Wild Wild West

                                                                         on March 27, 2011

She's so mean but I don't care. I love her eyes and her wild wild hair.

Dance to the beat that we love best. Heading for the nineties.

Living in the wild wild west, The wild wild west.

             
                        Quoted from song lyrics – Wild wild West

                        Written and performed by Escape Club

To acquire or to be acquired is not the question. What is central to agenda for everything imaginable is to earn profit or lose in future.

Taiwan financial sector – Beehive of M&A activity in future

Hoopla over a future shakeup in financial sector arose lately. Banks in Taiwan will receive new abacuses as the government is reckoning a new round of consolidations in state-run and privately-owned financial holding corporations (FHC), or the FHC M&A with domestic financial institutes.

Expressing a stance towards more market-oriented mechanism in the so-called 3rd-phase financial reform, it strives to turbo-charge progress to shore up bank balance sheet and step up bank foray into mainland China . In 2002 during former DPP administration, Taiwan mapped out FHC laws to allow establishment of 14 FHCs, under which the gamut of operations comprises insurance, securities and commercial banking.

The 2nd-phase structure retooling was initiated in 2004 to slim down financial institute number within a limited timeframe and reshape the industry into a rise of FHCs. But the results were notoriously ropy due to a series of scandals involving corruption, political bribery and insider trade. The streamlining pitted banks against each other, extracting enormous money from bank coffers to grab a new ownership in others. A total of 56 financial institutes in 1997 consisting of regional S&L and insurances firms were scaled back to the current 37. But none of their market turfs has been large enough so far to achieve over 10%, and the aggregate branch cluster was amplified from 2,729 to more than 3,200.

A handful of market raiders pocketed windfall income by launching hostile takeover scheme, initially scooping up a targeted financial stock under QFII accounts and then unloading holdings to their subsidiaries at higher price. Together with increased voting rights, that outsized price discrepancies assisted them to rake in fat income booked in a gray area of income statement. Activism was especially boisterous in securities sector, forcing a bevy of small-sized securities houses to be marginalized or fall into extinction by cannibalized effect. That was a grim reality amid a market saturation coupled with cut-throat competition, by which board ousters found themselves not in a good position to bargain on prices and finally buckled under a proxy fight.

There were also unexpected mergers for state banks being snatched by a leveraged buyout powered by internal capital of listed firms at the expense of shareholders equity. After the pruning done, market activists galvanized their assets to be put on the block again without government meddling. There's one inadvertent area most ignored, - they fired workers left and right, helping cranking up the island's jobless rate. Truly to say, the market must be straightened out by a friendly M&A or tender offer, not by an ugly looting. Though convicted of price scalping or breach of trust, the raiders mostly remain at large with some still appealing their cases to the court and some enjoying teaching at colleges.

To some extent, Taiwan financial sector is like a hodgepodge of participants and those who bore down rivals got the goodies, but didn't reinvent the sphere. Through their power of eminent domain, a few of FHCs have taken advantage of regulation arbitrage by reallocating capital to land risky assets such as offshore high-yield derivates in 2008, artificially stimulate their own affiliate shares and fund those housing developers. While the government pitched regulatory overhauls often, it had opted to side with entrepreneurs juggernauts in a tendency that will repeat itself, no matter which political party is at the helms. A shrinking number is to no avail and has little if any impact on the creation of new economic activity or employment.   

Plan to lift bank capital by M&A

The government may be sitting on the right side of the world by exercising a renewed consolidation move, so ambitious as it may seem that it will face challenge, albeit not definitely doomed for a failure. The same holds true for current 37 banks which must raise their capital in future. The Basel III Accord stipulates that the minimum Tier 1 capital requirement for banks is to be raised to 6% from 4%, and the minimum common equity requirement be upped to 4.5% from 2%, both set to be effective Jan. 2015, with the former to rise to 8.5% and the latter to 7% if the contingency fund is set at 2.5%. Statistics shows that as of June 2010, 15 domestic banks saw their Tier 1 capital requirement stand below 8.5%, with 6 of the banks being linked by government. To meet the new Basel standard, the said 15 banks must enlarge capital by USD2.8-3.13 bn ahead of 2019.

