Monday, October 31, 2011
Chart: MBSB's daily chart as at Oct 31, 2011 (Source: Quickcharts)
1st UPDATE: MBSB has just reported a very good set of results for QE30/9/2011. Its net profit for 9-month ended 30/9/2011 is RM241.6 million- an increase of 81% over the net profit for the same period last year. If it can maintain its current growth, it is likely to achieve a full-year EPS of 40 sen for FY2011. At RM1.73, MBSB is now trading at a current PE of 4.3 times. It will be very interesting to see how the cheap valuation would match-up against the technical resistance as noted in this post. If it can break above the resistance, the technical outlook would change from cautious to bullish.
2nd UPDATE: A reader, 小混混 has pointed out that the 9-month EPS should be about 20 sen. That's correct because MBSB had a Right Issue of 5-for-7 (c/w 1 free warrant for every share subscribed) in May. Based on this, the annualized EPS for FY2011 should be about 28 sen. Based on its closing price of RM1.73 yesterday, MBSB is now trading at a current PE of 6.2 times. Hat tip to 小混混.
Chart 1: JTiasa's daily chart as at Oct 31, 2011 (Source: Quickcharts)
Chart 2: TaAnn's daily chart as at Oct 31, 2011 (Source: Quickcharts)
Chart 3: Lingui's daily chart as at Oct 31, 2011 (Source: Quickcharts)
Chart 4: WTK's daily chart as at Oct 31, 2011 (Source: Quickcharts)
Friday, October 28, 2011
This week, the Edge published an interesting article written by Khairy Jamaluddin entitled ‘Time to Consider a New Social Contract’. He opined that “we need … a new concord … (to) address not only the never-ending parallel-lives issue but also deal with other fundamental issues regarding preferential policies”. His take on the need to reform the Malaysian education system is both bold & far-reaching. As a politician, he deserves praise for this serious proposal which would earn him more criticisms than accolades in his party.
A Typical Educational Journey
Let me firstly tell you a bit about my personal educational background. I studied in a missionary school, St. Mary’s in Sandakan, Sabah. My father sent me to this school because he’d studied in St. Mary’s and he felt that if it was good enough for him, it should good enough for his son. My father rejected my mother’s request for me to study in a Chinese primary school in order to learn Mandarin.
I joined St. Mary’s in 1970 when the medium of instruction was switched from English to Malay. My classmates & I learned, spoke & joked in Malay for 13 years. It was a fun group comprising mostly Chinese with a few from the other races; just enough to make up a football team which we called MCKIP. MCKIP stands for ‘Malay, Chinese, Kandazan, India (actually a Sikh) and Philippino’. Strangely, these days I can go for one whole week without speaking a single Malay word. After I’ve completed my Form Six, I applied to University Malaya to study either law or economics. I was only given a place to study Bachelor of Art which I did not apply for. I opted to study accountancy in Tunku Abdul Rahman College.
When my wife & I have our first child, we decided to send her (and her siblings) to a Chinese school because we felt that the standard of teaching in the Kebangsaan schools was lower than that of the Chinese schools. We were also motivated by our desire to have our children learn their mother tongue, Mandarin. All my children went to Chinese primary school, with my youngest daughter about to complete her Standard Six this year. Next year, she would proceed to a Kebangsaan school, like her sisters before her.
Living in a Parallel World
I agree with Khairy when he lamented that our children are living different lives- a kind of parallel world where they hardly interact. This is something which we need to address. I believe that our education system, from primary school level to the tertiary level, should strive to produce well-rounded graduates with the necessary skills to compete in today’s globalized economy. The education system should be cost-effective and also promote fairness & unity among the different races. I do not however agree with Khairy’s suggestion of completely phasing out the vernacular schools from the system, even gradually. Instead we should work to strengthen the Kebangsaan schools to such a level that even the non-Malay parents would not hesitate to send their children to these schools. Let me explain how we can achieve a cost-effective world-class education system with fairness to all & unity in mind.
Suggestions for Improvement
Firstly, promote Vision schools. We can do this through publicity but it would be more effective if we can show results instead. What we need is to enhance the effectiveness & efficiency of the teachers in this schools as well as the level of proficiency of the students entering such schools. Make these schools the elite schools and offer the students something special. For example, we can keep PPSMI in the Vision schools. I believe there are many parents who have seen the benefit of their children studying Science & Mathematic in English & they want their children to continue to have access to this medium of instruction. I daresay that even the Chinese parents would put PPSMI ahead of studying in a Chinese school. The government should also emphasize one important feature of Vision schools which should appeal to non-Malay parents- the teaching of the mother tongue in these schools. This may satisfy many parents who are not too demanding about their children studying every subject in the mother tongue. I could have been one of them.
