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Decided to make adjustments on the way I blog & share due to time constraints and other commitments. In the coming weeks you should see them. Short updates but more frequent & concise.

Monday, November 14, 2011

AA-MAS Deal: Rakyat are The Only Losers

This is a follow up on a previous post dubbed: I once suspected (with numerical evidence) based on Dali's argument that MAS will require some form of bailout from the government like most govt initiated "national project" on the basic of debt servicing. This time they the govt really had it going with tax payers money on the run.

"Let me put some numbers into perspective. The cost of buying these new aircrafts will be approximately RM23bil spread over 5 years (RM4.5 bil/year), MAS has RM2bil in borrowings but only RM2.2bil of cash. For the last 5 years, MAS's profit minus loss after tax is -RM500mil. Now you tell me how to save MAS? Just die la, like Proton and most GLCs you are a national liability not an asset."

That was some time ago and what do we have now? An AirAsia-MAS deal in which everyone calls it shady. MAS’s lacklustre financial performance in recent quarters and if you ask me for the past decade had resulted in the share swap between MAS and AirAsia on August 9. GLC Khazanah takes on a 10% stake of AA in exchange for a 20.5% in our national airline. This essentially means Tony Fernandez (TF in short) is able to sit on the MAS board. TF is certainly happy as his local rival Firefly is now gone with the wind and will probably close shop sooner rather than later.
"Tan Sri Fernandes has admitted that one of the contributing factors for Tune Air agreeing to this deal is Firefly. Firely a low cost airline of MAS covering the domestic sector, was stealing its market share. Out of every three Firefly passengers, two were from AirAsia and one from MAS. 60% of AirAsia's revenue comes from the domestic market, so Firefly was a threat."

On Nov 3, Bursa Malaysia and the SC is probing this deal for a possible insider trading but this is a "wayang kulit" show laaa as explained by Sakmongkol (will be difficult to understand if you are attuned to Mahathir's political life):

Anyway my story here is to tell folks that this very apparent 'shady deal' has ramifications for consumers. With budget domestic flight competition soon striped away, AA has virtual monopolisation. And as many would know by now, monopoly means no competition hence fares won't go cheaper from now on. In Malaysia you see similar monopolisation for example TMNet and Astro Binariang. The lack of competition will lead to inefficiency and eventual decline in the fortunes of a company when the competition comes, as it inevitably does. Some may argue that this deal is in response to the flight industry liberalisation in 2015 whereby Asean airlines will have unrestricted access to airports within the grouping. But how can you marry loss making MAS and profit making AA? Like a Hollywood love story in the making. Will Ananda Krishnan's daughter marry a Chow Kit drug addict? Highly unlikely. Again we just want to *SAVE FACE* by helping the ailing national carrier.
Maggie Wu Ya Xin 吴亚馨 is a model from Taiwan (born 8 Oct 1983).
I do not favour investing in companies with loads of debt and GLCs and is a reason why I totally shun away from putting any form of money into the aviation industry whether it is for short term gain or long term basis. My strategy is simply to avoid debt laden companies (D/E ratio) as part of my risk mitigation. Consider the below DE ratios (the higher ratio the more debts it has vs capital):

Malaysia Airline System: 1.477 with net profit in the red (in the RM millions range).
AirAsia Berhad: 2.039 but net profit of over RM1bil.
Thai Airways: 2.204 but also earning money over RM5bil.
Ryanair Holdings: 1.101 
Southwest Airline: 0.649 
Cathay Pacific: 0.713
Singapore Airline: 0.153 (the only one standing apart from the rest)

MAS airline is the only airline in the list that is bleeding and limping. But both airlines: *AA and MAS face a lot incoming debts*, the deal has to happen. The problem with MAS is not because of competition, nor high fuel cost (which is frequently being reported by the media). MAS is not making money because of political/govt interference in the management of the airline. E.g. SkyChef catering biz of the airline is linked to a relative of a govt personality way back in 2006. I bet the other services like maintenance, vendoring supplies to etc are now all linked to cronies some way or another. Will this deal spread the cronyism disease AA management side one day? This is MAS's benefit.

