Is the worst over?

Is the recent (mini) rally justified? One analyst points out that the financial woes are far from over - the US housing credit troubles have not seen their end; the domino effect have yet to reach consumer credit card and auto loans- is this really the time to be positive about the financial market?

NEW YORK 20 April: Investors will have seen enough corporate results by the end of this week to determine if the recent string of encouraging earnings was an anomaly or a real sign stocks can weather the credit crisis and economic slowdown.

If the market in the next five sessions manages to match last week's gains, it could put the Dow in positive territory for the first time this year.

All three major indexes ended last week up more than 4%, with the Dow posting its best week since February.

The Dow and the S&P 500 each ended the week up 4.3%, while the Nasdaq ended 4.9% higher.

"I think for the market to extend these gains it would have to have more comfort that the earnings are moving up and consumer cycle has bottomed out," said Subodh Kumar, chief investment strategist, Subodh Kumar & Associates in Toronto. "Last week, the S&P 500 has gone below my fair value calculation of 1,350 to slightly above."

Last week's swift advance was powered by financial sector quarterly results that suggested banks have done a thorough spring cleaning, leading Wall Street to believe they purged their balance sheets of any trace of subprime exposure.

"We're not out of the woods," John Forelli, senior vice president, Independence Investment LLC, said, noting that upcoming results will be key.

"The earnings can continue to come out fairly strong, but the news won't be that ebullient. There will probably be more write-offs, and you're going to have a fair amount of companies doing layoffs," he said. "The financials are the ones that are the key as far as getting confidence back in the market."

All eyes will be trained on Bank of America on Monday when the No 2 US bank reports earnings. Expectations will be running high after Citigroup, the top US bank, and No 3 bank JPMorgan Chase & Co delivered results last week that pleased Wall Street and sent their shares up more than 5%.

Other key earnings announcement from the financial sector include CME Group Inc, operator of the Chicago Mercantile Exchange and the Chicago Board of Trade, Tuesday and credit card and travel services company American Express Co on Thursday.

Investor sentiment about global growth improved this week after several US blue chip companies said robust overseas sales drove positive earnings results, reflecting strong demand overseas and the benefit of the weak dollar when overseas sales are converted into dollars.

"The real story will be strength in the global economy continuing to give a lift to companies like we saw this week with Caterpillar, Honeywell and IBM, said Fred Dickson, market strategist, director of retail research, DA Davidson & Co.

Investors will be watching for similarly strong foreign sales from oilfield services firm Halliburton Co, mobile phone chip maker Texas Instruments, diversified manufacturer 3M Co, jet maker Boeing Co and soft drink company Pepsico.

The housing market will be in the spotlight this week, with figures on tap for sales of both existing and new homes. Sales of existing homes, due Tuesday, are forecast to have slowed on an annualised rate, while new-home sales are seen having picked up slightly.

Several earnings reports from home builders will give investors another gauge of the housing sector. Data released earlier this week showed builder sentiment hovering near all-time lows in April.

No 3 builder Pulte Homes Inc and smaller rival Ryland report earnings on Wednesday. MDC Holdings Inc, the No 10 home builder, reports results on Thursday.

While the earnings outlook has improved this week, concern about the health of the US consumer is still running high and could pose an obstacle to the market's recovery.

This week crude oil reached a record of US$116 (RM371.20) a barrel and US rice futures soared, sparking worries that global turmoil over food prices could lead to panic buying, sending prices higher still.

The final reading of April's Reuters /University of Michigan Surveys of Consumers, due on Friday, will show whether higher food and fuel costs and the shrinking job market have made shoppers more pessimistic.

The survey's preliminary April reading showed confidence dropped to its lowest level in more than a quarter century. — Reuters

THE EDGE summaries 7 April - 13 April

Maybank entering Pakistan soon

• Maybank is exploring the possibility of acquiring a small (but meaningful) stake in Pakistan bank - MCB
• MCB is currently trading at 5 times its book value; it has a large monopoly in the low deposit market in Pakistan
• Its ROE is over 30%, but the risk of doing business in Pakistan is also high
• Strong performances in Pakistan banks have attracted a wave of foreign banks, including global and regional players like Stan Chartered, ABN Amro, Nomura Holdings, Bank Muscat and Barclays
• But given the response of investors following Maybank's recent Indonesian bank stake purchase, will they put this plan on hold?

