The UK Election is coming soon and the stakes would appear very high. If Jeremy Corbyn becomes Prime Minister, the some investors are afraid that the FTSE and the pound could crash by 10%.
Having done the maths, The Rembau Times is now coming with the bold prediction that Labour will form a coalition Government with SNP, sending Jeremby Corybn to 10 Downing Streer as the incoming Prime Minister of the UK.
(Note: To those unfamiliar with UK politics this is considered as likely as Malaysia beating France to win the World Cup. If any pollster predicts a Corbyn as PM scenario, he will likely be fired for suspicion of being drunk on the job.)
We repeat this is totally against all opinion polls that are predicting a Conservative victory. If you follow the experts, it means Rembau Times is dead wrong!
This stunning turn of events would probably shock the financial markets on Friday.
Eventhough Corybn is universally hated by the British public, the UK election this Thursday will turn on something uniquely British – the Weather.
Based on current estimates, the following is the weather forecast during election day.
Winds of up to 100mph are expected to batter the UK with yellow warnings now put in place. More stormy weather is coming – and it will be joined by heavy rain and freezing temperatures on election day on Thursday. The Met Office has put the warnings in place for most of Scotland and the north of England for Tuesday.
This will deter “Old Folks” (50 and above) from going out to vote which will severely affect the Conservative vote count in the toss up parliamentary constituencies. If the weather was not a factor, Boris Johnson’s conservatives would win the election outright with a 10 seat majority.
However, with the weather playing a factor, the turnout for the old folks will be disproportionately lower than accounted for, leaving Labour to triumph in key voting areas on a reduced count.
Our final count has
Labour – 289 seats
SNP – 41 seats
Conservatives – 302 seats
DUP – 10 seats
Sinn Fein – 7 seats
Labour to form a coalition Government with SNP, DUP and Sinn Fein, for a total of 347 seats, 22 seats higher than required to form a majority. The impact on this on FTSE could be quite massive, as many investors are very afraid of Jeremy Corbyn
30 years ago, a benevolent king received back a great piece of land which had been lost for 100 years to a group of foreign bandits. At that time, this king was in charge of another kingdom, which was far bigger and need much of his attention. So he appointed a group of eunuchs to oversee the land until the time was right for him to reintegrate the land to his kingdom.
However, the eunuchs were treacherous and filled with stupidity. They lacked the judgement and wisdom to administer the people of the land and always sided with the rich mandarins who lived in the land. Whenever the people complained, the eunuchs made it appear that their unfair ways was also the same way how the king treated his other subjects, but that was a lie. As the eunuchs and the mandarins grew rich, the people grew poor, angry and began to resent the king.
One day, one of the eunuchs got very drunk and in their drunken state came out with a ruling that upset a lot of people. When the people of the land heard about this, they were very angry and started to protest. But the eunuch kept on saying that this was the will of the king and the people will just have to accept it , while they became even more drunk and crazy. Day after the day, the people appeared to complain but the treacherous eunuch just made silly jokes and paid no attention.
Not long after that, some of the village children who had tried to reason with the eunuch were walking back to their home when a corrupt official, secretly released a pack of rabid dogs to attack the poor villagers. Many were badly bitten, which included little children.
When the village head asked the eunuchs why they had not taken care of the mad dog problem sooner, the eunuchs shrugged their shoulders and said: ‘We cannot shoot the dogs because these dogs are still wagging their tails, so they mean they just want to play.”
The villagers got very angry when they saw their children crying after being bitten all over their body.
They remembered that when they were under the previous bandits, mad dogs were kept in cages. Even though the previous bandit allowed these mad dogs on the land, they only allowed these dogs to bite other dogs, in dog fighting contests. This was illegal but tolerated. However, today not only are they upset with this stupid law, they also have to contend with the mad dog problem.
What do you think the villagers did after that? The End – Phase 1.
The Rembau Times is not pro-China or anti-China, we are anti-violence and anti-stupidity.
3 years ago, China’s Foreign Minister , Wang Yi lectured a Canadian reporter who asked a question during a joint press conference with the Canadian Foreign Minister on the actions concerning booksellers in Hong Kong who were abducted and taken to China.
Listening to that press conference, we agree with the point that China is currently the world’s second largest economy and has managed to lift 400 million people out of poverty – a great achievement.
However, 3 years later, China is now not facing the prickly question of a reporter but the United States Congress and the White House. Even though US is deeply divided the “Protect Hong Kong act” will become law in the United States in 2 weeks and specifically mentions in Section 17 the names Gui Minhai, Lee Bo, Lam Wing-kee, Lui Bo, or Cheung Chi-ping.
Moreover, China has no friends in Washington DC, only politicians who hate China and those who hate China even more. Those who are in charge of Hong Kong’s policy have miscalculated badly.
The question to ask is not whether China can fight the United States or not, because that is an emotional question and the answer is whatever the outcome, there will be many shattered bones, everywhere. One question is where will these bones emerge?
In New York? In London? Or in Wanchai? In Kowloon?In Taipei? In Shenzhen?
The question to ask is why did China hire a bunch of stupid drunken eunuchs to be in charge of Hong Kong and create this problem in the first place. Who was stupid enough to think that in today’s day and age , you can release a bunch of gangsters into a metro station, beat people and then go and pretend that everything is ok. Don’t they know that this will surely get shown on every TV not only in Hong Kong but throughout the world.
That is a question only China can answer.
In the meantime, resolution HR 3289 comes up for a vote next week.
Note: The Rembau Times predicted Donald Trump’s election in 2016 over here and the Malaysian General Election of 2018 over here. Two days ago, we predicted that if things remain as it is in Hong Kong, there will be a chaos. We hope we are wrong.