Why is this deal so important for TF?? TF is making a huge gamble to be in the business with the government. He used to be competing with MAS which was easy in the first place hence most of AA's profit is within the country only not overseas. Now he wants to take on the big guns. Read this article carefully: As of 31 March 2011, based on data from their 1st Quarter report, AA’s capital commitments stood at RM 19 billion. With that announcement, another RM 54 billion is needed and now roughly RM 75 billion will be spread over a 15 year period ending 2026. Short to say, AA needs to earn as much as Thai Airways does right now, a whooping RM 5 billion per year to meet these dues. Now consider this, for the last 5 years, AA only managed to grow its profit 10 fold  from ~100 million to roughly 1 billion. Second, it's cash holdings has grown only x6 in the same 5 years but its debts has x7 from 1 billion to 7 billion. To me it is unsustainable, borrowing more money on top of money, a bubble in the making. Where does the money come from then? Khanazah...which is of course from us taxpayers la. Win-win for both of them and Kanneh the rakyat will most likely end up as the losers. Government should stick its hand out from the business sector. Now I will suspect that *both* will come and "Minta Nasi". Sien lorrrrr.
Maggie Wu

Saturday, November 12, 2011

I Love Coffee, Do You??

I recently purchased a coffee brewer by the name of BrewStation Deluxe by Hamilton Beach. It's about $60, it's programmable and the ability to make both hot coffee and iced coffee. Pretty fantastico stuff I have. Here are the product features:
1) 12-cup coffeemaker with enclosed brewing system and no need for a carafe.
2) 1-handed dispensing; 4 brew cycles; brew-pause function; thermal-lined insulation.
3) Large digital clock/timer; programmable for "wake-up" coffee; auto shutoff.
4) Permanent Gold Tone filter and water filters included.

Hamilton Beach BrewStation Deluxe

Have used it twice, so far have not seen any problems with it apart from when it is brewing it makes some water pumping 'noise', it's not loud and you won't be able to hear it from your kitchen to your bedroom. It does not drip when you dispense the coffee which is neat!! It keeps the coffee warm for hours but not roast it which is cool!! It generates a splendid coffee aroma throughout the house after brewing which is tempting!! Overall I love it for now, let's see how difficult it will be when I wash it each month.

Now to ground coffee. I purchased the Equal Exchange Organic Coffee, Breakfast Blend type as you see below. Some history, EE was founded back in 1986 (my birth year) and is the oldest and largest Fair Trade coffee company in the United States. What the heck is Fair Trade coffee? It is coffee which is purchased directly from the growers for a higher price than standard coffee. The purpose of fair trade is to promote healthier working conditions and greater economic incentive for producers. Fair Trade certification began in the Brazil in 1988 in response to dropping coffee prices in the world market. The supply of coffee was greater than the demand, and since no price quotas had been reimplemented by the International Coffee Act,the market was flooded. Fair Trade certification aimed to artificially raise coffee prices in order to ensure growers sufficient wages to turn a profit. This is why the 12-pound bag cost me *$9.99* in the first place!!
Equal Exchange Organic Coffee: Breakfast Blend
This is *STRONG* coffee be warned. I love strong coffee, REAL coffee. All you need for coffee tasting is just your nose, your mouth and your throat.

Aroma: Toffee. 
Flavour: Not overpowering hence balanced.
Mouthfeel: Smooth, not too harsh.
Acidity: Bright which makes the coffee taste really strong. Got ommphh!
Aftertaste: Bitter, the finish is good and leaves a dense feeling.

Overall: Truly a breakfast blend. One that will get you upright pumped and ready for the day.

Thursday, November 10, 2011

Dangerous Times We Live In

Zhang Li 张俪 (born 8 Jun 1984) is a model and actress from Guilin 桂林, China.
Markets have been wobbly in recent weeks no thanks to the Eurozone debt crisis by the PIGS. Read this interesting article: you have President Obama who was at the G20 summit (obviously) giving some notion that US banks who have a tiny portion of stake in some of these debt laden European countries would require some form of bailout help. Again we see America digging a bigger and bigger hole, how is that possible? Why can America (and not any other country) afford itself to keep printing money from spandex or electronically and will it ever lose its currency's value?

This is where the Feds come into picture. The most important regulators are those taking care of the financial system as they are the ones who will determine how freely (liquidity) and safely (disposition) the credit flows. The U.S. banking system is ridiculously complicated and the top dog of regulators is The Federal Reserve regulating the bank holding companies like Citigroup and state-chartered banks. The Fed's actions are independent and therefore the Chairman can easily be considered the *second most powerful man* in America!!

