Friday, 30 March 2012

If Obamacare is Overthrown

If the Supreme Court tosses out Obamacare, the United States may have a unique opportunity to think about a framework for a rational health care industry.

The framework should begin with the free market. The guiding principle should be that individuals pay for their own health care. Without that guiding principle, health care provision will always be too expensive, inadequate for many, and absurdly inefficient. Check out the health care programs in Europe. None of them are any good because they all have too much government involvement.

Let us all admit that the free market isn't perfect. No question about it. The free market provision of health care will inevitably end up with situations that none of us like. No denying that.

But all policy decisions are a question of choosing among alternatives. No solution is perfect and government solutions almost always tend to be the worst available. Should the government really be delivering the mail?

We now have a completely absurd healthcare system. Hospitals are required, through the blunt instrument of denial of federal dollars, to provide health care to anyone who walks through the door. This absurd arrangement is a recent phenomenon. It wasn't always this way. There once was a time (pre-1960) that one had to prove that you could financially foot the bill before a hospital had to serve you. That concept worked.

To deal with folks who couldn't pay their way into a hospital, the US was dotted across the country in every locale with charity hospitals who took care of folks who couldn't pay their bills. There is no reasonable size county in the US that did not have such a charity hospital. This system worked and worked well.

But, the adoption in the mid 1960s of medicare-medicaid, spelled doom to the concept that hospitals could deny services to people that could not pay. In effect, the government took over the private hospital industry, by threatening the denial of federal funds connected to medicare and medicaid.

Now, it is automatically assumed that anyone has free and unfettered access to a hospital at any time they want simply by finding their way into an emergency room, whether they can pay or not. Meanwhile, charity hospitals no longer exist. Who needs them when every hospital becomes a charity hospital?

So, now we have a health care system that no one pays for (out of their own pocket). Any product that no one thinks they are paying for will find that it's price will increase without limit. Eventually, unchecked, the present health care system of providing free care for everyone will mean that all of society's resources will be consumed by the health care activities.

So, what to do? A return to a free market health care system is the answer. Individuals should pay for their own health care and should be denied access to health care in private hospitals unless they can pay for that health care. If the government wishes to get into the act, then the government should build charity hospitals and administer a separate system for folks who can't afford to pay, which would be a very, very small part of the population.

The market for catastrophic (in the sense of costs) care can be handled by the insurance market. Here is one place where state regulation of insurance should be abandoned in favor of a streamlined federal regulation that focuses only on "truth in packaging." The government should not dictate what insurance plans should be offered but should merely make certain that individuals are told straight up what the insurance plans offer and make certain that insurance companies deliver on the plans they sell to the public. In the case of pre-existing conditions, the government could subsidize some catastrophic plans if the citizenry deems that to be a good idea. But, individuals with heavy health care costs should shoulder much of the cost. No one should skate through the system paying little or nothing.

Those who fall through the cracks should become the wards of government-sponsored charity hospitals. No doubt, health care will not be as good in such places, but health care in such places will likely be far better than what governments provide currently in Europe.

There is no good definition of health care. I would not include provision of contraception as part of my definition of necessary health care, but it is clear that the Obama Adminstration does include such things. Let individuals make their own definition. The government is not omniscient. Citizens don't agree on what constitutes adequate health care.

One thing for sure: Americans don't like Obamacare. Even today, two years after passage, 57% of Americans favor repeal of Obamacare. That's pretty amazing.

Americans have traditionally believed in private responsibility and charity towards all. A free market in health care and a free market in health insurance, supplemented with charity hospitals for the indigent, is what the US needs, not federally dictated programs that deny citizens the right to choose the health care products and programs they desire.

Wednesday, 28 March 2012

Greece's Future -- Red or Brown?

The mainstream political parties are losing their support in Greece, as one would expect, given the imposition of austerity. The communist party and neo-nazi parties are on the rise and threaten political chaos and civil unrest. Sound familiar? This was the Germany of 1922-23 as the German government faced a mountain of reparation payments from the aftermath of the Treaty of Versailles and an enforced austerity program. Now Germany is the enforcer and Greece may well become the new Germany.

This is the predictable outcome of the Merkel-Sarcozy-IMF bailout scheme. There is no way that this solution will hold. It will come apart and Greece will become a different country, unrecognizable from the rest of Europe. Portugal, Spain, and Italy will eventually be on that path as well, unless the Merkel-Sarcozy-IMF plans are abandoned.

Europe needs a reality test, not austerity. The sovereign debts in Europe are unsustainable and unpayable. This is a pretty harsh reality, but it is the reality. No amount of "political will" by Germany and France will ultimately matter.

