Investor Central

On the Ground in the United States

2008-05-29T16:38:00.001+08:00

Today we are on the ground in the United States. The topic on deck: Is the US a nation of borrowers?

Consumer confidence is at an all time low in the U.S.
More than 2,000 people are declaring bankruptcy daily
Thousands upon thousands of jobs have been lost in recent months due to the sub-prime crises…

I am starting to wonder, what were the behaviors that got us into such a mess?

I think we can beak it down into a few root causes:
First, Greed and a “buy now as opposed to save and buy later” mentality
Second, Poor financial education and a lack of financial sophistication
And finally, consumer traps and the wide availability of credit with “sub-prime” terms

We want it all, we want it now. We want it bigger, better, flashier… and chances are, we are going to charge it. The consumer mentality in the United States has been shifting in the past few centuries.

From movies, to music, magazines, and books, popular culture is increasingly more focused on the pursuit of not life, liberty, and happiness, but diamonds, designer clothes, and the newest BMW.

They are pumping out the message that we deserve everything and anything, and the worst part is we are buying it, literally.

This point was truly driven home while I was working part-time at a US retail company, Victoria’s Secret. Like many clothing stores today, Victoria’s Secret offers store credit cards. The card comes with a hefty 24% interest rate, only disclosed in the fine print of a brochure handed out after the customer signs up.

One day a woman came in to sign up for the VS card (all it takes is a driver’s license and a debit or credit card). She had just obtained her first credit card from a questionable company. She was approved for the card (it is almost impossible to get denied) and was awarded a $500 limit. She proceeded to spend the limit almost to the dollar and then walked out. She took the bus home.

Regardless of financial stability it is incredibly easy to obtain credit in the United States. In fact, we are practically drowning in credit card offers the minute we turn 18 and it doesn’t ever seem to stop. And while many people seem to fall into the “credit trap” those who are perhaps the most vulnerable are the nation’s working poor.

According to a BusinessWeek article “Wages for the working poor have been stagnant for three decades. Meanwhile, their spending has consistently and significantly exceeded their income since the mid-1980s. They are making up the difference by borrowing more. From 1989 through 2004, the total amount owed by households earning $30,000 or less a year has grown 247%, to $691 billion, according to the most recent Federal Reserve data available.”

This has all been made possible through wide spread high interest, high fee financing, or subprime lending in other words.

Driving down the block in my hometown of Cleveland, Ohio (which has consistently been ranked as one of the poorest big cities in the US throughout the past decade) the messages along the road seem to repeat themselves.

“No Credit, No Problem”
“Financing for All”
“Rent to Own”
“Quick Cash”

Pay Day loan services, check cashing companies, rental services, used car dealerships all encourage low-income consumers to live beyond their means as they reap the benefits. In addition, the people they are targeting are frequently un-educated and easily susceptible to scams…. Something they are all too willing to take advantage of.

You might be wondering “Why on earth would these companies be targeting people low-income, low-revenue individuals who might never be able to repay?”

The truth is that it is a major, fast expanding business. In fact, these “alternative financial services” businesses generate more than US$250 billion a year.

Major US financial companies have caught wind and joined in. HSBC Finance, Sallie Mae, Wells Fargo, US Bancorp, Bank of America, and Merrill Lynch & Co all have either their own version of “alternative financing” services or are funding companies that do.

So, with all the constant “buy, buy, buy” messages, the wide availability of credit and credit with “subprime” rates, it is no surprise that the US is in the situation it is.

Only time will tell if behaviors and regulations will adapt to rid the county of this “affluenza” and spending craze.

Algorithmic trading on the SGX: less clarity, more volatility

2008-05-20T21:10:00.004+08:00

I'm never one to say things have to stay the same when new technology comes along. Resisting change is generally futile. That's particularly the case if new revenue streams can be earnt. But the Singapore Exchange's announcement of a partnership with SingTel to cut the processing time of trades to less than a millisecond from the current, oh-so-slow 4 milliseconds deserves further investigation. As always, whenever the exchange makes changes, there are winners and losers. In this case it appears the exchange is the winner, traders might be winners if they play their cards right, and investors are losers.

The point of the cut in the time it takes to consummate a trade from miniscule to even more miniscule is to allow traders to employ algorithmic programs. It's also called automated trading or program trading. It's when computers take over the job of brokers. There are some excellent articles around on this subject, such as this one from BusinessWeek a few years ago. The area of automated trading is an industry unto itself. There is even a magazine and a podcast on the subject.

Suffice to say, algorithmic trading will create:

1. Greater secrecy. It'll be harder to find out who's moving large positions because this will be done incrementally, and
2. Greater volatility. A third of all EU and US stock trades in 2006 were driven by automatic programs, according to this article on Wikipedia. That is, driven not by fundamentals but by technical trading.

It'll "enhance SGX's market liquidity and depth" alright. But I can't see how either of them will be good for investors. Recall, investors are those poor souls who buy stocks for what they're actually for: Dividend payouts and capital appreciation. There is already enough noise around to distract us from this. The last thing we need is to be tossed around by ever growing storms of volatility, and a decreased understanding of who is buying or selling what.

As I said, I am loath to critique new technology on the basis of resistance to change. It just means that investors will have to keep getting smarter. And not just investors. As Futures & Options Week points out, the increase in automated trading "presents a challenge to clearing operations" because lightning fast trades require lightning fast clearing. Let's hope the SGX is also geared up for that.

Mark Laudi, who fears the Singapore Exchange will become evermore Singapore's third casino.

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Journalists and companies – complicity exposed

2008-05-16T16:06:00.001+08:00

Now that the quarterly earnings season is drawing to a close you'll see many journalists head to the gym. Why? Because attending one or more earnings briefings a day can really start to impact your waistline, what with all that food that is served. My critique is not of the companies (for a change), but journalists. My old colleagues won't like me for saying this, but the fact is that journalists are fed so well at press conferences that I cannot see how investors can possibly expect to see unbiased, indepth coverage of the companies that are reported on.

