Migration of the Chinese Albatross

This is the time and season - Those S chips listed on the SGX are stirring. For a long time, they have slumped and weighed heavily like a dead albatross on many mariners' shoulders. Now, some are rebelling.

The first off the block is Chinese fertilizer company, China XLX Fertilizer, who yesterday announced that they are seeking a dual-listing in HK. Away from the usual PR talk of how a HK listing will align their business more closely with the capital markets, the real reason is simply, HK listed entities have enjoyed a higher price multiple. In other words, HK counters generally trade higher than those listed in SGX. One reason is: Investors believe that the HK Exchange regulates the listing more tightly and there is less risk of fraudulant listing. The recent spate of S chip problems strengthened this view. SGX must now be fretting and quite worried that this could become a trend.

The implication is huge. Imagine, if the better few starts the migration to HK, what will investors think of those that didn't migrate? Thus, the risk is: S chips that remained on SGX that didn't seek dual listing would be assume to be of a second class to those listed in HK. The entire SGX could be tainted.

In the meantime, today's price action said it all. At 9:40am, CXLX was up 16% while China Milk, probably a rumored candidate with migratory tendencies, was up 10%. This must be a sad day for the SGX. But, what can the SGX do? There are so many S chips running afoul that they have casted a cloud of doubt on all S chips. If I were a S chip CEO (assuming I'm clean), I too would be disappointed that my company's stock price has underperformed because of wrong association.

Well, SGX could start by acknowledging their laxness. Then they could review the listing and disclosure policies. For one, if the Management of a company pledges its entire stake to financial institutions, shouldn't this be disclosed? Currently, I think it is not required. In addition, Singapore and China should sign some extradiction treaty so that recalcitrant CEOs could be tried in Singapore Courts.

In the meantime, the migration north is starting. Happy reading.

The Emotional Life-cycle of Investment

The Emotional life-cycle of Investment is an interesting observation. Some of you may have heard or seen this chart before. Essentially it tracks the behavioral aspect of Investment. According to this chart, psychology affects our decision making process.

To the pure value investors, the view is Psychology detracts from performance as our human bias affects our decision making process negatively. Therefore, they advocate a cold, analytical approach. Famous value investors include Charlie Munger and Warren Buffet.

On the other hand, technicians and traders often take psychology into their decision making process. The key difference here is: Technicians (and Traders) believe they can outsmart others, by understanding the psychology that is prevalent in the financial market place.

Whilst it is unclear which approach is universally better, the availability of the two sometimes contrasting approaches, make the markets interesting. For me, I try and mesh the 2 approaches together. If nothing else, it makes interesting conversation piece. Happy reading.

PIKA Saves The Day

It is 2012. A new flu virus hits the world.....But "Don't Worry... Be Happy". The PIKA adjuvant saves mankind from destruction. Movie stuff? Maybe. So, what is PIKA?

PIKA is an adjuvant start up company I invested in, in 2004. An adjuvant is a compound that is added to vaccine to improve its performance as a preventive drug. It is like the caffiene in your coffee, and the "tiger in your tank", for those who still remember the Esso commercial. For a long time, in spite of the very positive scientific results, PIKA looked like it would not survive, as it was running out of cash. No new investor seemed willing to fund it. Certainly not the Singapore Government.

Then a breakthrough happened in mid 2008, when a team of local private equity investors chipped in money to fund the company. Soon, by introduction, a second group of private equity investors got interested and invested too, in 2009. Suddenly, PIKA lives again.

More interestingly, the scientific results continued to be very positive. The animal trials yielded results that were about 75 to 100 times more effective than conventional vaccines. Shareholders that have medical training or from the medical profession began to sound very excited and positive, as they felt that this could be a breakthrough in science. I am very excited too, given my stake in the company. Hopefully the returns could be life-changing.