The restored idea for financial industry reshuffling is announced to go forward on the principles of transparency, legality and selflessness. However, as was often the case in controversial policy matters in the past, there are varying characterization of decision makers' intent and even different interpretation of key terms and concepts that foster potential misunderstanding. Their mottos will be subject to change if condition warrant, since what they voiced is a bit ambivalent. Though government remaking attempt is still in an early or undecided stage, lack of detailed clarity for how it follows the principles will irk bankers, not to mention bank employee who might be agitated about losing a job. They must be well situated to take up the gauntlet, regardless of what it may come as a false alarm, or plunder and blunder.

Insider trading fueled by M&A 

To activate the future financial M&A in a fair and transparent fashion, the government is said to mull over plans to urge FHCs to gain approval for M&A in advance. Despite their struggling efforts, a whiff of M&A rumors might be leaked by insiders. When it comes down to valuation, things will get more complicated as to who will set the tone for the prices in the marriage among FHCs behemoths.

How far the government can ward off insider trading is a head-scratcher. Those who allegedly involved have never been punished to what the society can generally accept. Market players have been active in seeking inside news to make hay. A pump-and-dump action took place long before M&A talks which were later proven much ado about nothing. Few will finger the mole in listed firms, let alone taking the stand for an insider-trading trial for violating the confidentiality.

Even worse, officials were not blamed much for the lapse. Publicly-traded firms were also seldom accused of making their financial showings flattering after stock prices rocketed. Regulators unconcerned with aberrant events such as proxy fight seemingly only pondered drafts that pandered to lobbyists and corporate largesse which sometime pounded out upbeat news favorable to price riggers. It did happen that an officially commissioned examination on those delisted found that in the lead-up to a collapse they used various accounting gimmicks.

It's tremendously sad to raise questions about the number of officials also joining into the hype. Unfortunately, there isn't any immediate magic pill or panacea to wipe out the wrongdoing, as the government seems to run out of ammo. What we're still experiencing is the conspicuous lack of market disciplines over corporate news release. To erase their gratification, trading of a specific stock can be suspended prior to any major event rollout, noticeably related to valuation of a scheduled M&A.

A third independent party, better a global well-known underwriter, will be fit to pick up the slack to deliver the metric of closely-watched value, and quell suspicion about divesting state assets at distressed levels. Further, it may help ensure a success to raise fund overseas to meet new Basel ratios. Banks should ramp up global publicity by undertaking offshore roadshows to offer ECB or GDR in int'l markets that include China. If to inflate banks capital size is govenremnt ultimate aim, M&A is not the sole resolution and overseas fund raising is another way to consider. However, that's a sure thing for local FHCs in future to net proceeds overseas at cheaper cost and gain easier access into global markets, once their capital sizes and financial ratings improved marvelusly.

Which will be on the watch list of M&A targets?

State-owned FHCs would handily get a go-ahead but private ones might confront an uphill fight against divided insiders. But uncertainty will certainly loom in investors mind regarding the candidates willing to jump out of the block in future integration, given the fact that domestic banks scored the highest-ever pretax income of NTD183 bn in 2010. A bullish vision of widening interest rate spread leading to another knock-out year in 2011 is also in the cards. Since profits rebounded resoundingly last year and dividend payout will be disbursed in a larger manner, most ot them will tend to take a muted response.  

Domestic banks started to weaken in 1998 and inked a sizable loss of NTD104 bn in 2002. A year later their results zoomed back into black, then in 2004 hitting a record high of NTD155 bn income, which however was halved in 2005 due to financial upheaval goosed by credit and cash card loan defaults. A global financial tsunami in 2H08 further knocked out big portion of profits.

What the government can do to accelerate the gear lies in a fruitful M&A in state-owned FHCs sector where sacrificial lambs are needed, thereby to be modeled by private FHCs and other financial institutes. The new round of M&A library reportedly will be mainly focused on state banks. Much is riding on hope that quasi-state Chang Hwa Bank and Waterland Financial Holdings, which will reelect board members in late 2011, will be the first batch to explore respective merger plans. The government has actively racked up its stake in Waterland apparently for purpose to redo its management.

Jih Sun, Ta Chong, Cosmos and Entie, the four private FHCs with nearly half of interest held by foreigners or private equity funds, are now being touted as potential acquisition baits. Cashing-out from their partners will be likely on the surface following their enticing profits last year, thus making them much more manageable targets. However, the speculation may be unjustified as their Taiwanese shareholders would be cloaked under the umbrella of "foreign investors" to polish corporate image years ago. 