I really wonder whether Singaporean investors realise just what a bunch of lazy freeloaders reporters are. Already much of Singapore business journalism is nothing more than an exercise in rewriting press releases (without also reading the statutory announcement). It's the only exercise they get. The news Singapore investors consume is written by people who spend hours at press briefings in hotel ballrooms, consuming wonderful food and beverages which, inevitably, are paid for by shareholders.

The problem started with the fact that companies whose headquarters are not located within a ten minute taxi ride of the Toa Payoh/MacRitchie Reservoir area struggle to get media attention (because a trip out to Jurong and Tuas, or Changi Business Park is oh, so far away). To address this issue, they resort to renting out a function room in an inner-city hotel and serve up a big meal.

What disgusts me is not just that companies do this in the hope that they get more, and more favourable editorial coverage. What disgusts me is that they succeed with this tactic. Journalists lap this sort of thing up and complain audibly when companies don't put on a spread. To think that in other markets journalists refuse the offer of a glass of water from their hosts at press conferences, lest it be seen as interference with the editorial process!

I accept that things are done differently in Asia, and that much more effort goes into welcoming visitors, making them comfortable, offering refreshments and so on. But when it comes to corporate governance and competing in a globalised world, these customs should not apply to journalists under the special circumstances of an earnings briefing.

I have raised this point with David Gerald, the President of the Securities Investors Association (Singapore), who routinely encourages shareholders not to attend Annual General Meetings just for the food. My point is: journalists should not attend press briefings just for the food, then return to the newsroom to rewrite the press release without also reading the statutory announcement.

For as long as companies put on lavish lunches and dinners for reporters, readers and viewers of the financial media cannot possibly expect to be well served.

Mark Laudi, who attended the Banyan Tree earnings briefing at the Fullerton Hotel on Thursday. Yes, he also ate a plate of food so as not to offend his hosts. But he would have been just as happy if no food was served.

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No news is bad news, and silence is not golden

2008-05-15T17:35:00.003+08:00

Sometimes, disclosing what hasn't happened is as important as disclosing what has. And in this regard the Singapore Exchange is spot on (see end of this blog) when it praises companies which have provided updates on the impact of the earthquake in China on their businesses even though little or nothing happened to them. If only all companies did this on other occasions, too.

Talk to any 5-year-old and they'll tell you that not admitting to doing something wrong is not the same as lying. Conveniently forgetting to mention what hasn't happened is not the same as denying that they did something wrong, they say.

Fortunately, most SGX-listed companies are not run by 5-year-olds. Why is it, then, that the SGX had to "contact listed companies with known Sichuan operations" to establish whether the quake affected them.

Just as people visiting China would have phoned home to tell friends and relatives they're alright, SGX-listed companies with China connections should take the initiative to "phone home" to their part owners (that is, investors who bought their stock on the SGX) - even if they have nothing to say other than everything is okay.

So, we concur entirely with the SGX when it "encourages listed companies to continue heightened vigilance on disclosure" for the rest of the year, and the next fifty years (words and emphasis added).

This clearly should apply to all companies, but particularly those whose operations are in countries that are not easily accessible, where Singapore investors can go easily and see for themselves.

So, congratulations to those companies which have made announcements sofar in the last two days:

Anwell Technologies
China Eratat Sports
China New Town Development
Wilmar International
Sapphire Corp
China Dairy
China Zaino
Asia Water Technology

(Add your company name by making a comment, if you also did the right thing but are not listed here)

And special mentions to

CapitaLand
Radiance Electronics
Sino-Environment Tech
Sihuan Pharma

for contributing funds to the relief effort.

Mark Laudi, who wonders when Singapore companies with operations in Burma – such as DBS, UOB, OCBC, Keppel Corp, CNA Group and Shangri-La – will say something about whether the cyclone in Myanmar impacted their operations there.

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SGX Encourages Listed Companies to Continue Heightened Vigilance on Disclosure 15 May

SGX would like to extend our heartfelt sympathies and condolences to the people and families affected by the earthquake in China.

We have contacted listed companies with known Sichuan operations and been informed that most of them are unaffected by the quake. We also note that several listed companies have updated investors on the impact of the China earthquake on their businesses via SGXNET.

Listed companies are aware of their responsibility to make timely and accurate disclosure of material information. We encourage them to continue their heightened vigilance with regard to disclosure of material developments. In this connection, foreign listed companies can tap on their Singapore directors in the discharge of their disclosure responsibilities.

2008-05-14T18:06:00.001+08:00

SingTel: Borrowing to pay higher dividend

Shareholders will not be complaining that they can continue to milk the cash cow SingTel for dividends. Particularly during the uncertain and directionless market, when capital gains are no longer a sure thing, good dividend payers are very welcome. But a look through the Cashflow statement indicates that despite the billion dollar revenues and cashflows, SingTel could only afford to raise its dividend because it borrowed more money.

It's not rocket science:

The business generated S$5.45 bln in cash (Net Cash inflow from operating activities).

SingTel invested S$2.75 bln in associate companies, plant and equipment.

It also paid out dividends during the year of S$3,435.4 bln, compared to S$1.92 bln last year. The difference: S$1.515 bln.

How did it pay for this increase, even as it repaid loans worth S$3.75 bln?

Well, it borrowed S$4.93 bln in fresh funds, which means on balance it took out new loans worth S$1.67 bln.

Next question: is there necessarily anything wrong with borrowing to pay dividends?

Probably not. It's not uncommon, in other countries, too.

The reason companies do it is to maintain confidence in their shares. There's little that scares people away more, particularly during the uncertain and directionless markets I already mentioned, than a cut in the dividend.

But shareholders would be wise to pay attention to the cashflow statement to ensure that dividends aren't artificially propped up by loans even as sales are falling and the business is failing. That doesn't seem to be the case with SingTel, which generated sales worth more than S$14.8 bln! But few if any other companies can boast of similar revenue profiles.

Cash is king.

Mark Laudi, who doesn't own any SingTel shares, but sometimes wishes he did.

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Press Releases <> Significant Announcements

2008-05-13T18:44:00.002+08:00

It has long been a bugbear of mine that some PR companies stretch significant announcements of their clients over three days to try to get some media coverage. But another issue that yanks our collective chain is their use of the SGX Significant Announcements website as their corporate press release dissemination channel. Creative Technology stands out as one of the main 'offenders'.

