Roy Ho’s Blog

CNN continues to report the newest death toll caused by China’s earthquake.  What stocks are affected by this earthquake?  This natural disaster in China is a lot closer to America than Myanmar’s simply because China is a lot more involved in the global economy.

More than 2 dozens of Chinese public traded companies can be found in the States either as stocks or as ADR.  The PetroChina (NYSE: PTR) is the first one to be affected because it has fields in Sichuan, the province where the quake occurred.  Those oil wells are now shut.  This company is the largest oil company in China.  Nippon Oil (TSE only) has a joint venture with PetroChina.  

China Telecom (NYSE: CHA) may get the worst hit since it has 10% of all land lines in the region.

Sinopec (NYSE: SNP), which is developing a field in Sichuan may see decrease in revenue.  Damage to this gas field is unknown.

China Life (NYSE: LFC) is also dropping since it is expected to have a lot more life insurance claims.  This life insurance company is the largest in China.  The selling pressure is short term since the life insurance penetration in that area is low.  In fact, the price has come back up after the initial drop.  This selling pressure only lasted for 1 day.

PICC Property & Casualty (other-otc: PPCCF) may actually get a bigger hit than the life insurance companies.

Negative impact on HSBC will be minimal since this bank has very exposure to this geographic area.

Qingling Motors (OTC: QGLHF) will get negative impact.  This area has some exposure to auto factories and circuit design.  However, the foreign trade is not concentrated here. 

Huaxin Cement’s price is going up already, in anticipation of more infrastructure projects.  Huaxin is traded in Shanghai only.  Lafarge SA (OTC: LFRGY), of France, is the parent company of Huaxin.  Cement company Anhui Cement is other-otc: AHCHF.

Construction equipment companies that have a presence in China will do well.  Check Caterpillar’s (NYSE CAT) exposure in China or Hong Kong.  Its competitors are Deere, Gehl.  Astec builds road construction equipements and components (NASDAQ ASTE).  Check its exposure in China or Hong Kong.  A strong exposure will be a good sign.   

All medical supplies companies are going up in China and Hong Kong.

Foreign companies such as IBM, Intel, Wipro (NYSE: WIT) have sites here.  Japanese Toyota and Hitachit also have sites here. 

This earthquake will drive up inflation in China.  Given the tourism brought by Olympics, Chinese yuan is expected to appreciate until the end of the games.

If your desired company cannot be found in the States, find a proxy company in Hong Kong stock exchange, or ADR in the states.  If you are interested at funds, then get an Asian (or Far East) fund that has a heavier emphasis of infrastructure and medical supplies industries, a heavier emphasis in Hong Kong.  A lot of companies in China may get suspended if it has a big swing in price.  Hong Kong does not have such restriction.  This gives your mutual fund manager a greater flexibility.

Zimbabwe got a new twist.  CNN reports Mugabe decides not to atten the submit to be held in Zambia, its neighbour.  However, the opposition (Tsvangirai) is attending.  This will give the Tsvangiraia great opportunity to sell his plan of stabilization and strengthens Tsvangirai’s edge both internationally as well as domestically. 

The instability in Zimbabwe affects copper’s prices.  However, the copper price has been receding from its historical high.  This Zimbabwe episode will provide a support price level to copper.  So, this price will probably slow down.

Further down, Sino Union Petro & Chemical secured an oil field with Madagascar, expected to be worth 2B barrels.  China will own 50% of the venture. 

Chinese oil exploration firms have been trying to secure sites overseas with little success.  This is a firt major break not only for them, but also to Madagascar as well.  Madagascar has not produced oil for 60 years, reports Reuters! 

This company is not traded in LSE nor NY.  It is traded in HK only. 

This will also strench India’s resources as well.  Although India is not in as an urgent need as China in terms of resources.  Over the years, China is slowly moving in East Africa (more so than Africa in general), the traditinoally perceived sphere of influence by India.  Not that India has navy bases all over the place, but it has a lot of migrants and control a big portion of trade in East Africa.  It will only be a matter of time for India to express its security concern not only about the Himalaya border and Parkistan, but also about pan India Ocean security issues with China.  These oil exploration companies will have to learn that getting listed in London and NY helps them mitigate political risks.