Remember that the US situation is worse, once state and local debt is added to federal debt. Greece is our future as well unless the realization dawns that our debts are unsustainable and unpayable as well.

You can always tell when a country has lost it's fiscal sanity when it thinks that if only it could get more revenue out of it's richest citizens, it's fiscal problems would be solved. Taxing rich people is completely irrelevant to the fiscal situation of Greece and to the fiscal situation in the US.

What is driving the debt problems of the Western economies are the entitlement programs -- retirement and health care. There is no set of taxes that can support these systems -- not in the US and not in Europe. Absent private savings, there is simply no way to support our rapidly aging population and the health care needs of the future. The empty charade that "government programs can deal with this" is nonsense. The government is not providing any savings for the future and government policies have obliterated private savings.

So, watch the future play out in Greece. Coming to your neighborhood soon!

Monday, 26 March 2012

All you need to know about DORMANT account

In general, banks define dormant account (sometimes referred as inactive) when an account does not have any transaction (deposit or withdrawal) for a continuous period of at least 12 months. When your account becomes dormant, the bank would send you a notice letter to the registered mailing address to remind you to activate your account. You may be required to withdrawal or deposit some money over the counter to re-activate your account.

What are the charges?

In addition, should your account balances be RM10 or less, the bank would also inform you of its intention to close the account. The bank will send you a 2nd reminder when it does not receive any response from you (i.e. for activation of account or objection to the closure) within 3 months after the 1st notice. If there is still no response after 2 notices, the bank may proceed to close the account and absorb the balances as service fee.

For account with balances of more than RM10, the account will usually be charged with a dormant account service fee typically at RM10 per annum, until the balances are exhausted or up to 7 years whichever is earlier. Please refer to the tables below on fees and charges imposed by major banks in Malaysia on Saving account.

Unclaimed moneys
When your account remains dormant for a period of 7 years, the account will be classified as unclaimed moneys. Under the Unclaimed Moneys Act (1965), the balances will be transferred to the Government. You may recover your unclaimed moneys from the Registrar of Unclaimed Moneys by submitting form UMA-7 and the required supporting documents at any Registrar offices nationwide. There is no time limit for you to claim your money back.

Contact details of the Registrar are as follows:

Pendaftar Wang Tidak Dituntut
Jabatan Akauntan Negara Malaysia

Bahagian Pengurusan Amanah dan Sekuriti
Menara Maybank, 100 Jalan Tun Perak,

50050 Kuala Lumpur
Tel : 03-2034 1850
Website :

Source: Banking Info

Thursday, 22 March 2012

Europe -- The Unraveling Process

German bonds are beginning to sink. A national strike has been called in Portugal to shut down the economic life of the country to protest the government's austerity measures. Bond yields in Spain and Italy have resumed their upward march. There is a growing awareness that Greek reforms will never take place.

No surprises here, unless your name is Merkel, Sarcozy, Bernanke or Geithner.

The European debt explosion marches on to its inevitable conclusion. The forces that drive sovereign debt expansion in Europe, in Japan, in the US, are alive and well. Politicians can huff and puff all they want, but it won't matter. The unraveling process is well under way. Check out the trend in US bond yields. We're going the same route.

In case you didn't see it, Ben Bernanke and Tim Geithner weighed in yesterday on how things are going in Europe.

Bernanke (to a House Oversight Committee): "In the past few months, financial stresses in Europe have lessened, which has contributed to an improved tone of financial markets around the world, including in the United States."

Geither (to that same House Oversight Committee): "The European economies at the center of the crisis have made very significant progress."

You wonder what these guys are looking at to make these kinds of statements. The American public is not well served by misleading statements from it's chief economic politicos.

Summary of 2011 Bank Negara Malaysia Annual Report

The global economy grew at a more moderate pace in 2011 after the strong rebound in 2010. The growth momentum was weighed down by continued structural weaknesses and fiscal issues in the advanced economies, geopolitical developments in the Middle East and North Africa region and the disruptive impact of natural disasters on global manufacturing production. These developments reverberated onto international financial markets and contributed to heightened market volatility throughout the year.

Despite the less favourable external environment, emerging economies continued to record firm domestic-driven economic growth. At the same time, emerging economies faced increasing challenges from volatile capital flows and rising inflationary pressures. Amidst this environment, the Malaysian economy continued to grow steadily underpinned by the expansion in domestic activity and firm regional demand.