On the 31st of March 2019, the Civil Rights Human Front (CRHF), a platform for 50 Hong Kong pro-democracy groups, marched from Southorn Playground in Wan Chai to the Central Government Complex in Admiralty to protest against the Hong Kong Extradition bill.
6 months later, Hong Kong is facing a question that has never been answered since its cessation to the British in 1842, – a 177 year old question that the Rembau Times will answer today, and that question is will this end be a typhoon that blows away, a Tiananmen style crackdown or with the Independence of Hong Kong.
In order to understand the Hong Kong situation, we have to choose the right lens in order to see what the total sum of all actions points to. There are two possible lenses to use
Option A This is a protest for greater democracy that will die out as the Umbrella Movement in 2014. It will end when the economic cost becomes unbearable for ordinary Hong Kongers and the country slips into a deep recession.
Option B This is the initial stage before a revolutionary movement for Independence of Hong Kong which will end either like the Hungarian Revolution of 1956 or the French Revolution of 1789 or the American Revolution of 1776.
To answer this question, we need to consider the 2019 protest against the 2014 Umbrella protest which lasted 80 days and has been largely forgotten. From The Rembau Times point of view, there are several big differences between the 2019 Movement and the 2014 Movement, which makes the situation at least much more severe than it was in 2014
The biggest difference are
There is an unofficial Anthem for the movement which legitimises it as a struggle for independence
An active militia has been formed and is gaining training experience
Violence is employed and a stated objective to disrupt Hong Kong’s normal activities
Objective of the movement is to escalate the situation to take it to its logical conclusion
Adoption of an unofficial anthem
The movement has created the unofficial anthem – “Glory to Hong Kong”, which is quickly gaining widespread adoption among the segment of Hong Kong population who see this movement as something bigger than just a protest. This anthem unifies the movement and propels it further, giving them the identity which is Hong Kong is not a part of China, but Hong Kong is a country on its own. At the same time, this also causes the supporters of this movement to reject all symbols of China’s current sovereignty over Hong Kong.
A militia is a military force raised from the population. Over the last 6 months we have seen protesters transform from wearing ordinary clothes to wearing protective gear, much like a “ragtag” army. The trigger for this was no doubt the incident in Yuen Long on the 21 July 2019, where group of thugs attacked unarmed protesters in the Yuen Long MTR station.
Those who don the protest gear are mostly youths, probably in the 18 to 23 category, a similar age category for those who signed onto the American militia under George Washington Esquire, as he was referred to by the British, but General George Washington as he was referred to by the colonies.
Why are the protestors violent? Why do they smash down buildings and vandalise ATMs?
The answer: the need for chaos. This idea was actually explored by researchers who tried to explain why people share hostile political rumors. However, in the case of transforming a protest to a resistance movement, violence seeks to achieve several objectives, namely to increase the cost of staying neutral, undermine the status quo and create anarchy.
Redefining the Existing Power Structure
To people who are disenfranchised, or non-stakeholders , violence expresses the underlying latent emotion of being pushed down in an unequal economic system. Another effect of violence is that it increases the media coverage, which then draws more people into the question. By a simple law of probability and mathematics, the more people are drawn to choose between two sides, the greater the number of latent supporters the movement will engender. The question is not whether 5 million Hong Kongers are against the movement and 2 million Hong Kongers are for the movement – the question really is whether the movement can draw a critical mass of hardcore loyalists to take the movement to its intended conclusion.
The question what the Hong Kong Government should ask is what is this number and whether the movement has achieved this number? Does the movement have 5,000 hardcore loyalists or 50,000 hardcore loyalists? A hardcore loyalist is defined as one who has been involved in more than 3 protests and who dons the uniform. The Rembau Times estimates that the current at risk population of becoming hardcore loyalist is at least 15% of Hong Kong’s population, or about a 1 million people (those 18 to 29 years). To achieve the critical mass of 50,000 requires 5% or 1 in 20 to sign on to the cause. The violence against the police also trains those in the movement to transform from being civilians to a militia, with improvements in logistics and organisation capability. My estimate is that if 10% of the target group become hardcore loyalists, then the movement will continue to its intended conclusion
The worst outcome for the protesters is that if people stay un-bothered. Violence makes people come to a decision, either to support or to oppose. Remember at the time of the American revolution, most New Yorkers were very happy to be living comfortably as a British colony. But George Washington managed to gain critical mass of volunteers, who were derided by the British Military command under the Howe brothers as a ragtag army, but 200 years later is the most powerful military power in the world.
With all the following questions answered, we can now answer this question – what are the objectives of the movement? If one thinks about the question hard enough, the question itself becomes an absurd question. For one, in the 21st century hyper-connected world, a movement may have diverse groups with a differing scale of objectives. Some in the movement want greater democracy, some are anarchists, some want to fight for independence. Each sub-group coordinates through technology to achieve its objective, but the Government, Beijing and the United States Congress will see things from the most visually compelling pictures. Media swarm at the more violent protests because it sells, and this creates a self reinforcing chain of events.
Let us consider this a bit more critically. The question is not a financial economic question, whether Hong Kong will enter a recession, see massive flight of capital and a sell-off in the property and capital markets. That is a given because the movement has attained critical mass.
The question now is what is next.
We give two answers – the status quo and if the Standing Committee of the Chinese Communist Party agrees to follow the Rembau Times advice.