For India, issues such as Kenya and Zimbabwe will have to become the leverage points for it to enter the stage.  It is probably too late for this episode.  But next time.

Wall Street reports (print version) that Zambia President and SADC Chairman Levy Mwanawasa invited 15 South African countries for a submit on the Zimbabwean crisis.  How does Zimbabwe affect your $$?  Kenya is having their problems too.  Zimbabwe itself does not cause that much of a problem.  When the political instability gets Zimbabwe’s neighbour Zambia nervous, then it will affect your $$.  And how does Kenya play into this?  Well, most of the copper from central Africa are mined from land locked countries.  And they, just happen so, export through Kenya.

http://edition.cnn.com/2008/WORLD/africa/04/10/zimbabwe.election/index.html

Zambia and Zimbabwe shares a long border.  Zambia and Kenya also share a long border.  Zambia would get nervous because it sees a refugee crisis down the road.  And that is where the problem begins.  Zambia is still a major producer of copper.  This Zimbabwean political instability may create political instability in Zambia as well.  This will drive up the prices of copper.  Kenya may not create a refugee problem.  However, the seaports may not be working and we will get a real back log on copper.  That can be the same story as oil having its backlog created by Katrina, just a copper version of it.  And from there goes into your alloy producers, manufacturing, construction tools, …

Copper prices have been falling lately (as in days).  However, copper is around the historical highs (2008.04.09’s LMX cash ~8650/MT vs. 2006.05’s LMX cash ~8800/MT).

Who is the biggest buyer of copper right now? You got it right: China and India.  And they are importing for their infrastructure needs.

In addition, this Zimbabwe will increase pressure to push up inflation.  And the inflation effect may not be a cascading effect by imports.  If the Chicago market recognizes this risk quickly, the price level may get worked into it fairly quickly.  That affects the bonds market right away.  And any movement in bonds affects stocks of FIs.  

This may lead people to think about the exchange rate of US dollars.  The exchange rate of US is not affected much by this crisis.  The US exchange may be experiencing some psychological sell off due to US’ recent fall against Chinese Yuan.  US has fallen across the psychological barrier of 1US vs. 7Yuan, read Forbes’ story here.  

Wall Street reports (print version) that Zambia President and SADC Chairman Levy Mwanawasa invited 15 South African countries for a submit on the Zimbabwean crisis.  How does Zimbabwe affect your $$?  Zimbabwe itself does not cause that much of a problem.  When the political instability gets Zimbabwe’s neighbour Zambia nervous, then it will affect your $$.  

http://inthefield.blogs.cnn.com/2008/04/10/a-crisis-measured-in-hunger/

http://edition.cnn.com/2008/WORLD/africa/04/10/zimbabwe.election/index.html

Zambia and Zimbabwe shares a long border.  Zambia would get nervous because it sees a refugee crisis down the road.  And that is where the problem begins.  Zambia is still a major producer of copper.  This Zimbabwean political instability may create political instability in Zambia as well.  This will drive up the prices of copper.  And from there goes into your alloy producers, manufacturing, construction tools, …

Copper prices have been falling lately (as in days).  However, copper is around the historical highs (2008.04.09’s LMX cash ~8650/MT vs. 2006.05’s LMX cash ~8800/MT).

In addition, this Zimbabwe will increase pressure to push up inflation.  And the inflation effect may not be a cascading effect by imports.  If the Chicago market recognizes this risk quickly, the price level may get worked into it fairly quickly.  That affects the bonds market right away.  And any movement in bonds affects stocks of FIs.  

This may lead people to think about the exchange rate of US dollars.  The exchange rate of US is not affected much by this crisis.  The US exchange may be experiencing some psychological sell off due to US’ recent fall against Chinese Yuan.  US has fallen across the psychological barrier of 1US vs. 7Yuan, read Forbes’ story here.  