The Malaysian Economy in 2011
The Malaysian economy recorded a steady pace of growth of 5.1% in 2011 (2010: 7.2%), despite the challenging international economic environment. Growth was lower in the first half of the year, particularly in the second quarter, as the economy was affected by the overall weakness in the advanced economies and the disruptions in the global manufacturing supply chain arising from the natural disaster in Japan. Although the global economic environment became increasingly more challenging and uncertain in the second half-year, Malaysia’s economic growth improved due to stronger domestic demand.

Outlook for the Malaysian Economy in 2012

  • Malaysia’s economy is projected to experience a steady pace of growth of 4 – 5% in 2012
  • Domestic demand to remain resilient
  • 2012 Budget expected to provide support to private consumption
  • Upward revision of public sector wages and one-off financial assistance to low and middle-income groups
  • Ongoing implementation of projects under ETP
  • Higher capital expenditure by both the Federal Government and the non-financial public enterprises
  • Implementation of the Special Stimulus Package through Private Financing Initiative

Labour market conditions are expected to soften in 2012 amid the slower economic activity. The unemployment rate is projected to increase to 3.2% of the labour force in 2012. Headline inflation is expected to moderate in 2012, averaging between 2.5 – 3.0%. The lower inflation projection reflects the moderation in global commodity prices and a more modest growth in domestic demand.

Source: BNM report

Tuesday, 20 March 2012

New Fund: Public Strategic SmallCap Fund and Public Enterprises Bond Fund

Public Mutual today launched two new funds, namely Public Strategic SmallCap Fund (PSSCF) and Public Enterprises Bond Fund (PENTBF), and categorized as equity growth and bond fund respectively.

Public Strategic SmallCap Fund seeks to achieve capital appreciation over the medium to long term period through investments primarily in companies with small market capitalization, by investing in stocks with market capitalization of up to RM1.25bn at the point of purchase. The fund may also invest in companies which at the point of purchase form the bottom 15% of the cumulative market capitalization of the market which the stock is listed on, although the fund will focus its investments in the domestic market.

Funds' key data were shown at the end of this post...

To achieve increased diversification, the fund may invest up to 30% of its NAV in selected foreign markets if the returns are assessed to be promising. The fund generally maintains equity exposures within a range of 70% to 98% against its NAV, while balance in fixed income securities and liquid assets.

On the other hand, Public Enterprises Bond Fund seeks to provide annual income through investments in fixed income securities and money market instruments, by investing at least 75% of its NAV in sovereign bonds and corporate bonds issued by entities with total assets exceeding RM3bn at the point of purchase. To achieve diversification, the fund may invest up to 30% of its NAV in foreign fixed income securities.

What would be the credit ratings?
The bonds invested must have minimum credit rating of BBB for long-term instruments and P1 for short-term instruments as rated by local or foreign rating agency, at the point of purchase.

PENTBF Specific Benefits 
The fund allows the investor access to the bond market, which is usually inaccessible to the average investor as the standard transaction block amounts to RM5bn. Through this bond fund, it may potentially produce returns that are generally higher than fixed deposits.

Source: Public Mutual and Funds' prospectus

Monday, 19 March 2012

Big News -- Greece Back in the Headlines

Elections are coming up in Greece and guess what? Greeks don't care for the austerity plans and economic reforms foisted upon them by the terms of the recent bailout. Surprise, surprise!

Merkel, Sarcozy, the ECB and the IMF are a ship of fools. There is no way the Greek population, or any population, would agree to these terms. It won't happen. So, why are the politicians putting us through this ruse? The same reason that American politicians are going through the charade that higher taxes on the rich can fund the American welfare state.

This is all ridiculous. The Greeks will never abide by the agreements. All that has happened is that the debts of Greece have been assumed by Germany (and, to some extent the, US through the IMF backing). "Extend and pretend" continues to be the policy of the Eurozone, enthusiastically supported by the Obama-Geithner team. It won't work. Give it up.

These sovereigns debts are unpayable and the sooner that this truth is faced the better for all concerned. Time for workouts across the Eurozone (including Germany).

Friday, 16 March 2012

Diamond in the Rough

The "Jobs Bill," currently under consideration by the United States Senate is a terrible piece of legislation. Nothing surprising about that. The fact that it is bi-partisan only adds to its odor. However, buried within the bill is a provision that limits some of the worst provisions of the Sarbanes-Oxley legislation of 2002 that has all but destroyed the US IPO market. Sarbanes-Oxley is the legislation that was passed in the heat of reaction to Enron and World Com and is one of the worst pieces of finance legislation that ever found its way through Congress (although Dodd-Frank is certainly even worse).

