Yield Curves And The Economy

At first blush, it may appear that an inverted yield curve is desirable. After all, this is a possible indication of expected lower inflation in the future. However, the the past six recessions in the U.S. dating back to the 1960s have been preceded by an inverted yield curve. Recent Fed actions have led to a change in the interpretation of yield curve as Fed actions have flattened the yield curve by taking risk out of the system, reducing the term premium, or extra return for taking the risk associated with longer term bonds. Instead, the term premium between other financial instruments such as high-yield bonds may be more indicative of future economic stability. As this article highlights, even though the term premium for Treasury bonds has flattened, the term premium for high-yield bonds (Actually credit default swaps on those bonds: Think of it as insurance that only pays out if those bonds default.) has increased.

Zuckerberg Loses New Votes

Even though Mark Zuckerberg currently controls the majority of Facebook's voting shares, it appears that even that has limits. Facebook recently announced that it would not seek approval of Class C shares that would effectively allow Zuckerberg voting control forever. Market sentiment on dual class shares has shifted, as indicated by the announcements that no new companies with dual voting share classes would be admitted into the S&P 500 or any FTSE Russell indices. Additionally, the approval of Class C stock with super-voting power would probably have prompted a shareholder lawsuit in which Mark Zuckerberg would have been for a deposition or as a witness, something he would likely wish to avoid.

Buybacks Fall

In the second quarter of 2017, S&P 500 companies repurchased $120.1 billion worth of stock, down 9.8 percent from the first quarter and a 5.8 percent decrease from the second quarter of 2016. Only 66 of the 500 companies reduced the number of shares outstanding by 4 percent, while more than 20 percent repurchased more than 4 percent of shares outstanding the the second quarter of 2016. Apple and Boeing led the way, repurchasing $7.1 billion and $2.5 billion in shares, respectively. The S&P 500 companies did set a dividend record, paying out $104 billion during the quarter, up from $100.9 billion in the first quarter.

Corporate Underinvestment

A recent article indicates that financial managers may not be following good capital budgeting techniques. The median hurdle rate used to value new projects is 12.0 percent, with an average rate of 13.6 percent. Meanwhile, the same survey notes that the median WACC is 9.8 percent, with a mean of 10.6 percent. While that article infers that these numbers should be the same, we differ on this assumption. If new projects are riskier than the company, which would likely be the case, then the cost of capital for new projects would necessarily be greater than the WACC since the required return on a project depends on the use of funds, not the source of funds.

Underinvestment still does occur, as 67 percent of respondents answers “No” when asked if their company undertook all projects that create value. Common reasons given for not pursuing value creating projects were:

Shortage of management time and expertise (51%)

The project is not consistent with the company’s core strategy (41%)

The risk of the project is too high (39%)

Shortage of funds (38%)

Shortage of employees (32%)

EPF Should Not Sell PLUS

Is there an alternative to North South Highway? How much of toll roads come under PLUS? There are 14.5m EPF members. We begrudgingly pay tolls, at least thinking some of it goes back to EPF returns.

If you look at our population bell curve, you can surmise that we are a growing population with a relatively wider base. In many aspects we are skewed towards a younger working population. This means that the annual contributions to EPF is likely to grow even more.

We can also surmise that there are limited investing opportunities locally, taking into account the kind of risk EPF is allowed to partake. PLUS is a significant player in an infrastructure that plays a critical role for the country. To replace PLUS with a similar investment with similar returns would be very difficult.


Fair Value - Not Enough Even

As a socialist-capitalist, I can be torn between getting more than a fair return on investment. That is, if an asset is being sold at higher than normal valuations, by all means, sell. I am certain that any potential buyer would have to offer a premium. The question then is how much of a premium would it make sense for EPF and Khazanah to dispose PLUS.

To me, the premium would have to be very high, so high that it would be silly not to sell, so high that it would be sillier to buy.

p/s: Yoona of Girls Generation


Critical Asset

Imagine a few years down the road, instead of the usual 5-10% annual increment, you see your normal RM1.10 toll

being raised to RM2.50. I am not saying it will happen. Yes there are rules to safeguard some of the increments, but seriously, it can only go up, and it won't be LESS than when EPF/Khazanah are the owners.

We are already having to increase our investing overseas owing to the deluge of contributions into EPF. We should not replace PLUS or assets with similar values.


