Is the U.S. economy sliding into recession, and will it impact on Malaysia in the immediate future?

By Roland Lee, 3 May 2008

1. RECENT U.S. DATA
Remember that this year is Presidential Election Year in America and the election is set for November, 2008. As can be expected, the Bush Administration is doing everything possible to avert a recession. Being a Repblican himself, President Bush would like to favour a Republican candidate to win the next presidency post.

Apart from numerous significant interest cuts by the Feds, the Bush administration pushed through a ‘stimulus package’ worth US$150 Billion in January 2008 as part of an emergency rescue package centered on tax rebates and business tax cuts as well as increases in unemployment benefits and food stamps. The impact of the stimulus package is expected to take effect as from May 2008.

However there is always the growing probability of recession given the major issues currently facing the U.S. which includes the following:-
· A deepening housing recession
· Credit tightening
· High energy prices
· Plunging consumer confidence

As per announcement last week, the GDP growth for the first quarter is +0.6%. The positiveness of the GDP number was assisted by higher inventory numbers. Other significant announcement received this week are:-

· Initial jobless claims for the week ending April 26, 2008 totalled 380,000. The concensus estimate pegged jobless claims at 365,000. Though reported claims exceeded expectations, do note that the average jobless claims did not breech levels often associated with a recession.
· Personal spending continues to rise, as seen in the Personal Consumption Expenditure announced on 1 May 2008. It showed an increase of 0.4% in March which is more than the expected 0.2% increase.

. The stockmarket showed a positive increase with the S&P 500 index closing at 1409 which is a record as the index has not risen above 1400 since January 2008.

. Crude oil has fallen down to US$112 per barrel compared to US$119 per barrel last week.

The current outlook is for continued weak but positive growth supported by consumer spending, export growth and government spending. The stockmarket is anticipated to perform much better in the 4th quarter in the rundown to the U.S.Presidential elections. Some analysts even expect a mini rally of the stockmarket in the 4th quarter.

2. IMPACT ON MALAYSIA
The impact of a slowdown in the US economy is already evident in Malaysia. It is reported that direct exports to the US has significantly slowed down as well as the indirect exports of Malaysian exports to the U.S. via Singapore and HK. The impact of the US slowdown will also be seen in the growth of trade between developed countries and the US. All in all, Malaysia can expect to see a reduction in expatriate workers being based in Malaysia for the foreseeable future.

However, the implementation of projects delineated within the 9th Malaysia Plan and the anticipated spread of money into the economy via the multiplier effect, Malaysia should be able to mitigate a global economic downturn expected in 2008 and 2009.

Projects such as the Iskandar Region Development Authority in Johore, the second bridge and monorail for Penang, the upgrading of the Kota Kinabalu International Airport (projected to be the second low cost hub for Malaysia), additional runway and satellite buildings for KLIA, modernizing agriculture farming, agricultural irrigation schemes and the double tracking at selected priority stretches, should assist Malaysia make up the deficit of foreign investments into the country. The expected government capital expenditure within this 9th Malaysia Plan coupled with the fact of being a net crude oil exporter, probably explains why the revised GDP growth for Malaysia in 2008 stands at a +5.5% instead of a dramatic reduction in the projection from 6.5% last year.

Sub-Prime Mortgage crisis in America, its on-going fallout, and does this issue impact Malaysia ?

By Roland Lee, 3 May 2008

There has been questions asked whether the ongoing sub-prime mortgage crisis especally in developed countries has an impact on a developing country like Malaysia. To address this question it is necessary to understand what is the cause of the crisis first, what has transpired and then address the issue.

1. MAIN CAUSE
The main cause of the sub-prime crisis in the American financial system is a sharp increase in MORTGAGE FORECLOSURES, mainly subprime, that collapsed numerous mortgage lenders and hedge funds. One of the major factors that brought around this crisis in “sub-prime mortgages” in the US were loans made to not- so- credit-worthy households to buy houses.

Subprime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history. Subprime mortgage loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender.

2. HISTORICAL IMPACT
Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage defaults and foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation’s second biggest subprime lender that went into bankruptcy when they could not meet US$150 Million worth of margin calls from its warehouse lenders.