Push to set sights in China market

Rosy prospects lie ahead for bank stocks, now deemed as lucrative China plays underpinned by ECFA effect. Amid fear of missing a bonanza, they have flocked to  China these past 2 years in lockstep with manufacturers' massive west-bound flights. A Taiwan legislator, visiting Shanghai in early Jan. opined that Taiwanese banks in Yangtze River Delta should organize a Taiwan financial zone in Shanghai as a base from which they can flourish in vast China market. Lately, Taipei and Beijing have agreed to create a platform supervising cross-strait banking as soon as possible, hopefully by June at the earliest.

Perhaps time had run out on Taiwanese bankers in forging inroad into China . It is a late-to-the-game mission by over 10 years for them, who pale in comparison with Chinese peers in global assets rankings. Taiwan Financial Holding is the largest and most profitable FHC in Taiwan with total asset close to NTD3.25 trillion, a threshold for being qualified to be categorized in global top 100 banks. The fact reflects that domestic banks are not big enough to challenge world supremacy in banking filed in China. To tie the knot with Chinese bank, albeit not a surely permanent bliss on shaky cross-strait political ground, appears as feasible lifeblood for Taiwanese bank there. Also, it's expected that banks can see bread-and-butter work pay off if awarded an investment trust license which entitles them to tap into fiduciary, securities, venture capital and consumer banking fields.

Is that what you've got?

Apart from coaxing Taiwan banks into joining a west-side party and resuming M&A, policy makers likely have no Excalibur to jumpstart a banking sector growth at present. That's a marathon, not a sprint, for banks to march toward the unknown Chinese territory - it is all about endurance and motivation. 

If there's a state bank merger adding to layer of jobless pressure, then that is orchestrated to ease government burden in pension fund or retirement benefits. If that is the case it wishes for, then the government should be downsized first, alongside state-owned enterprises. Ask yourselves a question: why does China Petroleum Corp. always lose grounds in rivaling Formosa Plastic? It deserves a notice that the government should play a role as a profit generator for banks, as well as lay out what is needed to turn rhetoric into reality.

Financial innovation and Chinese buying on "T" shares

For years, we have been sick of repeated rhetoric to drive the island into a regional financial hub. In actuality, odds favored Taiwan to attain that end in the past, with a strong backdrop that it is a high-tech island chock full of manufacturers and listed firms. They require financial tools to cover hedging and trading in FX market and global investment. Innovation and promotion of financial products by local financial cohorts can be credentials as measures to update their hedging, or at least their knowledge to escape the pitfalls framed by overseas bankers' selling baskets including a ponzi scam.

Financial derivative is not a tormenter itself, but a cure to avoid risk. Rather, what could be the culprits to mess up global financial system derives from ailing quality of underlying assets and associated market liquidity condition. The reasons Taiwan hit a wall before can be partly traced to a still tight FX control and a non-globalized currency, NTD. As is a widely-perceived wisdom, a cap in personal outward remittance is not meaningful in a sense that those who demanding that will use nominee accounts. It's time to pull the plug on that control.

The government should embrace a laxer, or laissez faire attitude to be on par with HK and Singapore. The latter could become offshore RMB center after China's largest bank, Ind. & Commercial Bank of China, opened a RMB processing center there this month. In its move to internationalize RMB, Beijing has created an offshore version of the currency, called the CNH. Singapore is one of 8 countries with a swap line agreement with China, set at 150 bn RMB (USD22.8 bn). Meanwhile, Singapore bourse has continued its USD8 bn takeover bid of the Sydney bourse.

Taiwan should not meander by a wait and see mode in face of the dynamic forces driving development among global exchanges M&A. It can play a catch-up game along with China to form a new stock exchange that trades both-sides stocks, or more encouragingly, allowing Chinese to directly buy Taiwan shares classified as "T" shares denominated in RMB. Taiwan banks can act as clearing house and custodian bank, a step to beef up their profits. An already-strengthened political tie will cause the plans to be plausible, bringing cool back to Taiwan stock market which, after all, hasn't yet fully reflected Chinese investors' craving for the island. Meanwhile, Taiwan banks may also glow under China shadow to keep pace with Singapore as one of offshore RMB centers.  