Today's announcement is a case in point. If the announcement title 'Creative Introduces the Vado Pocket Video Cam - Capture Life - See it, Shoot it, Share it - All in an Instant' doesn't already give it away, the absence of any forecast on the impact on earnings - not even the obligatory but completely useless "this announcement is not likely to impact earnings this year" - is sure to make you see this press release for what it is.

We don't have anything personal against Creative's Corporate Communications Manager Jenny Wong, nor Yap Meng Lee from August Consulting, whose names grace the documents. In a way, I sympathise with Creative because of the tough ride they've been through. Wong and agency haven't exactly had a lot of good news to announce over the last year or five. But the SGX significant announcements page just isn't the place if the announcement is not significant.

Plus it's not like these postings have their desired effect. A scan over the last three months worth of announcements show that out of the nine announcements in that time, four were product press releases (the others were meaningful announcements about the sale and leaseback of their building, financial results and a tie-up with InnoMedia). A check on Google shows none of these four were picked up by the press.

This is where the Investor Relations Professionals Association (Singapore) – set up with the blessing of the SGX – can have an influence. If it wants to do something really useful, it would ask the SGX to split the current corporate announcements page into two: one for the really meaningful stuff which serious investors need to make investment decisions, and another for all the rest. This would include glossy PowerPoint presentations, press releases and so on, which are not permitted to say anything more than the statutory announcement anyway (and usually say a whole lot less). I suspect the IRPAS would not agitate for such a change, given that the Association's Board of Directors is made up entirely of investor relations people (or in any event corporate types who stand to benefit from putting a message out there), not the audience of investors and analysts who are at the receiving end of their output.

For the sake of clarity and an informed (not clouded) market, let's get rid of the PR stuff and cut to the real game on the SGX announcements page.

Mark Laudi

Microsoft vs Yahoo - Microsoft will win

2008-05-06T19:28:00.000+08:00

What a clever game Steve Ballmer is playing with Yahoo! Walking away from his bid for Yahoo was the best move he could have made. In the process, Ballmer is revealing himself a student of Sun Tzu's Bing Fa. My personal prediction is Microsoft will win in its bid, and probably for not much more than the bid he just ended. The reason is simple: Yahoo needs Microsoft more than Microsoft needs Yahoo.

Google is the dominant player in the online search game. Maybe not in every country. Yahoo is still very strong in China, while Google is not. But clearly Yahoo has a fight on its hands for dominance of online advertising. Note how Yahoo sought a white knight in the face of Microsoft's bid. Ironically, Yahoo approached its main competitor Google. Google, which was already warning it was going to fight a Microsoft-Yahoo tie-up on the grounds it would be uncompetitive, offered to share its search technology with Yahoo.

End result:

• Google became stronger by showing its dominance in the search game. It can't make a move on Yahoo because that will never get past the competition authorities. But by sharing its search technology it already smacks of a merger by stealth.
• Yahoo revealed its weakness by scampering for a saviour. Now that Microsoft launched a bid, the company is in play. Everytime the stockprice falls, people will say Microsoft will make another bid for it. It won't end until its taken over.
• Microsoft certainly didn't want to see a Yahoo-Google tie-up, and it was a good enough pretext for Ballmer to walk away from it. But come on, is he really now no longer interested in Yahoo? Microsoft is still the one with multi-billion dollar cashflows. Having shown his hand, Ballmer is committed to winning the game, or forever be reflecting on 'the one that got away'.

But don't forget shareholders. At the end of the day, it's their call. And right now, I would rather be Steve Ballmer than Jerry Yang. Yang has to explain to Yahoo shareholders why he said no to Microsoft's offer, which valued the company at substantially more than the market did.

My call: Microsoft will wait for a while to see what happens next. Yahoo's stockprice will fall further. Yahoo only has two choices: play ball with the arch-competitor Google, or Microsoft. Ballmer will then make another bid. Shareholders, who are unhappy with Yang for not saying yes to the now-defunct first bid, will be glad to accept.

Google may argue against a merger on competitiveness grounds. It knows Microsoft is still on the nose in many countries over its dominance in software. It will want to play on the fears that Microsoft will do to online search what it did to operating systems and office software. But then again, Google is already the Microsoft of the online search game. Regulators may take the other view and think that a little competition to Google will do advertisers more good than harm. Any advertiser, who has seen search terms become more and more expensive on a per-click basis, will testify to that.

But Microsoft will win it. Ballmer reminds me of Rupert Murdoch. Back in 2000, the News Corp chief wanted to get control of the US satellite television network Direct-TV. That was then owned by Hughes Electronics, owned by General Motors. News Corp lost a hostile takeover battle to Echostar. But Echostar's deal didn't go through. In stepped Rupert Murdoch again. He had the last laugh afterall.

The same will happen for Microsoft.

It's funny how these things turn out.

Mark Laudi, who predicts another Microsoft bid will come before the end of 2008.

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Comments on the Russian front

2008-05-05T18:23:00.002+08:00

It's a sad state of affairs indeed when investors coming to Singapore are eyed with suspicion just because of their country of origin. Rather than fall back on stereotypes and generalisations, investors should consider each individual on their merits. So when Mikhail Bolotin reportedly declared his intention to bring airconditioner maker Dunham-Bush to Singapore, after taking the company private on Bursa Malaysia, the first thing everybody seemed to think of was the autocratic Russian administration, the president who replaced himself with a ventriloquist's puppet whose words he steers from the prime minister's seat, and what Newsweek magazine described as a feudal system of government. Folks, it doesn't have to be that way. We should welcome people like Bolotin, who bring their fortunes here.

Just because Bolotin is 157th on the list of Russian billionaires doesn't make him a bad guy. Afterall, even though he is worth 3.9 bln Rubles that only translates into US$140 mln. And getting less by the week.

We should also avoid any finger-pointing, just because Bolotin's Most has a virtual monopoly over the manufacture of tractors in Russia.