Under the status quo, Mrs Carrie Lam continues to function as the Chief Executive of Hong Kong. As the movement has already reached critical mass, animosity towards Beijing increases and Hong Kongers start to yearn for independence. Rational cost benefit questions are thrown out of the window, the protests becomes more violent and the attacks become more pointed towards humiliating visible symbols of China’s claim over Hong Kong. Public anger in China over these actions leads the Chinese leadership to intervene and the Peoples Liberation Army is sent into the streets of Wan Chai. The skirmish turns more violent, Hong Kong is destroyed as an international financial centre and up to 100 people are killed.
This would probably happen at around January 2020, about the same time Elizabeth Warren takes a commanding lead in the Democratic nomination and openly declares that if elected President of the United States, she will support Hong Kong’s independence. There is exactly 115 days from today to the Iowa Democratic Caucus. China is now facing the threat of a military conflict with the United States and an unprecedented economic disaster.
Rembau Times Proposal
Usually decision making within Chinese communist structure is that those who have the right answer but are not in power will keep quiet until the one in power is completely exposed as being incompetent and removed. Hence, there is little consideration for unorthodox out of the box thinking. By relying on orthodoxy, China may be making the same mistake Japan did in establishing the Manchuko government in 1932.
If China does not want the Hong Kong issue to escalate to the level we have described, which is very probable given our view of the situation, China needs to act now.
Number one, ask Carrie Lam to resign and hire somebody like Michael Tien as the Chief Executive. One of the first things that new Chief Executive, should do is to declare a weekend of mourning over the 8 suicides that have happened so far. During that event he should speak carefully about what has happened so far and outline the human cost that has taken place so far. The thugs responsible for the Yuen Long protest also needs to be arrested and tried. The new CEO must hit the ground running with a lot of intensity, essentially creating a mini explosion.
(Note: Of course, he should have the right advisers who can make him appear more appealing to the people of Hong Kong)
There are many moving parts to this but the idea is a similar idea in how you combat a well oil fire – you light an explosion at the base and the resulting draft sucks out all the oxygen and kills the fire.
Lately, I have been following the “Rants and Bants” YouTube channel, which is a social media channel dedicated to Manchester United. In the wake of Manchester United’s 4 – 0 thrashing at Everton, the commentators did not disappoint those who sought to experience schadenfreude at the expense of the egos of the so called Manchester United stars as they lambasted people like Marcus Rashford as being “simply not good enough” to be United’s No 9.
However, there was an interesting debate surrounding whether or not it was sufficient for players to run around and cover every blade of grass to exclude them from any criticism should the results go the other way. In this regard, the commentator Rants had an interesting point.
Rants’ point was that it does not matter if Marcus Rashford runs around for 90 minutes like “a headless chicken” because what he is interested in is in the end product. Could he hold the ball up? Could he make an attempt on goal? Could he play in Lukaku? Did he score? Rants went on to make a comparison between Barcelona, who make the ball work for them and some Manchester United forwards, who seem to run around with little effect. And that would include Alexis Sanchez, Manchester United’s most highly paid star who does a fair bit of running but to no effect.
Well, what does this have to do with the topic at hand? Its all about critics, and when they are right, and when they are right, even when they are wrong.
Last week, UBS Global Investment Wealth’s Regional Chief Investment Officer, Kelvin Tay, let rip on the Malaysia economy during an interview session with Bloomberg TV. In it he suggested two negative factors, namely
Malaysia had a Current Account Deficit which was 3.5% of GDP
Abolition of GST would make the country more dependent on oil revenue, which could disappoint if Brent prices fall below $70 per barrel.
Immediately, YB Tony Pua, the advisor to the Finance Ministry questioned the credentials of Mr Tay, akin to putting him in the same category as a “kangkung economist” when he correctly pointed out that Malaysia’s Current Account was not in deficit and Mr Tay had mistaken the Budget Deficit for the Current Account Deficit. This criticism was supported by fellow Oxbridge graduate, Deputy Minister Dr. Ong Kian Ming. The error was glaring, and you did not need a Cambridge Masters graduate and an Oxford economics graduate to point out, but it does help the Malaysian Cabinet that we do have such “brains trust” at our disposal.
This error was finally admitted by UBS themselves, who conceded that Mr Tay had made mistakes and regrets any misunderstanding that may have arose.
Round 1 – Malaysia Bahru.
But here is where the Manchester United analogy comes in. Mr. Pua and Dr. Ong were right in defending Malaysia and pointing out the interviewer’s mistake with respect to confusing the Budget Deficit with the Current Account Deficit, but that does not mean a thing in terms of actually contributing to Malaysia’s growth – specifically, in attracting attracting portfolio investment into the country, which would improve our weakening Balance of Payments. Like Marcus Rashford, they ran a lot, won a freekick outside the area courtesy of UBS, but did they score?
Round 2 – The Rembau Times sheds light
Now, The Rembau Times is not completely sold on the idea that Mr. Tay was entirely wrong. He was wrong in terms of the using the wrong term but taken in context, everybody knew what we was talking about. And that is that Government revenues will fall below its lofty expectations this year which would could cause the Government to incur a larger than expected fiscal deficit.
Let’s examine the first argument, which is the abolition of GST would result in an increased reliance in Oil revenue from Petronas and contribute to a larger Federal Deficit.
Based on the following, the Government’s estimated fiscal revenue for 2019 is RM 262 billion (ish). In 2017, GST contributed RM 44.3 billion in terms of revenue, in 2019, the Government estimates 0 dollars. However, the total revenue is expected to increase massively from RM 220.4 billion in 2017 to RM 262 billion. That is an increase of RM 42 billion.
So, what gives? We start with a reduction of RM 44.3 billion in revenue and end up with a higher revenue of RM 42 billion. That is a swing of RM 86 billion!