Secondly, reduce the Bumi quota for our universities. If you believe that our lack of unity comes from the different races starting their educational life in their respective vernacular primary schools, then how is that any better when they complete their educational life in separate colleges or universities. Today, we can observe that most of the Bumi students study in local government universities, while the non-Bumi students study in private colleges or universities. The reason is simply because the chance of gaining entry in the government universities for non-Bumi is very low due to the quota system which limits the available places for non-Bumi to only a handful. This system promotes unhappiness among the non-Bumi as well as lowering the standard of graduates in these universities as many talented non-Bumi students are turned away. We clamor loudly about the problem of the poor ranking of our universities when the elephant is standing right in front at us.
Thirdly, terminate all the Matrikulasi & Asasi courses which are nothing but backdoor entry to local universities for Bumi students. These pre-university courses are of lower standard than the STPM certificates and yet they are given preferential treatment in application to our local universities. Instead the government should set up pre-university colleges for the teaching of Form Six for all students. Everybody should be treated equally.
Fourthly, reduce the role of UPU to a coordinating body, like the US’s College Board. When the role of selecting students is taken away from the universities, what we have is simply ‘garbage in, garbage out’. When students have no say (or, very limited say) in which university he or she is assigned to, how important is the choice of university in the application. When the customer (the student) and the seller (the University) cannot freely determine their choices, then the seller cannot be held accountable for sub-standard performance.
Finally, reduce the number of scholarships to be awarded to Form Five students for overseas tertiary education or abolish them completely. By giving out 500 scholarships (each costing RM500,000) each year, the government is committing to spend RM250 million for only 500 students for the next 3-4 years. The same amount of money could be better utilized to upgrade our local universities or to pay for the tuition fee for 5000 students (each costing RM50,000) to study in our local universities. While studying overseas is undoubtedly a good experience, it is a luxury that we can hardly afford in a time when our fiscal deficit is so high. Instead we should send only our graduates for post-graduate studies when they are matured and are able to learn new things that would benefit our country upon their return.
The Right Time for a Change
I hope our Prime Minister would take up Khairy’s suggestion to set up a national consultative council to look into this problem quickly. As we celebrate our 54th year of independence, Malaysians are hungry for more changes to improve their livelihood & the future of their children. Our Prime Minister has shown his mantle as a visionary leader by introducing a bold economic program, the New Economic Model. He has also taken brave political decision such as scrapping ISA and other draconian laws. Now is the time to do right for our children, by revamping our dysfunctional education system.
(This is my latest article in Merdeka Review. For the Chinese version, go here).
I will summarize the main points as interpreted by the author, Cullen Roche as follows:
Conclusion: This is a step in the right direction. By recapitalizing banks and enlarging the EFSF they have set a nice sized rifle on the table. Unfortunately, this is just more of the same in greater size. Ultimately, none of these measures will resolve the true cause of the crisis which is rooted in the currency and the incomplete currency union. Until Europe resolves the imbalance caused by the single currency there is no reason to believe this crisis has ended. I still believe the ultimate resolution here will involve fiscal transfers of some sort directly to the sovereigns that resolves the lack of sovereignty issue. That likely means e-bonds or a central Treasury at some point. We are clearly not there though this statement buys them time.
For now, we can breathe a sigh of relief knowing that we aren’t on the verge of Lehman 2.0. Unfortunately, we can’t expect this to resolve the sovereign debt crisis as austerity will continue and the current measures do not attack the lack of sovereignty issue. All in all, this removes the worst case scenario, but virtually guarantees a muddle through scenario. If budgets worsen on the periphery we should expect to revisit this issue in the coming quarters and the crisis will once again ripple through the market forcing Euro leaders into greater action. Perhaps a true resolution is not far in the future. Unfortunately, it likely means more market volatility before leaders realize the true gravity of this situation.
1. Greece Bondholders will take a haircut on the $120B Greek debt they own, but will also be recapitalized. This is really nothing more than a peace offering to those who want to see the banks “take a loss”.
2. Austerity will continue. Trade deficit nations undergoing a balance sheet recession will be forced into further budget consolidation which will continue to put downward pressure on growth and ultimately worsen the fiscal picture.
3. A larger EFSF will help to stem the bleeding and reduces the odds of a worst case scenario where we experience a Lehman type event. The leveraging of the EFSF ensures that Europe’s banks will not be allowed to fail and cause massive private sector contagion.