And when Russia's online daily newspaper Kommersant reports that "Mikhail Bolotin's successes are directly connected with Vladimir Putin's presidency", we had better consider the facts ourselves before jumping to conclusions. After all, if we were to invite only those Russian businesspeople who achieved their wealth without Mr Putin's help, we'd have a pretty empty list.

I am also certain that if Mr Bolotin wishes to list his tractor concern on the Singapore Exchange in November this year, the Monetary Authority of Singapore would have a pretty good look at it.

Mark Laudi, who has never met Mikhail Bolotin.

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Capitacommercial Trust Stays Execution Of Market Street Carpark

2008-04-29T20:40:00.001+08:00

The manager of CapitaCommercial Trust has deferred a decision on redeveloping Market Street carpark.

CapitaCommercial Trust Management said the decision will be made not earlier than mid-2009.

CapitaCommercial Trust said in January that it was granted an Outline Planning Permission (OPP) was granted by the Urban Redevelopment Authority (URA) for the redevelopment of the property into a Grade A office building.

The CEO of CapitaCommercial Trust Management said it deferred the decision due to the significant size of the project, rising construction costs and the currently volatile financial markets.

If CapitaCommercial Trust had gone ahead with redeveloping the Market Street carpark, it would have been its second time in just two years. Tearing down the place to build a spanking new office building would have meant a waste of S$14 mln.

Mark Laudi has touched on this subject of redeveloping the Market Street Car Park in January:
http://investorcentral.blogspot.com/2008/01/market-street-carpark-wasted-s14-mln.html#links

Analysts surveyed by Reuters have on average an OUTPERFORM call on the stock with a price target of S$2.655, compared to its last traded price of S$2.20.

As always, please see your licensed financial advisor before making any investment decisions.

Darco Water - Will Its Business Be Threatened By The Slingshot?

2008-04-25T16:09:00.001+08:00

Darco Water said yesterday it is confident of posting revenue of at least S$100 mln for FY2008 after securing seven environmental engineering projects valued at about S$25 mln.

The total project orders to be delivered in FY2008 now stand at S$126.00 mln.

Darco’s FY2007 revenue was S$87.6 mln.

The bulk of new orders come from the electronic and semi-conductor sectors, which make up almost 80% of the total orders.

But the two major orders of the bunch include Darco’s two wastewater treatment projects in Taiwan valued at S$12.3 mln and the repeated orders for Phase II of Seagate Malaysia’s facilities in Johor for air management and wastewater treatment systems valued at S$11.5 mln.

In another announcement, Darco said its lawsuit against insurer ECICS over an export credit insurance claim has resulted in the latter paying up. ECICS paid up “a substantial part of the claim” on 17 March for the purpose of compromise only and without any admission of liability, Darco said.

The unpaid claim had dragged down Darco’s FY2007 profit by 95% to S$120,000. It had made a one-time provision of S$4.6 mln relating to sub-contracting works arising from a Taiwan-based company, Hsin II, and was expecting the insurance claim from ECICS to come through.

~Jin San’s take~
Hear ye, hear ye – something has happened and the wastewater treatment industry will not be the same again. This momentous event happened last month, when Dean Kamen appeared on US talk show The Colbert Report and showed for the first time a water purifying machine. The machine, which Kamen (the inventor of the Segway - http://www.segway.com/) calls a Slingshot, can purify anything – ocean water, urine, sewage, you name it.

It looks about the size of a concert speaker, requires no filters, and can operate using an easily-obtained fuel: cow dung. Besides generating 1,000 litres of drinkable water a day, the Slingshot can generate electricity, too. Check out the marvelous invention here:
http://www.youtube.com/watch?v=EmTgVNFaDig

Kamen is trying to reduce the price of making the Slingshot to about US$1,000 to US$2,000. The prototype he showed on The Colbert Report was made for US$100,000, though. Price will be a major stumbling block - The One Laptop Per Child Project (http://laptop.org/), which had a similar humanitarian aim, took a long time to reach an acceptable US$175, which is much higher than its original target price of US$100.

But with more media coverage, the proper connections, critical mass, and further improvements, it will become a possibility for the Slingshot to help the 1.1 bln people in the world who don't have access to clean drinking water, and the 1.6 bln who don't have electricity.

On the other hand, this invention could potentially give wastewater treatment companies like Darco a run for their money. If this quantum leap in technology takes off, it could mean third world villages and small towns cutting out the middlemen to operate wastewater treatment plants and buying a bunch of Slingshots to produce clean water. The 1,000 litres of water a day the Slingshot can generate will hydrate a lot of human beings indeed. If each person drinks 1.5 litres of water in a village, I’m thinking a couple of Slingshots would be enough to serve the average village with a population of say, 1,000.

But we are only talking about the first generation of Slingshots. For sure, there will be variations and technological improvements in the future. Plus, the beauty of this invention is that it does not need anyone to operate it, unlike wastewater treatment plants. Which means cutting out the Operating part of BOT (Build, Operate, Transfer) or DBOT (Design, Build, Operate, Transfer) contracts.

To be fair, the wastewater treatment companies need not feel threatened for now because the plants they build and operate are much bigger and size. Plus, they are getting contracts at municipal and town levels. But I would not be as complacent as to discount the Slingshot as an idea that might not take off. Dean Kamen’s other invention, the Segway, hasn’t really revolutionized the way we travel, either. But he gave the Slingshot its name as a reference to the simple weapon that David used when he faced Goliath. In reality, the Goliath would be the billions of people without drinking water in the world. But this little Slingshot might take down more than just the water problem – it might take out a few water companies along the way.

But as with all technological innovations, we have to wait and see whether it will rise above the shadow of ‘just a prototype’.

As always, please see your licensed financial advisor before making any investment decisions.

SGX Research Incentive Scheme should not be for everybody

2008-04-10T07:51:00.000+08:00

There is no doubt the SGX Research Incentive Scheme has been a success. It's clear from the sheer statistics – which show that 64,000 registered users download broker-generated, company-sponsored research 50,000 times a month – that there is a demand for this type of research. There is also plenty of research which substantiates the long-held belief that research is critical to increase interest and turnover in stocks. My concern is centred purely around the fact that there are some companies who should not be receiving a subsidy for having such research conducted on them.

