The Economic Climate (12): The UNPREDICTABLE Economic Climate and the Investor

From the Great Depression to 1995, US had nine recessions.  So in your lifetime, you're likely to be subjected to a dozen or more. 

Each time it happens, you'll hear from the reporters and the TV commentators that the country is falling apart and that owning stocks is too risky. 

The thing to remember is that we've wiggled out of every recession since the one that turned into the Great Depression.

Reviewing the period from the Great Depressions to 1995 shows that

• the average recession lasts 11 months and 1.62 million jobs are lost, while
• the average recovery lasts 50 months and 9.24 million jobs are created.

The seasoned investor realizes that stock prices may drop

• in anticipation of a recession, or because
• Wall Street is worried about inflation

But there's no sense in trying to anticipate either predicament, because the economic climate is unpredictable. 

You have to have faith that inflation will cool down eventually, and that recessions will thaw out.

The Economic Climate (11): Fed and Money Supply

The agency in charge of climate control is the Federal Reserve System, also known as the Fed. 

It has a special way of heating things up and cooling things down - not by blowing on them, but by adding and subtracting money.  Given its huge importance, it's amazing how few people know what the Fed is all about.

In a survey from several years ago, some people said the Federal Reserve was a national park, while others thougth it was a brand of whiskey.

In fact, it's the central banking system that controls the money supply. (Monetary policy)



Whenever the economy is cooling off too much, the Fed does 2 things. 

(1)  It lowers the interest rates that banks must pay when they borrow money from the government. 

• This causes the banks to lower the interest rates they charge to their customers, so people can afford to take out more loans and buy more cars and more houses. 
• The economy begins to heat up.

(2)  The Fed also pumps money directly into the banks, so they have more to lend. 

• This pumping of money also causes interest rates to go down. 

And in certain situations, the government can spend more money and stimulate the economy the same way you do every time you spend money at a store. (Fiscal policy)



If the economy is too hot, the Fed can take the opposite approach:  raising interest rates and draining money from the banks. 

This causes the supply of money to shrink , and interest rates go higher. 

• When this happens, bank loans become too expensive for many consumers, who stop buying cars and houses. 
• The economy starts to cool off. 
• Business lose business, workers lose jobs, and store owners get lonely and slash prices to attract customers.

Then at some point, when the economy is thoroughly chilled, the Fed steps in and heats it up again.  The process goes on endlessly, and Wall Street is always worried about it.

The Economic Climate (10): The Government and the Fed

The US federal government is much bigger than it was during the last Great Depression. 

Back then, it didn't have much economic clout. 

• There was no welfare, no social security, no housing department, none of the hundreds of departments that exist today. 
• In 1935, the entire federal budget was $6.4 billion, about 1/10th of the total US economy. 
• In 1995, it was $1.5 trillion, and nearly 1/4 of the total economy.

An important divide in US:  As of 1992, more people worked in local, state, and federal governments than in manufacturing.  This so-called public sector pays so many salaries and pumps so much money into the economy that it keeps the economy out of the deep freeze.  

• Whether business is bad or good, millions of government employees, social security recipients, and welfare recipients still have money to spend. 
• And when people get laid off, they get unemployment compensation for several months while they look for another job.

The dark side of this story is that the government has gotten out of whack, with huge budget deficits that

• soak up investment capital and
• keep the economy from growing as fast it as once did. 

Too much of a good thing has become a bad thing.

The agency in charge of climate control is the Federal Reserve System, also known as the Fed.

The Economic Climate (9): Goldilocks climate, the perfect situation doesn't seem to last.

The perfect situation for companies and their investors is the Goldilocks climate:  not too hot and not too cold.

But whenever we get into a Goldilocks climate, it doesn't seem to last.

Most of the time, the economy is either heating up or cooling down, although the signals are so confusing that it's often hard to tell which way we're headed.

The government can't control a lot of things, especially the weather, but it has a big effect on the economic climate. 

Of all the jobs the federal government does, from fighting wars to fighting poverty, it may be that its most important job is keeping the economy from getting too hot or too cold.  It it weren't for the government, we might have had another Great Depression by now.

The Economic Climate (8): Cold Climates and Recession

Reviewing the recessions in US since World War II to 1995:  all last an average of 11 months, and cause an average of 1.62 million people to lose their jobs.

In a recession, business goes from bad to terrible. 

Companies that sell soft drinks, hamburgers, medicines - things that people either cannot do without or can easily afford - can sail through a recession unscathed. 

Companies that sell big-ticket items such as cars, refrigerators, and houses have serious problems in recessions.  They can lose millions, or even billions, of dollars, and unless they have enough money in the bank to tide them over, they face the prospect of going bankrupt.

Many investors have learned to "recession-proof" their portfolios. 

