Saturday, June 30, 2012

Buy "ME" Pleaaassseeeee ...

I have been reading my earliest postings, some are worth reposting again. This was back in October 2005, gawd its nearly 7 years already, many people would have had two failed marriages within that period of time. The long standing argument of whether we want foreign institutions in our market or not is a good issue to debate. It forces us to think rationally whether we "need" them or not.

To me, its not that we need them, but it is a reflection of the "openness" of our capital markets. Secondly it is also a reflection of the "number of sizable big growth companies" that are attractive enough for them to consider putting into their portfolio. Thirdly, its the "niche exposure that some of our companies avail to international investors", do we have the necessary industry specific companies, that holds sway with international investors. To those ends, we need international investors as a gauge.

What we shouldn't be doing is to attract foreign funds just for the sake of foreign funds. We need not have them telling us what is our worth, we should be better investors ourselves. 

What is this fixation with certain Malaysians that foreign funds MUST/SHOULD buy Malaysian stocks... is it a patriotic kind of thing, somehow "they love us more" if they do,... and if they don't buy, it means "we are not worthy... enough". Get out of the pre-independence, second class citizenry, developing country mentality. Stock markets are just a structure where shares are bought and sold, whether foreign funds come in or not DOES NOT mean we are running companies with "world's best practices/standards" or we are making strong strides in the respective industry's competitive landscape. NO, it does not mean that, one way or another.

People buy stocks if they think it is going to make them money - even if we have very good companies, people might not buy because we might be overvalued already. There are tons of options for the global investors, and Malaysian market is just a little thing. Get over yourself... do you know how big is the Malaysian stock market?? Take just ONE, any one of the top 10 market cap stocks in the US - it is bigger than the total market cap of all 1,000 companies listed in Malaysia. Now we are small, it does not mean we are "nothing", that is the reality. Here we have certain reporters and commentators crying wolf and trying to find hidden motives and agenda for Malaysian stocks NOT being on the radar, .... hey, anyone who blinks will miss the KLSE.

As a matter of fact, foreign funds ignoring smaller markets could be perceived as a good thing! Foreign investors will only but if they think they can make money. If they cannot, maybe the Malaysian stockmarket is fully valued or over-valued... or it could mean that the local funds/institutions and local private investors have "snapped" up all bargains - leaving no room for good stocks to be "under-valued". In other words, we could also argue that when foreign funds/research issue BUY on a certain country - that its because the local funds/institutions and local private investors are NOT SAVVY enough to pick up under-valued stocks. So which is which... a back-handed compliment??!!

It is a good thing to compare our performance with other markets to improve our ways, but don't get emotional about it. Its just stock prices not the price of my self dignity or the price of our children ... get a better perspective. True worth comes from knowing who we are ... we do not need some else outside to tell us that today we are just $1.56...

Friday, June 29, 2012

Bimbos and Window Dressings.

Do you know her? You should because as per US Govt. she is a “Genius” worthy of special visa for individuals with extra-ordinary ability.

I am not joking. So far her “extraordinary ability” seems to be limited to appearing in the Playboy magazine as their Miss November 2010. Her name is Shera Bechard, the Canadian-born former girlfriend of Playboy Enterprises founder Hugh Hefner. Now you know that America is in trouble.  

And if we get time to look around, we may find “Fast and Furious” that I wrote about yesterday is here on schedule. Did someone say that there is no proof of month end window dressing? May be not but there is enough proof of quarter ending window dressing. After the disappoint of no QE 3, it was least they could do to goose up the books, so that the report to the investors would not be that bad. And of course we have to recover the $5 billion that “Whale” lost sometimes back. Or is it $ 9 Billion. What do the small differences matter anyway? It’s all free.

Somehow, we had advance information of these shenanigans and we are not surprised. The 1365 level in the 1st week of July, which I wrote about 15 days back, is almost here. In fact I would love to see it reach 1380 by the end of the week. Because we also know what is next. Don’t be surprised to see that mood has suddenly turned positive and folks start talking about technical indicators giving buy signals. Although you cannot fool all the people all the time, but when Government is on your side, rather when you own the Government, you can come pretty close to that.

So let us enjoy this nice weekend in the grandeur of delusion that we live in free democracy. At least we are lucky enough to buy drinks and gamble as we wish with the food stamps. Isn’t it a great country or what!

Thanks for sharing my take on the end game. Be safe out there.

Timely Research Piece On Plantations

HDBS Research:

Sector valuation is overpessimistic. 
Even with lower crude oil prices and the EU debt crisis, we believe plantation stock prices have been unjustifiably sold off despite precarious vegetable oil supply outlook. By end Sep12F quarter, the combined ending stock of palm, soybean and rapeseed oils (as a share of consumption) would have been at its lowest since Sep05. There is no remedy for lack of supply. 

Looming end to soybean export boom.  
We recently examined soybean export data issued by Oil World and found that global inventories are fast depleting, due to South American crop failure earlier this year. Any US crop setback in Sep-Nov12 – if El Nino developed – would exacerbate this situation; as South American stocks would already have been depleted by then. Aug12 global stock levels are now forecast to be the lowest since Aug05. Subsequent stock levels are due to decline further – even after US output reaches the market – as Chinese imports are expected to jump 11% y-oy. We believe the market is ignoring this.  

Priced below market. 
Despite expectations of a further tightening in soybean supply, current palm olein (cooking oil) price discount to soybean oil is the widest since Oct11. Most planters PE now trade at -1SD and are pricing-in long term CPO price at 7-20% below current depressed levels. We think this is unsustainable; as CPO prices may not fall to such level on global vegetable oil supply constraints. In China, brisk soybean imports have so far defied poor crush margins. The coming supply crunch could spell even poorer margins, unless both soybean oil and soybean meal prices rise further. 

Don’t miss the boat.  
Planters with significant volume growth such as Sampoerna A., First R., TSH and Bumitama stand to benefit the most from both pricing and volume 
recoveries. Recall that poorer-than-expected 1Q12 FFB harvests, higher fertilizer costs – hence earnings – triggered the earlier sell-off. We also like Sime and Genting P. on sound balance sheets, decent growths.

Thursday, June 28, 2012

Patriotic Rally?

All the noise for less than three points? Definitely not worth it. If you jumped on the short side during the day, you must be very disappointed today.  May be one more attempt to the downside will be made tomorrow. But so far 1300 level have held throughout the week and depending up what happens tomorrow, I think we have a tradable base for the next patriotic rally. I better give a nice name to the coming rip. How about “Fast and Furious”?  Congress and Holders both should be happy.

