Saturday, February 7, 2009

Recovery 08.02.2009 - The East

Recovery In Sight 2009 - The East

In Oct 2008, I wrote "Recovery in Sight" followed by "Recovery in Sight II" in Dec 2008; since then there were some signs of stability and recovery. Is the worse behind us? Probably Yes; but there are still dark clouds that could torpedo this recovery. Verdict: Uncertain with downside bias.

The Stockmarket

Indicative High/Low up to end 2008

Indices                     LOW            HIGH          08/02/2009 

HSI                         10,676          32,000           13,655
Nikkei 225                 7,000          18,300             8,076
JKT CI                      1,100            2,800              1,328   
KLCI                           800            1,500                 896
Shanghai A               1,700            6,400              2,181
SET                            400               900                 444
STI                           1,500            3,900              1,715
Dow 30                     7,552          14,164              8,280
S&P 500                     840            1,540                868

The markets (Asian markets - East - seem to perform better) had rebounded from their lows and the rebound is base on hope NOT confidence. Its likely that we will see the market testing the lows in the coming months as hope turns hollow.
Baltic Dry Index 

The rebound in *Baltic Dry Index (the index provides "an assessment of the price of moving the major raw materials by sea) from the low of 800 points to current 1498 is an early indication of recovery in shipping, mainly commodities. Commerce is trickling through following a near standstill, especially for ships plying the Asian/China routes.

*the index covers HandymaxPanamax, and Capesize dry bulk carriers carrying a range of commodities including coaliron ore and grain.

Other related views

Standard Chartered Bank's analyst, Mr Stephen Green article on "China Materclass: Angus Maddison - the history man" dated 5 Feb 2009 and Nomura's analyst, MingChun Sun, article " China: The recovery may come earlier than expected" dated 2 Feb 2009 reflect an increasing number of views on possibility of early recovery in the East. Even the political boss in China indicates signs of recovery in China.

The Torpedoes 

i) Putting good money after bad - The new administration under President Obama is working very hard to restore confidence but it lacks the political will 'to right the wrong'; what is the point of spending US$900bil to buy toxic assets when you are *putting good money after bad? The bitter pill is to nationalize the ailing financial institutions, reform and restructure them, put in checks & balances without stifling initiatives; then refloat them to the public after they are recapitalized and strengthened. I find it hard to fathom that, in the name of capitalism, these institutions must be kept in the hands of private enterprise. The tax payers take the pain but the private enterprise have the gains! Banking cannot be left largely, and completely, to the private sector.

*sample - Troubled Asset Relief Program (TARP) - putting good money after bad

Troubled Asset Relief Program (TARP) - Bank of America and Citigroup are now worth less than the value of their TARP investment
                                           Bank of America                Citigroup
Pre TARP                              $159.7bil                             $110.4bil
TARP money received                   45bil                                   45bil
Current Value                              37.1bil                               22.9bil           
(as of 9 Feb 09 (Time Mag)

ii) Social issues - China's stimulus package of 4 trillion Yuan (US$590bil) includes spending on media, transport, infrastructures, construction, health, communication, rural development & agriculture, power grid and others. However, it takes time for the massive unemployment situation to adjust; in the meanwhile social unrests may be fanned by discontent and impatience as well as undesirable elements who try to undermine these initiatives. Besides, domestic demand is unlikely to replace the export-based economy in the immediacy. There is a delicate emotional balance between jobs made available in urban and suburban areas, inter-provincial provisions as well as returnees. 

The size of China's labour force is 808mil of which 130million are migrant workers; Unemployed migrant workers account for 20 million 

iii) Protectionism - With massive unemployment in most countries, it is not surprising that some level of protectionism will surface. When used as a bargaining chip, global commerce will contracts further. Most countries will look inward and satisfy local demands and deficiencies; its a 'me first' syndrome.

iv) Climate & diseases - I view this global contraction as part of 'boom and bust' cycle except this bust is of a deeper degree than previous cycles. However, with chaotic climatic changes, crops are destroyed, famine spreads and diseases will rear its ugly heads. When it happens, recovery cease as commerce shrink resulting in a downward pressure. 

Is it any harder to contain diseases like bird flu now than previously? Probably yes. When the rural populace is unemployed, displaced and hungry, be it in China, India, Vietnam, Africa or Philippines, they will feed on anything (any food) that is available. Culling of domesticated animals may be necessary but given the choice of dying of hunger or dying of disease, they may choose the latter; not because they want to die (also a disguise suicide)but because they need to fill their stomachs.  


The 1st - 3rd Qtr 2009 will see mainstream man-in-the-street coming to reckoning and sufferring from this financial fallout. Any hope of recovery will be shortlived unless there is political will to 'right the wrong' and to avoid protectionism.

Where the stockmarkets are concerned, its 'Trade with care' as fortune rewards the brave; For those who think they can bottom-fish and pile back into the markets after the crash like before, further dip is not a remote possibility.

Good Luck; Keep fit, eat enough and sleep well.

Best regards & God bless


1 comment:

Anonymous said...

mr. philip thx for the blog. but can you put white color text. is hard to read if you put black color heheh