JULY MARKET COMMENTARY

29th July 2008
“The Oil Factor”

The price of crude oil seems to be now ‘the factor’ affecting global market sentiments and a downward trend in oil prices may be the answer to a trend reversal in the current market sentiments. This month’s commentary focuses some questions on the oil factor.

Oil prices have risen to record levels in recent weeks, with traders in London and New York paying more than $147 a barrel for crude oil at its peak on 11 July. How much has oil fallen and has this been translated to cheaper pump price for the consumers?
Since July 11th, prices have fallen, dipping more than 20% to a low of $121.34 for a barrel on 29 July. Crude oil prices affect the wholesale cost of the petrol and diesel paid for by the major retailers. The good news is a number of those firms have passed on the lower prices to motorists at their forecourts, including our neighboring country, Singapore. The wholesale price of fuel also fell substantially last week. The price of refined diesel, for example, has fallen by 8.3% since it reached an all-time high on 11 July of $1,241 per metric ton.


Why did oil prices fall?
The perception in mid July that the slowing US economy could trigger a worldwide economic slowdown had clear implications on the expected demand for oil. Countries such as India and China depend on the US, Europe and Japan as major markets for their manufactured goods and services. If demand for their goods declines, as is expected, so too will their thirst for the oil and fuel needed to produce the products. Another factor helping to cut oil prices was on the supply side, where there were indications that tensions were easing between oil-producer Iran and the US over its nuclear program. This reduced fears that the supply of crude oil from Iran could be interrupted. Traders also pointed to news that a Chevron oil pipeline in Nigeria had reopened following an attack on it in June.


Are these the only factors that determine oil prices?
No. The price of oil on the international markets is determined by a combination of forces. There are the so-called fundamental factors of supply and demand which are expected to keep prices high in the longer term. On the demand side there is the rising need for oil from the ever-expanding economies of India and China, which need more fuel oil to run their factories and more petrol for a growing number of motor vehicles. On the supply side, there are concerns that it is taking longer than before to develop new oil fields, an average of at least 10 years, so it is difficult to increase output quickly to meet increasing demand.
This is exacerbated by critical shortages of skilled oil engineers, and the limited investments made by many state-owned oil companies who control the vast majority of the world's oil production. In the even longer term, there are worries that we may be reaching the limits of the world's finite oil resources and that production could begin to fall in the decades to come.


Can these explain the sudden changes in oil prices?
Not really, and crude oil is something of a special case. Oil is traded on futures markets, making it more vulnerable to the kind of speculation that can move prices by as much as $5 a barrel in a single day. According to Dr Manouchehr Takin of the Centre for Global Energy Studies this volatility is caused by oil traders. He says that oil traders are making decisions to buy or sell oil on a minute-by-minute basis, and are much more influenced by rumors and stories than their counterparts trading shares on stock markets. "Perception is the key word here because the fundamentals of the oil market don't change every minute". It is the perception of changes in either the demand or supply of oil that drives and fans market rumors.


Is the sudden drop in prices going to keep going?
Well, it’s hard to tell though measures have been put in place for curbing of oil trades. As the US Dollar continues to strengthen, demand begins to soften, and market manipulation is under a more watchful eye of the regulators, crude oil prices can be on the way down to as much as $70 to $80 per barrel by year end. Except for any other uncontrollable disruptions e.g. tropical storms or geopolitical risks, crude oil prices seem to be heading southwards which is translated to higher consumer confidence and better margins for many sectors of the economy worldwide. Certainly, inflation which is a huge concern at this moment for many Asian economies will ease as crude oil prices fall to sub $100/barrel levels. This will translate into more corporate margins, more money in our pockets and certainly a reversal in market sentiments globally.
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Received 4.5sen Dividend From Genting

Received dividend from Genting - 4.5sen. At this juncture, the best way dealing in bearish market is to concentrate bluechip counters that give consistent dividend. Dividend yielding of more than 7% onward is no doubt a good choice in your selection criteria. This dividend yield will provide a better yield comparing to FD rate at the same time cushion your stock price, it is the best defensive stock that one can consider holding them and lock them in long run like FD. Bluechip that given consistent dividend is a safer bet as these type of counters have solid background which is worth putting your investment money without fear......

