Buy on Dip or Wait for Double Dip?

Major causes of recent dip

1) Greek crisis morphing into a European crisis
2) Fears of China over tightening
3) Investors think that new financial regulations are not well thought out and too harsh
4) European liquidity and counter party risks re-emerging

What we think, and would do
1) We think that while we should be ready for a double dip by buying some put options on existing important long positions,
2) And that the end of this period of risk aversion should be quick
3) Keep a close eye on the spread between the Overnight Indexed Swap rate and the 3-mth LIBOR which is an important measure of risk and liquidity levels in the market. A high spread indicates a decreased willingness to lend by major banks. Normal spread is approx 0.10% and has spiked up to 0.28% recently. During the 2007-2009 crisis, this indicator had spiked to a high of 3.64%. If you can read this email, you can keep a good track of it here:
http://www.bloomberg.com/apps/quote?ticker=.LOIS3%3AIND

Macro Strategy
Do you remember when it seemed so obvious to be long risk? Fed was on hold, inflation was low, and the economic data continued to improve. Goldilocks was back and 2010 was supposed to be a good year for risk and selling volatility.

Friends - fun has turned to tragedy. The Greek crisis morphed into a European one. China tightening fears are taking a toll on equity and property markets. Financial regulation is frightening investors to take cover in fox holes. One of worst memories of 2008 was the funding crisis reflected in the OIS-Libor spread. This is turning ugly once again. It is not so much about liquidity this time as it is about counterparty risk.

For investors the choice after the recent correction in risk is rather digital. Do you buy the dip or position for the double dip? The answer to that is rather simple. Do you believe ISM sinks to 45 and claims go back above 550k and the US in on the verge of a second recession in 2011? If not then this week is likely to be an inflection point for risk.



If risk bottoms out, safe haven bond markets are vulnerable. Maybe it is a tail risk or maybe it is not, but a meaningful bear market in bonds seems possible if the buy the dip thesis proves correct. The weakness of the buy the dip thesis is that it minimizes the downward negative spiral dynamic. Weak growth, declining sentiment, deflation, and deleveraging are all self-feeding leading to a possible second leg of the banking crisis. Markets are giving this some delta now, but the real concern is that when policymakers check their tool box, they will find it bare. Fiscal policy spent, rates near 0, QE does not work.
Mr. Macro is taking a straddle position here. The advice is to reduce but not totally eliminate double-dip hedges. Buy puts on the Reds as a way of having an option on potential normalization and a reduction of safe haven premium. If forced to decide what happens and forced to get off the fence, the most logical outcome is that the risk off phase ends rather sooner tha later. History tells us risk aversion events are quick, not prolonged. So if risk off ends, then normalization could begin as a theme for the summer. That does not mean that the double-dip is ruled out, but markets may want to wait for some evidence about the downside of ISM and Ifo and the outcome for US unemployment claims before fully embracing that thesis.

Whether the normalization trade proves correct could be as simple as understanding the dynamics of OIS-Libor. That is the most important barometer because of the implications for the cost and availability of credit more broadly to the economy.

US Market View

Good News:
Oil USD70/BBL, financial reform bill not as tough as exp., Goldman Sachs likely to have settlement with US regulators, Germany approved USD1tr PIGs bailout package

Bad News:
Roubini says that US can drop a further -20% or Dow at 8,000.

Comments:-
Thanks to Roubini, an economist. His point is right, Let's bring the DJIA drop, so those missed the bull on last wave, can buy at this time. Good JOB!


THanks!

BLR(Base Lending Rate) 6.05% p.a.

Bank Negara Malaysia's (BNM) decision to increase the Overnight Policy Rate (OPR) by 25 basis points on 13 May 2010.

Base Lending Rate (BLR) from 5.80%p.a. to 6.05%p.a. with effect from Tuesday 18 May 2010.

CIMB.KL - 1Q10 Results, Within Expectations

 Reiterate Buy, TP RM8.00 — Maintaining Buy/Low Risk (1L) rating on CIMB Group Holdings. Our target price of RM8.00 values the stock at 2.5x FY10E P/B (midcycle: 1.8x). Although loan and CASA growth are behind targets, management believes momentum will improve in coming quarters. Management guided that lower than expected credit cost (60bps target) and strong IB pipeline provide room for positive revision in ROE target of 16% after 2Q10 results.

 1Q10 earnings +4.4% QoQ, +36.5% YoY — Net profit of RM838m in 1QFY10, accounted for 24% of our full-year forecast of RM3.47bn and 25% of consensus RM3.35bn. ROAE was 16.4%, ROAA 1.38% and BV/share RM2.92 (adjusted for Bonus Issue) as of 1Q10.

 Earnings drivers — The YoY improvement in earnings came mainly from: (1) Corporate & IB +103% YoY to RM236m due to more buoyant capital market; CIMB Niaga +265% YoY to RM423m on strong operational growth and gains from sale of

AFS bonds; and (3) Consumer Banking +9.5% YoY to RM127m. But Treasury & Investments -30% YoY to RM333m due to lower investment gains. On QoQ comparison, CIMB Niaga was main profit driver +85% QoQ, but Consumer Banking -55.6% QoQ as there was a RM110m GP write-back in 4Q09.

 Loan and deposit growth — Gross loans +12% YoY (adjusted for FRS139) with Malaysian consumer loans +15.6% YoY while CIMB Niaga +32% YoY (RM terms). Deposits +6.8% YoY lifted by CASA growth of 20% YoY. CASA ratio 32.2% vs. 31.7% in Dec 09 and 28.7% in Mar 09.

 FRS139 impact — Gross impaired loans +55% to RM11.5bn under FRS139, resulting in gross impairment ratio of 7.5% (1 Jan 10: 7.6%). Allowance for impairment losses +37% to RM9.26bn with impairment allowance coverage of 80.5% (1 Jan 10: 80.6%). Credit cost improved to 40bps vs. 56bps in 4Q09.

Greek Government Bonds Maturing over 2010-2012

Date                  term                  rate                 amount (EUR BLN)
19/5/2010          10-years             6%                 8.5
20/5/2011            3-years            3.8%               8.6
18/5/2011           10-years           5.35%             6.6
20/8/2011            5-years            3.90%             6.8
20/3/2012            5-years            4.30%             14.5
18/5/2012            5-years            5.25%              8.1
20/8/2012            5-years            4.10%              7.8
Total                                                                   60.9


Be careful on these dates. It could be big downtrend.

IOICORP : Slow Growth, but Trading at Premium?

Despite the recent selldown, we think IOI Corp is still pricey at 20x forward earnings, which we think is at the top end of the PE range in a post-bubble environment. This is despite IOI Corp being the world’s most profitable planter, generating USD2255 per mature hectare. For exposure to integrated planters, we prefer Singapore-listed Wilmar International (Neutral TP SGD7.00), which is larger and yet cheaper than IOI. Investors betting on a rebound in palm oil price should buy an inexpensively valued, upstream heavy player such as Golden Agri (Trading Buy, TP SGD0.635), the stock price of which tends to react better to an upswing in palm oil price.

Malaysia : Majority Plantation Stocks very expensive.
Singapore/Indonesia :  Majority Plantation Stocks in Indonesia trading at cheap valuation.

Recommendation:-
Underweight Malaysia Plantation, Focus on Indonesia Planter...It could give you better return in long run.