Genting - a gamble too many

• Last week, Genting's HK-listed Star Cruises Ltd announced plans to develop hotels and casinos in Newport City, near Manila's airport
• It will be a JV with Alliance Global Group, a major property and F&B group
• Star Cruises will also acquire half of Travellers International Group which has reportedly applied for a provisional gaming license for US$335mil
• In addition, Star Cruises will JV with Travellers to develop another project in Pagcor City - a casino-tourism complex close to Manila Bay
• Worthy of mention, the gaming market (and also the governance and regulations!) is dominated by the Pagcor Group
• Currently, according to an analyst, it is still early to examine the impact of Star Cruises venture into the Phillipines on the Genting group
• Political instability appears to be one of the grey clouds surrounding Genting's ventures: its casino project in Muslim-dominated Indonesia and now the Phillipines - will they pay off?

Weakened UMNO puts projects in jeopardy

• The effects of UMNO's poor performance in the March 8 general election are beginning to be felt in the corporate world
• A RM160mil road maintenance project in Selangor is hanging in a balance
• Protasco Bhd which has a long term concession to maintain federal roads, when the state was run by the previous Selangor Menteri Besar Khir Toyo, was slated for the road maintenance
• The Penang Monorail, the 2nd Penang Bridge, and the West Coast Highway stretching from Selangor to Taiping are also under scrutiny
• But the biggest of the contracts that has been taken away is the RM1.3bil Lahad Datu coal-fired power plant in Sabah
• Sabah Chief Minister Musa Aman cited "irreversible damage to environment" as reason for the cancellation
• But EDGE says it is more of a snub to UMNO's style of politics than an environmental issue, because until last week, the environment was never an issue!
• Sabah UMNO is indeed pulling ranks on federal government-sanctioned UMNO sympathisers
• Remaco's (Tenaga subsidiary) partner had always been Yayasan Sabah (a vehicle linked to UMNO Sabah), but when the tender results were announced, 3 unfacied names emerged: EDEN, Nova Nusantara and Maser - this basically demonstrated than UMNO at federal level was just too strong
  
• Now Sabah recognised its place/part in the new government given the latest election results, it is beginning to show some musle (worth noting, Musa Aman's brother Anifah Aman has rejected outright an offer to be a deputy minister in the new federal cabinet- the message sent out is clear: they want bigger and more important portfolios!)
  

Primus Pacific Partners taking the rein

Remember the deal which saw Primus Pacific Partners paying a hefty RM9.55 a share in EON Cap, a near 60% premium on its trading price and claiming that it was not interested in gaining management control of the banking group?

Well, the latest headlines on EON Capital's new strategy really revealed who the boss it and who controls EON Cap newsflow.

EON Capital eyes tie-ups with China, Mideast banks

By ELAINE ANG

31 March. EON Capital Bhd is eyeing strategic tie-ups with a major bank in China and another in the Middle East in the second half this year thus providing it with the platforms to tap into the fast-growing markets. More here.

THE EDGE summaries 31 March - 6 April

Why the surge in Transmile's share prices?

• Speculation is rife that the air cargo transporter is disposing its four wide-bodied MD-11 aircraft, an exercise that will improve its balance sheet, which was severely impacted by massive provisions and write-downs last year
• One industry player reckons that Transmile should keep its MD-11 which are better than its fleet of 727s in terms of fuel efficiency
• It was also said that it wasn't a wise move to shift from intercontinental routes to regional destinations as the long-haul routes are considered as the main revenue driver
• However, after the MD-11s disposal, Transmile would be able to fetch an extraordinary gain and keeps its balance sheet asset light
• Proceeds would also enable Transmile to meet its convertible bond redemptions
• Another speculation was also rife that Transmile may see a new shareholder emerging: DHL, POS, Konsortium Logistik, MASKargo and Tan Sri Syed Mokhtar are some names speculated
• However, one need to remember that it may take a while before investors start looking at the stock again if Transmile remains without a solid turnaround plan

Singapore's GK Goh buying local steel stocks

• GKG Investment Holdings (Singapore's Goh Geok Khim private vehicle) is now a substantial shareholder of Lion Industries Corp Bhd (5.3% shares as of March 19)
• According to brokers, GKGI also recently acquired shares in Kinsteel, but its shareholding has not reached the 5% level
• GKGI is also said to have met Ann Joo Resources management for a possible investment in the company
• According to the EDGE, GKGI is advised by OSK Investment Bank, which has aggressively promoting Malaysian steel industries
• OSK Research group believes that with China imposing higher export duties, there will be a shortage of the material in this region (China previosuly provided 75% of the regional demand)
• OSK stated that Malaysia 's 5 listed integrated steel millers has the available capacity to fill the void, and that the local steel producers are potentially riding a steel super cycle.
  