Received Final Dividend of 3.6sen and 4sen from Resort and Yilai

Just received the final dividend of 3.6sen from Resort and final dividend of 4sen T.E from Yilai respectively. During bear market is good to source for high dividend yielding stock as a more defensive stock to cushion your losses, it may in turn produce higher return comparing to FD rate in the long run. At current level many blue chips have came down drastically and comparatively the dividend yield looked even more attractive at this level in around 8% - 10% which is far more better than FD rate. This bearish market provide greater opportunity in increasing your dividend portfolio to a larger portion if one is really looking for more. I am still sourcing and waiting as for now no need to act hastily, just be patient and buy in stages at the right time. Divide your bullet in few bucket and lock them in gradually. Till then happy trading.

Bruce Lee - Just For Laugh

Bought IOICORP at RM5.80

Can't resist myself by buying back IOICORP at RM5.80 this morning which i disposed at RM7.15 some months back. Market condition is definitely still in the loom of downtrend due to many factors. Same strategy buying in in stages and keep very long term, this is the approach i am adopting. Happy to see that PBBANK is declaring 30sen dividend again with it 13% increase in profit. It may be tough in coming second half of 2008 in which economy may be slowing down due to global oil price hike, US recession, high inflation rate (abt 6-7%) and political uncertainty. I foresee that market will be drifting down further and the impending increase of interest rate by BNM will be a concerned where, by how many basis points will they implementing ? If it marginal say 25 basis points, i think the impact will not be that great to the market. Hope that this can be carried out in a proper and planned manner compare to increase steep oil price in a sudden without proper planning of curbing inflation by our government.

The Effects of Time

Got time to read this...perhaps? BEAUTIFUL:)

My wife called, 'How long will you be with that newspaper? Will you come here and make your darling daughter eat her food?

I tossed the paper away and rushed to the scene. My only daughter, Sindu, looked frightened; tears were welling up in her eyes. In front of her was a bowl filled to its brim with curd rice. Sindu is a nice child, quite intelligent for her age.

I cleared my throat and picked up the bowl. 'Sindu, darling, why don't you take a few mouthful of this curd rice? Just for Dad's sake, dear'.

Sindu softened a bit and wiped her tears with the back of her hands.
'Ok, Dad. I will eat - not just a few mouthfuls, but the whole lot of this. But, you should...' Sindu hesitated. 'Dad, if I eat this entire curd Rice, will you give me whatever I ask for?'

'Promise'. I covered the pink soft hand extended by my daughter with mine, and clinched the deal. Now I became a bit anxious. 'Sindu, dear, you shouldn't insist on getting a computer or any such expensive items. Dad does not have that kind of money right now. Ok?'

'No, Dad. I do not want anything expensive'. Slowly and painfully, she finished eating the whole quantity. I was silently angry with my wife and my mother for forcing my child to eat something that she detested.

After the ordeal was through, Sindu came to me with her eyes wide with expectation. All our attention was on her.

'Dad, I want to have my head shaved off, this Sunday!' was her demand.

'Atrocious!' shouted my wife, 'A girl child having her head shaved off? Impossible!'

'Never in our family!' My mother rasped. 'She has been watching too much of television. Our culture is getting totally spoiled with these TV programs!'

'Sindu, darling, why don't you ask for something else? We will be sad seeing you with a clean-shaven head.'

'Please, Sindu, why don't you try to understand our feelings?' I tried to plead with her.

'Dad, you saw how difficult it was for me to eat that Curd Rice'.
Sindu was in tears. 'And you promised to grant me whatever I ask for.
Now, you are going back on your words. Was it not you who told me the story of King Harishchandra, and its moral that we should honor our promises no matter what?'

It was time for me to call the shots. 'Our promise must be kept.'

'Are you out of your mind?' chorused my mother and wife.

'No. If we go back on ourpromises, she will never learn to honour her own. Sindu, your wish will be fulfilled.'

With her head clean-shaven, Sindu had a round-face, and her eyes looked big and beautiful.

On Monday morning, I dropped her at her school. It was a sight to watch my hairless Sindu walking towards her classroom. She turned around and waved. I waved back with a smile. Just then, a boy alighted from a car, and shouted, 'Sinduja, please wait for me!' What struck me was the hairless head of that boy. 'May be, that is the in-stuff', I thought.