What caused today’s massive “U” turn, only the manipulators know. Rumour is, someone purchased $ 3 billion worth of emini contracts and that caused the stampede. Whatever it is, it is not a definite trend. Just stupid gyration of momentum chasing bots.  And while we will get another rip soon, selling is by no means over. I keep writing, there is no panic in the market and as such no bottom yet. May be the bottom will come around 1230 or so and it will come by end of July.

Whatever it is, this guy cannot stop smiling today. Although the Court said the Obamacare is a tax on American people but the congress has constitutional right to tax Americans. It was a funny kind of day when FIX news and largely irrelevant CNN came out shouting that Obamacare has been repelled by US Supreme Court and then the stock market revert back up on some other rumour.  But Gold and crude did not recover much. Crude is over sold by a mile and is due for a bounce. May be it will bounce along with the equities next week.

The real news was that Barclays Bank has been caught with its hand in the cookie jar. The fine it has been asked to pay, $ 450 million + is just a slap on the wrist and is nothing compared to the tsunami of legal challenges facing it. I think it will have to make provisions for billions of dollars of legal settlements.  Who might be the losers in this rigging? One group that comes to mind are the investors who purchased short term bonds from the banks linked to LIBOR rate. The name of the guy looking over it is Bob Diamond. Kind of rimes with Dimon, whose bank now appears to be sitting over a loss of over $ 5 billion. And when they are caught red handed in wrong doing, they blame the small fishes in the food chain. The boss gives tacit approval for the wrong and illegal acts and collects millions of dollars of bonuses. Just what Barclays did between 2005 and 2009. And it is not just Barclays, HSBC, RBC, CITI, UBS and many others are involved. Is it any wonder that the Bankers are vilified and called Banksters? There is “Systemic Dishonesty” in everything that these TBTF Banks do. But nothing will happen to the big bosses. Didn’t we just see that during the Senate hearing of Jamie Dimon?

Tomorrow there will be photo-ops from the Euro leaders and some sort of statement. While for the sake of market, I think they say something soothing, personally I hope Germany tells them all to drop dead. Now the Euro cup final will be played between Spain and Italy. This is what is called “Battle of two losers”. ECB must be very proud that both its sponsored countries have made it to final.

Anyway, the last day of June is mostly bearish. Dow down 15 of the last 20 and Nasdaq down 6 straight. I think it will be down day tomorrow and that fits well with the pattern of 2011. Last July there were 5 red days before it made the final top. So far we have 4 red days. So one more red day is in order. Tomorrow will tell the story.

That’s it for today. Thanks for reading . Please join me in Twitter (@BBFinanceblog) and do re-tweet the post if you agree with it.

The Rain In Spain ....

Just how bad is Spain? Greece is Greece,its still relatively small in the whole scheme of things. Once the spotlight starts to shine on Spain, this will drag in Italy as well. Greece and Spain, and you can add in Portugal, and to a lesser extent Italy, have the same economy type, less export oriented, less high-tech, more rural, services, tourism, produce and crafts. In a significant way, these type of economies will find it extremely hard to export their way out of a financial crisis.

Spain at many levels is much more dangerous because the government is high on ego and is still not willing to fully acknowledge just how deep in doo-doo the economy is.

A snapshot of the problems:
a) unemployment is at 25% of the labour force (and rising)
b) 10 year bonds edging towards 6.8%, the debilitating rates will make any rescue difficult as the Germans insistence on budget austerity measures will be double hit by huge interest servicing
c) there is an estimated $230bn of troubled loans in real estate
d) property values have plummeted 60% from its peak in 2008
e) rather than make property developers loans in default, Spanish banks have basically given then new loans to pay off old one, so Japan circa 1990s
f) amidst all that concerns, money is fleeing from Spanish banks
g)  bad debts held by Spanish banks rose to yet another 17-year high in March.  8.37% of the loans held by banks, or EUR147.97 billion, were more than three months overdue for repayment in March, up from 8.3% in February--the highest ratio since September 1994. The total number of non-performing loans is now almost 10 times higher than the level reported in 2007, when Spain's decade-high property boom peaked

During the boom times, the real estate sector surged spectacularly, at one stage accounting for even 20%  of Spain's GDP. A level which Ireland also got to just as things started unravelling there. At least Ireland bit the bullet and took the hardy measures, and now seems to be recovering.

Thanks to being in the E.U., Spain cannot devalue their currency to restore competitiveness. Spain formally requested euro zone rescue loans to recapitalise debt-laden former savings banks on Monday, but those who receive funds will be subject to European Union state-aid rules that include selling equity assets.

With the price of such assets languishing as the euro zone's financial crisis drags on, that will involve the likely fire sale of big chunks of Spain's corporate titans, including telecoms leader Telefonica, oil major Repsol and power firm Iberdrola.

UBS estimates 22 billion euros ($28 billion) of Spanish stakes could be up for sale, most of which is in the hands of savings banks. This represents as much as 9 percent of the capitalisation of the country's blue-chip index.

Thought For The Day

Wednesday, June 27, 2012

In No Man's Land.

We are in that zone again, that 30 point up or down move day after day from middle of May onward.

By and large there is not much action really in the market and it is as if folks are going though the motion for the benefit of day traders. Or is this the calm before the storm? And already the hourly charts have moved from over- sold to over- bought.

Today everything was up. Equities, gold, crude, bond and US $. The divergence between equities and FX is quite big.

So who will catch up? If there is some good news from the four wise leaders of Europe, may be Euro will go up and equities will reach moon.  We will have to wait and see. If on the other hand, nothing comes out of the 913th Euro meeting, we may see bit of selling. Tomorrow is going to another important (impotent?) day for the market. The fate of Obamacare will be decided and then news from Euro summit. As you all know, I hate to take or even suggest to take any position before uncertainty. 

I am still debating whether to take any long position in the coming rip-fest. It will be like what I wrote yesterday: picking up pennies in front of a steam roller. There is nothing in the market except central bank liquidity which can move the market higher. Either the Fed or ECB or someone from somewhere will have to feed the junkies. Till that happens, the road is pointing down.  

I think the best trade now would be to wait for the market to reach either resistance or support and see if they hold. It is not necessary to force a trade here or take a trade just because we are bored. In the mean time,let me share with you a nugget of gold, an Analog which is not silly.

(Hat Tip: ED Matts)
Thanks for reading Please do re-tweet if you think it is useful.

Germany leaves the Euro?

The idea, crazy as it sounds, makes a lot of sense. The current hope -- in discussion today in Brussels -- is to consider ways for some central European finance minister to exert veto power over national budgets. That sounds to me like a recipe for disaster and ultimately real vicious conflict between European nations. Do we really want to experiment with that? As an alternative, consider a unilateral German exit from the Euro:
A better, bolder and, until now, almost inconceivable solution is for Germany to reintroduce the mark, which would cause the euro to immediately decline in value. Such a devaluation would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilize themselves.