• Reasons given for GKGI making Lion Industries its preferred investment are its ample spare capacity in steel-making plants, and its cheaper valuation compared to its more popular peers
• Lion Industries utilisation rates at the downstream rolling mills is also low; hence the huge earning upside

Picking the right banking stocks

• Banking stocks have weathered the KLCI well; the decline in the Kuala Lumpur Financial Index has been comparatively marginal -0.1% (not taking into account Maybank which has recently acquired BII)
• Most of them have recovered since the March 10 sell-off; with some even higher before the March 8 election
• Considering the projected slower economic growth (based on Bank Negara latest figures) , the future is said to be challenging for this sector as banking stocks are a natural proxy for the economy
• According to CLSA, credit growth wil moderate but will not fall off the cliff; the main concern lies with provision risks especially in auto finance
• In the previous 3 slowdowns, provisions jumped sharply in tandem with the magnitude of the economic slowdown
  
• CLSA expects banks that are most exposed to hire-purchase lending to be particularly vulnerable in a downturn
• However, CLSA still rates Public Bank and Maybank as the most resilient banking stocks, as they have the lowest non-performing loans ratios and have the highest loan-loss coverage
• The foreign house has an underperformed on AMMB and BCHB, and a sell on EON Capital
• Another banking analysts says investors should look at dividend-yielding banking stocks in the current delicate market conditions

trans-pas-dap-pkr-peninsular pipeline set to be cancelled?

Does it come as a surprise? Just a delay or cancellation?

Reasons cited for reconsidering this US$7bil pipeline project, a project that transversed Kedah (PAS-controlled state), Perak (Opposition Alliance) and Kelantan (PAS), were the need to preserve the 2,000ha fertile soil in Yan, Kedah and its kampung suraus, cemeteries and mosques, and to relocate the proposed Petrochemical Industrial Zone project to Gurun, as it is closer to the Petronas fertilizer plant.

A better argument for rethinking the whole project is the wider socio-economic implications (and complications).

Let's examine:

The project has a 40-year payback period according to one estimate.

It involves land acquisition in three different states, not just those cemeteries and suraus in Yan. So if those Yan folks aren't too happy, what about the rest in the proposed pipe-path?

It also involves turning forest reserves into pipe-path and therefore seeking EIA approval. More delay there.

The other issue is the matter of financing. In the absence of a major financial investor, TPP, a privately held company that is spearheading the project, may turn to the stock exchange to raise additional capital. In a report last May, Aseambankers, foresaw the project being financed with an 80-20 debt/equity ratio, implying a need to raise some $1.4 billion in share capital for the $7 billion project.

But the most important consideration is the project viability. After factoring in the unloading, transit and other handling costs that are part and parcel of this logistic short-cut, the margins may no longer be that attractive for potential financiers, and negotiating through the Straits of Malacca may not be that bad afterall for those oil-exporters.

Somehow, it seemed that the Malaysian PM have announced another mega project a little too prematurely without all the necessary survey and fact-finding. I don't think it is fair to implicate Opposition-run states wholly as reason for any stalemate. The people simply deserve to know more before allowing their kampungs to be demolished with the promise of rewards that come with the supposed industrialization.

Whatever the final answer might be, to continue with the pipe project or not, I just cannot foresee the mosaic State and Federal governments reaching a consensus anytime soon.

(Meanwhile, we can clearly hear Singapore sighing a relief, rubbing their hands together and just getting on with their port expansion...)