AP reports the political story as follows:

The opposition party said Thursday it will not participate in a presidential runoff, while spokesmen for President Robert Mugabe and his chief rival said both will attend an emergency summit of southern African leaders this weekend.

The Movement for Democratic Change says its candidate, Morgan Tsvangirai, won the March 29 vote outright, and has accused Mugabe of delaying the results to give ruling party militants time to intimidate voters and ensure he wins a second round.

On Thursday, the opposition leadership met and resolved not to participate in any runoff presidential vote.

“We won the presidential election hands down, without the need for a runoff,” MDC Secretary-General Tendai Biti told reporters at a news conference in neighboring South Africa. Party leaders had previously said they would not accept a second round, but the party had not taken a formal stance.

Deputy Information Minister Bright Matonga told CNN he believed opposition politicians would be “cowards” if they did not contest a runoff.

“They should come, they should face the music,” he said.

Twelve days after the vote, the results from the presidential race have not been released. The High Court will decide Monday whether to grant an opposition request for release of the election results.

Zambian President Levy Mwanawasa has called an emergency summit of the Southern African Development Community for Saturday to discuss the crisis.

“Such meetings are usually very healthy so heads of state can brief each other, not only us in Zimbabwe,” Zimbabwean Information Minister Sikhanyiso Ndlovu told The Associated Press.

But he insisted the meeting wasn’t necessary. “There is no crisis in Zimbabwe that warrants a special meeting on Zimbabwe,” he said.

Mwanawasa originally planned to send a delegation of former heads of state to Zimbabwe but decided to hold an urgent summit instead, Zambian state radio reported.

Matonga confirmed that Mugabe would attend. “If there is a SADC meeting of heads of state, then obviously he will attend,” he told the AP.

Tsvangirai also will attend the summit, MDC spokesman Nqobizitha Mlilo said, calling him a “head of state.” Biti said the party would press SADC to urge Mugabe to step down.

Tsvangirai, who was traveling throughout the region to ask Mugabe’s peers to push him to end the standoff, was headed Thursday to South Africa to meet with President Thabo Mbeki, Mlilo said.

“If Mr. Tsvangirai is in town and before the president leaves for the next meeting and his program allows it, it is important to hear what Mr. Tsvangirai has to say,” said Aziz Pahad, South Africa’s deputy foreign affairs minister.

African leaders previously deferred to Mbeki and his strategy of “quiet diplomacy” on dealing with Zimbabwe. Mwanawasa has stood out as the only southern African leader to publicly criticize Mugabe’s policies, last year likening the country’s economy to “a sinking Titanic.”

Mugabe has virtually conceded he did not win the election and appears to be campaigning for a runoff by intimidating his foes and fanning racial tensions.

Desmond Mufunde, a newly elected MDC councilman from the rural Gweru district, said soldiers attacked some people in his district last weekend.

Zimbabwe’s Commercial Farmers’ Union accused ruling party supporters of forcing dozens of white farmers off their land and ransacking their homes. Farmers warned that continued chaos could endanger the wheat crop, vital to a nation that has grown deeply dependent on food aid during the worsening economic crisis.

Fubon has been approved to buy approximately 20% of Xiamen City Commercial Bank at a price of US$34 M.  The biggest shareholder of Xiamen City Commercial Bank is the Xiamen City government’s Commerce Bureau, approximately 24%.  Fubon is traded in international exchanges.  Fubon is expected to name members to the board.

Xiamen City Commercial Bank is a local bank.  Xiamen (Amoy) has the heavies concentration of Taiwan businesses.  This local bank is not a troubled bank.  The significance is not who bought whom, but the approval by Taiwan’s authorities.  This will be considered a plus for Fubon. 

Taiwan’s government bureaucrats are quick to recognize the president elect Ma and quickly steering to approvals that would be considered as consistent with his platform.  There probably will be other approvals before May that are considered favourable to businesses/industries building ties to Mainland China. 