The sources are as follows
Increase in Sales tax of RM 13 billion and service tax of RM 8 billion, totalling RM 21 billion
Increase in Non-Tax revenue of RM 42 billion, from RM 39.5 billion in 2017 to RM 81.7 billion in 2019.
It is this increase in non-tax revenue, aka dividends received from Petronas, which supports Mr Tay’s argument that the Government revenues will be more “oil dependent”, but which we will qualify further.
Number one, the Government expects to receive RM 56.3 billion in 2019 from its investment stake in non-financial institutions (aka Petronas), up from RM 29.3 billion in 2018 and RM 17.9 billion in 2017. That is more than a 90% increase year-on-year and more than a 200% increase from 2017. The “delta” on this amount alone compared to 2017, when GST was fully in place amounts to RM 38.4 billion, which is comparable to the GST revenue forgone. Petronas themselves have said that they were confident that they could pay an RM 54 billion dividend, comprising of a regular dividend of RM 24 billion and a special dividend of RM 30 billion.
In 2018, Petronas EBIDTA (Earnings Before Income Depreciation Tax and Amortisation) was RM 116.5 billion, on the back of the following production stats
LNG Sales Volume – 28.94 million tonnes
Natural gas sales – 2,777 mmscfd
Crude production – 777 kboe/d
Condensate – 173 kboe/d
If we were to fast forward to today, the key question is whether or not this RM 54 billion is sustainable. By Petronas own statement, they seem to imply that the RM 30 billion is a “one off” dividend, and they probably have good reason to be a bit more circumspect.
Here is where I have a big issue. Mr Tay was slightly off in identifying the price of Brent as being a source of risk to Malaysia, it actually is the spot price of Liquefied Natural Gas (“LNG”).
Based on export data, the total export value for LNG in 2018 was RM 40.1 billion, which was from 24.347 million tonnes of export. (This number will be slightly lower from Petronas LNG sales volume because of Petronas includes sales from international segment which do not count in Malaysia’s exports). This translates to about RM 1,649 per MT of LNG, or about USD 410 per MT. This works out to a price of USD$ 7.9 per MMBtu, lets call it USD $8 per MMBtu.
The risk today is that LNG’s current spot price is only about $5 per MMBtu, so if Petronas were forced by their buyers to switch to spot based pricing, based on a benchmark like Singapore’s LNG as opposed to Brent pricing, we are looking at a revenue shortfall of USD $3 per MMBtu or about USD $4.2 billion. If prices collapse to USD $3, which it could as a whole host of LNG supply hits the market, Petronas is looking revenue shortfall of about USD $7.3 billion. Unfortunately, LNG prices are probably going to collapse because there is just a massive explosion in supply, which could put a bigger pressure on Malaysia precisely at the time when there is a greater reliance on the National Oil Company to plug the gap due to the GST. So Mr Kelvin Tay is may have misfired in terms of using the wrong terms, but he is spot on in terms of raising a risk that has not been adequately addressed by our Cabinet ministers and their advisers.
I share Mr Tay’s concern on the budget projections. Unfortunately this so called “people’s budget” did not really work to shore up Pakatan Harapan’s support, primarily because of a misallocation of resources – trying to pay up on the GST refund in one go when they should have spread it over several years. But I do hope that Pakatan Harapan does well on the economy, however merely shooting the messengers of bad news does not really cut in today’s world.
On 02 January 2019, after the close of business, Apple shocked the investing world when it announced that it was expecting a worse than forecast results for its December year end quarter. During Apple’s November 2018 earnings call, the company had forecast sales of between $89 – $93 billion, or $91 billion as its midpoint, which is frequently used by traders to determine whether or not the company “beat” or “missed” revenue expectations. The midpoint represented a 3% increase in the preceding year’s sales for that quarter.
It later announced on 02 Jan 19 that it revised its sales estimates downwards to $84 billion, $5 billion below lowest estimate of $89 billion and $7 billion below its midpoint estimate. Percentage wise, this was -5.6% below its lowest estimate and -7.7% below its midpoint sales estimate. Its shares shed $15 that day, closing at $142. On paper, that represented a loss of about 10% or $72 billion.
In his letter to shareholders, Apple CEO Tim Cook blamed the decline in sales due to the following factors – (1) slowdown in demand in China, (2) earlier shipments of its top selling premium smartphones that placed the sales in the preceding quarter and (3) the strong US dollar.
Subsequently, on its earning call on Jan 29 2019, Apple gave guidance that the sales for the Jan – Mar ‘19 quarter would come in between $55 billion – $59 billion, with a midpoint of $57 billion. At $57 billion, sales would be -6.7% below its previous year’s sales for the same quarter of $61.1 billion. At the lower end of $55 billion for the quarter ended in Mar ‘19, this would be -10% below its sales for the quarter ended in Mar ‘18. Gross margin was estimated at 37 – 38%.
However, Apple shareholders who did not sell on that fateful day in January were actually rewarded because Apple shares gained a whopping $48, or about $229 billion in market value over the next several weeks. It closed trading on Friday at the price of $190. To give you some perspective, in 3 months Apple increased its market capitalisation by an amount equivalent to the entire market capitalisation of Citigroup and Caterpillar combined. The current market capitalisation of Apple is $896 billion.
Part of this reason was that Apple engaged in a massive media blitz to promote an important corporate event that took place last Monday on March 25, 2019. Many investors were wondering what was it that Apple was going to announce and decided to buy the shares to avoid the Fear Of Missing Out (FOMO) , in case it was something truly special that would send the shares to the stratosphere. Some speculated that it will be a massive new media service, a new product or something that will dazzle the imagination. Few dared to bet against Apple for fear that Apple bull investors will be so taken up by this new service that the stock will zoom ahead to over $200.