Another major failure is Countrywide Financial Corporation, a diversified financial marketing and service holding company, that at its height in 2006 financed 20% of all mortgages in the U.S. at a value of 3.5% of U.S. Gross Domestic Product, a proportion greater than any other single mortgage lender. The bail-out of Countrywide Financial resulted in the company being purchased for US$4.1 Billion by Bank of America in January 2008.

The failure of these companies has caused prices in the $6.5 trillion Mortgage backed securities market to collapse, threatening broader impacts on the U.S. housing market and economy as a whole. The crisis is ongoing and has received considerable attention from the U.S. media and from lawmakers during the first half of 2007.

3. MELTDOWN SPILLOVER
The meltdown spilled over into the global credit market as risk premiums increased rapidly and capital liquidity was reduced. The sharp increase in foreclosures and the problems in the subprime mortgage market were largely due to loose lending practices, low interest rates, a housing bubble and excessive risk taking by lenders and investors.

Similarly in U.K., Northern Rock plc, a British bank that in 2000 was a FTSE 100 Index company, sought and received a liquidity support from the Bank of England in September 2007 following problems in the credit markets caused by the US subprime mortgage financial crisis. However in January 2008 as a result of two unsuccessful bids to take over the bank, Northern Rock was nationalized.

4. RE-PACKAGED SUB-PRIME DEBTS + CONSEQUENCES
However, the sub-prime mortgage crisis has had far-reaching consequences across the world. Tranches of sub-prime debts were repackaged by banks and trading houses into attractive-looking investment vehicles and securities that were snapped up by banks, traders and hedge funds on the US, European and Asian markets. Thus when the crisis hit the sub-prime mortgage industry, those who bought into the markets suddenly found their investments almost worthless or impossible to accurately value.

5. MARKET PARANOIA
With market paranoia setting in, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. As a result, ordinary healthy businesses with no affiliations to the sub-prime crisis suddenly started facing difficulties or even folding due to the banks’ unwillingness to budge on credit lines.

6. ROOT CAUSE
Some say the sub-prime problem is an emanation of the use of credit that started 25 years ago during the Ronald Reagan era in the US and during the Margaret Thatcher era in UK. The use of excessive credit led to periodic crisis. It was an era that believed that financial markets should be left on their own with minimal or non-existent regulator interference. Now we are seeing the turn-around where there is doubt that such an environment can proceed without regulations.

7. FURTHER POTENTIAL FALLOUT — Credit Default Swap (CDS)
Now that the subprime mortgage crisis appear to be stabilized by various actions taken by central banks and governments, another potential major problem is looming in the horizon as an offset of the subprime mortgage problem. This is the Credit Default Swap (CDS) that is an unregulated financial market that has a US$45 Trillion bubble. The CDS resemble an insurance policy as it is an instrument to transfer the credit risk of fixed income products. The buyer of a credit swap receives credit protection. The seller ‘guarantees’ the credit worthiness of the product. Simply, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

Recently, a bond insurer, ACA Financial Guaranty Corp., has problems to unwind more than US$60 Billion of insurance contracts it sold to financial firms. The contracts are intended to protect Wall Street firms from losses on mortgage securities and other debts they own.
Bond Insurance is a service whereby issuers of a bond can pay a premium to a third party, who will provide interest and capital repayments as specified in the bond in the event of the failure of the issuer to do so.

8. IMPACT ON MALAYSIA
For Malaysia, it is fortunate that the mortgage loan industry has followed a strict and prudent process of checking out the credit-worthiness of an applicant before lending proceeds. Thus the usefulness of procedural checking via CCRIS (a credit control bureau) to check on repayment record of an applicant plus the use of CTOS for checking on bankruptcy record of the applicant, have certainly eliminated or minimised the possibility of a sub-prime issue arising within our mortgage industry.

