.

Time to do some reshuffling (asset reallocation) and do not hesitate to chop down the dead woods. If you have wrongly invested in certain assets, cut the losses and shift the funds to the ones with the highest potential for recovery and value growth over the next five years.

Bear in mind, markets react in anticipation of the actual event. As such, you just can't wait to enter the market only until the economy has recovered. On average, markets will react six months in advance of actual. Therefore, it is a calculated risk. For example, if you believe that the global economy will turn better in the second half of 2009, 1st quarter of 2008 may well be the major turning point.

Dollar-cost Averaging is one technique where you can look at to consistently accumulate promising assets going forward. Set aside a certain percentage of your income and keep to the discipline by investing the money on a regular basis (common is monthly). However, make sure the money you set aside are not meant for emergency purposes and is relatively free from emotion, in case you have to bear some short term losses in the event the asset value goes lower.

Remember this, abundance of wealth can be best created during crisis! Now is not the time to feel sorry but to look ahead for opportunities!

U.S. Federal Reserve, the modern Santa Claus

The U.S. Treasury Department initially promoted the US$700 billion financial rescue package approved by Congress last month as a vehicle to buy toxic mortgage assets from banks and other institutions to spur fresh lending. However, in a sudden twist of event, it has decided to change its target to focusing on making direct investments in financial institutions and shoring up consumer credit markets instead. This has certainly rocked the equation and many were questioning the rationale of this sudden change of target, thereby causing immense uncertainties.

Apparently, the original plan never got off the ground and U.S. Treasury Secretary Henry Paulson declared that asset purchases were not the most effective use of the funds!

Hey, isn't he the same guy who advocated the original idea at the first place? A sign of "loss of direction"?

With the other significant root cause of the problem being the sky-diving U.S. consumer confidence, this change of target is therefore aimed to help restore credit flows to U.S. households by using financial rescue funds to lure investors back to markets for securitized debt such as car loans, student loans and credit cards.

It appears that many more troubled banks, companies or industries have started asking more bailout funds from the Fed, as if they are some kind of Santa Claus freely distributing free handouts! The latest being AIG, whose original US$85 billion bailout has now ballooned to US$150 billion, and the U.S. automotive companies also similarly demanding some large sum of rescue funds!

Last but not least, U.S. leading charge card company AMEX has now been granted a Bank holding status, i.e., they are now much more ready to tap into the seemingly "un-exhaustable" Federal Reserve funds!

To the U.S. Government, they will have a busy task to make sure that their money printing machine is not going to let them down by going overtime!

Start Buying Now, Seriously?

This is a recent interesting article that i would like to share with my readers. The author claims that it is now the right timing to re-enter equity markets.

Warren Buffett proclaimed that it is now time to buy American stocks, and he certainly led by example. Bear in mind given that Warren is the top 2 richest man on earth, his words are definitely not to be taken lightly.

However, there are also many doomsayers who claim that the worst is yet to come. At the same time, many so-called investment gurus were criticising Warren. They said he was irrelevant to the new economy in 1999, when he refused to buy technology shares. They say he didn’t understand the situation when he said that financial derivatives were “financial weapons of mass destruction” back in 2002. And now they say that he is simply trying to talk up his own investments, when he said recently to “Buy America”. These things they say of the world’s most successful investor. Nobody remembers these “they”, but Warren Buffet continues to make loads of money from his investments.

The reasons in favour of things will get worse include:
1) This time is different, because this is an unprecedented global economic slowdown!
For this reason, the author argued that of course it's always different. After all, if it wasn’t different, no one would panic, and no one would sell their shares, and stock markets wouldn’t fall. However, he also argued that human race has always been able to find solutions to these problems and emerge stronger. This is one of the reasons world stock markets grow over the long term!

Point taken!

2) There's no clear sign that the recovery is in sight!
For this reason, the author argued that if we had clear signs, the stock markets would have gone up a lot, and you would have missed the opportunity to make profits. Stock markets always anticipate economic recoveries. By the time the analysts are able to report clear signs, we would be more than halfway to the top. The author also claim that some of the "clear signs" could well be the fiscal and monetary policy actions undertaken recently by various governments of different countries.

Valid point again!

3) The recession will last for another 3 quarters!
For this reason, the author argues that assuming this is true, three quarters means the last quarter of 08 and the first two quarters of 09. Let’s budget another quarter and say it goes on till the end of 3Q 09. Stock markets always recover before the economy does. So if stock investors all thought that the global economy would recover by end of 3Q 09, we ain't that far away....

Lastly, the author points to the "I wish I had bought" syndrome. Many investors surely have experienced this before and regretted not buying when the market was heavily trashed! The author's reasons for optimism include Malaysia's current low market Price Earnings (PE) valuation, supported with growing population and successful regionalization of many local businesses, which means many businesses are less dependent on one country's economy alone.

Nevertheless, the author further advised that make sure one invests with money one can set aside for at least three years, so that one will not be caught short having to sell at the wrong time, as market needs time to realise its potential!

Here you are. Do you agree now is the time to re-enter equity investment?

The above article was written by Moh Hon Meng, the co-founder and executive director of iFAST Corporation.

For the full article, click here.

Five Personality Tips To Better Your Investment

First Tip: Save Money
Many people come to me and tell me that they have no money to invest. So i ask, " Do you spend money on buying unnecessary items each month?" Most responded by saying they do. Here lies the problem. People mindset are naturally tuned to spend but not to save!

Keep a diary of what you plan to spend versus the actual spending for each month. Make sure you spend within budget and only on necessities. If need be, you may also budget not more than 5% to 10% of your income on entertainment or something to pamper yourself each month. What's left over should be kept as savings. At the minimum, the savings should be at least 10% of your income.