• They buy stocks only in McDonald's, Coca-Cola, or Johnson & Johnson, and other such "consumer growth" companies that tend to do well in cold climates. 
• They ignore the likes of General Motors, Reynolds Metals, or U.S. Home Corp.  These are examples of "cyclical" companies that suffer in cold climates. 

Cyclical companies either

• sell expensive products,
• make parts for expensive products, or
• produce the raw materials used in expensive products. 

In recessions, consumers stop buying expensive products. 

The Economic Climate (7): The economy has gone from hot to cold in a matter of months.

A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.

Suddenly, there's a slump in the car business, and Detroit has trouble selling its huge inventory of the latest models.  The automakers are giving rebates, and car prices begin to fall a bit.  Thousands of auto workers are laid off, and the unemployment lines get longer.  People out of work can't afford to buy things, so they cut back on their spending.

Instead of taking the annual trip to Disney World, they stay home and watch the Disney Channel on TV.  This puts a damper on the motel business in Orlando.  Instead of  buying a new fall wardrobe, they make do with last year's wardrobe.  This puts a damper on the clothes business.  Stores are losing customers and the unsold merchandise is piling up on the shelves.

Prices are dropping left and right as businesses at all levels try to put the ring back in their cash registers.  There are more layoffs, more new faces on the unemployment lines, more empty stores, and more families cutting back on spending.  The economy has gone from hot to cold in a matter of months.  In fact, if things get any chillier, the entire country is in danger of falling into the economic deep freeze, also known as a recession.

The Economic Climate (6): Price of Money (Interest rate) rise in hot economy

With new stores being built and factories expanding all over the place, a lot of companies are borrowing money to pay for their construction projects.  Meanwhile, a lot of consumers are borrowing money on their credit cards to pay for all the stuff they've been buying.  The result is more demand for loans at the bank.

Seeing the crowds of people lining up for loans, banks and finance companies follow in the footsteps of the automakers and all the other businesses.  They, too, raise their prices - by charging a higher rate of interest for their loans.

Soon, you've got the price of money rising in lockstep with prices in general - the only prices that go down are stock prices and bond prices. 

• Investors bail out of stocks because they worry that companies cannot grow their earnings fast enough to keep up with inflation. 
• During the inflation of the late 1970s and early 1980s, stock and bond prices took a big fall.

A hot economy can't stay hot forever.  Eventually, there's a break in the heat, brought about by the high cost of money.  With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth.  So they stay where they are and put off buying the new house.  Or they keep their old clunkers and put off buying a new car.

The Economic Climate (5): Inflation in a hot economy

The main worry is that a hot economy and too much prosperity will lead to inflation - the technical term for prices going up. 

• Demand for goods and services is high, which leads to a shortage of raw materials, and possibly a shortage of workers. 
• Whenever there's a shortage of anything, the prices tend to go up. 
• Car manufacturers are paying more for steel, aluminum, and so forth, so they raise the prices of cars. 
• When employees begin to feel the pinch of higher prices, they demand higher wages.

One price hike leads to another, as businesses and workers take turns trying to match the latest increase. 

• Companies are paying more for electricity, raw materials, and workers. 
• Workers take home bigger paychecks but they lose the advantage because everything they buy is more expensive than it used to be. 
• Landlords are raising rents to cover their increased costs. 

Pretty soon, inflation is out of control and prices are rising at 5%, 10%, or in extreme cases, upwards of 20% a year.  From 1979 to 1981, United States had double-digit annual inflation.

The Economic Climate (4): The Hot Climate

The Hot Economic Climate

Business is booming, and people are crowding into stores, buying new cars, new couches, new VCRs, new everythings.  Merchandise is flying off the shelves, stores hire more clerks to handle the rush, and factories are working overtime to make more products. 

When the economy reaches the high-heat phase, factories are making so many products that merchandise is piling up at every level: in the stores, in the warehouses, and in the factories themselves.  Store owners are keeping more goods on hand, so they won't be caught short.

Jobs are easy to find, for anybody who's halfway qualified, and the help-wanted ads in the newspapers go on for several pages.  There's no better time for teenagers and recent college grads to enter the workforce than in the middle of a hot economy.

It sounds like the perfect situation: 

• Businesses of all kinds are ringing up big profits;
• the unemployment lines are getting shorter; and
• people feel prosperous, confident, and secure in their jobs. 
• That's why they're buying everything in sight. 

But in the world of finance, a hot economy is regarded as a bad thing.  It upsets the professional investors on Wall Street.  If you pay attention to the business news, you'll see headlines that read:  "Economy Strong, Nation Prosperous, Stock Market Drops 100 Points."

The main worry is that a hot economy and too much properity will lead to inflation.

The Economic Climate (3): Hot, cold and warm or Goldilocks climate

In the economic climate, there are 3 basic conditions:

• hot,
• cold and
• warm.

