Roy Ho’s Blog

No, not a bank insolvency but bank insolvencies.  It is not just Indymac, but also Freddie and Fannie.  

Taking over will also create more national debt, by 1/3.  This will make USD fall even further; gas goes higher; imports more expensive.  Euro is getting lower.  TSE is also falling.  This latest hit in the US may start a domino effect (finally) of global correction.

It is likely 2009 will see more government involvement, possibly through tax dollars.

With the collapse of Indymac, this may make the legislature get into the speed of passing the appropriate housing bill.  The sign is that house republicans are likely to pass anything democrats ask for to save their seats, although bush wants to have advantages for banks and investors, rather than retail consumers and mortgagors.  However, the house democrats may want to drag it longer for the presidential election. 

Frank-Dodd bill is looking at a higher likelihood of passage into law. The bill would provide a federal guarantee for refinanced mortgages where the principal had been written down below the value of the underlying property.

If the question is if there will be mortgage relief bill, then the answer rests with House Speaker Nancy Pelosi.  The only way to see that a good bill passed ASAP is the house democrats see the urgency of showing their homework to voters.  News on Monday is that Pelosi wants to get this done.  If indeed the case, then this should be done in weeks.  This cannot get drawn into the election.  Else, this legislation will get too much volatility into the race, and thus more tubulence int he market as well.  The draw will be the effect on the next administration.  Which fix will be considered handicapping the next President?  Is the neighbourhood item too fiscally expensive for a Republican president?  Or too “Democratic” to provoke more right wing votes?  Will the item of bank’s consent to write down as too Republican?  It will become too difficult for any candidate to get a grip on this issue. 

Where should money go? 

Consumer is down.  Financials are also down.  Manufacturers are getting beaten up by Chinese manufacturers who are also closing down due to the down turn in the US.  That leads back to the necessities: commodities. 

If the question is if the economy will get over soon, then the answer is the same as stated before in this blog, not yet.  Will more banks close?  Treasury does not want to bail any one any more.  He would rather see insolvencies than bail.  His famous line is going to be this one: “For market discipline to effectively constrain risk, financial institutions must be allowed to fail.”  Well, read his press release here.  There are many reasons banks will close, but there will be very few reasons this year, since the government regulator is unlikely to force more closures by anything other than insolvency.

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.

India held its last election in 2004 and due for another one in 2009 or earlier.  The party in power is Congress and they won primarily for their agenda for the lower castes and/or the poor.  India has been having great economic performance as well.  India still has potential to be exploited.  This potential can be achieved when the social integration of the untouchable is successful.  And investments in that area require a tacit knowledge. 

CNN made a mistake in using the word class.  It could have been a typo if class were used consistently through out its content.  However, class and caste are used inter-changeably in the content.  That seems to suggest the difference between caste and class is misunderstood.  Class can be ascribed, as Plato suggests.  Caste is innate.  

Prior to Congress’ victory, many foreigner investors considered the previous government led by BJP as more investor friendly.  This is to argue otherwise.  

BJP’s core value was Hindutva.  That was to ask: who is Indian?  That came as polarizing as Bush was to the States.  Yes the poor were ignored and that constituted as a block of votes for Congress.  However, investors need this much needed Congress for political stability is the first requirement for any investor into long term investment cycle.

Violence in the rural areas can be instigated by religion as well as by caste differences.  This is only one case that gets to the media.  

Labour upgrade is difficult because education is not as accessible to the lower castes as the upper castes, not necessarily just the untouchables.  Jobs, lending practices are sometimes not favourable to the untouchables in some areas.  

Although the federal government has strong affirmative action laws for the lower castes since the first legislature, social inequality continues.  And sometimes it can turn violent with great organizational support.  

Differences in religion can be just as problematic.  And with the separatist movement at the far corners, although calming down in recent years (or decades now), managing such a diversity requires great political skill.  