Sarbanes-Oxley was a reaction to the fact that the US stock market, from 1981 until 2002, had increased 1200 percent. That, apparently, was an inadequate return, according to the political class...hence the adoption of Sarbanes-Oxley. Since Sarbanes, Oxley, the stock market has basically done nothing, which, I suppose, is more in keeping with what the political class deems to be a more investor-friendly climate. Both SOX and it's step-brother, Dodd-Frank, have placed the American financial system in the deep freeze and other financial centers around the world could not be happier. Seeing American voluntarily abdicate its pre-eminence in world finance plays right into the game plan of Europe, China and all of our competitors.

Thus, the effort to give the IPO market a breather from the Attila the Hun approach of the Congress to free markets.

But, watch out. Now the political class is objecting. Even the Council of Institutional Investors has even weighed in. You might think that such a weighty institution is non-political, but you can forget that. The CII is dominated by far left politicos whose main goal is to use a heavy sledge hammer on American corporations and they are succeeding. Now the CII wants even this glimmer of help to those seeking access to capital markets to go take their case to foreign capitals. America is no longer the place to bring your IPO, so says the CII and the left wing political class. So, this small effort to give breathing space to companies seeking to raise capital is under siege.

This was the only decent provision in the "Jobs Bill." The rest of the bill is embarrassing. Perhaps the diamond in the rough will survive. We shall see.

Monday, 12 March 2012

Why All of Us Must Care about 1Care Malaysia?

Heard about 1Care Malaysia healthcare plan? If no, then you must read this article thoroughly word by word. Because the the proposed healthcare system will drastically change the way we seek for treatment in the future. The main issue was "Is it viable to implement 1Care?".

Well, the intention is good for our community. The plan had a very beautiful definition as below:


Concern is always there whenever Government want to implement something and that thing is managed solely by Government. Experience? Got (bad experience). Money? Got, but already drained somewhere (normally). You can't prevent Malaysians from worrying, especially when 1Care touches each and everyone of us for life.

What are the concerns?
  1. Each person in different sector have different risk level. How to determine the amount of contributions of each contributor?

  2. Subsequently, how to determine the benefits package each individual entitled to? If the benefits was based on the amount of contribution, then, our existing insurance system already functioning very well now.

  3. Then, you can say that it was community-rated, not risk-rated. That's mean rich are subsidizing the poor, economically active to passive system. But, doesn't rich already pay taxes to government to subsidize them currently?

  4. Level of services of hospitals and choices of hospitals. Can we seek treatment at any hospital, be it general or private hospitals? If not, it will again limit our choice.

  5. Choice? Emm. The proposed 1Care is being made compulsory to all employees and employers to contribute (except government servants). Wait!!! Does this mean that private sector is subsidizing public sector?

  6. A government agency was being set up to manage the pool of money collected from all of us. OMG!!! We are talking billions of ringgit per year. It's a huge huge huge amount which could bought over CIMB bank!!!

Once 1Care was implemented, the following sector will suffer:

  1. Private sector. If the said 10% mandatory contribution by each employee is true, most salary based person will switch to personal loan, I think.

  2. Retailers will suffer badly from less disposable income after the mandatory deduction of salary. No more 25% drop in car sales anymore. It's probably 90%.

  3. Property market will slump. Don't forget that our loan applications now is based on net salary, which means deducting your 11% EPF + 10% 1Care + Socso + Tax. How much left?

  4. Private healthcare system. Private hospitals have to lobby smartly to get involved in 1Care system to remain in business. Monopoly game means you have to "pay" more? Good Luck.

  5. Private insurance companies and its agents. A big chunk of their medical policies will be terminated and a big chunk of premiums will flow to the new set up government agency. Thousands of agents will struggle to survive.

Then, why Government proposing 1Care Malaysia? Emm. I got many input from friends and professionals and below could be the 3 reasons behind 1Care:
  1. Diversifying the problems of public healthcare system to private healthcare, so that private healthcare was forced to collaborate.

  2. Reducing Government's burden, thus reducing budget deficit, by imposing mandatory contribution from everyone. For us, it's just like another form of income tax.

  3. Hijacking the lucrative insurance business which was dominated by foreign companies (etc. Great Eastern, Allianz, AIA, Prudential, ING...) especially on medical policies. With 1Care, it could effectively grab the market share from them, entrusting government agency as the undisputed largest insurance company in Malaysia.

Finance Malaysia blog is just voicing out the concerns of general public for betterment of Malaysia going forward. Readers were welcome to give comment or feedback. Thanks.

Saturday, 10 March 2012

Read Danny Hakim's NYTimes Article

I am not normally a fan of plugging NYTimes stories, but this one has to be read. Danny Hakim has written a terrific article laying out the plight of cities and counties in the state of New York. He recounts one story after another of impending municipal bankruptcies. In every case, the cause is the same -- bloated public employee expenses -- mostly public employee retirement and health care.