That will be a long way for Taiwan banks to build a solid footing in commercial banking area in China, but private banking looks promising. Because some state-run banks represent major brand names in Taiwan, and because their stocks had shown much more vigor to defy gravity recently, the government makeover intention in the industry, if put into practice again, will have investors place bullish bets on the counter in future.

Taiwan stock market - On the ropes

Despite bouts of negative news related to Japan nuclear crisis and western military action against Libya, bulls rope-a-doped bears this past week, reiterating a pledge to keep faith in Taiwan stock market which ended at 8,610, up 216 points WoW. Volume was anemic as shown by a cautious tone among mom-and-pop investors. The market outstanding margin loan, an indicator of retail investors' risk/reward appetite, barely bulged to nearly flatline at NTD301.6 bn, up slightly by NTD452 mn WoW. In the aftermath of Japan quake on Mar. 11, the loan languished from NTD315.8 bn, meaning that worry about a pull-back was percolating among them.

Last-ditch buying from foreigners who posted a net buy of NTD12 bn Friday prodded the market to record a winning streak of 5 consecutive sessions. But a plethora of domestic bearish economic reports would signal potential market capitulation. Taiwan's export orders edged 5.33% higher YoY in Feb, the first disappointing, single-digit growth in 16 months; West-bound investment in China totaled USD1.82 bn in the first 2 months of 2011, rising 33.29% YoY, while China invested USD6.9 mn in Taiwan, down 77.8% YoY in the period; Jobless rate in Feb. surged to 4.69%, up by 0.05 pct from Jan., ending a 6-month string of declines yet skidding by 1.07 pct from a year ago.

The worst might be yet to shine on the export segment on the heel of Japan quake, as Taiwan imported 20.7% of goods from Japan which is the mainstay of tech material supplier to Taiwan. The quake and tsunami could cost Japan as much as USD308 bn, more than doubling the level in 1995 Kobe quake. The lingering crisis of nuclear plant will cast additional doubts about Japan's economic momentum, with its snowballing effect over Taiwan remaining as the spotlight for market's every twist-and-turn in future.

Rough ride might be in stores for Taiwan market which is due for a technical breakdown next week. A shortfall of volume, failing to confirm a bullish implication for last week corrective rebound, is suggesting market hesitance to climb the wall of worry. Against the weaker fundamental and technical circumstances, the market will be vulnerable to any depressing event. Chance for it to retrace last week gains is not ruled out, while significant overhead will still rest at the area over 8,550.

Good Luck !

You've got a friend

                                                                                    ---- March 20, 2011
When you're down and troubled and you need a helping hand.  

And nothing, whoa nothing is going right.

Close your eyes and think of me. 

And soon I will be there to brighten up even your darkest nights.

You just call out my name, and you know wherever I am.

I'll come running to see you again.      

Winter, spring, summer, or fall.

All you have to do is call, and I'll be there.    

You've got a friend.

If the sky above you should turn dark and full of clouds.

And that old north wind should begin to blow, Keep your head together.  

And call my name out loud,  and soon I will be knocking upon your door.---          
    
     Quoted from song lyrics - You;ve got a friend                                                                   
     Written by Carole King and performed by James Taylor

Digging up global economic trends at present isn't so easy as usual, as Old Man Winter is sure making it hard to figure out what's going on in the world. A series of pro-democracy moves across the N. Africa and Arabian countries had played havoc with economic data. The seismic shift in Pacific Rim, as-yet unknown outcome of Japan nuclear crisis and western military action against Libya further darken visibility of global economy. The world's domino effect has taken hold. There are several grave concerns for us to face:

Domino one: Global divergent trends in nuclear plant policy

One is a recurring theme of environmental protectionism. The 9.0 quake on Japan eastern coast and subsequent tsunami that impaired Fukushima Daiichi power plant prompted the countries using nuclear power to reevaluate their systems. For years, the world has regarded the energy as cornerstone for countries vying for resilient earning profile and success in global competitiveness.

The US, contending for retaining its world's No.1 economy, is said to plan a quintupling of its 104 nuclear plants amid a belief the industry will grow in prominence as oil supply will decrease in decades. Meanwhile, still sticking with its nuclear program, France plans to provide electricity to German in 2050, but has pondered restriction to help set up nuclear plants overseas. The countries now weighing ceding nuclear projects include German and Switzerland, and it's clear that who poses threat to the world's safety while shrugging off a nuclear crisis.