Although repeated currency devaluations are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline. The tremendous loss of human capital and human dignity we are witnessing would ease.

Reintroducing the mark would not solve the debt burdens of southern European countries, but it would give them needed breathing room to restructure their economies, reform labor markets, collect more taxes and reassure investors. The ability of the southern European countries to service their sovereign debt would immediately improve, helping to end the slow-burning debt and banking crises that have engulfed the Continent since 2008.
Read the whole proposal here. Sadly I suspect this is a little too bold and creative to actually be considered seriously. 

Tuesday, June 26, 2012

Dilbert@FGV Underwriters' Secret Meeting Room

p/s: it should read "upsize" instead of "size up", plus deutsche and jp morgan cannot be termed as lead underwriters together, while we are talking about errors, you probably cannot locate 3 bottles of 98 Chateau Le Pin in Malaysia ...

Bear Flag and Unfilled Gap.

I am not an expert in TA, not by a long shot. More of an arm chair technical analyst. But it looks like a bear flag to me. What do you think?

Also there is this area of unfilled gap which I have been writing about for a while and that is my target area before any bounce. Well, if the market decides to ignore that gap, I cannot argue with it but I think chances are high that tomorrow we will see another down day and maybe we will get a chance to fill that gap. That is also the area of strong support. All in all, not yet right time to play for the bounce.

If you look at the chart of yesterday, we were due for this green day. Should I call this an Analog? Nah! I don’t have much faith on Analogs. They are fun to watch when they happen, but it is suicidal to take action based on Analogs. We better have some other edge in trading or investing.

Nothing changed fundamentally in the world today. Despite the tension in Middle East, Crude did not budge much. Gold is hanging there by a thread. Euro land remained front and centre of the market. And no one is talking about the bigger mess that is America. But this constant up and down without a clear direction is draining for both the bulls and bears. You really have to be super smart to win in this market or luck or both. The last sell-off which took SPX from 1358 to 1314 has severely discouraged the bulls. Today it gained a mere 6 points which it may give back tomorrow and some more. If the plan is to discourage retail and then jack up the whole thing on super light volume, then it is successful. We will soon know. Even if we want to play for a bounce, it has to be super quick and for a very short time.

Every world leader is talking of growth and austerity. The leaders of the failed states like Greece or Spain are blaming Austerity for the ills of their country. But where is this “Austerity” that they keep talking about? They have not reduced spending. Per latest report, Greece did not reduce the number of its public sector employees that it agreed when it took the bailout. Why I am not surprised. What austerity measures Spain took or for that matter France or Britain? What % of GDP they saved through Austerity? What these countries have been doing all these years if they are talking about Growth only now? Politicians are same everywhere be it Spain or Uganda. May be now-a-days they are less corrupt in Uganda.

But these things will run its own course and nothing will change however we may shout. We just want to eke out a living and survive from these crooks. That’s it for today. Thanks for reading . Please do re-tweet of you think it is useful.

Dilbert@FGV Listing

FGV Listing & A Sobering Overview By Profundo

I may not agree with the way this issue got itself listed, still from a trading perspective, there is a decent opportunity in the first few days. My assessment from the overall demand patterns, it has a very good chance of hitting RM5.40, a good chance of RM5.60, and if the market is crazy even RM6.00. That is not the real market price for FGV, the real price will be after the lockup period is over.


Stock exchange Bursa Malaysia
Listing date 28 June 2012
Shares for sale 2,189 million
Proposed price  RM 4.55 (€ 1.14)
Issuing syndicate CIMB, Maybank, Deutsche Bank, JP Morgan, Morgan Stanley

Land bank 424,995 ha
FFB production 5.2 million MT/yr
CPO sales 3.0 million MT/yr
Annual sales € 1.8 billion

Social risks
Settlers 112,635
Land bank 522,000 ha
Compensation for land - Insufficient
Payment for fruit - Below market

Environmental risks
Deforestation - Indonesia, Africa

Political risks
Ruling party in Malaysia - UMNO
FGVH management control - UMNO
IPO proceeds for FELDA € 1.38 billion
Opposition parties - Against IPO
Press freedom (RwB) - Partly free
Elections - Coming months

Financial risks
Average age of oil palms 20+ years
Profitability - Poor
Governance - Poor
Financial dependency on land lease agreement - High
Continued access to land bank - Uncertain

By Profundo:
Investors face huge risks…
Investors buying FGVH shares will face significant environmental, social and governance risks, which are likely to create financial risks:
 Tensions between the company’s ambitions and the Malaysian rural poor are rising because of alleged systemic undervaluation of oil palm fruits and the use of power politics to grab land;
 The company does not have a strong sustainability record, with only 3% of its landbank RSPO certified. 50% of IPO proceeds will be used to develop plantations in vulnerable areas in Africa, Indonesia and elsewhere;
 Malaysia’s ruling political party, UMNO, controls company management and lines up state-controlled investors to inflate share demand. Opposition parties favour redistributing FGVH’s landbank under the
rural poor. With elections upcoming, changes in the political landscape may affect FGVH’s access to land and income streams;
 Yields are below average and half of the plantations need to be replanted. Investments needed are much higher than projected.

p/s click on image for larger view

Monday, June 25, 2012

Calvin Economics.

So far things are going as anticipated. No major surprise yet. The 1300 line held in SPX and the gap in SPY has not yet been tested. It is as if the last 15 trading seasons did not happen. Why last 15, we are back to where we were on January 31st of this year. All the euphoria of March now seems like a distant dream. The moods are as gloomy as it can get and yet folks are so conditioned with the Bernanke tonic that there is no real fear or panic in the market. Here in North America, we have found a good scapegoat to blame, that is Europe and particularly Germany. Why Germany is refusing to wallow in the mud like the rest of the PIIGS? Why it is refusing to do the same thing that others have done, i.e. borrow and spend what they do not have. Yes, the poor Greeks may have lied and cheated and extorted and spent money which was not their in the first place but so what. After all, you can print money out of thin air. Hasn’t the great super power America done that over and over again? Nothing has happened to America, yet.  But do not despair, even if Germany is not ready to walk to path of destruction, the great nation of American is committed to kick the can down the road. Till the road ends. And all roads end somewhere sometime. But I do not know much. To understand it better, ask Calvin how it works.