Normally in recessions, the costs of running government agencies slows down since there isn't any reason for employment costs to rise. But, not so with pension and health benefits. They rise astronomically regardless of the economy.

This problem is not confined to cities and municipalities in New York. California faces the same situation for almost all of its large cities and counties. Many other states are in the same boat, especially where unions have major political clout -- Illinois, for example.

So, for those who think Europe has problems, just relax. European debt problems are coming to your neighborhood soon and for pretty much the same reason -- absurd expenditures on retirement and health care programs.

Friday, 9 March 2012

Spain Says: "No Way, Jose"

The new Spanish government has announced that it plans to flaunt Eurozone rules regarding it's fiscal deficit. The 4.4 % promised by the previous government in its deal last year with the European Commission has been tossed aside by the new Spanish Prime Minister Mariano Rajoy. So much for fiscal austerity. Spain now has the worst of both worlds -- expanding debt and no real spending curbs. The Spanish economy has the highest unemployment rate in Europe, pushing it's way toward 25 percent. Not surprisingly, the new Spanish government cannot survive politically if it fully implements the austerity program that it agreed to just twelve months ago.

This will be the continuing tale. European countries will not live up to the austerity agreements that they forge with the ECB and the European Commission. Merkel and Sarcozy are wasting a lot of people's time with this. It is not going to happen.

Meanwhile, interest rates on Spanish debt surged upward. The beat goes on. Sooner or later the Eurozone "solutions" will collapse in tatters and reality will set in. The sooner the better.

Thursday, 8 March 2012

More Nonsense from the NY Times

Nicholas Kristof has a piece in today's NY Times depicting the plight of present day Athens. He concludes that the economic collapse of Athens is the result of "Republican-like" policies enacted by the Greek government. Really?

According to Kristof, the problem in Greece is the result of "austerity" imposed by Germany and France. I'll buy that. But, the question is why is the austerity being imposed. The answer, which Kristof seems blissfully unaware of, is that Greece is broke and cannot borrow any more money from anywhere. Thus, on their knees, they have gone to the ECB for funding. Should the ECB simply write them a blank check. That seems to be the view of Kristof.

Kristof joins a long list of commentators that cannot seems to add and subtract. Where is the money to come from to continue to support Greek profligacy? Kristof, like most far left commentators, seems unconcerned about who pays for all of this. But, at some point, someone must pay for all of this. Who is that to be?

Greece is suffering from living way beyond it's means. Nothing more, nothing less. They should default on their indebtedness and start anew. That way, Greece could avoid most of the most pernicious effects of austerity. But, no. We are still in the "pretend and extend" mode. So that, for now (but not for long), we think we have forged together a "Greek solution." But, we haven't really.

As Kristof notes, austerity is disastrous. But, the right answer is not to blame some outside party for removing the punch bowl. The right answer is honesty. Admit that Greece cannot pay its debts and start anew. Just doing debt swaps with private creditors is not enough . Greece needs a total debt workout with all of its creditors, not just with the private ones.

Meanwhile, Kristof needs a lesson in arithmetic. No one can afford what goes on in Europe or the US. Eventually, those funding this kind of nonsense will quite funding it. That's where we are with Greece.

The Right Energy Policy

Why does the US government need an "energy policy?" The free market is available. Oil companies, owned mostly by average Americans through their pension investments, will develop whatever is needed. Recent natural gas discoveries and production have blunted the environmental argument against the use of fossil fuels. So, why doesn't government just get out of the way?

The Obama crowd seems to believe that if they legislate a drop in demand that will solve the energy problem. I guess, in the extreme, if they were to outlaw the use of cars, fossil fuel consumption would drop precipitously. Outlawing cars probably seems extreme even to the Obama crowd, so they have taken the half way step -- tell everyone what car to buy -- the Volt. Since Americans don't want to buy the volt, the Obama folks sweeten the pie with a $ 7,500 tax subsidy per car (now, urging that the subsidy be raised to $ 10,000 per car).

But Americans don't like the Volt and it's sales are moribund. Americans like the big SUVs and that's what they are willing to pay for. So, why not let them? Why does government know better than individuals?

Obama says that "big oil" gets $ 4 billion per year in subsidies. Is that true? What he calls subsidies are "intangible drilling expenses," which is nothing more than the depreciation scheme available to natural resource producers of all stripes. Should you be able to deduct the wearing out of plant and equipment? Most people would say yes. Should you be able to deduct the wearing out of an oil field? Most people would say yes. In any event, it is the average American who mostly owns big oil, so Obama should say "we are subsidizing average Americans with $ 4 billion a year in depletion write offs....let's stop doing that and raise the taxes on average Americans by $ 4 billion." That is what he is really advocating. Soak the middle class by pretending to go after "big oil."