4. The ECB will temporarily enter markets in order to avoid catastrophe, but will not become the fiscal issuer required to resolve the crisis.
5. Europe needs a fiscal union of some sort, but not everyone is on board. This is a work in progress.
In a follow-up article, Cullen talked about the Global Government Put (here). To wit:
In the last few years we’ve witnessed unprecedented government intervention at every twist and turn. We’ve seen massive fiscal stimulus, endless monetary stimulus, QE2, Euro plans, etc, etc. It’s been an endless parade of government “fixes” that don’t appear to have really fixed anything. And if you’ve been an investor in this market, there is one clear cut lesson from all of this government intervention – don’t fade government intervention. If you’ve shorted government intervention in the last few years you’ve had your face smashed into the pavement time and time again.He concluded with the advice that you should "know your government intervention. While all this government intervention might not be doing much for capitalism, the failure to understand it is surely detrimental to your portfolio’s well-being. Sadly, this is what “investing” has come down to in the day and age of the “New Normal”. Welcome to the global government put. Fight it at your own peril".
Thursday, October 27, 2011
Chart 1: KNM's daily chart as at Oct 27, 2011_4.45pm (Source: Quickcharts)
Chart 2: WTIC's daily chart as at Oct 26, 2011 (Source: Stockcharts)
After seeing the sharp rally in Supermx, one must be convinced that the rubber glove sector has turned the corner. The two most important factors determining the financial performance of these stocks are rubber latex prices, which are heading lower and the USD-MYR cross rate, which is moving favorably for rubber gloves makers. See Chart 1 & 2 below. This potential development was first noted in my post dated October 3 (here). So, what is the next stock to consider? I think it is Kossan, which is trading at a PE of 9 times.
Chart 1: TOCOM RSS3 price chart as at Oct 26, 2011 (Source: Rubbernet)
Chart 2: USD index's daily chart as at Oct 26, 2011 (Source: Stockcharts)
Recent Financial Results
Kossan's latest results is for QE30/6/2011. In that quarter, its net profit dropped 8.8% q-o-q or 30% y-o-y to RM20.9 million while turnover inched up 7.5% q-o-q as well as y-o-y to RM276 million. The bottom-line is still trending lower while top-line is still inching higher. With this divergent movement, the profit margin can only drop further. However, this could be about to change. That's why the results for QE30/9/2011 will be very interesting.
Table: Kossan's last 8 quarterly results
Chart 1: Kossan's last 20 quarterly results
Chart 2: Kossan's profit margin for the last 20 quarterly results
Kossan (closed at RM2.78 last Wednesday) is now trading at a PE of 9 times. At that multiple, Kossan could be the most attractive rubber glove stock.
Kossan is still in a downtrend line, with resistance at RM2.90-3.00. A break above that level could signal the beginning of its recovery.
Chart 3: Kossan's weekly chart as at Oct 27, 2011_11.00am (source: Quickcharts)
Based on possible improvement in its bottom-line & current attractive valuation, Kossan is a stock worth close monitoring. As its technical outlook is still bearish, we should avoid buying into the stock for trading purpose. However, since we expect further improvement in this sector, those with a long investment horizon may slowly nibble into the stock.
Chart 1: FBMKLCI's daily chart as at Oct 27, 2011_12.00pm (Source: Quickcharts)
With the European nations making steady progress towards resolving the sovereign debts problem and the surprisingly positive economic data coming out from the U.S., I expect the market will continue to rise for the next few days (or even the next few weeks). Unlike 2008 when the Fed was very reluctant to step in to tackle the sub-prime problem, the European nations are forewarned that ignorance is not bliss. A blow-up in Greece would lead to contagion effect to neighboring countries (such as Italy & Spain) as well as a run on the larger German & French banks which had lent to the problematic countries. If the European debt issue is taken out of the equation, then equity market could continue to improve.
Looking at the market today & in April-May 2008 (Chart 2 below), we can see the important psychological level which could make or break this recovery. These psychological level is at 1500 level for the current market while in 2008, it was at the 1300 level. The failure to cross the 1300 level after two attempts was followed by a continuation of the bear market. Will the same happen now or will we see a different outcome? Only time will tell.
Chart 2: FBMKLCI's daily chart from June 2007-June 2008 (Source: Quickcharts)
Tuesday, October 25, 2011
A picture of one of ENG's two plants in Thailand hit by flood recently.