9. INDIRECT IMPACT OF SUB-PRIME PROBLEM ON MALAYSIA
The direct impact of the sub-prime mortgage problem though minimal or non-existent may have an indirect impact. This indirect impact can be seen from such issues like:-

a) Lowered direct and indirect imports of Malaysian exports into the U.S. due to lowered consumption in the U.S. as a fallout due to the impact the sub-prime mortgage crisis had on the U.S economy.
b) Lowered demand for high-end rental properties especially in Kuala Lumpur and Petaling Jaya due to down-sizing of global operations by major U.S. and European companies as a consequence of the anticipated slowdown or recession in the developed world.

10. AND FOR THE IMMEDIATE FUTURE ?
George Soros, the well-known international investor, was quoted to have recently said,

“We are now in a period of financial wealth destruction. Global markets were in a period of rapid, massive de-leveraging that would fuel volatility.”

These words from a respected guru certainly calls for a cautious approach to investing in the coming future. Take care!

VOLATILITY OF THE MARKETS: AN EXAMPLE

By Roland Lee, 22 March, 2008

At about 7pm ET Sunday 16 March (Asian time 7am Monday), I sent the following message to those who subscribed to my shortlist for virtual trades:-

“Fed decreased discount rate by 25 basis points on Sunday 16 March. On 18 March expect 75 basis reduction of Fed Fund rate. Expect market this short week to be bullish by the Fed action. Consider Calls this week for GME and QLGC. Also monitor Calls for GS and MS due to Fed action.”

On the same morning at 10pm ET Sunday 16 March (Asian time 10am Monday), after I read news of massive concerns in the Asian markets, I sent a second message following the opening of Asian markets:-

“The Asian markets are down. Concerned that Bear Stearns bailout could mean more problems in banks. US markets expected to open down on Monday. So be careful this week. Can be volatile.”

For readers familiar with the US markets, the market on Monday 17 March, 2008 was indeed volatile. The Dow was down 193 points by midday and the Nasdaq and S&P 500 were also in the negative. At the close of the market the Dow recovered and closed with a positive 21 points whilst the other two indices remained in the red. Bear Stearns, the venerable US investment bank, was sold at an unexpected price of $2.00 per share to JP Morgan Chase. This led Bear Stearns to close on Monday at $4.81, a drop of 25% off last week’s close.

At Monday’s close, Goldman Sachs (GS) and Morgan Stanley (MS), closed at $151.02 and $36.38 respectively.

Guess what happened on Tuesday 18 March, 2008 after the Fed announced a 75 basis point reduction to the interests rates? The market soared to a record, with the Dow closing at 412 points. My shortlist performed very well. GS closed at $175.59 (up 16.27%), MS closed at $42.86 (up 17.81%), GME closed at $48.55 (up 3.30%), and QLGC closed at $16.25 (up 3.44%).

Being a short week as there were no trading on Good Friday, the markets closed up on Thursday 20 March, 2008. The Dow was up 262 points, the Nasdaq up 48 points, and the S&P 500 up 31 points. My shortlist closed with three of the shortlist performing well, namely, GS closed up at $179.63, MS closed up at $49.67, and GME closed up at $50.18. The volatility of the market saw my last shortlist, QLGC closing down at $15.12.

The markets are indeed volatile! For the less weary investor, it can be costly. A way to mitigate the potential of losses due to such volatility will be for the investor to be equipped with the correct knowledge and skills to handle investments or trading in the stockmarkets. Note however that such knowledge and skill does not completely mitigate an investor from losses because systematic risks that are difficult to foresee can indeed swamp the best of forecasts.

What good investment and trading courses will do for the investor is to make the person more aware of the potential traps the market can present. Afterall, winning in the markets is always a game of odds. You just need to give yourself that higher probability of winning and that’s what a good training course must offer you! Take care.

The upcoming 2009  4-day trading workshops start on Saturday, January 17  and February  15, at 9.30am - 6.00pm.

Participants to the 4-day Trading Workshop will learn a variety of tools and techniques so that they will be fully equipped to trade the stockmarket using both equities and stock options. Amongst the topics they will learn include:-
** How to interpret macro-economic news that impact the stock markets

** How fundamental analysis and value investing are carried out

** How to use powerful technical analysis techniques for acute timing of entry and exit

** How to use trading strategies and techniques to suit one’s risk-taking appetite

** Learn when to use stocks and when to use options

NOTE:  There are 4-day Trading Workshops conducted every month. Weekend and weekday classes available. If you do have any date or month that you are interested in attending the workshop, do email us at: roland@investsmart.com.my. Thank you

Upon completion of the workshop, the participants are equipped to select any stockmarket of their own choosing to make their own money from the markets.