Consumption of the energy must be reigned in, as price will be paid on any botched nuclear plant. Most remember all too well about incidents of 1979 Three Mile Island and 1986 Chernobyl plant in Ukraine. To some extent, a damage of plant is self-inflicted. It might be the occurrence due to our excessive spending which phases out nuclear plants at a faster clip. As the old adage goes, people have spent money they didn't have, to buy things they didn't need, to impress people they didn't even like! There'll be time to pay the piper. Why on earth do they turn on the light after leaving offices at nights? The answer probably is for security or coverage of burglary and robbery insurance. One thing is certain that no one can resist romantic ambiance radiating from illumination in city skylines of Paris, Rome and Manhattan .  

Domino two: Taiwan's raging debate on nuclear plan

In the wake of meltdown of Fukushima Daiichi plant, Taiwan officials look unfazed to pledge its establishment of No.4 nuclear plant on this choked and cluttered island, an inhabitation environment akin to Japan. With backdrop of fewer factory installment and paucity of infrastructure project, ramping up power supply is quite disturbing, skeptical to those green movement supporters who lack a significant political weight. Taiwan is equipped with a 28% surplus of spared electricity capacity, whereas domestic electricity demand supplied by nuclear plants hits only 18%. The striking gap might fuel another round of raging debate about whether No.4 plant is exceedingly required.

The disastrous quake has sent Japan into a deep limbo, not in the least of which is rampant anxiety that a contagion effect of nuclear fallout will spread through the Globe. Taiwan may proffer plans to venture into wind and solar power spheres, with feed-in subsidies offering to developers. It's time to take a serious hiatus from the nuclear energy sector and let it slide towards oblivion in the world. You can run, but can't hide away from a nuclear plume of radioactive material.

Domino three: Disruption of Japan economic activity

Most analysts seem to sell the ideas that the quake will deal a modest blow to Japan GDP generally reassessed to be cut by a 0.5 pct from a previously estimated gain around 1.5% this year. Economic revival will arrive in latter part of 2011 as Japan rebuilds. Japan, the world's 3rd largest economy, is responsible for roughly 8.7% of global GDP, based on IMF. Even assuming a flat Japan GDP trend, global GDP will slump by a mere 0.1 pct to 4.2% this year, barring a full-blown nuclear catastrophe or other calamitous events. On an even brighter side, a bank juggernaut on Wall Street tipped that its forecast figure of Japan's economy will be barely budged. More sanguine is that the US could receive a "mild boost" to GDP as it runs a USD60 bn trade deficit with Japan. It is calculated that US' exports to Japan account for only 4.7% of all US goods exported.

Their unruffled hopes for Japan economic climate is relatively underestimated. Japan is a highly open economy interconnected with global counterparts. Its woes will then have widespread ramifications to regional and emerging countries, where it long spread its footholds. Japan's outbound investment is expected to dwindle in favor of its future reconstruction. A reassuring assumption of GDP, which is "domestic" one, may belie its influence on global economy. Regional countries lately were stunted by languishing tourism and consumption powered by doughty Japan shoppers, not to mention a ripple effect against global logistic system and supply chain.

Japan in 1995 suffered a fatal earthquake in Kobe, a city west of Tokyo, pushing most of leading makers to relocate production lines to currently-ravaged NE part. If the resettlement proven to be a failure, supply of key IT component to assemblers in ex-Japan area will be delayed and disrupted. The setback will also cast a pall over global electronic output and pent-up demand. Apple is reportedly victimized that its just-in-time products will be postponed with earnings dislocated. A quick fix is certainly a bounty to those emerging markets, yet the unfolding trouble is worrying, not just to economy but also human health. Civilians have evacuated the nuclear-ruined area which might be deserted and shunned by investors for years.  

Domino four: Disorder in global financial market

in a tone appearing to soothe investors, newsletters from foreign banks and securities houses in large conclude a limited economic affect. But funds exposed to Japan have met redemption frenzy, with calls for cashing out ringing up before next wave of depressing news. Plus, as recovery could cost more than USD186 bn, or about 3% of its GDP, repatriation by Japan institutional buyers in offshore funds gained tractions.  