This week, the Company will be submitting their findings to the Singapore Government. If approved, Human clinical trial testing could begin this year at the SGH. For now the company's plan is simple. Get the positive results from the human trial, and dangle that in front of the big pharmaceutical companies. If successful, this could be my legacy for mankind.

Even though my stake is very small, I am proud to be part of this venture. I remember fondly what the founder told me in 2005. In Chinese, he said: " I would not mind being called an ant and remain insignificant, if my product can be used to save the millions of lives". In similar tone, "All flesh is as grass, and all the glory of man as the flower of the grass. The grass withers and its flower falls away". But let this legacy be the one that endures forever.... No moth will eat away this legacy....

W-shaped Recovery and Asia

Whilst Asia cheered the recent round of US quarterly earnings, the better-than-anticipated results generally pointed to a stabilization and not an imminent recovery. Therefore, many economists fear that the "green shoots" we are witnessing may not sustain, or at the very least, take a while before blooming. Hence, they have warned of a W-shaped recovery, whereby 2H 09 data disappoints. How would Asia react?

According to a UBS research, the bad news is Asia (and the emerging markets) would not escape unscathed. Asia is still very dependent on global trends and global risk appetite; if growth momentum in the G3 turns for the worse, Asia would not get the quick export-led rebound.

On the other hand, UBS believed that the downside for the emerging markets, including Asia, has been sharply reduced when compared to end 2008 or early 2009. A W-shaped recovery would not carry the same negative connotation for EM today than say 6 months ago. He cited 3 reasons:

Firstly, global trade volume have fallen more than underlying G3 demand, implying the sharp inventory adjustment is over. Secondly, the financial pullout from emerging markets is already at a very advanced stage, and there is less scope for damage going forward. Thirdly, domestic trends, like the massive infrastucture spending in China has gained importance, supporting their economies.

On hindsight, it is likely that the 1Q 09 lows in asset prices marked the cycle lows. But, given the nature of this global recession, it is equally likely that the rally would be bombarded with less favorable economic data going forward. But will the markets care? This is beyond fundamentals, and would depend on the psychological and emotional state of the markets. In short, don't know...

Deflation and Liquidity Trap. The Solution.

Paul McCulley, PIMCO wrote an interesting article that reminded us of the risk of deflation, Japan-styled. Often, this risk is the result of politics when government officials withdraw the stimulus prematurely to appease the people. Today, this pressure is already building with everyone pre-occupied with the Fed's bloated balance sheet and the Treasury's huge budget deficit.

For those with monetarist roots, this excess money supply must surely be the classic brew for inflation. For others, this current policy brew is a deflationary force, as the huge deficits would provoke foreign investors to flee from both the USD and Treasuries, driving up interest rates. Indeed, the current brew of policies seemed to please no one. Yet, everyone knows there are no other choices, given the state of the consumer and the negative wealth effect on the economy.

As a result, everyone goes along with the policy brew grudgingly... complaining about it every now and then, and hedging ourselves by saying the Government has to have an exit plan and be fiscally responsible. But here lies a problem.

In 1998, Paul Krugman in the context of the Liquidity Trap, warned that if the public believes that the central bank will exit the printing of money ie. no inflation, then the printed money will simply be hoarded as the deflationary expectations remain entrenched. Hence, to be effective, Mr Krugman said central banks must "credibly promise to be irresponsible" to permit inflation to occur. To get out of the trap (deflation), Krugman said central banks needed to radically change expectations. Quite a radical!

In 2003, Bernanke made comments to the same effects. Essentially, his recipe to get out of deflation is price level targetting. This is more stringent than inflation targetting, as inflation target "forgives" past deflation. This would imply that after a period of deflation, Bernanke would actually allow inflation to be higher and exceed the desired long term rate, to close the price-level gap. This is the reflationary stage. But do central banks and government have the will to do this, knowing that they could come under heavy criticism if expecations swung to the other inflationary extreme? Hence, it was on this point, that Bernanke once remarked that the Fed should subordinate itself to the fiscal authority. Quite a radical too!