A hot climate makes investors nervous.

A cold climate depresses them.

What they're always hoping for is the warm climate, also known as the Goldilocks climate, when everything is just right. 

But it is hard to maintain the Goldilocks climate.  Most of the time, the economy is moving toward one extreme or another:  from hot to cold and back again.

The Economic Climate (2): Farmers and the Weather

At one time, when 80% of the population owned farms or worked on farms, the economic climate had everything to do with weather. 

If a drought burned up the crops, or they drowned in the rain, farmers couldn't make money.  And when the farmers had no money, the local general store wasn't doing any business, and neither were the suppliers to the general store.  But when the weather was favourable, farms produced a record harvest that put cash in farmers' pockers.  The farmers spent the money at the general store, which put cash in the store owner's pockets.  The store owners would restock the shelves, which put cash in the suppliers' pockets.  And so on.

No wonder the weather - and not the stock market - was the favourite topic at lunch counters and on street corners.  Weather was so important to people's livelihood that a book of homespun predictions, The Farmer's Almanc, was a perennial bestseller.  You don't see any weather books on the best-seller lists today.  But books about Wall Street make those lists quite often.

Today, with less than 1% of the population involved in farming, the weather has lost much of its influence.  In the business world, people pay less attention to the weather report and more attention to the reports on

• interest rates,
• consumer spending, and
• so forth, that come out of Washington and New York. 

These are the man-made factors that affect the economic climate.

In the economic climate, there are three basic conditions:

• hot,
• cold, and
• warm.

The Economic Climate (1): Companies live in this economic climate

Companies live in a climate - the economic climate.

They depend on the outside world for survival, just as plants and humans do. 

• They need a steady supply of capital, also known as the money supply.
• They need buyers for whatever it is they make, and
• Suppliers for whatever materials they make it from. 
• They need a government that lets them do their job without taxing them to death or pestering them to death with regulations.

When investors talk about the economic climate, they don't mean sunny or cloudy, winter or summer.  They mean the outside forces that companies must contend with, which help determine whether

• they make money or
• lose money,

and ultimately, whether they

• thrive or
• wither away. 

Maybank Research ups Hartalega’s earnings forecast

Maybank Research ups Hartalega’s earnings forecast
Written by Maybank Investment Research
Tuesday, 26 January 2010 10:00

KUALA LUMPUR: Maybank Investment Research has raised the earnings outlook for Hartalega by between 12% and 19% and lifted the target price to RM8.30.

It said on Tuesday, Jan 26 it expects 3QFY10 results are expected to again beat consensus forecasts. It has a Buy call on RM7.77.

“Strong earnings and margins should extend into FY11 before industry capacity catches up and restocking activities abate, potentially impacting ASP (average selling price) and margins in FY12.

“Nevertheless, we think that Hartalega, with its superior technical abilities, should be able to ride this out by raising operating efficiencies. Maintain Buy. Our new TP is DCF-derived,” it said.

Buy and Hold vs. Market Timing

Buy and Hold = Select your stocks for your portfolio and hold.

Stock picking is easier than timing whole market.

Nobody can predict the future.

Even a broken clock is right twice a day.

What's luck got to do with it?

Is this person skillful or lucky?

For every action, there's an opposite reaction.

Buyers & Sellers, Bulls & Bears: that is what makes the markets.

The higher the risk, the higher the expected return.

http://video.yahoo.com/watch/3913819

Chat site for local or regional stocks

There are many blogs on local and regional investing. 

Which is a good chat site(s) to visit for sharing on local or regional stocks?  Any recommendations?

Fitch upgrades Indonesia

Fitch upgrades Indonesia
Published: 2010/01/26


HONG KONG: Fitch Ratings upgraded Indonesia's sovereign rating yesterday to one notch below investment grade, giving a vote of confidence that is likely to spur further investments in Southeast Asia's biggest economy.

Indonesia's rating was raised to BB plus, with Fitch citing rising foreign exchange reserves, improving public finances and strong growth prospects as key factors behind the move. The outlook on the rating is stable.

The rupiah currency snapped back from early lows and spreads on Indonesian credit default swaps tightened after the upgrade of its long-term foreign and local currency ratings, and analysts said an investment grade rating was likely in the next few years.

"This (upgrade) reiterates what markets have been saying for a long time now, that Indonesia is a great credit story but it has some more work to do before getting that investment grade rating," said Kenneth Akintewe, a fund manager at Aberdeen Asset Management in Singapore who manages US$500 million (US$1 = RM 3.41) in assets.

Though foreign investors have been snapping up its bonds and stocks on its strong economic outlook as well as its high yield, analysts said high and volatile bouts of inflation and weak infrastructure meant its debt yields were close to those of Argentina - which has billions of US dollars in unsettled debt.