Course Fee for the 4-day trading workshop:  Only RM3,800

( This is a real value-for-money, hands-on comprehensive stock and options trading workshop for a serious participant)

Registration:

Email roland[at]investsmart.com.my

THE CURRENT U.S.ECONOMIC SITUATION AND ITS IMPACT ON THE GLOBAL INVESTOR

By Roland Lee, 15 March, 2008

There is an on-going flight to safety. This can be witnessed from a decline in the yield of the 3-Month U.S.Treasury Bill (T-Bill) to below 1.5% in March 2008 compared to being above 4.7% in October, 2007. This indicates that the demand for the T-Bill is significant and it represents an uncertainty of how the market will pan out in the short term.

The demand for this short-term T-Bill will not be good for the stockmarket in this three-month period as it removes money from investing in the market.

The uncertainty is exacerbated by many outstanding issues. The market is uncertain as to how successful the solutions that the U.S.authorities are putting in place will be. Some of the outstanding issues include:-

• Sub-prime loans. The negative impact of problems created by U.S. mortgage-backed securities globally does not seem to be over. Even well-rated mortgage-backed bonds are currently only fetching a fraction of their face value. Unless amicably resolved, this problem will be a constant drag on the recovery of the stockmarkets.

• U.S.jobs. In February 2008, instead of an expected 23,000 more jobs, the news that came out showed 63,000 fewer jobs. This cannot be good for an economy like the U.S. that is dependent on consumer spending. Fewer jobs and a slowing economy means more people will be careful on how they spend. This will have an impact on the retail sector which in turn will impact the manufacturing sector and related sectors.

• U.S.economy. The meltdown in the pace of growth of the U.S.economy will be felt globally as many countries worldwide have the U.S. as their main trading partner. The recent announcement by the Federal Reserve (the Fed) that they plan to pump in $200 Billion into the U.S. economy is certainly good news. The latest news that the Fed has used a rare procedure to support troubled Bear Stearn companies, coupled with the expected announcement of another significant drop in interest rates when the Fed meets on March 18, 2008, clearly shows that the U.S. authorities are doing everything possible to avert a collapse of the U.S. financial system. Hopefully the measures undertaken can stop the negativity that is prevalent currently in the market. Certainly it may help the market recover for the short-term and holdout for positive earnings reports from U.S. companies in the coming April earnings season. If that pans out then the market may fractionally recover over the April / May period. The market has a further chance of sustaining a positive outlook further than the month of May as US taxpayers may start spending their $150+ Billion worth of tax refunds from the fiscal stimulus passed by Congress earlier this year.

• U.S.Dollar. There is concern that the $200 Billion package proposed by the Fed may result in the further weakening of the U.S.Dollar against other major currencies. Such weakening of the U.S.Dollar should be a big help for U.S.exports but cannot be good news for global investments based on US Dollar terms.

• Commodities. The weakening of the U.S. Dollar is certainly driving commodity prices, literally through the roof. It is no longer an imagination to see crude oil above $100 per barrel, and gold above $1,000 per ounce. It is actually unfolding in front of us and the expectation is that commodity prices are still on their way up for the foreseeable future. This news has to good for those ready to invest in commodities or commodity funds. But it is not good for the consumer who will be faced with having to pay higher prices. Higher prices will then mean higher inflation rates and that in turn will not be good for economic growth.

For the global investor, what is currently happening to the world’s largest economy is not good news. In fact it is scary, to put it mildly, as there is nothing the investor can do but watch and hope as the U.S. authorities do their best to turnaround a difficult economic situation. However, for some investors, the current situation does offer opportunity to make some money from a weakening U.S. Dollar and the escalating commodity prices.

For the global investor, it is certainly worth the while to monitor closely how the situation unfolds in these coming months. Hang in there and have success!