So the event last Monday came and went. There was Steven Spielberg and more importantly, there was Oprah Winfrey. This was the reaction by one CNBC reporter:
Apple has been talking up the importance of services to its business on earnings calls for the last two years.
Monday is supposed to be the big coming-out party for new services that would drive this strategy, but Apple does not announce pricing for many of them, including video.
The entire event feels rushed and incomplete.
“Monday’s event was supposed to be the big coming-out party for this services vision.
But if Apple v.3 is going to change the way investors value Apple, they’ll need more answers than Cook gave Monday. Apple was so sparse on key details around its video and news services that it felt like Apple had rushed the event or was waiting on a critical deal that never came through.
Apple introduced Apple TV+, its subscription video service for original programs, and showcased a handful of series starring Jennifer Aniston, Kumail Nanjiani and Oprah Winfrey.”
The only logical reaction to such a letdown would be to hit the sell button. Aggressively and repeatedly. On that day, Apple shares did tumble about $7 to $186, but it regained to $188. This was done on a volume of 50 million shares. However after that day, when you would expect to see a more violent reaction, Apple shares were extremely stable and over the week it was very clear to everybody in the market that Apple had a major support at $188. By support, it means that if the price went below $188, then there will be huge buy orders to bring the price back above $188. By Friday this support level moved up slightly to $188.6.
For example, on 27 Mar ‘19 (last Wednesday), the Dow Jones and the Nasdaq sold aggressively during the morning session, with the Nasday down 90 points at one time. Big tech companies like Microsoft sold down consistent with a volatile session but Apple stock did not budge below the $188 barrier for a long time. When it finally broke below $188, the joy of the short sellers was short lived as the shares pulled back almost immediately i.e within an hour.
When we look at the short sales, it becomes clearer. Short sellers profit when the share price goes down. On Monday to Wednesday, the average short sale volume was about 9.7 million shares. On Thursday to Friday, it dropped to 4.5 million shares.
The reason I think is due to this major $188 support level. What this means is that there is a “big” buy order at $188 per share, big enough to absorb millions shares worth billions of dollars. The order is probably at least $10 to $15 billion in size, which could support about a volume of 70 million shares. Even worse for the short seller is that if the initial support is breached, a new buying order could be triggered that will push the price back up. Only a mad person would dare pick a fight against a stock backed by such strong support levels.
This reminds me of the case of the London Whale, a JP Morgan credit trader in the UK who traded aggressively and made others afraid to bet against him. In the case of the London whale it worked for some time, until it didn’t and JP Morgan ended up with a $6.2 billion loss. Actually JP Morgan was lucky, if things went sour the bank could have gone underwater.
So who could this be?
It is probably not Warren Buffet, one of the largest shareholders in Apple because he had deemed the price at about $171 to be its fair value. And Buffet did mention that Berkshire has no interest in increasing its stake in Apple.
Well, the biggest suspect should probably be Apple itself. Apple is notorious for using its vast cash reserves to buy back its shares. Let’s give an idea how big it could be.
In the quarter ended Dec 31, 2019 Apple repurchased $8.9 billion of its stock. If you think that is a big number, consider that in its Annual Report issued a quarter earlier, Apple could still repurchase $70.9 billion of its stock under its buyback program. This means that Apple entered the Jan to Mar 19 quarter with enough “ammunition” to repurchase $62 billion of its stock. And in case if you were wondering, yes – Apple has net cash (that means cash minus debt) of $130 billion. So it could easily put in a buy order of lets say $20 to $30 billion at a certain price point and still have room to spare.
However, there is a catch to this and it goes back to the 3 reasons cited in Tim Cook’s letter to shareholders on 02nd Jan 2019, warning them of worse than expected results.
(1) Slowdown in demand in China,
(2) Earlier shipments of its top selling premium smartphones that placed the sales in the preceding quarter and
(3) The strong US dollar.
Unfortunately for Apple, factor (1) and factor (2) has gone worse over the quarter.
Slowdown in demand in China
The slowdown in demand in China is not only due to saturation of smartphones but Chinese consumers actively deciding to support Huawei in retaliation to perceived US injustice towards the Huawei CFO. This means that American brands like Apple would be punished severely as it will be considered “bad manners” to be seen with an Apple iPhone in a society known for its nationalistic views.
Earlier shipments of its top selling premium smartphone
This is also bad for Apple as its premium iPhone, the iPhone X would now be considered 2 quarters “old” and not as new as the latest releases from Huawei and Samsung.
To that, we may even add to other factors
Slowdown of demand in Europe and Slowdown in demand in the United States.
In the US, consumer confidence took a hit in February and the overall imports decreased in Jan. This is not good for Apple, as even though Apple is a US firm, the iPhone is actually manufactured in China, which means that it will count towards imports to the US.
This perhaps makes the entire rationale for the rushed Mar 25 event more logical. Apple may have known that it could post worse than expected financial results for the Jan – Mar ‘19 quarter due to the slowdown in iPhone sales. The only way was to try to get the market to think that Apple was now a services company or a media company or a media – services company so that it won’t get punished by the stock market. It also put in a massive support level at $188 to discourage short sellers from entering into positions.
Well all of this is conjecture right now, but we will see over the next several days. If Apple does not come out with any statement next week, then it is safe to assume that sales was between the estimates made, or in the worst case only slightly off. If not, then we may see this:-
Economists loosely define a recession as 2 consecutive quarters of negative GDP growth. The last time this happened was during the Global Financial Crisis in 2008 – 2009.
The question that always perplexed me is why do recessions occur in the first place? Why can’t everything just go on as before.