But, at the end of the day, why not let capitalism do its thing. By tinkering, by restricting the ability of the oil industry to develop oil and natural gas to meet domestic demand, the Obama policy leads to volatile energy prices and US dependence on the good wishes of countries like Russia, Iran, and Venezuela. Why is this a good idea?

What free markets do best is to allocate scarce resources and provide for alternatives when some resources become too expensive. That would be the correct energy policy -- no energy policy at all.

Wednesday, 7 March 2012

Austerity as the Welfare State Unravels

We are treated daily to news accounts of families suffering from removal of government benefits that such families had come to expect. Today's NYTimes features a community in England facing the loss of a government-provided day-care center. These stories describe the often desperate plight of families suddenly deprived of something that they had come to depend upon. This is the cruel downside of the modern welfare state.

Inevitably, the welfare state, in every country, expands it's reach into every aspect of life. Eventually, with the elimination of private saving and a sense of personal responsibility, the welfare state becomes wildly unaffordable. That's where we are now in most of the Western world. Now comes the painful, but inevitable, process of dismantling the welfare state as the promises run up against reality.

The money has to come from somewhere. No matter how loudly welfare proponents proclaim the existence of this economic right or that economic right (now proclaiming, for example, the right to publicly provided contraception!). Europe now and the US soon will unravel their welfare states, since there is no one out there willing to fund ithem. No doubt the NYTimes will treat us to more stories of families who, having abandoned earlier habits of thrift and self reliance to accept government welfare, now face the withdrawal of those benefits.

There is no limit to the expansion of the welfare state short of catastrophe because those who are it's proponents are unmoved by arguments about incentives and affordability. But, numbers are numbers, so more and more families in the West will be forced to face the harsh realities that the welfare state and it's ultimate dissolution will impose.

Tuesday, 6 March 2012

Valuing Common Stocks

The smart money is still bearish. With the Dow Jones hovering just below the 13,000 level, the financial pundits are almost unanimous in their bearish outlook. The exception to the gloom is the optimistic view of the sell side -- the brokers. They like the market here, but then, they pretty much always like the market. It comes with the territory (that is, the job).

So, are the bears right? Is the party over? Is it time to take a pause?

First a caveat. The only honest answer is that no one really knows, no matter how convincing one's argument may be.

That said, my guess is that the pundits are wrong. Common stocks will likely be much higher in value ten years from now than they are now. It would not be a surprise to see stock performance exceed historical levels over the next ten years, which would mean a Dow Jones of over 30,000 by 2022.

But what of the next twelve months? Will the market conveniently sell off or pause to give the late-comers an opportunity to climb aboard? I doubt it.

That doesn't mean that the economy is set to take off. It isn't The economy will continue to plod along with high levels of unemployment and very slow economic growth. Businesses will continue to find ways to avoid employees and taxpayers will look for ways to avoid the tax hikes that everyone knows are likely to be in our future. This means continued economic stagnation, albeit a slowly expanding economy.

This is not an economy that provides opportunity for those with limited economic means. That has been effectively precluded by government policy. But, it is an economy that benefits those who ride on top of the stagecoach. Their ride will get better, stocks will go higher. The Warren Buffetts will do well (and they won't pay higher taxes, even if they face higher tax rates).

Monday, 5 March 2012

RHBRI: 4Q11 Earnings Review and Market Strategy

In tandem with the moderating economic growth trend, corporate earnings remained weak in 4Q 2011Of the 113 reported earnings that we cover, 55 of the results (48.7% of the total) were within our expectations, 33 below projections (29.2% of the total) and 25 above forecasts (22.1%) (see Table 1). Against the consensus numbers, 44.2% of the reported earnings were within expectations, 38.1% below and 17.7% above projections (see Table 2). Sequentially, net EPS for the FBM KLCI stocks under our coverage weakened back to +1.7% qoq and +2.8% yoy in the 4Q, from +8.9% qoq and +12.4% yoy in the previous quarter (see Chart 1).