In the review of asset classes for an individual, it is obvious that the ability to make money from the stock market is an important skill to possess over the long run. Executed correctly, the individual can enhance his own wealth significantly. Fund managers of many unit trusts and mutual funds have long recognized the importance of the stock market to generate profits for their funds. The challenge for both the fund managers and the individual is how to make money consistently from the stock market.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers. Apart from providing information on listed securities, the stock market is an important source for companies to raise capital. A successful stock exchange provides investors with the ease to quickly buy and sell securities.

For the individual, there is plenty of ‘noise’ in the marketplace. To get the investors’ attention, the noise can come from many sources including a mix of financial journalists attached to newspapers or magazines, television commentators, stock analysts, stock brokers and even from chat rooms and message boards. Some tips may pan out to be correct but many have over time been shown to be just noise without much correct substance in their content.

The efficient market hypothesis (EMH), commonly presented in formal investment courses, indicated that share prices are affected only by fundamental factors such as profits or dividends declared by companies and that all price movements are non-trending and random. However, there are other studies especially from technical analysis that shows that there are periods where stock markets do trend over periods of some days or weeks.

Sometimes prices of stocks have been shown to move based only on the sentiment of traders or investors, sometimes without any financial justification. Some researchers put it down to psychological factors or even the phenomenon of ‘group think’ that can result in exaggerated stock price volatility. Many a time, markets have been swayed by adverse press reports, circulating rumors and unverifiable tips.

How then can the individual rise above such a situation and be able to differentiate what is correct and what is not correct?

One safer way is for the individual to learn a disciplined, systematic process of investing or trading the stock market. In the course of such learning, the individual should amongst other things, likely learn how to read stock market cycles, how to pace between risk versus returns, how much trading capital to use per trade, how to use stop-loss orders, how to follow trends, how to set up defined trading strategies and plans and how to diversify.

There is also the issue of whether the individual should be an investor or a trader. The investor usually puts capital into the stock market under the assumption that the investment will increase over time. In a bull market the chances are better as strategies of buying low and selling high should work out well. But there are also protracted periods in a bear market where share prices even of good stocks can get knocked down badly. In such situations, a knowledgeable trader is more likely to profit as there are ways to make money when the market goes up as well as ways to make money when the market tanks.

Equipping yourself with a trading process does not automatically mean you can always make money in the stock market. It does provide some assurance that compared to less informed investors, you have a higher probability of winning. Afterall, winning in the stock market like most investments, is a game of odds. You want to give yourself as high a chance of winning and surely you do have that higher chance if you have a disciplined process and knowledge to guide you along.

The upcoming financial workshop will commence here:
Date: 8 February 2009             Time: 9.30am - 5.30pm
Venue: Petaling Jaya

Using a case study that typifies the life-style of many young families, participants will learn various financial planning tools necessary to better plan for themselves. Amongst a varied number of topics that are covered, they will learn the following:-

** How to calculate children’s education needs

** How to calculate their own retirement needs taking EPF into account

** How to identify what is a good investment and what is not

** How to calculate the returns from a business

** How to identify a good business worthy for investment

** How to select life insurance policies that match with their own needs

Course Fee: RM480

Registration

Email roland[at]investsmart.com.my

The upcoming 4-day trading workshop starts on January 17 & February 15, 2009, 9.30am - 6.00pm.

Participants to the 4-day Trading Workshop will learn a variety of tools and techniques so that they will be fully equipped to trade the stockmarket using both equities and stock options. Amongst the topics they will learn include:-

** How to interpret macro-economic news that impact the stock markets

** How fundamental analysis and value investing are carried out

** How to use powerful technical analysis techniques for acute timing of entry and exit of trades

** How to use a range of trading strategies and techniques to suit one’s risk-taking ability

** Learn when to use stocks and when to use options

** Learn different stock and option trading strategies

Upon completion of the workshop, the participants are equipped to select any stockmarket of their own choosing to make their money from the markets using both stocks and options as trading instruments.

Course Fee: Only RM3,800

( This is a real value-for-money, comprehensive, hands-on stock and options trading workshop for the serious participant conducted by an experienced lecturer)

Registration: Email roland[at]investsmart.com.my