Enough of macro economic nonsense. There are smarter people than me, like Bernanke or Kurgman, who know what is best for America. I am just concerned how I do save what little I have from these gentlemen and their brothers. This weakness / sell-off in market was well anticipated and  I wrote that there will one more bounce in the 1st week of July. In the very short term, the question is, when does that bounce starts and when does it end.  I think it is possible that we will see little more selling. Then on Thursday the honorable manipulators will have something to hang their coats on from Europe. The last two days of window dressing can start in earnest whereby they can suck in the fresh 401K money coming in the market in the beginning of July. So I would expect bounce from Wednesday or Thursday till about the 1stweek of July. Do we play this bounce? It all depends. Are we investors? If so, stay away. Are we nimble traders? Then give it a shot. But remember, it is like picking up pennies in front of a turbo charged steam roller and the steam roller has aids. (Hat tip: Josh Brown). Short term, one hour charts are bit oversold and a bounce can happen.

The pattern is looking so similar to last year.

No need to match 2011 SPX with 2012 AUD and then match 2012 AUD with 2012 SPX. If you like analogs, simply match 2011 SPX with 2012 SPX. Such a rally is a selling opportunity but be aware of the levels.

I think July will be very exciting for the bears. Because unless there is pain and panic, Bernanke will not be able to hand out money. I am repeating myself 461 times now but so far my theory has proved right. There is only so much wiggle room left for these bright folks. It is like playing chess and anticipating the next move of your opponent. Only we are playing against those who want to fool us forever. With its ZRIP policy, the Fed is forcing Pension funds and ordinary investors to take unnecessary risk while on the other hand it provides free money to the TBTF banks to bet against. With no growth in income, job or economy, you can easily guess the direction of the market, no need for a PHD.

Thanks for reading Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog)

Saturday, June 23, 2012

Another Weekend Rambling.

Everywhere you look today there is a mention of how Chinese data is fake. Yawnnn! Have they discovered God in the laboratory? Of course almost everything that comes out of any Government is false. China may be faking 90% of what is reported but look closer at home. I think almost everything that USA reports are blatantly false. Be it BLS job data, GDP data, Housing data, Loan data or even serious things like WMD. Colin Powel even lied before the UN and US went to a false war on false pretext. So I fail to understand what the big deal about the false data out of China. Whoever believed it in the 1st place please raise your hand. You must believe in tooth fairy as well!

Europe has been the front and centre of our life for the last few months. But so it had been in these very months of 2010 and 2011. Every June, from 2010, we feel that Europe is coming to an end. The fact is, America will falter before Europe. If Europe is struggling because of its massive debt, if Japan is in depression because of its 200% + Debt:GDP ratio, just wait when the chickens come home to roost in USA. With its $100 Trillion unfunded liability, many more trillions of dollars of Muni Bonds, almost 100% official debt to GDP ratio, destruction is staring at the face of USA. Many of my American friends think that USA is the best house in the bad neighbourhood. Actually, it is the best camouflaged booby-trap in a jungle.   

In a ZIRP environment, the only solution left to the Fed and politicians is to print more money. Already the money supply is running at 9% and yet we see deflation all around. The 10 year yield at the height of the economic crisis in 2008 was 2.10 % and now it is 1.67 %. So the bond market thinks that we are closer to a disaster now than we were at 2008. Every successive QE has demonstrated the law of diminishing return and just to get back to 1400 level of SPX, Bernanke will have to pump another trillion dollar. Even if he does that, nothing will change. And yet he will do it because his political master wants him to do so. The long term 30 year cycle of bond yield has topped now and in a matter of weeks and months, we will see yields rising.  Time to scale in TBT.

The short term target remains as we discussed and nothing has changed. We might see a lower low on Monday before we shoot up one more time. If I think there is a trade worth taking, I will send the information through Twitter. The real damage will come after that which will force the hands of Bernanke. Barring one day, June 4th, there has been no panic in the market so far and just for this reason, I think selling is not over.

Those of you who swear by TA I have a nice article for you from Brian Shannon. Brian wrote a book on Technical Analysis:
The market is tricky, and it seems so even more lately. Technical analysis is often misinterpreted as an exact science, it is merely a tool which allows us to determine potential price based scenarios before we commit our money to a position.
Lately we have seen a lot of technical analysis misused. From a couple of closes below the 200 day moving average being interpreted as bearish, to a couple closes above the 50 day moving average being interpreted as bullish, or believing that one can buy the break above the “neckline” if the inverted head and shoulder pattern and then kick back and wait for the price objective to be met. These examples of ‘failed technical analysis’ are “proof” by doubters that technical analysis is useless. If you are going to succeed in the markets, risk management should be your first priority, regardless of what your timeframe is. I consider technical analysis to be the finest risk management tool that anyone can use if they really understand the psychology of the formation of patterns rather than focusing on pattern recognition alone.
Also from Tuesday’s post — As I often point out, moving averages should not be used as a stand alone tool, but they give us a great reference point to compare price to. We want to objectively observe how price acts around those levels on shorter term timeframes The same goes for trendlines, price patterns, oscillators, Fibonacci, etc We want to be aware of these key levels which motivate others to take action so we can ANTICIPATE the likely scenarios, but wait for price confirmation before we PARTICIPATE and put our money at risk.
Price is objective, we often we are not.

So let us be objective and be aware of the bigger picture. Time is running out.

Hope you are having fun in this beautiful weekend. Stay sharp and filter the noise. Thanks for reading . Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)  

Thursday, June 21, 2012

Markets Hit By BullS--t.

For the better part of last seven days I am writing about a day like today.  From “ BullS**t Ad Infinitum” on June 14th till yesterday, I have been urging readers not to get caught up in the meaningless gyration of the stock market and for those of you who cared to listen, congrats for being in cash and safe. This is my two pence service to the ordinary investors who are regularly taken to cleaners by the Wall St. Pandits and various talking heads.

I have written on last Monday that if SPX holds 1300-1320 level by this weekend, we will see a higher high. It was a bold statement at that time, when indexes were ripping higher to talk about a lower level. And yet we are almost there now. Yesterday I wrote about 1365 by 1stweek of July and a reader asked me if I meant 1265. I really meant 1365. May be even higher, up-to 1380. So it is a bold statement even now but  1st we wait to  see where it ends in a day or two. Tomorrow we might see a dead cat bounce before some more selling. Ideally I would like it to fill the gap on the way up which I have circled below.

As much as the up move was a fake move, you cannot trust this down move either. Basically we have been in a range for quite a while as highlighted by the rectangle.

