Interest Rate Cut: How Does It Impact You?

The Central Bank of Malaysia cut its interest rates by 75 basis point from 3.25% to 2.5%. The latest move is higher than the consensus expectation of 50 basis point. The higher than expected rate cut probably reflects a faster than expected deterioration in the country's economy.

In the same token, the Central Bank has also reduced the Statutory Reserve Requirement (SRR) of banks by 150 basis points, from 3.5% to 2%. This potentially neutralizes the expected margin squeeze on banks (due to lower rates) by reducing banks' cost of funds, expanding liquidity in the banking sector and thus increases the capability of banks to restructure loan defaults and helps reduce risk of non-performing loans.

With the latest low interest rates, it's a blessing to loan borrowers but a bane to depositors. For loan borrowers, it is a good time to refinance their existing loans. A low interest rate environment will most likely bring some relief to the property market too.

On the other hand, the lower interest rate should benefit bond yield.

With the slowing economy (and possibility of recession) and volatile investment climate, it is indeed imposing greater challenges to sustaining real wealth creation in the foreseeable future.

What Do You Really Want?

An interesting story about an investment banker and a fisherman...

An investment banker was at the pier of a small coastal village when a small boat with just one fisherman docked.

Inside the small boat were several large yellow fin tuna.

The banker complimented the fisherman on the quality of his fish and asked how long it took to catch them.

The fisherman replied, “Only a little while.”

The banker then asked, “Why didn’t you stay out longer and catch more fish?”

The fisherman said, “With this I have more than enough to support my family’s needs.”

The banker then asked, “But what do you do with the rest of your time?”

The fisherman said, “I sleep late, fish a little, play with my children, go for walks with my wife, stroll into the village each evening where I sip wine and play guitar with my friends. As you can see, I have a full and busy life.”

The banker scoffed, “I am a Harvard MBA and can help you. You should spend more time fishing; and with the proceeds, buy a bigger boat! With the proceeds from the bigger boat you could buy several boats.

“Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution.

“You would need to leave this small coastal fishing village and move to the capital city. After that, who knows, maybe you could take on the world!”

The fisherman asked, “But, how long will this all take?”

To which the banker replied, “I’d say about 15 to 20 years.”

“But what then?” asked the fisherman.

The banker laughed and said, “That’s the best part! When the time is right, you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.”

“Millions?…Then what?” the fisherman continued prodding.

The banker said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, go for romantic walks with your wife, and in the evenings you could sip wine, play guitar and sing songs with your friends!”

To which the fisherman mused, “Now, isn’t that strange? Isn’t that what I’m doing now?”

Now, ask yourself, what do you really want?

Global Banking Crisis In The Making

In the past, i would never have believed the possibility of Citibank encountering severe financial crisis let alone on the brink of bankruptcy. That is until recently, after the startling US financial bailouts in 2008....

Another global bank, London-based HSBC Holdings Plc, Europe’s largest bank by market value, announced that it may have to raise as much as $30 billion and cut the dividend in half as earnings drop!

One of the better performer in the banking sector last year, HSBC’s profit is likely to fall sharply this year and recovery is expected at the earliest 2011.

According to Morgan Stanley, HSBC has one of the weaker capital ratios in Europe and the second weakest in Asia.

In addition, HSBC will have to make greater provisions in 2009 because 75% of its loans are in the U.S. and U.K.

The worst financial crisis since the Great Depression is hurting banks worldwide. Deutsche Bank AG, Germany’s biggest banks, reported a loss of about 4.8 billion euros as it increased provisions for bad debt. Citigroup is selling its best performer, Smith Barney brokerage to Morgan Stanley and may also dump the CitiFinancial consumer-lending unit, pointing to an imminent breakup of the once giant financial group.

Nothing seems impossible these days.....

Video On The Resignation of Ramalingam Raju of Satyam

Found this video on the resignation of Ramalingam Raju, former Chairman and founder of Satyam. Watch this...Sounds more like a commentary on a horse racing day!

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Oh No, Another Accounting Scandal?

Oh no, here it is again, another massive accounting scandal and fraud, involving another top company. This time, is happening at the shores of one of the world's fastest growing emerging market, India. The latest fiasco involves India's fourth largest information technology company, Satyam (Computer Services), that is.