However, the downgrade to upgrade ratio has improved significantly to 1.07 times, from 1.65 times in the previous quarter. Overall, 2011 has been a year where Corporate Malaysia suffered from slowing sales and falling utilisation rates. This, coupled with the trend of higher costs, resulted in falling margins for many companies under our coverage. Consequently, normalised net EPS growth for the FBM KLCI stocks under our coverage slowed sharply from 20.9% in 2010 to +4.7% in 2011. The sharp slowdown in EPS growth, however, partly reflected the higher base effect as well as the plunge in Tenaga’s earnings arising from the gas curtailment issue. Excluding Tenaga, our 2011’s normalised net EPS for the FBM KLCI stocks has slowed down less significantly to +10.1%, from +21.2% in 2010.

Businesses Turning More Upbeat

What’s worth highlighting is that Corporate Malaysia are becoming less pessimistic and expect their business prospects to be stable with prospects of it turning up gradually as the year progresses. Likewise, we expect almost all sectors to record flat or improved earnings in 1Q 2012, with the exception of transport and semiconductor sectors. In our view, earnings of the transportation companies will still likely to be weighed down by slower economic growth and rising fuel costs. Whilst we also expect the semiconductor industry to suffer weak earnings in the 1Q, its outlook should improve from 2Q as cost rationalisation and stronger chip sales will likely translate into a significant improvement in earnings thereafter.

Meanwhile, we have seen more aggressive inventory write-down by companies, particularly amongst the steel product manufacturers. At the same time, banks could have also made pre-emptive provisions for loan impairment. Consequently, barring unforeseen circumstances, the downside risk to corporate earnings may not be as significant moving forward and analysts have turned less pessimistic in their assumptions for earnings projections.

Earnings Revised Up

Overall, we have adjusted some of the assumptions, translating to an upward revision in our 2012’s normalised net EPS growth for the FBM KLCI stocks under our coverage to +12.3% (see Table 3), from +10.3% previously (as reflected in our 2012 Market Outlook & Strategy Report dated 16 December, 2011). Excluding Tenaga, our 2012’s normalised net EPS for the FBM KLCl stocks has also been revised up to 8.8%, from 7.8% two months ago. The upward revisions in earnings were more significant in the oil & gas, consumer and utilities sectors (see Table 4). Similarly, our 2013 earnings estimate for the KLCI benchmark has been tweaked up slightly to 7.9% (+7.0% ex-Tenaga), from +7.3% (+5.5% ex-Tenaga) previously.

General Election Will Create Volatility,
Not Likely To Be A Game Changer

On the local front, a key event that will have significant bearing to the equity market is the impending general election. There are strong market expectations that the country’s general election (due in March 2013) will be held any time soon. Given what happened during the previous general elections on 8 March 2008 where the ruling coalition, Barisan Nasional (BN), lost two-thirds majority, there are fears that if BN were to lose a simple majority, the local bourse could suffer a major temporary setback. This is on account of uncertainty in the continuity of the country’s economic policies that could slow down the implementation of the economic Transformation Programme (ETP). We, however, believe that the likelihood of this happening is low.

Market Strategy :
Buy On Dips With Increasing Focus On Recovery Sectors

Whilst not all the external risk factors have gone away and the impending general election locally could also create uncertainty for the local bourse, the global economic recession risk is receding. Consequently, we are turning more positive on the market. Nevertheless, as fundamentals are just starting to improve, earnings will still need to play catch up for stocks with rich valuations before the market can scale new heights.

Consequently, the risk of a market pullback and consolidation in the near term is still high although we believe that any volatility in the market would provide opportunity for investors to accumulate fundamentally-robust stocks on weakness. We are also turning more positive on cyclical sectors that are poised for recovery, although investors’ risk perceptions can still change very quickly should situation turn out to be worse than expected. As a result, we would still recommend investors to hold some defensive stocks that have strong cash flows to pay sustainable dividends. A list of our top picks is reflected in table below, which includes “buy on weakness” tactical holdings.

Source: RHB Research Institute report

Thursday, 1 March 2012

OSK's March 2012 Outlook and Strategy

While Malaysia remained a laggard compared to the rally in developed markets, the global rally that had started in January finally dragged the local bourse kicking and screaming up during February with a rally of more than 3%. Globally, markets continued to rise despite the patchy fundamental landscape. Thus, while we had anticipated a potential rally in the 1st half of February, our expected market retraction in the 2nd half failed to materialize.

Top Gainers for February were dividend plays such as Carlsberg or companies with corporate activities such as Hartalega with its bonus issue or potential targets such as RHB Cap and MBSB. Smaller plantation companies such as TH Plantations and RImbunan Sawit also had a good run.

On the flip side, companies with poor results such as Maybulk, MAS and KNM got sold down. On a broader sectoral basis, telcos were the dominant play. It was the return of the Big Caps in February as the catch-up played by the KLCI meant that big caps ran up with the inflow of foreign funds.

KLCI year-end target set at 1,620 pts!!!