How the folks are going to react to today’s selling? Till yesterday, there were talks of end of correction, start of new bull phase because the market did not sell off after the QE disappointment. Will they short the market again now that GS has recommended its clients to short the market with a target of 1285? If GS has recommended a short trade I would rather take the opposite route, more so when short term cycle is indicating a bottom tomorrow. Let’s keep in mind that cycles are not an exact science and the bottom may well come next week. But taken everything together, I do not expect a huge sell from here immediately. As I said yesterday, there is still Quarter end window dressing to be done and beginning of the month 401K money to be stolen.

I am holding to the GLD for now to see where it goes till the 1st week of July. I kept it as insurance, just in case Bernanke went crazy and declared QE. I do not expect it to do much till August but if gold falls below $1530, I will get out of it. On the other hand, I am thinking of taking a short position in Bond through TBT. That is going to be another long term play. Despite every effort Bernanke is making to keep the interest rate low, it will soon get out of control. Either interest rate goes up or inflation goes up. Bearded one has painted himself in a corner and may have only six more months. You see, I am more generous than Soros. He gave three months to the Europeans. I am giving six months to the Fed. I think it is going to far worse than what we have seen in 2008. This time there will be no country in the world to print and save.

I got quite a few response / email to my last night’s trivia and I must confess, you guys know your history. To sharpen your understanding of history, you may want to read the book” This time is different” .

Thanks for reading Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)  

Thought For The Day

Wednesday, June 20, 2012

Reality Comes Back.

It’s nice to see a plan working out. It’s nice to have your stand vindicated. And now I can say with more conviction that we are going to follow the script of 2010 and 2011. More than anything else I did not suffer from any anxiety attack and chew my nails off thinking what Bernanke will do.

Precious metal sector and Bonds were giving signal for quite a while that QE is not yet on the menu. Does this mean there will be no more QE? You must be kidding to even think like that! Of course there will be QE and it will be on August 1st.  It is like joining the dots and draw a figure. It is that simple once you understand the principles at work.

Let us keep our focus in various time frames. Longer term we are screwed. The challenge then will be how best to preserve the capital. More than anything I am worried about possible social unrest that all the unemployed, hungry and armed have-nots will unleash. They have nothing to lose. It has already arrived at so called developed nations like Greece or Spain.

Even intermediate term, it is not that difficult to predict that stocks will go up one more time. Question is when the intermediate term begins. Let us apply our collective commonsense again. If QE is due on August 1st, then the intermediate term begins at August 1st and ends with the US Presidential election.  So now we have narrowed ourselves in the short term, which is between now and July 30th. Question is, do we care? As an investor, I would not but as a trader I would like to take advantage of the coming volatility. We do not care that the system is rigged. Only thing we care about is bring on the right side of the rigged market.

Coming back to short term, I expect to see some corrections for the next few days. I do not think it will be huge and by the 1stweek of July, we will possibly reach around 1365 in SPX. Give or take few points of course. That would be a good place to take a relatively risk free trade. But we are still another 10-12 days away and a lot may change in between. You may ask, if there is no QE why should the equities go up at all in the 1st place? That is because of the 2nd quarter ending book adjustments and beginning of the month 401K allocation from the pension funds. There is another fancy name for manipulation, it is called window dressing!

So now all distractions are out of the way and not much rumour to play around with. We just wait for the last bit of window dressing be done with. Till then we patiently wait and see all the useless gyration of the respectable manipulators and applaud them for saving the world. Before I sign off, here is a trivia. Send me the answer if you can. Which is the most respected and loved drug dealing family of the world. A hint, the family has retired from opium trade for over 60 years now.

Thanks for reading . Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)  

Tuesday, June 19, 2012

This Will Be A Great Concert

When Liu Chia Chiang meets Li Zhong Shen. I was not brought up on Mandarin popular music, if anything, I am more a Canto-pop kind of guy. However, if you examine the musical landscape of Mandarin music, no greater giants can you find other than the two names mentioned, from the 70s right up to the 90s. Naturally I prefer Li Zhong Shen, his lyrics already kills me most of the time and the melodies are superb as well.

Leslie Loh the producer has this to say when I asked him to elaborate why this concert is unmissable:

1) this is winnie ho's latest concert, and her only major concert in 2012, fresh from her sensational solo album! like her or not, you can't deny she can sing and very well at that! 

2) it has two fantastic guest male singers in ah worm and ah fei

3) it has tay cher siang yet again. who doesn't know TAY CHER SIANG by now? 

4)  we are singing songs from the two most respected and legendary composers in the chinese pop history: jonathan lee and liu jia chang. together these two godfathers are responsible for evergreen classics too many to count!

5) winnie ho and tay cher siang are malaysia's treasures and they will carry the malaysian flag proudly abroad in the very near future. be the early supporters rather than late supporters cos it is cooler that way!    

6) be part of the FIRST CHINESE JAZZ MOVEMENT in malaysia!  

7) it is held in bentley music auditorium again, the 2nd best hall in malaysia after DFP in terms of acoustics

8) ticket price are only RM125 and RM85, well worth the price for a full-scale jazz production

9) you get to meet hundred of like-minded chinese jazz lovers under one roof! and lastly,

10) the organizer is pop pop music, you can't expect anything less from us (ahem, blowing a big trumpet!)

buy your tickets at Popular CD-RAMA at ikano power center (IPC) or telephone booking at 012-2083790

Indulge me while I share this song Ling Wu, so heartbreaking, to know and understand, to realise after just how great and wonderful they were together. Both LZS and Sandy Lam were married to each before, I cannot help but feel they were singing about each other. Beautifully aching, to say the least, ... who showed more regret and emotion?

The other LZS song that mesmerises me, the melody and lyrics ... OMG...

Patience, Dear Mr. Watson.

SPX did remain elevated on Wednesday, i.e. today and I think it is all due to the QE expectation. Stock Traders Almanac has this to say: One of the driving forces of this speculation was a report from Goldman Sachs. Jan Hatzius, Goldman’s Chief U.S. Economist said that they “would be quite surprised if we saw no easing this week.” This was enough to stampede the bull all day. 

Disappointment is going to be huge if dear Uncle does not come up with something substantial. At today’s level, Ben cannot justify further liquidity pumping. I think SPX have to drop substantially, may be 1200-1250 level for the Fed to act. Even Greece did not go out of Euro zone. So where is the crisis?  As of today SPX reached and exceeded 1360 level. I was talking about this level when SPX broke 1284, not in very distant past. Only about 15 trading days back. But it took SPX much longer to reach here than I anticipated. I went out of the long position around 1340 level and after that SPX has moved in a range for about six trading days before breaking up. I am tempted to take up a short position tomorrow morning if the market opens higher but I have promised myself to stay away from any temptation. I think a better opportunity to short will come soon.