The Fed's creation can be traced back a long time ago during the Panic of 1907 and was finally passed as an act in 1913. What the act said was that it gave the Fed permission to create an "elastic" currency, one that essentially means the ability to expand (print) or shrink (take out from circulation) the money supply as needed. Hence their two powerful roles: Lender of Last Resort and Dictating Monetary Policy. The Feds power was clearly demonstrated when the financial crisis and recession of 2007-2009 came about; printing money to lend to all (which is for bailouts), slash interest rates and buy up tonnes of bonds.

Malaysia's Central Bank (BNM) is similar to the Fed but with *one key* difference that we are not able to print the Ringgit at will (please do not believe our pig headed dumb ass ruling party politicians) because we are not a global currency. The ringgit has little value outside our national borders as no other country uses that for their reserve currency. The U.S on the other hand, has the Fed to issue the U.S Treasury securities and conducts Treasury security auctions and there are always buyers. And who buys them? Other countries...China holds ~28% of U.S debts followed by Japan at ~20%. U.S debt is projected to be at 100% of the GDP (the total size of their economy) by end of 2011 which is ~15 trillion dollars. All I can say is that debt to GDP ratios are irrelevant (I'll talk more in another posting). E.g. Greece had 130% and collapsed. Japan is at 200% and is in safe fiscal position.
Back to the issue. Why does the USD still hold the demand. 1. It has value 2. Intl accepted payment for G&S 3. Huge liquidity in the world financial market and 4. Been in the radar and is engraved in the world's trading infrastructure. Our Ringgit fulfills not of that and is why we can't simply print money, it will devalue it tremendously and quickly. This is also the sole reason why the U.S is a consumer driven economic country. Foods and goods are cheap because they are priced in the US dollars. Consider this:

Gas prices in the US is cheaper compared to any other country because they do not suffer from converting their own currency to the dollar (only true for countries that are weaker compared to the USD). In Europe most countries pay anything between $7 to $10 per gallon (mostly due to heavy tax). In Msia we pay about $3 per gallon but that is after subsidies. This is true for all imports which are paid in dollars and only true for the United States. And for all goods that are made using oil and gas which it mostly is, everything will be cheaper in the States. Other countries have to first change their currency into dollars to settle their balance of payments on imports and exports. This is the main advantage of being a reserve currency for the world and sadly America is abusing that state by printing more money every year and then.

Yes, of course the $$ can lose its value one day but what's the cue?? Two possibilities I can think of, one that the market decides not to use USD to price commodities. E.g. imagine when the oil players OPEC decide to use something like Yen instead. Second, that the US one day might be totally unable to repay its interest of its debt/default. You saw this year's US credit rating downgrade from AAA as the politicians bicker amongst each other. The consequences from this would be catastrophic: hyperinflation, big loss of USD value, shocking rise of interest rates, unemployment; practically an end of a nation just like Greece. The best indicator IMO is to look at the *Foreign Currency Reserves* which shows the USD declining slowly but gradually.

As of Q2 2011 (most recent report), there was a record $3.28 trillion in foreign government reserves held in dollars. This represents 60% of total measurable reserves, down from Q3 2008, when dollars comprised 67% of reserves. Since the percentage of dollars is slowly declining, this means that foreign governments are slowly moving their currency reserves out of dollars. In fact, the value of euros held in reserves increased from $393 billion to $1.45 trillion during this same time period. 

Source: IMF

Because I am following the 2012 Primary Debate in the US, one particular Republican candidate by the name Ron Paul intrigues me. 

His stance that US has been overspending and he wants to end the Fed. As mentioned the Fed answers to no one, they don't face audits, nobody can question their actions, they are not accountable to the US Congress as well. Why is the Fed so dangerous? Money in the US now comes into existence via debt which is then used to create more debt. The Feds make funds (from thin air) available to the US government to overspend, instead revenue should be gotten from direct taxation. Whether he is right or wrong is itself another posting and is also a difficult question to answer. It's more or less an Austrian economics vs Keynesian economics. Folks and experts have been debating on this for decades. I'm an Austrian believer and I believe free market pricing is better than interventionism (which is exactly what the Fed is doing; distorting the market value).

What's to look at in the near future? Italy and Spain is on the verge of unable to service their debts. Because Germany and France (the biggest economies in the EU) won't have enough money to bail both of them out in addition to save Greece, only the US can step in to help. US banks have stakes in these countries though only a small fraction of it. The US can be tempted to save them because if Europe goes into recession US economy will falter just as they begin recovery. If they decide to help guess who needs to print more money: *the FEDS*. Dangerous times we live in which is why I wrote this post in the first place :) Next I will post on the AirAsia/MAS debacle.