Asia-Nakornsawan Road T.Banlane,
A.Bangpa-in, Ayutthaya 13160,
Tel : +66 35 729 100
Fax : +66 35 729108
Rojana Rd, T.Kanham, A.U-Thai,
Ayutthaya 13210, Thailand
Tel : +66 35 719 579
Fax : +66 35 719 583
ALTUM PRECISION CO LTD's plant is located about 1-2 kilometers from a nearby river while ENGTEK (THAILAND) CO., LTD's plant is not located near any river. Of course, it is the topography of the location rather than the proximity to the source of the flood which is important in a flood. We can't tell from the map. If we zoom into each of the two Maps, we can hardly see any evidence of the flood. We can see motor vehicles parked along the road as well as within the compound of the plant. If the satellite images are a few hours old, this means that the plants are now not inundated by flood. I will try to upload the images later for your viewing. (UPDATE: The sentences in italics are incorrect. Google Maps satellite images are not updated in real time; they are several months or years old. Sorry for error.)
As I am writing this post, we can see that ENG has just broken below the RM1.50 psychological level. It is now trading at RM1.47. This negative technical breakdown would lead to more selling in the market.
Monday, October 24, 2011
Daiboci has just announced its results for QE30/9/2011. Its net profit dropped by 8.7% q-o-q or 5.8% y-o-y to RM4.5 million. Its turnover also dropped by 7.5% q-o-q or 5.3% y-o-y to RM67.7 million. During the quarter under review, a few machinery in the packaging segment broke down. This has resulted in lower output & higher wastage. This may explain the lower top-line & bottom-line.
Table: Daiboci's last 8 quarters' results
Chart 1: Daiboci's last 16 quarters' results
Chart 2: Daiboci's profit margin for last 16 quarters' results
Daiboci (closed at RM2.57 on Friday) is now trading at a PE of 10.5 times (based on last 4 quarters' EPS of 24.38 sen). At this PE multiple, Daiboci is deemed fully valued. The stock pays a decent dividend of 13% per annum last year, which translate to a dividend yield of 5.06%.
Daiboci is likely to continue to trade in a sideway manner for the next few weeks or months. Its trading range is between RM2.40 & RM2.80.
Chart 3: Daiboci's weekly chart as at Oct 21, 2011 (Source: Tradesignum)
Based on unexciting financial performance & technical outlook, I would rate Daiboci as a HOLD.
Supermx has just announced its results for QE30/9/2011 where its net profit increased by 26.5% q-o-q but declined by 18.9% y-o-y to RM30.9 million. Its turnover increased by 14% q-o-q or 15% y-o-y to RM271 million. Supermx's top-line improved due to increased sales of rubber & nitrile gloves. Bottom-line improved due to favorable forex rate movement (as USD strengthened against RM) & 11%-decline in rubber latex prices. However, one input item, nitrile saw an increase in prices of 12% but its impact is less significant than the decline in prices of rubber latex as the output of nitrile gloves is lower than the output of rubber gloves.
Table: Supermx's last 8 quarterly results
It is significant to noted that Supermx's top-line, bottom-line & profit margin have all hooked up. See Chart 1 & 2 below. The last time we saw the same pattern was in QE31/12/2008 which was followed by a strong rally in the share price.
Chart 1: Supermx's last 20 quarterly results
Chart 2: Supermx's profit margin for the last 20 quarterly results
Supermx (closed at RM3.25 last Friday) is now trading at a PE of 10 times (based on last 4 quarters' EPS of 32.55 sen). Based on this PE multiple, Supermx is deemed fairly attractive.
(Note: I have earlier stated that the EPS was 41.55 sen & the PE was 7.8 times. That was incorrect. The error has been amended above. Hat tip to reader, winterad99 for bringing this error to my attention.)
Supermx may have broken above its intermediate term downtrend line at RM3.10. Its next resistance is at RM3.70 & thereafter at RM4.70.
Chart 3: Supermx's weekly cahrt as at Oct 24, 2011_4.00pm (source: Quickcharts)
Based on improved financial performance, attractive valuation & good technical outlook, Supermx is now rated a BUY.
- 700,000 shares on October 12; and
- 1,871,400 shares on October 14.
In the process, Dato' Teh Eong Liang has ceased to be a substantial shareholder of ENG. His shareholdings stood at 4.528 million shares as at October 21 (here). For details of the selling, go here & here.
Dato' Teh Eong Liang is the brother to ENG's CEO Dato' Teh Yong Khoon and the son of ENG's Chairperson, Datin Low Yeow Siang. There is a proposal to privatize ENG at a price of RM2.50 a share from TYK Capital, a company controlled by Datuk Teh Yong Khoon and Datin Low Yeow Siang (combined 95% interest), with the remaining shares held by Advance Capital (go here). While Dato' Teh Eong Liang is closely related to the Chairperson & the CEO, he is not a party to TYK Capital. This may be a significant point- he is not a party to the privatization exercise. Why?