If Equities are going up expecting new QE, that enthusiasm has not been shared by the precious metal sector. Gold is having difficulties passing $ 1630 level. I may get out of the GLD position by the 1stweek of July, depending of course on the price action. If GLD remains at this level without breaking higher, it may be prudent to get out and re-enter at a lower level.

VIX was in red outside BB for most part of the day but closed in green. It has not yet triggered a sell signal and will do so when it closes inside BB. But I think in short term, VIX may fall further, to the level of 16.50 or so before it goes up again.

G20 achieved nothing except BRIC countries promised token donation to IMF. There was serious infighting and Canada lectured Europeans which they did not like. And Germany is not going to buy bonds of PIIGS either. Greece may discuss re-negotiation conditions as much as they like, but that is all wishful thinking.
So everything else now depends on the bearded mad scientist tomorrow. Alas he does not have the necessary cataclysm yet.

Let me finish by quoting Mr. David Weidner, legendary writer on Wall St. :
You can’t time the market: Also, technical analysis is phooey. Momentum plays are foolish. Anyone who wants to sell you a plan to beat the market is full of baloney. Investing schemes are exactly that. As I’ve written before, some people will tell you that you can hedge your bets. But insuring trades has never made sense to me. If you have to spend money to hedge a bet, it probably means you can’t afford to invest the money.
When it comes to markets, what can go wrong, will, and bubbles happen. The problem is we never know which is which until it’s too late.
Too often, we’re caught up in the daily fluctuations in our portfolios. What really matters is what the investments are worth when we need them.
Mutual funds are a waste of time: The fund industry was my first beat in New York. Here’s how it was explained to me: You buy a fund. The fund trails its index but you pay a management fee and other fees that are usually diminishing returns. You will pay a fee to buy the fund, or exit it, or both. Index and exchange-traded funds are the best thing to happen to investors since cash.

Hope you are keeping your powers dry. Patience is the key in such markets which are ruled by rumours and greed. Thanks for reading . Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)  

Buffett's Most Realiable Indicator ... Not For Us

Buffett has said before that the total market cap vs. GNP is one of his preferred valuation metrics. The current reading of 89% is still above his preferred buying range (70-80%), but well off the highs we've seen in the last 15 years. Buffett has previously explained his thinking behind the indicator:

"For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%-as it did in 1999 and a part of 2000- you are playing with fire."
So stocks aren't cheap, but they're also not terribly expensive based on this measure. If the recent trend holds we could be nearing Buffett's preferred buying range in the coming years….
(click to enlarge)

Yes, its a good indicator, but a very basic indicator akin to above or below NTA. If you are buying below 100%, you are "safer", its not rocket science. This indicator ranges from 60%-140% of GNP owing to the US economic structure.

One has to bear in mind that the market cap vs GNP relationship is very different for other countries.

One of my favoured economist, Chua Hak Bin, wrote on the same topic some time back, with an Asian flavour:

Malaysian Economy More Sensitive to Crashes
The Malaysian economy is however more sensitive to crashes. The representation of households who own shares directly or indirectly is probably similar to the U.S. profile. The market capitalisation of the KLSE is however about 320 percent of GNP. This implies that a 30 percent crash in the KLSE amounts to the equivalent wipe-out of 96 percent of GNP. If the stock of wealth is about 10 times GNP, this still amounts to a dissappearance of about 10 percent of total wealth. Such a sharp fall in wealth will inevitably hurt consumer spending.

The Malaysian economy's sensitivity to stockmarket crashes has been increasing over time with the rising market capitalisation of the KLSE. During the 1987 crash, Malaysia's stockmarket capitalisation accounted for only about 90 percent of GNP. As such, the ripple effects from the 1987 crash did not have such far reaching consequences. However, with the capitalisation accounting for more than 300 percent, Wall Street's sentiment may have become inevitably linked to the Malaysian economy. This worrisome conclusion extends to Hong Kong and Singapore whose market capitalisation have both exceeded 250 percent as well.


Market Cap/ GNP (%)
Fall in Value from 30%
Crash as Percent of GNP

Hong Kong
New York

Some Comforting Thoughts
There are some important factors to account for when linking market capitalisation to total wealth. First, the rather high market capitalisation of the Kuala Lumpur, Singapore and Hong Kong stockmarkets are partly a result of its openness to foreign investors. As such, a large fraction of the market capitalisation is "foreign wealth" rather than "domestic wealth." The fraction will be higher in Singapore and Hong Kong than Malaysia. If the fraction of Malaysian shares which are foreign-held account for as much as 30 percent, then the true "domestic market-capitalisation to GNP" that matters for calculating the local "wealth effect" is reduced to only 224 percent.

Second, consumption is dependent on permanent rather than current wealth. Consumers take into account their future income when deciding on their habits today. If the fall in the stockmarket is regarded as temporary rather than permanent, consumers will not treat the loss as a real loss but a temporary paper loss. As a result, consumers will not reduce their spending as sharply when faced with the fall in current wealth. A word of caution is noted however as empirical studies have provided evidence that consumption is linked to current rather than permanent wealth due to the existence of credit constraints.

My Comments: It is not the Asian markets openness that causes the 300% market cap vs GNP, or anything to do with foreign investments. Rather, its the listing mentality of the respective countries coupled with the "designed rules". In Malaysia, once you start making RM3m-5m a year, there will be predators coming to you thinking of ways to list your company.

This makes for a much lower threshold to list companies in Asia (generally) than elsewhere. Hence you may generalise that the only things not listed in Malaysia are the mamaks and mechanics (though some of the  bigger mamak chains make quite decent bucket loads of money, but then they have to worry about paying real taxes if they were to list them properly). 

Of course we can still use the market cap vs GNP indicator for the Malaysian market alone, maybe the range over a 20 year period could be between 200% to 400%, and you surmise that anything below 300% might be a "safer" buying territory. To me, its still more b.s. than anything.

Hence we can also surmise that a market correction of 25% in the US and a similar 25% correction in Malaysian, Singaporean and HK markets are very different. The latter 3 countries will see a more pronounced real money flow effects (shrinkage and reduced velocity of money). In most of Europe the normal indicator is around 50%, which is to say a market correction has less real impact on the real economy as a large portion of the economy there are still not listed.

That indicator is shallow and does not relate or take into account the dynamics of the markets. For example, you can tally up the holdings of indexed stocks in Malaysia held by local funds, esp local government or GLC funds. Without the exact data, I can say it has been a substantial rise over the past 10 years, in particular over the last 5 years. 

What that means may be that the index could be easier to "control". This will also mean that you may be able to "engineer better" a stock market sell down, or the reverse as well. Just think how well you could "control the index" if you hold 25% of all indexed stocks, what if its 35% or 45%, maybe 65% later on.