Paulson made this long expected announcement about residential mortgage regulation.  What is relevant? To Who?  Irrelevant or indifferent to McCain, this plan is not adding points to McCain.  It does not do anything to elevate the pains a lot of people are suffering right now.  What is going on?Below is the news from Reuters: http://www.reuters.com/article/bankingFinancial/idUSN3142489220080331

This kind of regulation is not something Democrats are good at.  However, putting something like this up front can reduce a lot of fire in this election from the Democrats.  So, it does not add points to McCain, it can take a few hits from Democrats.  However, after reading the pdf file from Paulson, one may protecting McCain is only a collateral benefit.  This piece of work is more about pay back time, paying back to a core constituence.

This overhaul is to take the initiative of repair from the Democrats to the Republicans, in particular, someone who knows the financial industry well.  Paulson is not a retail banker.  He comes fromt he capital markets.  His placed a great emphasis on capital markets, like merging SEC and futures trade commission.   

The change regarding exchange traded funds is a good call.  But then, how is it related to the purpose of residential mortgage overhaul?  Fixing the approval process is needed. And couldn’t this be done in legislation maintenance?  Why packaged in such a big fix?  It serves the industry more than the purpose of residential mortgage regulation, similarly for expanding the Investment Company Act to permit a new global investment company.  

It is probably a good idea to have oversight of broker-dealers and investment advisers offering similar services to retail investors.  What about the practice of licenses being licensed to the companies rather than the individuals who actually do the work?  That has been the cause of a lot of discrimination lawsuits.  Since the licenses are licensed to the companies, this looks more like territorial fighting than “oversight”.  Of course, some kind of retail investor protection will be part of the deal.  

Of the whole 7 pages of summary, only 0.5 page of it is focused on residential mortgage origination.  Another 0.5 page about state banks, payment systems and thrift charter, the real retail customers related issues.  Once insurance is added on top, there is 1.5 page of material!  

It is true there are other issues involved, such as the new powers to the Fed that has indirect positive consequences to the retail customers as well.  However, the meat is in the regulation reduction.  And for all fairness, it is about redundancy.  But don’t do it in the name of preventing similar mistakes like this mortgage crisis!

Who cares? Of course anyone who has a heavy position in FIs.  However, the benefit is more on the bigger guys.  The bigger institutions are the ones who have cross jurisdiction issues.  The retail level gets affected the most looks like the mortgage brokerages.  More details regarding the mortgage origination is needed to see if Home Depot and the like would get affected.

Nothing looks good.  Today’s data are weak.  US dollar falls against yen, reports CNN.  In real time, US is bouncing up against Yen and Euro.  GDP grew very little.  Durable orders are down.   

http://edition.cnn.com/2008/BUSINESS/03/27/asia.dollar.ap/index.html

Essentially, everything depends on this mortgage crisis.  And politicians are offering all kinds of things.  What for? To occupy your TV box so that you forget about the other ones. 

Depending on your time horizon, all the political fuss about the mortgage crisis may or may not have an impact on you.  This is the newest round of talk, from Wall Street Journal:

http://online.wsj.com/article/SB120658212569867477.html?mod=hpp_us_whats_news

The most visible talks related to mortgage crisis come from the presidential candidates.  They make get you excited.  However, you need to start align this temporal emotional development to TIME.  It’s election year!  All bets off!

The new president will take office next January.  It takes a month of 2 to transition the administration.  So, any work for such an important topic will be some time in Feb, almost a year for anything to be put on the table.  So, don’t let Clinton’s auction talk, Obama’s credit card solution or McCain’s inaction be a factor on your today’s decision.  If your horizon spans > 18 months, then I would say you need to pay attention to their talks.  For instance, you are about to buy an existing internet foreclosure auction site, due diligence is about to complete and on to develop a term sheet.