The general answer is that in times of economic boom, capital aka money is invested in ventures that in the end turn up to be poor decisions. In the 2008 – 2009 crisis, the asset was US housing which became a deep criss due to poor risk management practices by Anglo banks. But that is for another day.
But surely many would say people would have learnt their lessons, right? Err..crypto currencies anyone?
But even though the Bitcoin crash may have caused maybe $100 – $200 billion of losses, it’s no where big enough to cause a recession. But we are actually very close to a global recession this year and following are the reasons why. Also remember that foreign funds have been selling out of Malaysia so these guys may know something.
REASON 1 CHINA , JAPAN AND EUROPE. BUT MORE IMPORTANTLY CHINA.
The first reason is to understand that the major economies, namely China, Japan and Europe are slowing down, more so for China, which had been considered at one time as a source of economic growth. Germany and Japan are probably already in a recession as of late March 2019 due to slumping industrial production.
For China, the “fuel”that could cause a severe economic recession is the unbelievable amount of non central government debt in the country, which is estimated at US$30 trillion. To understand this problem deeper, Chinese banks regularly sell off their Non Performing Loans (“NPL”) to Asset Management Companies so that their balance sheet looks better than it actually is. This year, these Asset Management Companies themselves cannot absorb any more bad debt as they are under capitalised which will cause the NPL in Chinese banks to spike up.
To the Rembau Times, China is currently in a much much worse situation than the US was in just prior to the Global Financial Crisis.
Figures released by the China Banking and Insurance Regulatory Commission (CBIRC) on Friday point to an NPL ratio of 1.89% at the end of last year, with the total NPL’s of commercial banks standing at 2 trillion yuan, unchanged form the third quarter.
“Special mention loans” – or loans considered at risk of becoming non-performing, hit 3.4 trillion yuan as of the end of 2018, compromising 3.16% of all lending by Chinese commercial banks.
– Non-performing Loan Ratio of Chinese Banks Hits Decade-long High (http://www.chinabankingnews.com/2019/01/13/non-performing-loans-chinese-banks-hit-decade-long-high/)
If the trillions of debt is the fuel, the match is Trump’s trade war that could push many companies over the edge. Currently, there is a wave of defaults by corporate and local government borrowers in China. The Chinese banking system is under stress and could topple if Trump goes ahead to raise tariffs to 25%. This is because that will cause a collapse in the Chinese stock market, and maybe bond market as well, which will affect loans made by banks against shares and the shadow banking system.
REASON 2 HONG KONG AND THE PREDICTED COLLAPSE OF THE HKD: USD PEG IN LATE 2019.
Ok this is a piece of news you should know about which is over the past year, the Hong Kong government has spending several billions to defend the currency. If this number starts to increase to $20 or $30 billion then you may see there is the beginning of a massive speculative attack. If speculators can crash the Hong Kong dollar, whose economy is already beginning to face the effects of a slowdown in China and weak property prices, they could trigger a 1997 style crisis. Pay attention to this news as this can be very important.
REASON 3 US & EUROPEAN STOCK MARKETS
Next week will be very crucial as the British parliament votes on Theresa May’s Brexit deal. This risk had been ignored ever since the results of the Brexit referendum caused losses on the world’s capital markets in 2016. If the British parliament rejects Theresa May’s deal the stock market could sell off worldwide. At the same time we have the next round of US China negotiations , which could create negative headlines as China has hardened their position since the last meeting. We have said that we do not expect a deal as we cannot see the Chinese government backing down to the US so easily since they accept as truth that Trump will not dare to affect the US stock market.
After that we have manufacturing and trade data coming out in first week April. So if things go wrong over the next 2 weeks, we could see about 8 days of continued losses on the US stock market. And we have questions on Boeing which may remain unanswered.
Now that is the mystery that people need to understand. All it takes is 8 to 10 days of continued selling on the US stock market to throw the world into a recession. This is because that will affect US consumer sentiment which could send things overboard as we are very close to the edge. For example the Dow Jones slumped about 3,000 points in December over 2 weeks so that could happen again, but if we get 2 weeks of negative news continously.
REASON 4 TRIPLE B BONDS
Currently about half of all investment grade bonds are currently rated BBB, the lowest investment rating grade possible. If we get downgrades of some bonds to below investment grade then there could be pressure in the debt market as people exit these bonds at terrible prices. This will cause losses which will contribute to more volatility in the stock market. So far rating agencies have yet to start to cut ratings aggressively, they will probably wait until the company defaults or enters bankruptcy process before they act. This risk is not yet evident but we will keep monitoring for this.
So these are some things to bear in mind. I think that we will see some big losses on the stock market followed by a little rebound. I personally think the real crash will happen from July 2019 as the Chinese economy explodes. But since first quarter results are getting terrible, the smart money may decide to disappear earlier as there is little chance of continued gravity defying upward momentum.
On Friday, Mar 22, 2019, the 10 year yield on US Treasury bonds went below the 3 month Yield Treasury bill.
To explain what a Treasury bond is, it is basically a debt instrument (aka loan) issued by the US Government. A 3 Month Treasury bill means that the debt matures in 3 months, likewise a 10 year bond means the debt matures in 10 years.
That actually sets the stage for this discussion. First, let me try to explain this in as simple as terms so that elderly people can understand.
The yield of a treasury bond really means what kind of returns investors are willing to receive to buy the bond. So in the example above, investors are willing to accept a return of 2.434% a year if they invest in a 10 year treasury bond as opposed to receiving an interest of 2.464% pro-rated over 3 months, if they invest in a Treasury bill. The difference is -0.032%
That actually is interesting. Why should someone be willing to accept a lower return for investing in 10 years, as opposed to investing over 3 months. For example, one could just keep on buying 3 months Treasury bills over 10 years – i.e. this means that every 3 months they keep on buying 3 months Treasury bills and do so for 10 years and be better off than just buying a 10 year bond?