The SGX Research Incentive Scheme is an admirable and worthwhile attempt to give a helping hand to smaller and mid-sized companies, which usually escape the attention of analysts at broking houses and therefore see low liquidity in their stocks. The problem, it was argued at the time of the launch, is that financial analysts usually write about companies which are already "in play", because that's where the turnover already is, and where the cost of financial analysts can be defrayed by commissions from share trades. By launching the scheme, this cycle of encouraging more trades in stocks which are already heavily traded, while smaller companies are ignored, could be broken.

The Monetary Authority of Singapore also understands the value of the scheme because it provides more information (=a more level playing field) in the market. The MAS subsidised the scheme through the Financial Services Development Fund from the beginning.

Sofar, so good.

The problem, in my view, is that companies which are already receiving a great deal of analysts' coverage are also permitted to take part.

Our research in late 2006 showed the following:
(Unashamed opinion continues below advertisement)

There were six companies which were already covered by more than 10 analysts.

They were:

• SingTel
• UOB
• DBS Group
• ST Engineering
• SembCorp Industries, and
• Jurong Technologies

In addition, there were 22 companies which were covered by at least 4 analysts, including COSCO, SMRT, Hyflux and Noble Group.

My argument is: these companies are already receiving a significant amount of coverage – why are they receiving a state (=taxpayer) subsidy to have even more research conducted on them?

Or, more to the point, let them take part but make them pay a higher price and receive no subsidy at all?

Granted, the sums we're talking about here aren't huge. Twentyeight companies which, in my book, should be ineligible, each receiving S$4,000 in subsidies, totals only S$112,000. But what if these funds were used to pay analysts to cover companies which currently have one or two analysts covering them, or even none?

Mark Laudi, who wishes all analysts contribute all their reports to the SGX Research portal - not just the ones generated through the SGX-MAS Research Incentive Scheme.

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Agflation: new words for a new world

2008-04-09T15:24:00.000+08:00

Even as we're grappling with the spectre of a recession in the United States, prices are rising paradoxically. But not just plain-old inflation, no! The current economic circumstances have given rise to a whole new language, as if to make us feel better, by rationalising the whole barrage of price increases we're seeing.

For example, you may have come across agflation. Google has about 47,200 listings of the word, including Investopedia's matter-of-factly definition:

An increase in the price of food that occurs as a result of increased demand from human consumption and use as an alternative energy resource. While the competitive nature of retail supermarkets allows some of the effects of agflation to be absorbed, the price increases that agflation causes are largely passed on to the end consumer. The term is derived from a combination of the words "agriculture" and "inflation".

It's as though agflation is a real word! (Dictionary.com has no record of it). David Shvartsman acknowledged the word in an almost year-old article for Safe Haven, while expertly correcting the media and economists who have bastardised the word "inflation" to make it fit into their own view of the world.

In any event, we at Investor Central have come up with our own set of words to describe the current state of affairs:

Transflation - the economic rationalist explanation each time the Public Transport Council raises bus and MRT fares.

Meeflation - the "sticker shock" you get by going to People's Park and being offered Hokkien Mee, not in $2/$3/$4 portions, but $4/$5/$6 sizes.

Proflation - the phenomenon by which landlords are inexplicably bestowed the right to triple rents for long-standing tenants, or other people in the property business predict an endless rise in sale prices.

Cabflation - the mathematical relationship between the increase in taxi fares and the lengthening of queues of taxis waiting for passengers.

These inevitably lead us to the most important of all, and unlike "agflation" this one is a real word. Click on the link to read for yourself:

Afflation – the blowing of hot air by Treasury Secretary Henry Paulson and his Wall Street buddies about giving the Fed more power. Does anyone else sense another Patriot Act coming on, this time stomping on civil liberties and rights to privacy in the banking sector?

What -flations are currently weighing on your finances?

Mark Laudi, who did a double-take when he first saw the word agflation and thought the author had meant "stagflation" (rising prices in a weakening economy). Hmm… stagflation: the increasingly panicked rantings of a groom when presented with the dinner bill for his wedding?

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Jade Tech 'designated'. And here's another...

2008-04-08T07:48:00.001+08:00

Congratulations to the Singapore Exchange for designating Jade Technology - meaning, the stock can no longer be sold short. Frankly, it was starting to bore us that each morning at our editorial meeting the top traded stock was… drum-roll please… Jade Tech. But we think there are a couple of other stocks which rank highly in the "eye-rolling" stakes, and qualify for special attention from the SGX, most notably E3 Holdings.

The stock formerly known as ei-Nets has been seeing a lot of volume, with 15 mln shares changing hands last Friday. Trading at 3 cents apiece that does not translate into a lot of money. But their announcement late March that a subscription agreement with Pacific Capital Investment Management Limited has been terminated.

Is it a coincidence that the venerable Dr Anthony Soh, who's also behind Jade Tech, is E3's President, and bought 280 mln shares in E3 Holdings worth almost S$10 mln just a month ago?

I haven't spoken to Dr Soh, and so I am not sure whether there is a relationship between the Jade Tech and the E3 Holdings announcements.

But it seems even if he cashed out this investment he still would fall short of the S$67 mln he needs to pay for the now-cancelled takeover of Jade Tech.

On the face of it it looks like whoever's been shorting Jade Tech is actually shorting Dr Anthony Soh, and is drawing E3 into it in the process.

Clearly, reading the articles and announcements about all the stuff that's gone down over this counter, there is more to it than a bunch of speculators getting hold of the stock. For example, the collapse of Australian stockbroker Opes Prime, and the investigation by the Securities Industry Council into the role played by OCBC Bank.

At the least Dr Soh could take comfort that he still has some money in the kitty, after his dream of taking over Jade Tech went down with Opes Prime.

Mark Laudi, who would like to extend an invitation to Dr Soh to appear on camera on Investor Central for a chat about what's been going on.