What is really relevant is about what Treasury Secretary Paulson says.  Below is not exactly news any more since it is almost 2 weeks old.  However, it is relevant:

http://www.nytimes.com/2008/03/13/business/13cnd-paulson.html?em&ex=1205553600&en=5ceef68e75d21e48&ei=5087%0A

It may look inconsistent to this:

http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-24037412.htm

They are not inconsistent of each other.  Paulson does not want a quick fix.  He wants a “solution”.  That translates to regulatory risk (not compliance risk.  A lot of people mistake regulatory risk as compliance risk.).  And if one looks at the Feb 7 press release of the Undersecretary Robert Steel, Paulson will definite create new regulations in a very short term.  

 Related industries will not only be FIs or mortgage insurance companies, but from suppliers to appraisal firms to ABC Papers packaging shops.  Paulson seems to be undeterred by the election politics.  Or Bush is not? Paulson is the real deal.

CNN has a summary of Social Security proposals among the three candidates here:

http://money.cnn.com/2008/03/25/news/economy/socsec_candidates_trustees/index.htm?postversion=2008032508

The problem with Social Security is similar to any pension plan, GM’s or Chrysler.  The fixes are also similar to those too.  They all revolve the following, like them or not:

1)      Increase the quantity of contributors, i.e. workforce or taxfilers.

2)      Increase the amount of each contributor, i.e. increase taxes or increase income (productivity)

If we only consider domestic options, then the increase in contributor can only be done through 5 things:

1)      Optional retirement instead of mandatory;

2)      Decrease minimum labour age.

3)      Increase the amount of immigrants

4)      Increase the birth rate

5)      Increase the female labour force participation rate

The increase in contribution per contributor can only accomplished through 2 things:

1)      Increase in taxes

2)      Increase the income of the contributors, i.e. productivity

There are only 7 options.  Some of them are not politically viable to any politician, even the Obama type.  Some of them are not really political solutions.

US is not China.  US is not playing a catch-up game.  So, there is no growth of 8% / year to make up the needed funding for Social Security.  So, this one is out.  Increase birth rate takes too long.  Well, it takes at least 16 years for one to join the workforce!  Female labour participation has been around the same for years and probably is difficult to get any more lift.  Decrease minimum labour age?  Out of your mind. 

That is why there are always the same options being talked about:

1)      Optional retirement instead of mandatory;

2)      Increase the amount of immigrants

3)      Increase in taxes

4)      Increase the income of the contributors, i.e. productivity

Increase productivity will have to involve technology improvement.  This kind of things does not come out of a “technology factory”, a gadget / month kind of a deal.  This is either about the mode of production so that each worker can produce more than before, or something others cannot produce.  

We all know how increase in taxes is like politically.  So, do you want immigrants or optional retirement?  

Now look at the voter base. 

Obama will have a huge black voter base.  That may prevent him from enlarging the immigrant pool.  That would leave him with either more taxes and/or optional retirement.  

McCain will have more white voters, and more voters who will get the biggest impact by tax increase.  As long as optional retirement is optional and not affecting their benefits (Go study Canada’s experience since they have a more acute problem), McCain will have to get that option or inaction.  Clinton will have the largest Hispanic voter base of the three, she will be the most likely candidate to enlarge immigration pool.  Then it will be optional retirement for her.

The general sentiment of the economic outlook written on 03.21 is reflected today in markets.  The article on 03.21 is here: 

http://royho.wordpress.com/2008/03/21/taiwan-count-down-1/

This is from Reuters:

http://edition.cnn.com/2008/WORLD/asiapcf/03/21/taiwan.elections/index.html#cnnSTCText

CNN:

http://money.cnn.com/2008/03/24/news/international/taiwan_markets.ap/index.htm

CNN has a summary of the post election here:

http://edition.cnn.com/2008/WORLD/asiapcf/03/23/taiwan.ma.ap/index.html#cnnSTCText

http://edition.cnn.com/2008/BUSINESS/03/24/taiwan.markets.ap/index.html

Some stocks are going up in Hong Kong and Shanghai as well.  Stocks in Shanghai will have a much shorter ride.  Since you probably cannot trade in Shanghai’s market, you cannot be exposed to it.  Your mutual fund may.  If your mutual fund does not have a local office, it may not actually understand political dymanics and the reasons for its short ride.  This is a good opportunity to watch your fund manager. 