Having investments in that area requires all this local knowledge.  The current Congress is just as pro-economic growth as BJP.  In fact the current government is much better equipped than anyone else to manage growth in India.  They have a good finance minister from a major seaport of India.  They have a long history of governance.  In a country where they have strong regulation and a lot of oligopolies, this is an important asset.  The current government is also the party that can unite different castes, religion, promote peace in the region and continue its relationship building effort with its greatest perceived threat of China at the same time.  

There are reasons for both house and senate not to do anything with Bush in regard to recession (or anything else, like treaty ratification) for their personal and political gains.  However, such a delay may not be a bad thing for the country.  

A new president will be mandated by November, almost down to 6 months now.  A new administration will start operation by next January, 9 months away.  So, the good reason for not doing anything with Bush is: if legislations are passed now, then it will be the new administration that has to execute them, what if these legislations will completely contradict to the new administration’s mandate?  Is this legislative prescribing “solutions” that are going to be doomed? Or even worse sour the relationship with the new president?  

And if these legislations turned out to be successful, guess what, the outgoing president will definitely claim to be his credit years from now in his memoir just as the same time the new president will claim to be his credit.  Will any new president like such a trap?  How can any well intended legislator purposefully set such a political trap up for the new president to step on?  

We know there is no solution that would be “the only” solution.  Creating grand standing solutions right now requires an unquestionable monolithic ideological conviction that says this is the only solution to the problem.  The worse is this conviction can be misinterpreted as: arrogance. 

How can the legislators trust the new administration to execute these solutions faithfully when they just push them down the new administration’s throat?  Therefore, the delay tactic is not only for the gain of the legislature as a whole as well as individuals, but also prudent for the nation.  

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.

Treasury Secretary Henry Paulson is visiting China.   It is said that he will bring the issue of Tibet to China.  Among other items for discussion are: Chinese tariffs on environmental technology, restriction on financial markets open to foreign competition, the free currency exchange rate of Chinese yuan.  Forbes has a summary:

http://www.forbes.com/markets/feeds/afx/2008/04/02/afx4843254.html

A visit by Treasury is of course arranged way in advance.  So, Tibet is not what prompted the visit.  Neither would Tibet become the main focus at the last minute for a Treasury Secretary.  So, the Tibet talk is for domestic consumption.  Is the appreciation of yuan the point, now that Paulson is actually in China? 

Yuan has already appreciated 4% this year, i.e. 4% in 3 months.  That is quite a bit of appreciation in such a short period of time.  That topic cannot last long.  So, any accomplishment out of this trip would not be in this topic.  And someone like Paulson who has decades of experience in international banking knew that.   

So, what does he want to accomplish here? 

He will put some effort into the environmental technology issue.  However, he is not an expert.  If he has a delegation to go with him, then he will be able to facilitate a lot business card exchanges among the right people.  The irony here is US isn’t really a great leader in this field.  The strength is probably in the capital intensive side of this business, such as wide farms.   

Wang Qishan, the Vice Premier of China managing trades, is the counter part of Paulson.  They met when Paulson, while at Goldman Sachs, helped China restructure one of the big banks.  Therefore, they will be able to spend the most time on opening financial markets to foreign competition.  US’ interests will be on having foreign insurance, investment and banking companies to operate in China while China will say they are not ready yet.  An achievement should not be expected since this ought to be a long term negotiation.  Besides, China is waiting for a new President to deal.  They can also spend some time in the difficulty of conducting M&A in China.  However, if Paulson brings up that issue, then the conversation will easily be dragged into the difficulty of having M&A done in the states by Chinese firms.   

The importance for the US is this is the first trip since the new leadership in February.  So, this is a relationship building trip.  A lot of career bureaucrats of both sides need to find out who their counter parts are.  US’ new Trade counter part will give US less confrontation.  However, by no means negotiations will be easier.  This is a difference in style, not in substance.  Paulson will also gain a lot from this trip.  His Goldman Sachs resume put him to DC.  He paid back to his core constituency by the recent overhaul to make the industry more competitive in the global market place.  Now, his position of power opened even more doors to his post Treasury Secretary career.    

At least someone got something useful of Bush Administration.

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.