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Henry Paulson's plan to reduce the SGX's attractiveness

2008-04-02T15:53:00.002+08:00

The US Treasury Secretary's plan to develop new laws for the financial services industry there may be long overdue. The Securities Act dates back to 1933, and while there have been many additional laws put into place sometimes it's just better to start anew. I don't want to debate the merits of Henry Paulson's plan here. But a perhaps unintended consequence may well be that smaller markets outside of the US, which have been positioning themselves as attractive bourses to list, will be under pressure.

Let's face it. We all love the Sarbanes-Oxley Act. Not because it straightens out shrewd American executives. It might do that, I'm not entirely sure. We love it because it makes the US such a damn difficult place to maintain a listing that even reputable companies are looking elsewhere to go public. According to figures produced by Harvard Law Professor and head of the Committee on Capital Markets Regulation, Hal Scott (quoted in USA Today), the US has been losing its attractiveness big time. In 1996, he says, eight of the 20 largest global initial public offerings were listed on a US exchange. In 2006, it was only one. Up till December 2007, not one of the top 20 global IPOs listed in the US. Similarly, 56 foreign companies abandoned their US listing in the first ten months of 2007, compared to 30 for all of 2006. Among them: Creative Technology and Australia's ANZ Bank.

Bad for them, good for us. Because it inevitably means markets such as the London Alternative Investment Market (AIM), as well as Hong Kong and Singapore, are more attractive listing destinations.

I'm not terribly concerned with the angst US exchanges may have over the prospect of equities and futures markets merging. This is already de rigueur in Asia. Just look at the merger between Singapore Exchange and Singapore International Monetary Exchange (SiMEX) in 2000 (!), and the merger between the Australian Stock Exchange and Sydney Futures Exchange to form the Australian Securities Exchange in December 2006. It's time those mile-driving, gallon-drinking and ounces-weighing Americans get over it and join the 21st century (maybe they'll consider switching to metric in the process).

My greater concern is that the United States already attracts a huge amount of capital, not because they're experts at handling money (for those that think they are, I have two words for you: sub-prime), but because of their sheer size. The statistics from the World Federation of Exchanges (page 33) bear this out. The US financial market has the inertia of a supertanker, even if it's a rusty one.

By contrast, the Singapore Exchange is a tugboat. If the supertanker modernises and becomes more agile, it is my hope that the SGX won't capsize in the wash.

Your thoughts?

Mark Laudi, who thinks it's quaint that the NYSE ditched fractions in favour of decimal calculations less than a decade ago.

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Commodities: the next market to collapse

2008-04-01T20:45:00.004+08:00

If you thought tumbling equities market were merely correcting from a bubble, just wait for a big collapse in the commodities market. Not all commodities will fall, but there are clearly some which are defying fundamentals in the same way stocks did prior to the big bust. Longer term, I certainly buy the argument that commodities will be supported by growing consumer demand. But in the short term, my personal view is that the big gains have more to do with 30-something day traders with laptops and a trading account than strong demand.

The three commodities I want to focus on are oil, copper and crude palm oil.

Oil. The price of Nymex light sweet crude continues to hold above US$100 a barrel - inconceivable just a few years ago. Yet the US economy is slowing. Refineries aren't at full capacity. At 300 mln barrels, stockpiles are not just very high historically, but actually very normal by recent standards for this time of the year. The US has more gasoline (=petrol in standard English) in reserve than at any time in the last 15 years. 15 years!! Whether you believe those who are looking toward the inevitable drying up of oil wells in 50 years from now, or writers like John Cassidy who predicts a 50% decline in prices, the fact is that:

"...crude's rise despite swelling inventories highlights the disconnect between supply and demand fundamentals and the current, speculator-driven price.
"It [early March inventory report] is a ridiculously bearish report," said Stephen Schork, editor of The Schork Report.
"We have major concerns regarding the economy in the United States, rising supply, falling demand. Why is crude oil trading at over $100 per barrel? It makes no fundamental sense."

'Nuff said.

Copper. The three-month contract in London recently hit a record US$8,820 per tonne. On the one hand, you hear comments that stockpiles are at their lowest since October. But then you read "inventories in Asia are rising and Chinese demand is likely to fall further, after the world's top copper consumer imported so much of the metal it is now oversupplied". Further, "experts expect that the copper price will eventually be lowered to some extent as copper output will rise by some 850,000 tonnes when new mines are put into operation in major copper-producing countries such as Chile in the second half of this year". If that's not enough, back in June last year, when London stockpiles were around 120,000 tonnes, the price was around US$7,415. Now with stockpiles up to around 200,000 tonnes, we're supposed to believe that the price at US$8,820 is justified? Come on!

Crude Palm Oil. Prices have recently come down from records around 4,000 Malaysian Ringgit per tonne. And about time. Stockpiles are near records (1.88 mln tonnes in January). There is a limit to how much all these can be explained away by long-term demand, geopolitical issues, declines in the US Dollar, and all the other reasons financial journalists usually clasp for when writing their stories. Sooner or later, the house of cards crumbles to its foundations (=fundamentals).

As I mentioned, not every commodity is in the "fundamentally overpriced" category. A report in the New York Times says global wheat stockpiles are at 30 year lows and US stockpiles at 60 year lows. Demand is growing while drought is hitting supply. There are plenty of reports from around the region that support this view. These are flowing through to the consumer in the form of higher prices.

People like my good friend Jim Rogers keep talking up commodities. And he'll probably be right in most cases, and in the long run. But you can say that about equities too. Just like equities, I won't be surprised if the rout spreads to the commodities market in the meantime.

Mark Laudi, who was recently told by an executive in the oil industry that it still costs only US$25 a barrel to produce that stuff.

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DMX Technologies - Chasing the long tail

2008-03-28T20:58:00.003+08:00

Hong Kong-based DMX Technologies said today it is planning to get a regular stream of revenue by focusing more on digital broadcasting.

The company, which provides broadband infrastructure and provides digital media content for CATV operators, telcos and satellite companies, recorded a 37% increase in FY2007 revenue growth from digital media content.

It said the business environment for its infrastructure business was difficult due to a mature infrastructure market in Korea and China being slow in rolling out its infrastructure.

Revenue for the segment slipped 6.6% to US$125.8 mln in FY2007.