Cornerstones Should Not Be Tampered With

We should be thankful that EPF has been able to give around 6% annual returns (tax free). Go and ask CPF whats their rate for the past few years. The high-ish rate is thanks to a solid platform girding the overall investing philosophy. Cagamas and other critical asset like PLUS are the cornerstones. You do not want to remove the cornerstones as the foundation would be shaky then.

Toys R Us Joins Retailers In Bankruptcy

With $5 billion in debt, Toys R Us becomes the second largest retailer in U.S. history to file bankruptcy, following only KMart. The bankruptcy filing is at the worst possible time for the company as it is ramping up inventory for the fourth quarter, which typically accounts for about 40 percent of the company's revenue. Overall, 2017 has been a bad year for retailers as 35 retailers have filed for bankruptcy, including Wet Seal and Radio Shack, who filed Chapter 22 bankruptcies.

An IPO Set To Fly Or Crash

Finnish mobile game maker Rovio has set the price for the company's IPO. The maker of Angry Birds will have a value of about $1 billion based on the IPO price. The company will sell about 55 percent of its shares, with current owner Trema International retaining about 37 percent ownership. The IPO price of 10.25 to 11.50 euros values the company about the same as peers, but does include an expectation for profit growth.

5 Big Questions Pop-Out from the US-Trump trip !!!

It's strange when many of us read the news saying that the recent US trip made by our PM is somewhat 'surprising'! Before the Trump face to face meeting, it was highlighted that we're not going to the US begging for money. Yes, it's true. However, after the meetup, many Malaysians think that we better go US begging for money instead of giving money to the US. Lol... ☺☺☺

A very expensive US trip ???

We're not talking about the airfare, we're talking about the outcome from the trip. Almost RM100billion (equivalent to $25 billion) !!! It's a huge amount considering our economy size compared to the US itself.

#1: Malaysia to help boost the US economy???

Awesome. Most of us can't believe that Malaysia is such a powerful country, which can boost the US economy. Unbelievable. Really. Given our size of the economy, obviously, US should be the bigger brother to look after us. Anyway, it looks like the other round now.

#2: US enemy is our enemy???

Yup. This one we agreed, especially on terrorism. No matter I.S or North Korea or Taliban, we have the same enemy of the US. But, how about the enemy from an economic angle? How about China?

#3: Malaysia Airlines buying 16 Boeing planes???

President Donald Trump touted what he described as a plan by Malaysia Airlines Bhd. to spend between $10 billion and $20 billion on Boeing Co. jets and General Electric Co. engines as he opened a White House meeting with Malaysia’s prime minister.

Yes, it's confirmed now that our national carrier will purchase 8 of the carbon-composite Boeing Dreamliners, and another 8 Boeing 737 Max planes. On top of that, our prime minister said we will buy another 25 more 737 Max in the near future.

Not only that, AirAsia was being mentioned, to buy the engines for its new planes as well. Hmmm. Let's see whether Tony Fernandes will buy into this remark or not.

#4: EPF to increase their US investment???

The deep pocket EPF had once again being put on the table. It was reported that EPF intended to invest an additional US$3bil to US$4bil ((RM12.6bil to RM16.76bil) to support infrastructure redevelopment in the United States.

Infrastructure? Then, why our own East Coast Railway needs funding from China? And, how about the upcoming KL-Singapore HSR project? This infrastructure projects not attractive for EPF to invest into?

#5: Khazanah also follows???

The owner of Malaysia Airlines, nation’s sovereign wealth fund Khazanah Nasional Bhd planned to increase its investment in high-tech firms, in addition to the US$400mil invested so far. How much more? It didn't mention.

Wait... Don't we forget that all GLCs were being told to dispose their foreign assets and bring back the money since last year?

No comment...

Hurricane Irma And Cat Bonds

Our thoughts and prayers go out to those affected by Hurricane Irma. Fortunately, Irma weakened as it approached the U.S. and property damage estimates dropped from $200 billion to $49 billion, although the final tally won't be known for months. As you can imagine, large natural disasters such as this affect financial markets. Last week, the stock market fell and the dollar weakened based on the dire projections, although both have rebounded today, in part because of the storm's weakening. However, no financial instrument was hit as hard as cat bonds based on hurricane damage in Florida. In fact, one cat bond that was recently issued by Heritage Insurance Holdings fell to 50 cents on the dollar. The cat bond market has reached $90 billion, and almost one-half is tied to Florida hurricane damage.