Nevertheless, Dato' Teh Eong Liang's action of selling off his shares in ENG prior to October 15 - when the share was trading between RM1.80-2.10 - suggests that he believed the deal was likely to be either aborted or substantially adjusted. If he was willing to sell his shares at RM1.80, then he must feel that the deal, even if it is not aborted, would entail an adjustment in price. Assuming that he is willing to accept a price for immediate sale of 10% lower than the final privatization price, then the final price in Dato' Teh Eong Liang's estimation could be RM2.00. On the other hand, if Dato' Teh Eong Liang felt that the deal could be aborted, he must have felt that RM1.80 was a good price since ENG share price did not drop much in the recent selldown because of the backstop presented by the privatization proposal. Dato' Teh Eong Liang has also notified the company of his intention to deal with the share during close period. Could he be selling more shares? Or, is he intending to buy back his shares at lower prices? Only time will tell.
Chart 1: ENG's daily chart as at Oct 24, 2011_11.00am (Source: Quickcharts)
No matter how one looks at this news, the implication is negative. However, if you look at the longer term chart for ENG, I believe you would agree that the share price has probably priced in all the negative development, including the possibility of the privatization deal being aborted & the losses & damages from the flood. When a stock has priced in all the negatives, then the only way forward is likely to be up (after a long spill). I believe the appropriate rating for ENG is HOLD.
Chart 2: ENG's daily chart as at Oct 20, 2011 (Source: Tradesignum)
Timecom dropped from its high of RM0.955 on April 26 to a recent low of RM0.415 on September 26. At the current price of RM0.61, the stock has recouped 36% of its lost ground.
Based on technical breakout, Timecom could be a good stock for trading BUY.
Chart: Timecom's daily chart as at Oct 24, 2011_10.00am (Source: Quickcharts)
Friday, October 21, 2011
British American Tobacco Bhd (BAT) is involved in the manufacture & sale of cigarettes. It is the largest cigarette company in Malaysia. For more, check out its website.
Recent Financial Performance
From the table below, we can see that BAT's net profit declined by 4% q-o-q but rose by 3% y-o-y to RM176 million for QE30/9/2011. Its turnover rose by 6% q-o-q or 11% y-o-y to RM1.104 billion.
Table: BAT's 12 quarterly results
From Chart 1, we can see that BAT's bottom-line has been flattish for the past 3 years. Despite the increased top-line over the past 3 quarters, the bottom-line remained stubborn unchanged. The reason is the steady erosion of its profit margin (see Chart 2).
Chart 1: BAT's last 19 quarterly results
Chart 2: BAT's profit margin for the last 19 quarterly results
BAT (at RM44.38 as at 4.00pm) is now trading at a PE of 17.5 times (based on last 4 quarters' EPS of 253 sen). At this level, BAT is deemed fully valued. Some may find BAT's dividend yield attractive at 6.2%.
BAT has been range-bound between RM43 & RM47 for the past one year. It is also in an uptrend line with support at RM41.50.
Chart 3: BAT's daily chart as at Oct 20, 2011_4.00pm (Source: Quickcharts)
Based on steady but unexciting financial performance, fully valuation & unexciting technical outlook, BAT is rated as a HOLD. You may time your buying at RM43 & sell at RM47, after receiving your handsome dividend. If you can get in right, the capital gain plus the dividend income could yield a return of 15% per annum.
Thursday, October 20, 2011
Huayang has just reported its results for QE30/9/2011, where its net profit increased by 21% q-o-q or 222% y-o-y to RM13.9 million. Its turnover has also increased by 23% q-o-q or 114% y-o-y to RM76 million. The strong growth in its top-line & bottom-line is attributable to the steady construction progress & better sales. In addition, you may also note that Huayang's net profit margin has grown steadily over the past 3 years, due to strong demand for properties in Malaysia.
Table: Huayang's last 8 quarters' result
Chart 1: Huayang's last 13 quarters' results
Chart 1: Huayang's net profit margin for the last 13 quarters
Corporate Exercise Outstanding
Huayang has proposed a 1-for-3 Bonus Issue where the entitlement date is fast approaching. That date is on October 28.
Huayang (closed at RM1.64 this morning) is now trading at a PE of only 4.2 times (based on last 4 quarters' EPS of 38.37). At this PE, Huayang is deemed very attractive.