In DMX’s corporate presentation filed on SGX, it will be providing digital media content for 3G mobile phones and CATVs. It cites the Long Tail theory, which describes the niche strategy of certain businesses with huge inventories that help them realize significant profit out of selling small volumes of hard-to-find items to many customers.

Examples of such companies with inventories that cater to all kinds of consumer tastes are online auctioneer eBay, search engines Yahoo! and Google, retailer Amazon and the iTunes music store.

With this change in business focus, DMX Technologies is changing from being a business-to-business service provider to a more consumer-oriented business. It intends to start with the Chinese media industry and use content as the connecting thread for all its businesses.

As part of its aim to become a media player in China, It has taken an investment stake in a Chinese company that has the rights to operate mobile TV. Once in the consumer arena, DMX is sure to face a new set of risks like fickle consumer tastes, strict censorship rules in China, and potentially keener competition, to name a few.

But rewards could be bountiful - according to CCBN (China Content Broadcasting Network), China has the world’s largest subscriber base in cable TV, currently at 130 mln. And the Chinese government has laid down industry-friendly regulations to digitise all broadcast services by 2015. This is expected to pump up the number of digital TV household subscribers to over 180 mln by 2015.

In a country like China, government regulations often play a role in helping a company flourish, and DMX is most probably hoping its business will be on the good side of government mandates.

As part of the usual routine for companies that are trying out a new business direction, DMX announced on 13 March that it had been awarded an initial contract to implement a provincial scale interactive digital TV platform for a cable TV operator in Inner Mongolia, China. It did not say how much the contract was worth.

At least Aztech proudly announced a S$250 mln contract last month after it said it would venture into supplying construction materials. Perhaps DMX will announce more contracts (one or two?) in the next few weeks.

DMX Technologies is not covered by Reuters Estimates. It was last traded at S$0.216, around the same levels it was trading when it first listed in 2002. It has fallen since and has not recovered to above the S$1-dollar mark since May 2006.

As always, please see your licensed financial advisor before making any investment decisions.

- Tan Jin San

The nonsense of the "falling knife"

2008-03-24T21:42:00.001+08:00

"When is it time to buy stocks again?" This was the question on everyone's lips at the Asia Trader & Investor Convention over the weekend. Like Singapore investors, Malaysians are just as keen to dive back into the markets. It's quite apparent that most people who showed up at the Kuala Lumpur Convention Centre were biding their time, getting ready to pounce once things turned. This is almost the smartest thing investors can do. Almost. While the Dow Jones Industrials Average gyrates in 300-point ranges, investors who've got their eye on the long term are not perturbed. They use the steady compass of valuations. They are, to borrow the oft-used phrase, walking placidly amid the noise and haste.

Which brings me to my favourite hobby horse: conventional un-wisdom. Stuff that people truck out and cling to because it sounds comforting, but which either makes no sense at all or contradicts common sense. Here are my two favourites:

"Good things come to those who wait". What nonsense! Anyone who teaches their children to take opportunities as they come along will know that this is pure and utter rubbish expounded only by those too lazy to get off their butts and make things happen. Plus it contradicts that other great adage, "don't wait for your ship to come in, swim out to it". Or as Confucius put it: "A man who stands on a hill with his mouth open will wait a long time for roast duck to drop in."

This is just as true in the markets as it is in other aspects of your life.

A worse version of the above is:

"No one wants to catch a falling knife". Here is another phrase which analysts use to explain the absence of buyers. This is more a sign of ignorance and the absence of a strategy than any real, valuable insight. The sentence means that no one knows how far the market is going to fall, and therefore anyone who buys in now will get "cut" as prices fall further.

Implicit in this sentence is the assumption that we don't know how far the proverbial knife is going to fall. I don't profess to be an analyst, nor do I know how far the market is going to fall. But then, I don't care about how far the market is going to fall. What I, and most investors, want to know is when valuations are reasonable, even when you take into consideration a decline in earnings. Only when you look at stock specifics, and forget about the market, do you start to get clarity.

The knife is not falling. In fact, there is no knife. It's more like a gold pan. Slowly we're washing out all the mud and rocks. What remain are nuggets. Those nuggets may fall in price before they shine through. But nuggets always shine through in the end.

Mark Laudi, who prefers to use the elevator metaphor. It doesn't matter which floor you're on, or even if your elevator goes down in the short term before riding up in the long-term - as long as the elevator you take is of good quality.

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Can the Olympics save Synear from snowstorms and inflation?

2008-03-20T11:18:00.007+08:00

Fancy pesticide in your frozen dumplings? Or how about a rat’s head in your prawn crackers? Made-in-China products are getting a bad rep but at least this company is pretty safe from it.

For Synear Food, which makes frozen food like dumplings and desserts, the bad reputation of Chinese products worldwide is not going to affect its business since it sells its products in China.

But inflation is. Just like other food producers, Synear has to cope with higher raw material prices, despite raising its selling prices. It is affected by the rising prices of main raw materials such as pork, flour and packaging materials. This has caused its FY2007 gross profit margin to go down 1.4 percentage points to 32.2%.

Inflation in China was at 8.7% in February and at its highest in 12 years, due to higher food prices. Even the government has made tackling inflation its first priority. But like the previous efforts to cool down the economy or the property sector, it will take time for measures to work.

In the meantime, inflation will definitely affect Synear’s profit margins for this year if its move to increase the sales of its new and premium brand products do not work.

One day after it released its earnings report on 25 February, Synear saw a spike in trading volume and its stock plunged. A report by CIMB-GK had drastically downgraded the stock from OUTPERFORM to TRADING SELL due to the company’s increasing costs overshadowing its management’s aggressive expansion plans.

As if things can’t get any worse, Synear Food announced yesterday that it joins the list of Chinese companies affected by the severe snowstorms in China. It said the recent snowstorm in January had affected the transportation and sales of its products to southern China. It also said its sales in Northern China are not enough to fully offset the impact of the snowstorm.

It is expecting sales for Q1 2008 to be lower year-on-year, although it still expects the figure to be higher than the previous quarter.

But the group does have aggressive growth plans – it is intending to buy land outside six cities in China to build cold storage warehouses and stock more raw materials. And it is building an industrial district in Henan province to increase its production capacity.