The stock market jumped over 80 per cent and bonds posted equity-like returns last year as investors have been attracted by the tantalising prospect that relatively stable politics and healthy economic growth could catapult the country to investment-grade status in a few years to stand alongside BRIC nations Brazil, Russia, India and China.

A US$2 billion Indonesian government bond sale earlier this month attracted US$4.5 billion in orders, bankers said.

Pimco, the world's biggest bond fund manager, recently said that it expects the economy to get an investment grade rating in the next three to five years.

The rupiah was the best performing Asian currency last year, gaining 17 per cent, and analysts are bullish about its prospects this year, too.

"I see capital gains for holding Indonesia's bonds with maturity above 10 years for long-term investors and the rupiah should also get a boost," Gunawan said.

Fitch now has the highest rating for Indonesia among the three major rating agencies, though it remains below its investment grade rating prior to the 1997 Asian financial crisis.

Standard & Poor's rates Indonesia's unsecured foreign currency debt at BB minus, while Moody's Investors Service has its sovereign foreign currency rating at Ba2, two notches below investment grade.

The upgrade means it is the highest ranking non-investment grade country in Asia ahead of the Philippines and Vietnam.

Fitch noted, however, that the country's relatively shallow capital markets remained vulnerable to risks surrounding a reversal of carry trades or sudden emerging-market risk aversion. It also said more reforms in its financial sector were needed.

"The concerns on the ground are the success of the reforms. To get investment grade, the reforms would have to play out," said Wellian Wiranto, Asian economist at HSBC in Singapore. - Reuters

Some Lowest P/E Stocks

LTKM 3.02
KUMPULAN FIMA 4.06
MEASAT GLOBAL 4.54
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POH KONG 6.22

Hong Leong's offer undervalues EONCap: Chairman

Hong Leong's offer undervalues EONCap: Chairman
By Chong Pooi Koon
Published: 2010/01/26

EON Capital has sought clarification from Hong Leong 'on a range of details' in its buyout proposal, particularly on the valuation.

EON Capital Bhd (EONCap)(5266), which must decide on Hong Leong Bank Bhd's takeover offer by tomorrow, may try to remove the clause that restricts it from talking to other potential bidders while asking for a higher price.
 EONCap, the smaller of the two banks, said it has yesterday sought clarification from Hong Leong "on a range of details" in its buyout proposal, particularly on the valuation.

"The board (of directors) is evaluating this approach, but on the face of it the offer price significantly undervalues EONCap," chairman Tan Sri Syed Anwar Jamalullail said in a statement yesterday.

Hong Leong, the sixth largest local bank, last Thursday said it will offer RM7.10 cash per share to take over EONCap. The offer priced EONCap at 1.4 times book value, which falls in the lower end of the past valuations range in local banking deals.

Still, many banking analysts feel that the price offered was fair given EONCap's weaker franchise, though others argued that scarcity premiums should be attached as there are not many local lenders left available for a takeover.

Hong Leong has also set strict conditions in its proposal, one of which requires EONCap to deal with it exclusively on the sale.

"In evaluating the Hong Leong Bank offer, we will consider all alternatives open to us in order to fulfil our responsibility to shareholders," Syed Anwar said yesterday.

Meanwhile, EON Banking Group chief executive officer Michael Lor was quoted by Bernama news agency as saying that EONCap's board was also looking into other offers as there were interested parties.

"If there are better opportunities, why not pursue all the alternatives?" he told reporters in Petaling Jaya yesterday. Lor, however, said that he did not know whether other banks had submitted their applications to Bank Negara Malaysia to participate in the negotiations.

EONCap said it had launched a three-year transformation programme in October 2007, which sharply improved the bank's performance despite difficult economic conditions in 2009.

"In the past year, we have seen our transformation programme succeeding. As Malaysia emerges from the economic downturn, EONCap is well positioned for future value creation," Syed Anwar said.

Public Bank lowered to 'sell' at Citi

Public Bank lowered to 'sell' at Citi
Published: 2010/01/26

Public Bank Bhd, Malaysia’s third biggest lender, was downgraded to “sell” from “hold” at Citigroup Inc. amid the bank’s lower dividend outlook.

Citigroup also cut Public Bank’s share price estimate to RM10.90 from RM11.67. -- Bloomberg

Hartalega gains as target price raised

Hartalega gains as target price raised
Published: 2010/01/26

Hartalega Holdings Bhd, a Malaysian rubber-glove maker, rose to a record after Maybank Investment Bank Bhd increased the share price forecast, saying fiscal third-quarter earnings due on January 28 will exceed consensus forecasts.

The stock gained 1.7 per cent to RM7.90 at 9:38 am local time, set for the highest level since it went public on April 17, 2008.

Maybank raised the target price for the stock to RM8.30 from RM6.50. -- Bloomberg