The chairman of India's fourth largest information technology companies admitted he concocted key financial results including a fictitious cash balance of more than $1 billion, a revelation that sent shock waves across corporate India and is likely to prompt investors to question the validity of corporate results as the once-hot economy slows.

B. Ramalinga Raju, is the founder and chairman of Satyam. In fact, the word "satyam" means truth in Sanskrit! Satyam has presence in over 66 countries and employs more than 53,000 global workforce. Together with the revelation, Raju has also tendered his resignation today. In his letter, he revealed overstating profits for the past several years, overstated the amount of debt owed to the company and understated its liabilities.


Raju said that Satyam had inflated its operating profit for the three months ended Sept. 30 to 6.49 billion rupees ($136 million) from 610 million rupees reported previously, while revenue was inflated to 27 billion rupees from 21.12 billion rupees. It had reported an operating margin of 24% which was actually 3%.

Raju also said Satyam's balance sheet as of Sept. 30 had a non-existent cash balance of 50.4 billion rupees; nonexistent accrued interest of 3.76 billion rupees; an understated liability of 12.3 billion rupees; and an overstated debtor position of 4.9 billion rupees compared with 26.51 billion rupees reflected in its books.

This has resulted in artificial cash and bank balances going up by 5.88 billion rupees in the second quarter alone.

Interesting to note that the auditor of Satyam Computer Services is no other than one of the big four Accounting Firm, PricewaterhouseCoopers (PwC). Questions point to whether PwC was involved in the accounting fraud. Remember the fate of Arthur Andersen with Enron?

Satyam's share price has plunged a staggering 78% in one day! On the other hand, India's Bombay Stock Exchange has plunged more than 7%.

For a copy of the content of the letter, please click here.

Belated Santa Rally?

Just when the expected year-end (2008) window-dressing activity (or commonly known as Santa Rally) for global stock markets ended with much disappointment, global stock markets have surprisingly started the year with resolute intention! The chart below shows selective global market performance over the first 2 to 3 days of trading.


Having a sense of too good to be true, especially after so many false starts and suckers rally?

This may well be an exception! In my opinion, key global markets are possibly gearing up for a mini-rally this month, particularly after such a severe bear beating last year. So, there is a good chance we may experience more than just a technical rebound. After such a devastating and disappointing stock market performance in 2008, where key global markets plummeted from around 30% to more than 60%. The start of the year saw fund managers worldwide jostling to position their portfolios for the new year and the bombed out stocks worldwide, a scenario that has not happened for a very long time.

In Malaysia, the reasonably high average daily Bursa volume of about 700 million seem to support the notion too, suggesting there were plenty of buying support, on top of the more than 5% gain in 3 days.

However, bear in mind that this does not mean we have seen market bottom. It's just market "forces" at play at the moment.

While the US Government is doing what they possibly can to salvage the wreckage back home, the story in Asia may just be the beginning of a severe slowdown. Hence, the worst may have yet to happen in Asia. On a conservative note, economic recovery may be more realistic in 2010 than the second part of 2009.

The Best And The Worst of 2008

2008 is an eventful year but probably a year to forget for many! Ironically, it is so eventful that perhaps it is impossible to forget!

To name a few....sub-prime financial crisis, global credit crunch, global assets crash(es) followed by the extreme volatility, oil price skyrocketing to $147/barrel followed by skydiving to below $40, inflation followed by stagflation, global recession, Obama becoming the first black American President, the collapses of well-known global powerhouses such as Lehman Brothers, financial bailouts of giants such as Citibank, China Sichuan earthquake, etc.

For Malaysia, we have the added March 08 General Election followed by the political uncertainties.

Here's how some of the major markets have performed in 2008:
Dow Jones Industrial Average -33.8%
Japan's Nikkei -42.1%
Hong Kong's Hang Seng index -48.1%
Singapore's Straits Times Index -49.4%,
Malaysia's KLCI -39.3%

By the way, the dash (-) stands for minus!

Below shows the best and worst performing stock markets all around the world in 2008. Interestingly, only one stock market (Tunisia) ended in positive territory. Some you probably never even knew existed, but all were victims of the credit crisis and global recession.

Source: BBC