The company is using its IPO proceeds of RMB 1.14 bln and is borrowing from banks to fund its expansion plans.

In yet another aggressive move, the company signed on Jackie Chan as its brand spokesperson in July last year. I’m thinking this is just for the lead-up to the Olympics, for which Jackie Chan is also a spokesperson. But how much are they paying him? From Synear’s FY2007 report, selling and distribution costs shot up 54% to RMB 207 mln due to TV ads and billboard advertising. I’m thinking that includes Jackie Chan’s massive fees as well.

This company’s aggressive trait can cut both ways. Analysts are downgrading their calls on this stock, but Synear seems to be betting on sales during the Olympics to make its FY2008 a good year, despite thinning profit margins. And after the Olympics, who knows?

- Tan Jin San

SGX-Bursa link: do we really need it?

2008-03-05T22:58:00.004+08:00

I have been a strong advocate of the trading link between the Singapore Exchange and Bursa Malaysia because it brings the two countries closer together, it fosters economic cooperation and it will likely add liquidity to both markets. It is heartening to read that they're finally getting it together. But while I hold firm to these points, it is merely stating the obvious that the trading link has been delayed so often that retail investors could be forgiven for thinking it will never happen. And now one wonders whether it actually should.

The fact is, Singaporeans can already trade on Bursa Malaysia using established brokers and networks (watch the video to find out which ones). Trading commissions may be higher, but it is unclear whether fees would come down when there is an electronic linkage between the exchanges. Presumably, the exchanges would justifiably seek some return on the extra infrastructure needed to establish the linkage.

The real issue is not so much the technology involved, although the long delays and integration of the technology have been frustrating enough. It's an issue of marketing. Our own Investor Central research has often found that investors - particularly at the retail end - much prefer to invest in the markets in which they live. That is as true of Singaporeans, as it is of Malaysians, Thais and the Chinese. It makes perfect sense: they like to buy stocks they are most familiar with.

Incidentally, the second highest preference of investors in these markets is the US market. Which also makes sense, given the prominence of US companies in the news.

If the SGX-Bursa link is to work, it will be more about achieving a familiarity with companies in each other's markets. It was this lack of familiarity, in the absence of a decent marketing campaign, lead to the demise of the SGX-ASX WorldLink in 2006.

Another issue, which hasn't been dealt with publicly, is the political aspect (watch the video to hear Mark's views on this). So, given all the technical and political difficulties that may arise out of a formal trading link, it may be wiser to focus a marketing campaign on the services which are already available in the market.

Mark Laudi, who is a particular fan of the Malaysian equities market because of the complementary investment opportunities it offers.

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The SGX's "Watch-List": Complete duds or hidden value?

2008-03-05T02:32:00.004+08:00

The Singapore Exchange is to be applauded for trying to raise the standard of mainboard listed companies, but generating a list of those which fail to meet minimum standards. Companies which have reported consoliated pre-tax losses for the prior three years can find themselves on this list. If they don't improve, they could find their shares suspended or even delisted. But while the motivation is laudable, the criteria used to judge companies could be debated.

Right up front: this is not a recommendation to buy any shares, nor am I going into bat for these companies. Not least, because they didn't acknowledge their "spoon award" beyond the necessary disclosure, and explain how they were working to make sure they weren't on the list again in the future.

But I'm concerned the SGX is using a profit number, rather than cashflow, as the category to measure companies by (loss-making companies must also have a market capitalisation of S$40 mln or more to escape being named). As we all know, "profit is opinion, cash is fact". And because profit numbers can be affected by property revaluations and other arbitrary, non-cash measures, CFOs of the affected companies can find ways to escape being listed.

If we then look at cashflow instead of profits, five of the eight companies named on the first list could perhaps we cut some slack.

Watch the video to see what I mean.

Fact is: none of these companies are stellar performers. But if the list was compiled based on cashflow, not only would we quite likely see a very different list, we would also ensure that CFOs had no way to cook the books to get their way out of trouble.

Mark Laudi, who thinks this would have been a good opportunity to convert investors from focusing on profit to focusing on cashflow.

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Retail market alive and well

2008-03-03T16:25:00.002+08:00

Judging by attendance at the Asia Trader & Investor Convention (ATIC) over the weekend, retail investors are still enthusiastic participants in the local stock market. Despite the rain and NATAS travel fair at Singapore Expo, the crowds kept coming, perhaps swinging by after visiting the bridal fair upstairs at the Suntec Convention Centre to find ways to pay for it all.

The strong attendance should be comfort to anyone - in particular institutional investors - who might be worried about the retail investors leaving the market. A quick check with my good friends at the SGX recently confirms that the number of active investors (=traded at least once in the last three months) still hovers at around the 200,000 mark. It is retail investors who provide the liquidity needed for institutions to throw their money around. All the more reason why retail investors should be better looked-after!

While the mood was obviously not as buoyant as last year, when the bull run was still in full swing, here are other adjectives we'd use to describe the frame-of-mind of local retail investors:

Expectant. True to form, retail investors are still on the lookout for opportunity. They expressed a mixture of apprehension and opportunity. Either those who have been completely scared off by the market plunge didn't show up at ATIC at all, or they came anyway to learn new trading skills to deal with the new realities of the market.

Skeptical. The search for opportunity is coloured with an increased skepticism of the gains to be had in the market. There is a general acceptance that the good times of recent years are over, as there should be. It made overly optimistic sales pitches by anyone at the expo much less credible. No wonder most exhibitors talked about minimising losses and capital protection, than leveraging to go all out for profits.

Insecure. No surprises there. Investors came to get clarity in a market that has become murky at best. But there is also still hope that they will return in some fashion. They were willing to listen to what was being offered. The problem I see is that there were obviously fewer people who are new to investing who wanted to see how they could jump onto the bandwagon. The bandwagon has passed. If only those people realised that now is precisely the time to start thinking about investing.

What adjectives would you use to describe your frame-of-mind about the Singapore market?

Mark Laudi, who would like to say thank you to all those Investor Central customers who dropped by and said hello

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