Huayang is in an uptrend line with support at RM1.26. It trades within an expanding triangle formation (or loud-hailer formation), with upside resistance at RM1.90 & support at RM1.10. In addition, the stock's immediate resistance is at RM1.70-1.72 while the support is at RM1.60. Over the next few days, the stock is likely to enjoy good buying support from retailers who seek bonus issue from the company. As such, the stock will probably trade between RM1.60 & RM1.70.
Chart 3: Huayang's daily chart as at Oct 20, 2011_12.10pm (Source: Quickcharts)
Based on good financial performance, management's generous capital management policy (2 bonus issues in 2 years) & attractive valuation, Huayang is a good stock for long-term investment.
Chart: UOADEV's daily chart as at Oct 20, 2011_12.10pm (Source: Quickcharts)
For those who are holding large position in the market, you should consider reducing your position with the breakdown of the short-term uptrend line. Those waiting to buy should wait & see whether the market can recruit buying support. If the index were to drop too sharply (say below 1400), you should stand aside and let the market find its level. Over the past few days, there are tentative signs that trade in risk assets is running into trouble. Would there be another flight to safety? Let's wait & see.
Chart: FBMKLCI's daily chart as at Oct 20, 2011_12.10pm (Source: Quickcharts)
Chartwise, the stock has broken above two strong horizontal resistance at RM0.57 & RM0.595. Its immediate resistance is the medium-term downtrend line (S1-S1) at RM0.62-0.63. Thereafter, it may test its intermediate downtrend line (SS) at RM0.69-0.70. The indicators are all turning upwards, supportive of further upside for the stock.
Based on good financial performance, interesting prospects & attractive valuation, Sozo can be a good stock for medium-term investment. However, one should avoid holding too large a position in any Mainland China-based company due to questions about its corporate governance. A good entry level may at RM0.57-0.60.
Chart: Sozo's daily chart as at Oct 20, 2011_9.30am (Source: Quickcharts)
Wednesday, October 19, 2011
October 18, 2011
Over the past few weeks, the stock markets throughout the world rebounded as investors breathed a sigh of relief that European leaders have started to put their house in order. Investors were greatly encouraged by economic data coming out from the U.S. which show that the U.S. economy was in better shape that expected. For example, the most recent weekly jobless numbers declined by 37,000 to 391,000. Retails & car sales were up nearly 10% in September. U.S. ISM numbers stayed above the critical 50 level. How does one make sense of these positive economic data when compared with negative forecasts by renowned economic forecasting organization, ECRI or well-known economist, Nouriel Roubini?
To be frank, many investors- including yours truly- were flummoxed by these conflicting data or forecast. Thanks to John Hussman, all have been cleared up. In his recent article entitled ‘Europe: Just Getting Warmed Up’, Hussman explained our confusion over the use of Leading, Lagging & Coincident Indicators. To wit:
From my perspective, Wall Street's "relief" about the economy, and its willingness to set aside recession concerns, is a mistake born of confusion between leading indicators and lagging ones. Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession. As Lakshman Achuthan notes on the basis of ECRI's own (and historically reliable) set of indicators, "We've entered a vicious cycle, and it's too late: a recession can't be averted." Likewise, lagging evidence is largely clear that the economy was not yet in a recession as of, say, August or September. The error that investors are inviting here is to treat lagging indicators as if they are leading ones.
The simple fact is that the measures that we use to identify recession risk tend to operate with a lead of a few months. Those few months are often critical, in the sense that the markets can often suffer deep and abrupt losses before coincident and lagging evidence demonstrates actual economic weakness. As a result, there is sometimes a "denial" phase between the point where the leading evidence locks onto a recession track, and the point where the coincident evidence confirms it. We saw exactly that sort of pattern prior to the last recession. While the recession evidence was in by November 2007 (see Expecting A Recession ), the economy enjoyed two additional months of payroll job growth, and new claims for unemployment trended higher in a choppy and indecisive way until well into 2008. Even after Bear Stearns failed in March 2008, the market briefly staged a rally that put it within about 10% of its bull market high.
Indicators DefinedThe good folks at Investopedia give us a good definition of these three indicators. A leading indicator ‘signals future event’, while a lagging indictor ‘follows an event’ and finally a coincident indicator ‘occurs at approximately the same time as the conditions it signifies’. Investopedia used a traffic light to illustrate how these indicators work. The amber traffic light is a leading indicator of the coming of the red light. It is also a lagging indicator for the green light because amber trails green. Finally, the green light would be a coincidental indicator of the associated pedestrian walk signal. For more, go here.