'Sir, your daughter Sinduja is great indeed!' Without introducing herself, a lady got out of the car, and continued, 'that boy who is walking along with your daughter is my son Harish. He is suffering from... leukemia'. She paused to muffle her sobs. 'Harish could not attend the school for the whole of the last month. He lost all his hair due to the side effects of the chemotherapy. He refused to come back to school fearing the unintentional but cruel teasing of the schoolmates. Sinduja visited him last week, and promised him that she will take care of the teasing issue. But, I never imagined she would sacrifice her lovely hair for the sake of my son! Sir, you and your wife are blessed to have such a noble soul as your daughter.'

I stood transfixed and then, I wept. 'My little Angel, you are teaching me how selfless real love is!'

The happiest people on this planet are not those who live on their own terms but are those who change their terms for the ones whom they love...

Defensive stocks the choice picks

CIMB: Investors should go for high-dividend counters
PETALING JAYA: Stocks with high dividend yields continue to provide some form of protection to investors who are seeking defensive stocks amid the current market and political concerns, said CIMB Research.
CIMB has picked its top five high yield stocks- DiGi.com Bhd, Gamuda Bhd, Public Bank Bhd, Telekom Malaysia Bhd and Wellcall Holdings Bhd.
The stocks were expected to give a dividend yield of close to double-digit percentage and above in financial year 2009 and were rated “outperform”, it said.
In its recent research report, CIMB said: “We believe that the high dividend yields of these companies are sustainable thanks to strong cash flows and balance sheets.”
The report said DiGi is an outperform stock that offers both defensive and growth elements in an uncertain environment.
“We believe DiGi will pay above its free cash flow yield of 7% to 9% in the next few years to optimise its balance sheet,” it said, adding that key catalysts for growth includes potential capital management moves, a positive impact from mobile number portability and a greater competitiveness with 3G.
Assuming that DiGi pursues a net debt and earnings before interest, tax, depreciation and amortisation of 1 to 1.5 times in FY08, shareholders are expected to get a return of RM3.20 to RM4.65 per share.

Despite rising raw material prices and weaker long-term earnings visibility for the construction sector, Gamuda remains an “outperform.”
Given its strong cash support of about RM300mil per annum from its concessions, Gamuda offers a solid three-year earnings compound annual growth rates of 31% and the highest dividend yield of above 10%.
In addition, the sale of Gamuda's 40% stake in Syarikat Pengeluar Selangor Holdings Bhd and 80% stake in Gamuda Water Sdn Bhd estimated at RM1.5bil to RM2bil would result in a potential special dividend.
Public Bank remains CIMB's top-pick thanks to its strong fundamentals that includes a high return on equity of 20%, fastest loan growth, non-performing loans ratio of 1% and the lowest cost-to-income ratio in the banking sector.
CIMB is maintaining a “trading buy” on Telekom as it believes the shares have not priced in the likelihood of a special dividend in coming quarters.
TM is believed it would consider a special dividend after receiving TM International Bhd's loan repayment to TM, said CIMB.
Due to rising production costs, rubber hose manufacturer Wellcall's group earnings is expected to remain strong as there are further signs that major players in the rubber hose industry are outsourcing their orders to smaller players such as Wellcall.
Currently, Wellcall offers more than 11% dividend yield at its current price.
It pays out 50% of its earnings backed by its strong net cash position of RM28mil.
DiGi, Gamuda and Wellcall are in a good net cash position and enjoy robust earnings growth, while Public Bank is pursuing a 100% payout ratio and TM has surplus cash, said CIMB.

Sold PBBANK (1295) at RM10.20

Political uncertainty and market heading south, this trigger my decision in off loading PBB for the time being. Will definitely buy back this giant when it dip, hope that i did not make the wrong decision by getting rid of this golden goose that really lay eggs. Market sentiment is just bad, it might drift down further. Feel a bit uneasy while selling PBB, in fact i have been keeping this giant for almost 6 years. The capital appreciation, bonus and dividends received thus far has giving me an approximately 500% gain if calculation is not wrong, that indeed a handsome gain considering an average of 83% per year. Wow...So, all the best and good luck to you guy. I am staying out at the moment.