The reason is that the yield on 3 months bill is extremely related to the Federal Reserve’s interest rates. That is the “big event” you hear about every other time – the Federal Reserve cuts interest rates or raises interest rates. (Technically it refers to the rates at which banks lend money to each other, but that is a topic for another day – like when we have bank failures, but for today lets believe it is the same). The idea is that if there is a recession, the Fed could cut rates to any number, even negative rates, like what happened in Europe. This means that those who had a locked in 10 year interest rate of 2.434% would do better than the poor fella who believed that 3 month rates would remain higher.
By the way, if long term rates do fall to 0, like the case in Germany, a 10 year Treasury bond with an interest rate of 2.4% which was previously traded at $100 will be worth $123. So that is a gain of 23%, which is massive for bond traders, who trade in the hundreds of millions, if not even billions at one go.
Actually, the last point deserves some mention. The daily trading volume of US Treasury bonds is about $600 billion dollars. To put it in context, the daily trading volume for Apple Computers, is about $6 billion dollars. To put this is another context, the total outstanding US Treasury debt is about $21.5 trillion dollars versus the total Dow Jones Market Capitalisation of about $6 trillion.
Ok, now why do people get so messed up about this?
The reason is that this Yield Curve inversion is one of the best leading predictors of a recession. Bond traders are driven by fundamental economic data and do not care how sexy your Amazon, your Apple or any other stock sounds at the moment. They are making the best possible decision using all the available information and not based on algorithmic driven momentum training. When the economic data worsens, they feel that a recession is around the corner and the Federal Reserve will cut interest rates to stimulate the economy. I will explain the last part a bit later. That is also around the time that all these sexy stocks we hear about get smashed down. Netflix is a good example of overlevered cash burning stock , soon to be joined by Lyft and Uber.
So why should a recession matter to the stock market?
Well, this is because a recession will cause the earnings of the Companies to plummet . Some , who have borrowed too much money, may even go bankrupt. The share prices tumble as investors face this bad news. Business investment collapses, so even the strong companies don’t earn as much. Also, the market reaction usually happens very quickly so investors may suddenly find themselves with massive losses within 6 -8 months, as what happened in 2008.
For example, take Micron – one of the leading producers of computer memory.
This is probably the best example of seeing how a recession can totally destroy the share price of a company. This is because Micron manufactures a commodity – computer memory, which is also manufactured by other South Korean companies. When there is a recession, the demand for computer memory may fall, causing all these companies to fight for the smaller demand and undercut each other. The end result – nobody makes any money and all die together. Likewise, when there is a boom, the demand is so great but only few people can supply the goods, so the companies make a lot of money and their share prices rise.
Ok, now back to the last point – why does the Federal Reserve cut interest rates when they are facing a recession?
The reason was because lower interest rates would make banks more willing to engage in riskier lending and so stimulate the economy. But this idea is total crap – as the EU has been in negative interest rate regime for a long time but economic growth was pathetic for the last 10 years. What lower interest rates do is to incentive the large companies to borrow big and buy back their stock. Imagine what happens if they borrowed all the money to buy back their stock at high prices and then the market collapses? Sounds dumb right – but that is a story for another time.
So lastly, is this yield curve inversion a big deal for stock market investors over the near term aka 1 – 2 weeks?
The answer depends on the computer programs that really drive the prices of securities, which in turn drive investor behavior. Literally, if the AI programs believe that people have become more cautious, they will drive prices lower, causing the market to go down. If the AI programs believe that big investors ignore this and are willing to buy up, prices will pop up rapdily. However, this chart is a bit scary. JP Morgan started the week at about $107 and ended up down below $100. The last time this happened, it was in December 2018, followed by a very sharp steep selloff. The AI computers may actually learn from that and start to sell off aggressively on Monday – that is my best guess.
Yesterday the world was shocked to find out with the news that a brand new Boeing 737 MAX owned by Ethiopian Airways crashed flight on route from Addis Ababa to Nairobi, killing 157 people. This is tragic news and comes after the same identical type of plane owned by Lion Air crashed on 28 Oct 2018, resulting in the loss of 189 lives.
Altogether, 346 lives were lost and countless families who are left to grieve the loss of their loved ones.
At issue is a fundamental question of who is to blame. Whilst the NTSB and the respective authorities conduct their investigation, the tendency is to “wait first” until the results of the investigations are released.
However, this would be a fair assessment if these issues were isolated and Boeing retained the benefit of doubt. However, they are not.
More tellingly however were the revelations by an ex-Boeing quality control inspector, Mr. Gerald Lee Eastman in his blog :The Last Boeing Inspector. Unfortunately, Mr Eastman passed away in February 2019.
The issues highlighted by the late Mr. Eastman deserves a full explanation by Boeing and the FAA. This includes complaints raised by Boeing safety inspectors on 787 oxygen bottle squib failures, Boeing South Carolina’s failure to ensure part serial numbers were recorded correctly during production and failing to notify Boeing customers that their Airplane Readiness Log (ARL) lists were suspect as a result of those errors, and the “lost” defective 787 parts that were likely installed on random 787s in service today. (see here) and Foreign Object Debris on Boeing 787 (see here).
The Pentagon themselves had cited Boeing for quality concerns going back over several years (see here).
Thus, I think the decision by Economic Affairs Minister Dato Seri Azmin Ali in requesting that Khazanah review (or in other words terminate) the deal with Boeing is spot on. There are far too many questions raised on safety by this company that can endanger the lives of Malaysians.