Understanding ECRI numbers
In another article in July entitled ‘Betting on a Bubble, Bracing for a Fall’, Hussman further explained what to look out for when one uses indicators published by ECRI as well as how one should adapt these indicators to make a call on the stock market, which is itself a leading indicator for the economy. To wit:
The ECRI emphasizes that when interpreting economic data, there are three requirements that have to be satisfied to confidently indicate an oncoming recession - the downturn must be profound, pervasive, and persistent. Profound means a deep decline, which we're clearly observing here. Pervasive means that it must not be driven by simply one or two components (for example, the drop in 1987 was almost exclusively driven by stock prices). ECRI considers a range of factors such as stock prices, housing, employment, money, and confidence measures, among others, but does not articulate the specifics. For our part, we observe not only stock price weakness, but disappointingly high new claims for unemployment, weakening confidence, soft retail sales, easing growth in new factory orders, a flattening yield curve, wider credit spreads, and so forth. This downturn is not limited to stock prices.
Finally, persistence is required. The signal can't last simply for a few weeks. It is here where we require a bit more subtlety than does the ECRI. The reason is that our primary object of interest is the stock market, which is itself a leading - though imperfect - indicator of the economy. The stakeholders of the ECRI are largely interested in economic activity, and can weather a longer period of uncertainty than investors can. I've noted, for example, that the ECRI's admirable recession calls over the past decade have sometimes come only after significant market declines. The March 2001 call, for example, caught the precise beginning of the recession from the standpoint of official recession dating, but the S&P 500 was already down over 25% by that time. This is not at all a criticism of the ECRI, which is an outstanding institution - just an observation that our constituency is different, and timing lags can be very costly.
With this article, I hope the readers would able to put into perspective the many economic data or reports that are announced on the daily basis in the media. Before I go, I shall leave you with this question. Which is more important- the current quarterly results announcements on Wall Street or a survey of Chief Financial Officer’s profit outlook which concludes that profit has peaked (like this one)? The answer should be the latter.(This is my latest article in Merdeka Review. For the Chinese version, go here)
Chart: BRDB's weekly chart as at Oct 19, 2011_4.00pm (Source: Quickcharts)
Based on the above, PICorp could be a trading BUY.
Chart: PICorp's daily chart as at Oct 19, 2011 (Source: Quickcharts)
If you want to read about PICorp, check out my earlier post (here).
ENG has not only not dropped on this bad news, it has actually risen to close at RM1.57 as at end of the morning session. If the stock can close at a price higher than yesterday's close, that could be a definite positive for the stock. If the next day (or next few days), ENG can climb back above yesterday's high of RM1.72, then ENG's sell-off could have ended. The fact that the stock is now trading at a price higher than yesterday's close is an indication that the sell-off is now sputtering.
Chart: ENG's daily chart as at Oct 19, 2011_12.15pm (Source: Quickcharts)
If the stock can close with a small gain today, I believe those who having the stock should hold onto the stock and wait for the recovery that may come.
Based on this, JCY could be a trading BUY.
Chart: JCY's daily chart as at Oct 18, 2011_plotted on log scale (Source: Tradesignum)
Tuesday, October 18, 2011
Since the previous announcement on 13 October 2011, the floods have now caused both ETHB Group’s factories in Ayutthaya to be inundated by water. In addition, ETHB’s subsidiaries in China and Philippines have also experienced disruption to their production as a certain proportion of their output was meant for their major customers in Thailand situated in the flood affected areas. The whole hard disk drive industry in Thailand is facing major disruptions as a result of the floods. In the meantime, certain of ETHB Group’s production have been redirected to other plants to maintain supply to unaffected customers.The negative points in the announcement have been highlighted. With this announcement, there is a high possibility that the recent buyout deal by its major shareholder would be re-negotiated. A price revision is possible, if the company, which made a net profit of RM10.3 million for 1st half FY2011, might not report a net profit for FY2011. This could mean that the group could incur a loss of more than RM10.3 million from the flood. It must be emphasized that this is a very rough guesstimate because the management has no idea what's the loss will be and how much of it will be covered by insurance claims.
The above will negatively impact ETHB Group’s overall performance in 4Q2011. The management views the loss to be significant since Thailand’s plants house half of ETHB Group’s machining capacity. However the management is unable to determine the extent of this loss at this point and whether the Group would be profitable for the entire financial year 2011. This will depend largely on the overall damage incurred and subsequent degree of success of insurance claims as well as the timing of reimbursements of these claims which could only be ascertained once the floods subside.
In preparing this profit guidance, management would like to state that it is unable to gauge with great certainty how and to what extent its business will be affected as there has been a substantial disruption to the supply chain of the hard disk drive industry.