Do not think the amount of savings is too small to begin with. Let's just say $200 a month. This will accumulate to $2,400 a year! Multiply that with compound interest year on year and you will get the picture...

2nd Tip: Invest Only Money You Can Afford To Lose
Try not to invest money that are to be used for emergency purposes or other purposes such as your children tertiary education fund! Reason is because this kind of funds tend to attract plenty of emotions during investing, i.e., one simply can't afford to lose it! Remember, one of the most fundamental rule of thumb in investing is that one must be able to control his or her own emotions. Emotions tend to lead to poor decision making and panic state!

That does not mean you absolutely can't invest your emergency funds. First and foremost, you should classify the risk profiling associated with the type of funds you have, prior to investing. You may place funds that have the lowest risk profile into cash instrument such as Fixed Deposit or capital guaranteed mutual fund or unit trust. Choosing the latter has the advantage in the sense that you have a chance to see the money grow but at the same time capital is guaranteed. However, bear in mind you should expect a lower rate of return for such capital guaranteed instrument.

3rd Tip: Invest Comfortably
One should adopt a systematic approach to investing, particularly for investments such as equity, derivative or currency. The key is model after what other successful traders have done, emulate their trading style and follow a systematic approach. Eliminate as much as possible the element of GREED, FEAR AND EMOTIONS from your investments so that investing is enjoyable and least stressful.

Where applicable, try adapting a particular trading style to suit your own needs and practice. However, bear in mind you should never deviate too far away from the successful trading principles and make sure the adaptations must make sense and workable.

4th Tip: Invest In What You Know Best and Stick To It!
In a nutshell, don't be a Jack of all trade and master of none! Given there are so many investment instruments out there, choose only the ones you know best and focus in perfecting your investment technique.

Trust me, it's easy to always think that the grass on the other side is always greener but the reality is that it's seldom true! When something work against you, don't just give up and jump onto another bandwagon! After all, there are so many instruments out there where you can invest, be it equity, derivative, bond, currency trading, various types of commodities, wine, etc.

Always find out the reasons for failure and learn from it. Don't simply give up!

5th Tip: Stay Current
Stay current and be up-to-date with latest happening, trends, economy and industry development. Knowing the latest trends will help you to unearth the next potential boom or burst! You can achieve this by reading the latest books or publications, attend workshops or seminars, or even through sharing with friends and peers.

What Does De-leveraging Mean To You?

In 2007, we had the the buzzword carry-trade, followed by sub-prime. Both have had devastating effects on global financial markets! The latest financial buzzword is "de-leveraging". In simple terms, it means that banks, consumers, companies, and the government need to reduce their debt.

From the early 1920s through 1985, the average level of debt-to-GDP in the U.S. was 155%. The highest peak in history (until the recent debt boom) was in the early 1930s, when debt-to-GDP soared to 260% of GDP. In the 1930s, the ratio then cratered to 130%, and it remained close to that level for another half a century.

In 1985, U.S. started to borrow, and last year, when U.S. finished borrowing, the country had borrowed 350% of GDP! To get back to that 155%, U.S. need to get rid of more than $25 trillion of debt!

For a start, U.S. banks have written off $650 billion of debt so far!

Global stock and asset prices in general have been the victim of the global de-leveraging exercise, pushing prices of equities and commodities to unrealistically low levels. This de-leveraging is being driven by the unwinding of over-leveraged positions, and compounded by fund redemptions and frozen credit markets.

The bottom of the markets will happen when this whole de-leveraging exercise ends - which for now is still uncertain. It is important to take note that Lehman Brothers reportedly has between US$40 billion to US$70 billion of assets belonging to hedge funds that are frozen in its UK arm - and negotiations are still ongoing with the administrator to release them.

When the time comes, prepare for another round of "de-leveraging" exercise!

To The American...It's Time For A Change

It's finally over! U.S has a newly elected president in the name of Barack Obama, ending the longest presidential campaign (21 months) in the history of America! Obama is also the first black African-American to become president of the states and what a victory it was, beating his counter part John McCain convincingly!

Let's hope the new leader will bring peace to the world (unlike the predecessors) and rekindle the past glory of the American economy, and indirectly helping the rest of the world to get rid of the current gloom and doom!

For detailed analysis on why Obama won, read here.

Here's a video of Obama's victory speech...."All Things Are Possible"!

Malaysia's Economic Stimulus Plan: What To Expect?

THE second phase of Malaysia's economic stabilisation plan to be unveiled by the Government later today is expected to focus on measures to restore consumers’ and investors’ confidence. The stabilisation plan could see the Government focusing on shorter-term projects with a higher multiplier effects on the economy, and ensure that the country’s banking system remains strong, while funding and credit lines remained open to small businesses and manufacturers. The expected major beneficiaries for these measures could well be the construction and oil & gas sector.

Besides, the Government could introduce new measures to boost consumer spending, perhaps in the form of optional reduction in employees’ contribution to the Employees Provident Fund, similar to what has been done in both 2001 and 2003.

The plan could also include income support programs to protect rural households, especially smallholders in the palm oil and rubber plantations, amid the plunge in related commodities’ prices.

In anticipation of the positive measures from the plan, KLCI rose 4.1% yesterday in active trade.

So, could we expect a sustainable stock market recovery going forward? Well, in my opinion, much will depend on the state of affairs and key performance data released from U.S., and how the rest of the world respond. One of the key data to watch out for this week is the employment data to be released on Friday. Besides, whether related or unrelated, the world will be watching over the choice of American's next President in tonight's U.S. Presidential election!