You may happen to have some stocks in Hong Kong since HK is a lot more accessible to foreign capital and quite a good amount of their listed companies are also listed elsewhere (London, NY’s 2 markets).  This ride could be slightly longer.  New president does not come until much later.  So, all these trades are also emotional. 

Some Taiwan companies are traded overseas.  These rides are longer.  Again, new president does not come until May 2008.  So, these are sentiment trades.  One may want to wait untill some announcements come.  But it is the time to study the annual reports. 

Is the Taiwan the safest bet while the USD continues to fall?  It is not as easy to hold foreign currency in US as in some other countries.  So, holding a foriegn currency at the retail level is not easy.  The second best is to find a foreign currency/foreign money market fund.  The third is to find conservative funds with foreign positions, foreign as in outside of North America (Canada is not safe enough).  If you are a hands-on kind of guy, and you are interested in this region, then Taiwan banks are okay (among the public tradable in NY).  Avoid banks in Mainland China (for a different reason).  Some other FIs are okay, but not banks.

Taiwan’s presidential election is to be held on 2008.03.22.A.  Since Taiwan is half a day ahead of US, the stations will open starting tonight.  What is at stake (of your wallet)?  CNN gives a decent last day summary: 

http://www.cnn.com/2008/WORLD/asiapcf/03/21/taiwan.elections.ap/index.html 

The first industry is computer component manufacturing.  Taiwan’s computer component manufacturing has the greatest market share in the world.  It will directly affect the manufacturing costs of everyone from Dell and HP to IBM.  Taiwan’s computer component manufacturers can produce any kind of PCs without outside vendors.  The only thing they lack is brand name.  If Ma Ying-jeouwins this election, the costs from these manufacturers will come down because Ma Ying-jeou’s policy will favour stronger commercial ties between Mainland China and Taiwan.   

Financial services industry will get a real boost.  If Ma Ying-jeouwins, that will create foreseeable stability required for Taiwan.  FDI will increase as a result.  Taiwan FIs will be able operate in Mainland, not only a greater amount of them, but also in a greater geographic span.  Currently, only 1 bank is allowed to operate in only 1 city in China.  Capital of Taiwan residents and companies held in overseas will also flow back to domestic market.   

Shipping and hospitality industries will get receive more customers from Mainland China.  Taiwan airlines will get a better coverage in the future.  Their air fleets will finally get the cash flow to finance needed replacements.   

However, this is not a sure win for Ma Ying-jeou.  DPP is within a striking distance.  The poll may suggest a comfortable lead for Ma Ying-jeouover DPP by US standard.  These polls are known to be unreliable not by the bias of the pollsters but by voters.  DPP voters traditionally lie to the pollsters or remain silent.  Conventional wisdom gives an additional 20% point to DPP. 

In the case of a DPP victory, it will not be the end of the world.  CPP may have learnt something no one is privy of in this election and thus gave sweet announcement to DPP’s outgoing president Chen Shui-bian in the past days to prepare for DPP’s victory.  If DPP indeed wins, computer component manufacturing will not get anything as a result.  FIs will not get the benefit above.  Shipping and hospitality will get some reward due to DPP’s convergence of its Mainland policy to Ma Ying-jeou.  However, the benefit will not be as great.  Agriculture has been rumored to be negatively affected by this election in the case of Ma Ying-jeou.  However, Taiwan does not have big publicly traded agriculture companies.   

The advantage of Taiwan’s agriculture over Mainland is the R&D side of agriculture.  The most potential of Taiwan’s agriculture is how to turn their R&D into more productive scale: for a bigger market and/or for more capital intensive firms. 

All Japanese firms with heavy investments in Taiwan will get affected.  One particular industry people may oversee is content distribution industry.  If KMT wins, these firms may get crowded by a Mainland fever.  So, these contents range from comic books to cables to films.