Moving forward, we unveil our KLCI year-end target at 1,620 pts. This is derived from the average of our 2012 and 2013 fair values at 1,466 pts (13.5x PER) and 1,775 pts (15.0x PER) respectively. We still believe that weak fundamentals justify a lower PER than the historical average of 16.6x for the KLCI. While we remain unconvinced of the current rally’s fundamentals and still see a risk of market correction, news flow with regards to large infrastructure investments should help the KLCI post a stronger 2H2012.

The derivation of our target is as such:
  • There is no change to our 2012 KLCI fair value of 1,466 pts based on 13.5x PER on 2012 numbers
  • We still believe that weak fundamentals justify a low PER for 2012 and that there may be mid-year weakness in global markets
  • We derive our 2013 KLCI fair value of 1,775 pts based on 15.0x PER on 2013 numbers
  • The higher PER of 15.0x is based on 0.5 std dev below the historical average 16.6x PER of the KLCI
  • We are still holding back from applying a historical average PER as we remain concerned on overall global economic fundamentals
  • Nonetheless, the global liquidity fuelling the current rally could continue to drive markets and the news flow with regards to large infrastructure investments should keep the KLCI buoyant in 2013. Hence, we apply a higher PER compared to 2012
  • Our 2012 KLCI year-end target is the average of the 2012 and 2013 fair value which gives a figure of 1,620 pts

Upgrading market call to NEUTRAL
Rolling forward our investment outlook horizon and nothing that the year-end target gives some 3.2% upside to the market, we upgrade our call on the market from Sell to NEUTRAL. Given our view that this is a Liquidity-Driven Rally with risk of correction, we recommend investors take a Balanced approach to the market for the remainder of 2012. As the market could still turn south in the middle of the year, we keep some Defensive stocks among our Top 10 Buys. At the same time, the burgeoning news flow on Construction and Oil & Gas means we recommend investors take some positions in these sectors. We, thus, expand our Top Sector calls from Consumer and Telcos to also include Construction, Oil & Gas and Banks.

Top Buys are a balanced mix
Our revised 2012 Top Buys represent a balanced mix of Defensive and Cyclical stocks with a range of deep value to reasonable yield plays. Our Top Buys are Maybank, CIMB, Axiata, TM, Gamuda among the Big Caps and Dialog, KPJ, QL, Padini and KimLun among the Mid and Small Caps.

For March, given the uncertainty remaining in the market, we introduce a balanced Big-Small-Cyclical-Defensive portfolio. As such, we select Maybank, CIMB, Axiata, Gamuda and KPJ as our March top buys.

Source: Excerpt from OSK Research report

Another Economist Off the Rails

Maybe he is being misquoted! In today's NY Times Professor Ronald Kurtz of MIT's Sloan School of Management is described as believing, in his new book, that tax policy is the reason we have an out of control debt situation. If Kurtz believes this, he must have some serious trouble with arithmetic. Taxes are really irrelevant to our long run debt situation -- whether high or low. The entitlements cannot be afforded if we were able to grab 100 percent of everyone's income -- rich and poor.

So what difference does the tax rate make? There are, of course, two debates going on. One is the "fairness" debate which is a bit misleading, since those who advocate "higher taxes on the rich" are well aware that higher tax rates may end up reducing what rich people will show as taxable income and reduce revenues, potentially dramatically reduce revenues. So "fairness" may come at the price of lowered federal revenues. Is that fair?

The other part of the debate is that higher marginal tax rates reduce incentives for business expansion and employment. Those who deny this point to earlier periods when marginal rates were higher. But, no one paid those higher rates of yesteryear. There were far too many loopholes.

When John Kennedy was first sworn in, he asked for a report on all the taxpayers paying the 91 percent rate, which was the highest rate at the time. Guess what? There were a whopping total of seven taxpayers paying that rate. No one willingly pays rates like that. You wouldn't either (neither would Warren Buffett). The rich simply shift assets around so that no income shows up. One of the wealthy taxpayers in 1961, Mrs. Dodge, a General Motors heiress from Grosse Point, didn't even file a tax return. Her assets were all in tax free municipal bonds. So, do you think Mrs. Dodge cared a whit whether rates were 30 %, 70 %, 91 %, or 100 %.

So, what did John Kennedy do? He sent a bill over to Congress to lower the highest marginal tax rate from 91 % to 70%. His purpose? To increase tax revenues. President Kennedy got the point, that seems lost on Professor Kurtz.

Anyway, here we go again. Another economist who thinks that a $ 66 trillion unfunded liability can be dealt with by taxing a hand full of wealthy Americans.