THE EDGE summaries 24 March - 30 March

Race on for RM1bil oil and gas job

• Dialog, Kencana, KNM, Sumatec, Sime Darby, Muhibbah and Ranhill have pre-qualified for the RM1bil Sabah Oil and Gas Terminal (SOGT)
• All of them have foreign joint-venture partners
• The SOGT in Kimanis is one of the mega O&G infrastructure projects under the 9th Malaysian Plan
• The terminal is designed to receive 180,000 barrels/day of dehydrated crude production from Gumusut, Kakap and Malikai
• It will also receive 500mil standard cubic feet per day (mmscfd) and 700 mmscfd gas from the Kinabalu and Kebabangan fields
• Early this month, Dialog has bagged the Sabah-Sarawak Gas Pipeline (SSGP) project worth RM1.6bil together with Punj Lloyd and Sabah's government Petrosab Logistik
• The other beneficiary of the SSGP project is believed to be Wah Seong, to provide pipe coating works worth RM400mil
• EDGE says it is still early to tell who the front-runner for the SOGT project is; will Dialog win it again, as it is believed to be teaming up with Punj Lloyd and Petrosab?

Snag in Ramunia's India contract

• Some of the contracts entered into by Ramunia, especially the recent RM2.2bil contract with ONGC of India, could face thinning margins as Ramunia did not hedge its steel requirements
• The steel component of the Indian project (B-193 oilfield development) makes up about 70% of the raw materials for the fabrication works
• Ramunia boasts 90-acre fabrication yard, which is Malaysia's largest
  
• Its failure to hedge its steel requirements given the soaring steel prices could deal the company a blow as many analysts expected earnings to soar after securing the ONGC project
• To recap, MISC had proposed a reverse takeover plan of Ramunia in January this year, the results of a due diligence conducted by MISC is believed to be ready by the end of the month

CPO bull loses steam

• In the past weeks, CPO prices have dropped to as much as 26% after rising to a record high of RM4,486
• So EDGE asked, is this an indication that the bull run for CPO has ended?
• The recent CPO price correction has led to HLG Research and Aseambankers reducing their ratings on plantations sector to negative and underweight respectively
• Some of the factors that contribute to the price fall include the fear that global demand for vegetable oil may weaken due to the economic slowdown
• China may also turn to its domestic reserves and reduce its imports of vegetable oils to curb inflationary food prices
• There are reported concerns that a Chinese buyer is defaulting on the purchase of US soy and this could potentially spread to palm oil
• ING Funds' Wu Yah Ning said that the recent slide in CPO price is merely a period of profit taking to cover for investors' losses in the equities market
• He went on to say that the underlying fundamentals remain bullish
• KLK's chairman Datuk Lee said that falling CPO prices would kick off demand for biodiesel, which in turn will provide a support mechanism to CPO prices and maintain upward pressure on the price
• Meanwhile India has cut import duties on edible oils to curb inflation
• The other factor supporting CPO price could well be the adverse weather conditions, dry spells are expected in South America which may affect production
• At the close on Friday, May CPO delivery rose RM4 to RM3,349 - so is this bearish trend short-term in nature?
  

Do you like the outcome of the election and the new cabinet line-up?

If you've been reading The Edge Daily, the underlying writing tone is one of support for the following agenda:

(1) Keep the current PM, reject calls for his resignation
(2) The new cabinet line-up is a breath of fresh air (who is the breathing this air, I don't know, presumably certain selected investor community and UMNO reformers)
(3) Agree with PM decision that all ministers and deputy ministers must declare their assets to the public (so you think there is no other way to conceal assets?)
(4) Dropping Rafidah Aziz was the right thing to do, she was too entrenched in her ministry (or was she an uncomfortable reminder of Mahathir's legacy?)

Rightly so, THE EDGE wrote that they have one important concern (only one??): the appointment of Shahrizat Jalil as special adviser to the PM for Women and Social Development Affairs with ministerial status. What is this?

PM says he will listen to voters. The public voted Shahrizat out, but he kept her in.

PM says his cabinet line-up reflects the changes seen in the voting outcome. Really? UMNO popularity has depleted and the percentage share of Sarawak and Sabah BN parliamentary seats have substantially increased. But the top jobs still remain with UMNO (deputy PM; Finance; Defence; Works; Energy, Water & Communication; MITI, Education) and most of the Sarawakians and Sabahans get the Timbalan jobs - supporting role only.

So we ask, is the PM really listening to voters?

EDGE carried this editorial headline today: THE NEW CABINET A STEP IN THE RIGHT DIRECTION

I wonder if they meant THE NEW CABINET, A STEP IN THE RIGHT DIRECTION FOR THE OPPOSITION?

image from kakiseni.com/blog