Chartwise, the stock has broken below its strong horizontal support at RM1.60 today. It broke below the long-term uptrend line at RM1.80 yesterday. With this bearish breakdown, the stock is likely to test its next support at RM1.50. If this support cannot hold, it may even drop to the following support at RM1.20. Despite the bearish technical reading, I believe the stock is not a SELL at this stage. The worst case scenario is that the deal may be aborted and the stock could drop below RM1.50 (or, even to RM1.20 for a short while) before recovery. I feel that ENG, being a well-managed group, would have taken adequate insurance & should be able to ride out this disaster.
Chart 1: ENG's daily chart as at Oct 18, 2011_4.30pm (Source: Quickcharts)
Chart 2: ENG's weekly chart as at Oct 18, 2011_4.30pm (Source: Quickcharts)
(Note: I read this announcement at 4.15pm today. If I have read it earlier, I would have advised readers to avoid buying into this stock since the technical outlook took a turn for the worse. Without any visibility, investors are selling or buying blindly. We should step back & do not take part in this selling or buying activities.)
If the market action in 2008 can be a guide, the current rally's next stiff resistance would be at the 20 & 40-week SMA lines at 1471-1483. On weakness, it may drop back to the breakout level of the previous downtrend line at 1435. I expect the market to trade within this band- between 1435 & 1483- for the next few weeks. A breakout of the band (which has yet to be formed) would then point the way forward for the market.
Chart 1: FBMKLCI's weekly chart as at Oct 17, 2011 (Source: Quickcharts)
In late September, I have posted about the possible bear rally to come (here). I have re-drawn that weekly chart for your guidance. This chart is not inconsistent with the earlier chart, except for additional SMA lines as well as displaced SMA lines.
Chart 2: FBMKLCI's weekly chart as at Oct 17, 2011 (Source: Quickcharts)
In conclusion, those who hold a bearish view of the market should look to sell but you can afford to pace your selling. If possible, you should sell into strength at 1471-1483 (and possibly buying on dips to 1435). However, those who think otherwise, you can choose to hold & add to their position on market weakness (by buying on dips to 1435).
Monday, October 17, 2011
One can make a case that YTLPower & YTLLand are good companies which have seen a sharp decline in share prices over the past 8-12 month. YTLPower is a steady income stock which generates good cash dividend as well as dividend in specie. However, YTLPower has invested in YTL-e which is setting up a new WIMAX mobile telecommunication & broadband services. This capital-intensive business would be a serious drain of YTLPower's resources for the next few years until YTL-e's operation is self-sustaining. You may notice that YTLPower's dividend has declined in FY2011 (here). In addition, YTLPower's main cash earner, the power generation division is under the cloud due to possible restructuring of the energy sector. Would YTL Corp want to buy up YTLPower at this juncture? If YTL-e continues to be a drag on YTLPower, wouldn't the share price of YTLPower be even lower in 2-3 years' time? A buyout in 2014-15 would be even cheaper for YTL Corp.
YTLLand is nearly completing a massive restructuring where it will become the dedicated property arm of the larger YTL group. That restructuring was announced in November 2010, which includes properties & property companies being sold by YTL Corp to YTLLand; settlement agreed; as well as a proposed issuance of ICULS. In fact, the only thing outstanding is the issuance of the ICULS where the closing date is October 20. For more, go here. If YTL Corp wants to takeover YTLLand, the management would not go through all these troubles & then does a volte-face at the last minute. So, I think a buyout of YTLLand is not likely. In fact, the whole buyout story has generated quite a lot of excitement which would only encourage shareholders of YTLLand to subscribe for the YTLLand's ICULS. Is that the real reason for the story? Only time will tell or maybe not.
Based on the above, I believe that YTLPower & YTLLand have come up to a level where one who is holding shares in these companies should consider selling.
Chart 1: YTLPower's daily chart as at Oct 17, 2011 (Source: Quickcharts)
Chart 2: YTLLand's daily chart as at Oct 17, 2011 (Source: Quickcharts)
Now iFS weekly chart has "expanded", I can have my weekly chart by fitting only 2 charts into one, instead of 3 charts into one chart. The margin of error would be reduced & from the chart below we can see that the 2 years old uptrend line is still intact. The uptrend line support is at RM2800.
With this, the prospect for further recovery in CPO is better. Plantation stocks would obviously benefit from higher prices of CPO, which would add to the recovery for equity market as a whole. This error and the resulting earlier bearish call for the Plantation sector are much regretted.
Chart: CPO's weekly chart from October 2008 to October 7, 2011 (source: ifs.marketcenter.com)