The second, a headline from WSJ sounded very different.
So, is there a deal or not? Will President Trump meet with President Xi in less than a month’s time and sign over a couple of papers and signal the US China Trade War to be over?
Let us make it clear who thinks that there is going to be deal. Bloomberg. Reuters. CNBC. CNN. TIME Magazine. FORBES. Virtually every single major news network as well as your local mamak tea stall operator says that the “US and China are very close to signing a deal.” By the way, they were close last week, and they are very close this week.
To be honest, every indication was that this particular deal was considered to be “in the bag” on Friday. That is of course the opinion of many fund managers and short term traders. But I believe a careful reading of the news actually reveals that there is no deal, tariffs are going back up to 25% and we will not only see a trade war, but a military conflict between the US and China within the next 2 years.
The reason is that President Trump’s tweet carries more weight that the Wall Street Journal’s article. The WSJ article is considered a defensive leak by US trade negotiators – meaning that it is intended to protect the progress made so far in the negotiations. The US trade negotiators knew fully well that there was no way China was going to agree to remove agricultural tariff’s immediately so they wanted to “front run” the President by giving the idea that the deal is almost done. This is to make it difficult for President Trump to suddenly flip and declare that there is no deal between the US and China.
Now, why would the President suddenly flip? There are two reasons.
The first is that this was created by the Chinese themselves which wanted to make Trump look very weak by agreeing only to a watered down deal by dragging out negotiations. This is because I doubt Vice Premier Liu He has the necessary clout in China to actually get everything across the board. By the way, Prime Minister Li Keqiang asked the Chinese citizens to brace themselves for tough times during yesterday’s Central Assembly Meeting of the Chinese Communist party.
The second deals with the Trump flip. If recent history is used to gauge the probability of Trump changing tract in mid air, it is as not being as remote as being priced in the financial markets. For example, President Trump walked out on the North Korean delegation during their summit in Vietnam, citing disagreements with Kim Jong Un’s position, even though his chief intelligence officer had warned him prior to the summit not to expect the North Koreans to drop their nuclear arms program.
Another more sinister motive is that the President thrives on chaos and removing the US – China threat so early in the run-up to the Presidential re-elections will remove a major campaign point. Also, there is the spectre of a new Congressional investigations led by the Democratic controlled House Judiciary Committee that could make it more likely for President Trump to face impeachment. The issue that bothers President Trump is not really the stock market, but Mueller, the FBI, the Russia probe and with that, not only the possibility that the President may be impeached, but that he will spend the rest of his life behind bars.
So the President has one of two alternatives. Play nice, go along with the China deal, and perhaps adding a 1,000 points to the Dow Jones Industrial or, put in place the elements that would lead to an open clash between the US and China in 10 – 12 months down the road.
If you consider his latest Tweet on the matter, it is clear that the President is not intending to go through the motions and sign whatever is front of him. In fact, his stated demand is in contradiction with China’s position as reported in the Wall Street Journal article. President Trump asked/demanded the Chinese to drop all tariffs on US agriculture exports in consideration of his decision not to impose an additional 25% tariffs on Chinese exports on March 01, 2019, when the Journal’s article revealed that China has agreed to reduce the tariffs on US imports once Washington removes the tariffs on Chinese imports, and that as part of the trade deal and not a gesture of goodwill.
So where does this leave us?
At the time of writing, Dow Jones Futures are strongly in the green, indicating an open of 26,135 as market participants ignored the Tweet and reacted to the WSJ article. We expect the index to be down 1,000 points by mid-March, as Trump will make clear that he is not going to sign the deal that is in front of him and instead directs additional tariffs to be employed.
UPDATED 8 MAR 2019
Rembau Times is spot on. Dow Jones Futures as of 8 Mar 2019 @ 1030 pm was 25,200 almost 1,000 points lower than Monday when we made the call. US Ambassador to China warns that no date has been set for US China meeting. This was the toughest call we made but currently we are proven correct.
Breaking news: As predicted by The Rembau Times as early as Jan, BN has retaken DUN Semenyih with style. They have managed to overturn ab 8,000 vote deficit to win with 2,061 votes.
The result is nothing short of a disaster. PH even lost the postal vote, with members of the police voting for in a BN 3:1 ratio. As it stands, PH is in deep political mess.
For BN, Tok Mat’s formula of winning over the older Malay vote with Najib winning over the youth vote is proving a winner. Tok Mat is extremely pragmatic, speaks very well and has executed a perfect strategy to sew up the Malay support as early as possible. Judging by the current progress, BN can win the vote outright in Peninsula Malaysia and form a Government with either Warisan or PBB.
For PH, the writing is firmly on the wall : A one term Government that may be deposed within the next few months if there is no peaceful transition to Dato Sri Anwar Ibrahim.
There is no guarantee that things will improve under Dato Sri Anwar but there is certainty that things will continue to deteriorate politically if Tun Dr Mahathir remains in power. Given the candidate is from Bersatu and Tun campaigned hard for this byelection, the result can only be intepreted as a vote of no confidence by the Malays on Tun Dr Mahathir. What makes this loss even worse is that Pas President Dato Sri Hj Hadi Awang had actually stayed away from campaigning and indirectly thrown his support behind Dr Mahathir.
So will things improve under Dato Seri Anwar? Well, hopefully he can stop the bleeding by sacking Waythamoorthy , Kula Segaran and the flying car Minister from the Cabinet. There are also other things that can be done quickly to halt the decline. And he could enforce some discipline among Ministers with respect to their relationship with the civil service. Until that change happens, PH will continue to bleed support and be confirmed to a premature exit.