Fortunately, we are not quite there yet. The US consumer and stock markets have surprised me and they seemed embarked on a self healing process. Still, it bears watching. The antidote for deflation can be radical.

A Cautious Minister

Mr. Lim Hng Kiang, Singapore's Trade Minister, warned that the rebound in drugs and electronics output might falter, preventing a quick recovery from the country's deepest recession since Independence.

In an interview today, Mr Lim said demand for goods from US, Europe and Japan was still weak and any pick-up would be "bumpy". Whilst the economy expanded a whopping annualised 20.4% in 2Q09, compared to the previous 3 months, Mr Lim felt Singapore had to wait for a more general demand recovery to be on a sustained growth path. Mr. Lim did not expect a V-shaped recovery.

The service sector, for example, continued to languish and shrank for the third consecutive quarter. Tourism has slumped on the back of the global slowdown, as well as concerns over the H1N1 influenza. Fortunately, the employment situation appeared manageable and retrenchments in 2Q09 was not as high as in 1Q09. However, Singapore is still not "out of the woods" and the situation bears monitoring. As Mr. Gan Kim Yong, Manpower Minister puts it: " It remains uncertain whether companies can sustain hiring".

In the meantime, the local stock market seemed more positive than government officials. On the back of the more favorable US earning releases on Friday, the STI added a further 1.5% (as at 3.45pm) today. Sadly, I have long given up trying to explain the market... the articles and publications I read are not adrenalin-coated and therefore this 60% rally from the lows scares me.

My occupation as an applied psychologist (Trader), requires that I accept the view that "markets can choose to behave however they like". Often, traders have small ego and that is how we survive. Happy reading.

An Interview with Bob Shiller and Nouriel Roubini

The afternoon rally in US stocks was largely on the back of Nouriel Roubini's prediction that the recession will end by year end. To some, this is the capitulation of the last Bear, one that had earlier in the year, painted scenarios of a Great Depression and financial ruins and chaos.

But to be fair, these views were not new, as in an interview, together with Bob Shiller on the 11 July 2009, both of them agreed that the worst was over and a recovery was in sight by the end of the year. Before elaborating further, a quick introduction first... Robert Shiller is the co-designer of the famous Case-Shiller Housing Index used widely in the the US. He is also a Professor, at the Yale University. Nouriel Roubini, Professor, New York University, is the famous doomsayer that gripped markets in late 2008 with his warnings of financial ruins.

Today, the markets again exhibited selective hearing. Whilst Roubini talked about the end of the recession, he also talked about a period of exceptionally slow recovery of 1% or less in the US for the next 2 years. Here is the summary of the 11 July interview:

Essentially, both panelists agreed the recession would end soon (6 months), but the recovery would be exceptionally slow as this is a balance sheet recession, and the sharp falls in all asset classes, would force a deleveraging at corporate and consumer level. The consequence of such recovery is zero job growth. Hence, unemployment would rise for the next 12 months, peaking at over 11%.

The risk of this is a self-fulfilling reverse "animal spirit", as Bob Shiller described it, that discouraged consumers from spending. Roubini simply described this as a rationale response to the fear of job losses and falling asset prices. Nonetheless, both agreed that the consumer is a spent-force. Hence, Bob Shiller said we have no choice but accept that fiscal intervention has to be considered.

In fact, both also agreed that a second fiscal package is probably required, if unemployment turned out to be expectedly weak. But would the political landscape allow it? Would foreign investors still happily fund the US deficit? Against this, there was also the risk that to appease the US public and foreign investors, the US might prematurely withdraw the stimulus. These were mistakes Japan made back in the 1990s. Would they be repeated?

In short, the US is not out of the woods. Policy responses over the next 12 months will be key. But sadly, markets are too short-sighted to think about them. It seems only bloggers with too much time on their hands bother with such issues. Oh well, at least these topics make good conversation piece. Happy reading.