The amount of local funds have been mushrooming and EPF has really no space to put it anymore, which is why they have to think of overseas. The other local funds have also been growing as well. Its all good  and well if it does not get to the level whereby there is more "manipulative streaks" than a genuine "investing strategy for better returns". The bigger danger is that if you hold a strong hand, you could also close a stock price "artificially higher every year end" to maintain the appearance of good performance for your overall funds, even though in reality the fundamental performance of the said stock may be not exciting.

The powers to be has to be fully aware of the potential distortion this may bring and prevent this scenario from ever occurring. We are not there yet, but we need to be on guard owing to rise in investible funds in our country.

Monday, June 18, 2012

The Great Game.

I quote from Mark Grant:

“It is the Great Game. They try to lure you into their various traps; I try to keep you out. They offer headlines from countless sources and I try to tell you what things really mean. They make use of a giant propaganda machine and I chant alone in the wilderness. They make up stories and present them as accurate data and I try to give you the facts. They want your money and I want you to “Preserve your Capital.” They are as diabolical in their pursuits as Professor Moriarty was in his. They are the political masterminds and I am a sort of Sherlock Holmes trying to analyze and conclude one case after the other. You may listen or you may not but I pay for my own supper while others ask for their compensation first. It is their Game, my Game; it is the Great Game”.

“Has all my instruction been for naught? You still read the official statement and believe it. It's a game, dear man, a shadowy game. We're playing cat and mouse; cloak and dagger.”

                                           -Sherlock Holmes, A Game of Shadows

I could not have said it any better. 

Bottom line, “ Cash”, at least till FOMC is over and we see the market reaction. I am very certain that the bearded one will not come up with candies for the market on June 20th but who knows. At least I am not taking any bet on the outcome and am content to sit it out. 

Just like last Sunday, Euro spiked up and faded thereafter. But precious metal sector did not rally. Even when Equities held up for the day, credits was down and bonds were up. A correlation between SPX and Euro shows that the sync broke today.

Normally in such situations, either one catches up. Because of the market sentiment with Euro, I think in the very short term, there are less chances of Euro going up. Logically therefore, SPX will catch it downward but it may remain elevated till Wednesday. Question is how much down SPX will go from here? And therein lays the answer for week after. If SPX can hold 1300-1320 level this week, the next move would be higher. But that will be a bull trap, not a real up-move. More so if it comes without QE. If you are confused, just remember that we will have chop fest for the next two weeks but the selling is not over.

My take therefore is the same as last weekend. Nothing has been fixed. Market cannot go up without additional liquidity. Till that comes, the risk is to the downside in intermediate time frame although in short time frame, we may see higher highs. A heaven sent opportunity for the day traders but for a normal investor it is the worst kind of nightmare possible.

Thanks for reading . Please forward / re-tweet / post it on your wall and join me in twitter. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

IHH, This One Is Fairer

Malaysia is the third-most-active venue for the IPOs globally this year after Felda's offering, up from 20th place at this time last year. IPOs on the Bursa Malaysia have raised $3.45 billion already, according to data provider Dealogic. A successful offering by IHH will only further strengthen Malaysia's standing in the global IPO market this year.

Despite the resounding 'success' of FGV, the book building among foreign institutions have been naturally disappointing. Many got less than 1% of what they actually bidded for. Both these big IPOs went for the cornerstone strategy, which requires pricing it well since they will be locking up for 6 months. Little for foreign institutions meant that market prices will move up as investors top up their holdings.

Bear in mind, the real market price is 6 months later when the lock up expires.

Elsewhere in the region, companies have been either delaying and cancelling their IPOs on worries about the euro-zone debt crisis and souring investment sentiment. In Singapore a $2.5 billion deal by motor-sport franchise Formula One Group was delayed earlier this month, while a $1 billion Hong Kong IPO by U.K.-based jeweler Graff Diamond Corp. was pulled.

Kuwait Investment Authority (KIA) will invest about US$150 million (RM477.8 million) in Malaysian firm IHH Healthcare’s planned US$2 billion (RM6.4 billion) IPO in Kuala Lumpur and Singapore. The investment is poised to make KIA the second-biggest investor in the Malaysian healthcare firm’s IPO. It will be the fund’s biggest investment in an Asian flotation since it poured US$800 million (RM2.5 billion) into Agricultural Bank of China’s US$21 billion (RM66.9 billion) offering in 2010.

With a heavy reliance on cornerstone investors and domestic demand, Malaysia has bucked the dismal IPO trend in other markets such as Singapore, where motor racing firm Formula One decided to delay its near US$3 billion (RM9.6 billion) offering due to volatile markets. In the latest blow to Asian deals, soccer club Manchester United also ditched its plans for an Asian stock market flotation and is preparing to list in the United States.

Cornerstone investors back many Asian listings, committing to buy large, guaranteed stakes and agreeing to a lock-up period during which they will not sell their shares.

KIA, which manages US$280 billion (RM891.4 billion) in assets, invests in big-ticket IPOs, but has been lately keeping its powder dry amid volatile markets. Malaysia pension fund EPF will separately invest about US$200 million (RM636.7 million) in the IHH IPO, making it the biggest investor in the deal, said the sources, who could not be named because the details of the deal are not public.

The IHH IPO is expected to be priced in the second week of July and the listing is scheduled in the week starting July 23, according to a term sheet. IHH this week already locked in BlackRock Inc, Capital Group and Och-Ziff Capital Management Group as cornerstone investors for its dual listing. The board of International Finance Corp (IFC), the financial arm of the World Bank, has also approved a proposal to become a cornerstone investor in IHH’s offering.

Finance Asia: Malaysia-based hospital operator IHH is looking to raise up to $2.2 billion but, excluding the cornerstones, only $280 million will be available for institutional investors.

Perhaps it is the fact that the company is operating in the healthcare industry that makes it so prudent, but IHH Healthcare, which is backed by state-owned Malaysian investment company Khazanah Internasional, is certainly taking no chances with its initial public offering.

In addition to the 15% of the offering that has already been set aside for Bumiputera, or ethnic Malay investors, the company has secured commitments from 22 cornerstone investors that will buy 57.7% of the deal.

In terms of the number of cornerstones, this may well be a record in Asia, but perhaps even more noteworthy is the quality of the accounts. The line-up comprises 12 international accounts, including three sovereign wealth funds and the International Finance Corp, as well as 10 Malaysian entities. A couple of the cornerstones were shareholders in Parkway and Pantai before these two units were taken private by IHH and delisted from the Bursa Malaysia and the Singapore Exchange in 2007 and 2010 respectively.

Another 14.6% has been earmarked for retail investors in Malaysia and Singapore, as well as directors and employees of the group, which means that only about 12.8% of the offering will be available to institutions through the bookbuilding that will kick off in early July.

Based on the earlier announced maximum price of M$2.85 per share and the announcement on Friday that IHH will sell up to 2.4 billion shares, including a 7.6% greenshoe, the deal could raise up to M$6.85 billion ($2.2 billion). But after taking away the other tranches, there will be only about $280 million worth of shares for international and non-Bumi Malaysian institutions combined. And that includes the greenshoe. Excluding the shoe, the institutional tranche will amount to only $124 million. Given the scarcity of shares, though, it is highly likely that the greenshoe will be exercised.

One could argue that the bookrunners may have gone a bit overboard by leaving so few shares for non-cornerstone institutions, but sources say the presence of so many high-profile cornerstones will help to validate the valuation, which involves quite a lot of assumptions about the growth in the next few years.

IHH currently has more than 4,900 beds divided on 30 hospitals as well as medical centres, clinics and other healthcare businesses across eight countries in Asia, the Middle East and Eastern Europe. Most of the beds are located in Malaysia, Singapore and Turkey — countries that the company refers to as its “home markets”. However, it will add a further 3,300 beds in the next five years, including the new Mt Elizabeth Novena hospital in Singapore, which is scheduled to open next month and will add about 333 beds by the end of 2013. The growth will come from new hospital developments as well as expansion of its existing facilities.

Importantly, the company has already paid about 75% of the capital expenditures for the new beds being added in the next five years, which means the ramp-up should have a significant impact on earnings.

Because of IHH’s many different businesses — apart from its core operations in Malaysia, Singapore and Turkey it also holds a 36% stake in Singapore-listed Parkway Real Estate Investment Trust (Reit) and an 11.2% stake in India-listed Apollo Hospital — and the lack of current earnings contributions from Mount Elizabeth Novena, analysts are using a discounted cash flow (DCF) and sum-of-parts-based methodology to value the company. DCF allows them to capture the strong cash-flow generation of the sector, as well as its defensive nature and structural growth prospects, but with the DCF assumptions being different for different countries, it does take some work to understand the valuation.

Syndicate analysts argue that the fair equity value for the company based on these calculations is about $8 billion to $10.5 billion, while the maximum price per share translates into an equity value of about $8.8 billion. The latter implies a 2013 enterprise value-to-Ebitda multiple of 16 times, which looks rich compare to other regional hospital operators like Singapore-listed Raffles Medical Group, Bangkok-listed Bangkok Dusit and India’s Apollo, which trade at about 13 to 14 times.

However, if you remove Mt Elizabeth Novena from the calculation, since it has yet to contribute any revenues, IHH’s EV/Ebitda multiple drops to about 11 times, according to a source. Analysts argue that IHH should trade at a premium to comps, however, due to its greater scale (versus other Asian operators) and stronger growth prospects (versus its US and Australian peers). Investors will have to get their heads around these numbers and in that context it should be helful that 22 cornerstones have already given their okay.

It is perhaps also lucky that the IPO process is so drawn out, as it will allow investors more time-than-usual to work on the numbers. The reason for the lengthy process is that the company is seeking to list in both Kuala Lumpur and Singapore, which means it will have to adhere to the rules related to prospectus exposures in both countries. Initially it will only offer shares to retail investors in Singapore, while the shares sold to institutional investors will all be listed in KL, but in terms of the timetable that makes no difference.

The company started investor education on June 8 and kicked off the management roadshow last Friday. However, the institutional order books will only be open from July 4 to 12. The pricing will follow shortly thereafter, while the trading debut is scheduled for July 28.

IHH is selling approximately 2.235 billion shares as part of the base offering, of which 1.8 billion are new. The remaining 434.7 million shares are secondary paper that will be sold by Abraaj Capital, the former owner of the Acibadem hospital in Turkey which got paid partly in shares when IHH acquired the business. Abraaj will sell its entire stake through the IPO.

In addition to that, there is a greenshoe of 169.4 million secondary shares that will be sold by Khazanah.

Including the shoe, the offering will account for 30% of IHH’s enlarged share capital. After the IPO, Khazanah will hold about 46%, while Japan’s Mitsui group will own 21% and the chairman of Acibadem Group about 3%.

The price range will be set just before the start of the bookbuilding, so the final proceeds have yet to be determined. But according to the preliminary prospectus, IHH will use 90.9% of the money raised to repay bank borrowings. A source said that this will reduce the company’s net debt-to-Ebitda ratio to about one time from five times based on 2012 numbers, which should put it in a good position to finance its future growth and to acquire additional assets. 

One of the key buying arguments is scale. IHH will be the second-largest listed hospital operator in the world after HCA in the US and the largest in the high-growth emerging markets. It will be about twice the size of Bangkok Dusit, which is currently the largest hospital operator in Asia with a market cap of just under $450 million. The other companies in the sector are significantly smaller and, according to a source, the seven largest listed hospital operators in Asia have a combined daily turnover of only about $45 million.

The hospital sector is also quite defensive with visible earnings and predictable cash-flow generation. Healthcare spending is underpinned by rising GDP per capita, rising affluence and ageing population, and one syndicate research report noted that the growth of hospital beds has lagged the population growth in IHH’s home markets, which has resulted in a supply shortfall. This is helping to spur a migration to private-sector hospitals. Another growth driver is medical tourism, which is not only contributing to an increase in admissions, but is also pushing up margins.

The prospectus doesn’t provide a breakdown of how much each of the cornerstone investors are buying, except to note that Malaysia’s Employee Provident Fund Board is taking 200 million shares, or about 8.95% of the total offering (pre-shoe), and the Kuwait Investment Authority is buying 150 million shares, or 6.7% of the deal.

The other cornerstones are AIA Group, Blackrock Investment Management, Capital Group International, Capital Research Global Investors, CIMB-Principal Asset Management, CMY Capital Markets, Eastspring Investments, Fullerton Fund Management (a unit of Temasek), The Government of Singapore Investment Corp (GIC), HPL Investers and Como Holdings, Hwang Investment Management, International Finance Corp, JF Asset Management, Keck Seng (Malaysia) and Keck Seng (Hong Kong), Kencana Capital, Lembaga Tabung Haji, Mezzanine Equities, Newton Investment Management, Och-Ziff Capital Management Group, and Permodalan Nasional Berhad (BNP).

Bank of America Merrill Lynch, CIMB and Deutsche Bank are global coordinators and bookrunners. Credit Suisse, DBS, and Goldman Sachs are joint bookrunners.