Japan is the 2nd largest foreign holder of US Treasury bond, and there's a risk that  fixed-income markets will be shaken by typically aggressive Japan insurance buyers who may be forced to become net sellers raising cash to oblige claims. The damage bill for Japan insurers has been estimated at up to USD30 bn. But some dismiss an imminent liquidation, citing a firm showing in the aftermath of Kobe earthquake in 1995, in which Japan investors didn't dramatically lighten up but actually strengthened appetite for US Treasury bond.

However, after digging into historical data, one can reexamine their assessment which is mainly reviewed to blunt what could have been a snowballing effect of a lack of faith, or system risk in global financial system. Japan this time around will likely limp back to normal status and withstand hardship at a slower, sluggish pace. By comparisons, the island nation in 1995 raked in GDP and GDP per capita at USD5,244 trillion and USD41,807, while last year the figures stood at USD4,724 trillion and USD32,600. The unfavorable differences carry a bearish outlook still clouded by the nuclear radiation threat. 

As in most of the cases, there'll be always something, be it exogenous or endogenous, that allows folks and analysts to reactively assign reason to the rhyme, and make assumedly reasonable comparisons with isolated, past-tense events. They don't intend to neglect the quake's lingering impact, much less a spillover effect from their clients who may close out positions in droves. An exodus will slice their arrangement or annual administrative fee, etc., thereby they skewed comparable basis in comments. A relatively calm valuation noted in their fine-print newsletters to clients can be understandable.

A wild card in global forex market loomed after the USD-JPY pair last week saw JPY scale a record high against the greenback in Asia. The eye-popping appreciation of JPY was attributed to repatriation of foreign assets by Japanese firms and unwinding of carry-trade. A G7 statement about coordinated intervention drove down JPY a bit last Friday. While Japan downplays the need for the joint action, a further weakness of the pair will definitely crimp price rivalry for the export-oriented nation. A global continued forex conundrum will be likely morphing into a trade dilemma of sorts.

Domino five: The Chrysanthemum and the Sword

The world is now facing the worst nuclear crisis since 1986, as Japan lifted the Fukushima Daiichi INES event rating to 5 and placed the emergency on par with the 1979 incident at Three Mile Island power plant. The Chernobyl one in 1986 was rated at 7. Prime Minister, Naoto Kan of Democratic Party of Japan, is pressured by salvos for his failure to improve situation in the quake-stricken area.

Japanese are variously described as rigid and adaptable, submissive and resentful of being pushed around, loyal and treacherous, brave and timid, conservative and hospitable to new ways, according to Ruth Benedict in her 1946 research - The Chrysanthemum and the Sword. Being rigid in their behaviors, Japanese seemed not so disconcerted by current crisis. The West might get worry about Japan political road ahead after the crisis is resolved to an inevitably bitter end. The country has been changed by natural disasters before and not always for the better, as reflected by 1923 earthquake that eventually led to military rule. It's hoped that Japan can undergo a true two-party system where the veil of sensitive political issues can be lifted.

Each country needs a do-over from time to time, and Japan will likely rip up its prior political picture and craft a new one with a single aim: Instilling renewed business in restructuring. However, what's deeply rooted in western mind will be a mighty Sword reemerging out of a traditional "shame Vs. guilt" culture. In some countries, spent fuel rods are reprocessed and plutonium, produced during nuclear fission, will be dumped. Japan , viewed frugal with a valuable resource, mixes the used plutonium back into new fuel rods. Doubts gain grounds that reactor 3 fuel rods contain a higher backlog of plutonium, resurrecting caution against Japan's ambitious bid capable to produce atom bomb by using key material, plutonium, should situations demand. Japan's future rebirth action will be watched under strict microscope, much as its political landscape.

Taiwan stock market: In a state of flux; "No-fly zone" over 8,550 for bulls

Global stock markets have coped with double whammy - Japan's struggling efforts to rein in nuclear radioactive leak, and escalating tensions in Libya and Mid-East. The UN authorized military strikes on Libya last Thursday and martial law was in effect after violent crackdown in Bahrain .

Taiwan stock market last week plummeted 173 points to close at 8,394, well off its weekly low of 8,070 seen Tuesday. Helping form a V-spike reversal pattern in daily time-frame came from jumps in last two sessions, as oversold constructions roared back on Friday amid rumors that the new luxury tax draft will be shed. Nevertheless, the pattern looks less meaningful judged by its outsized volume on Tuesday versus average daily volume. The outburst of volume was up by nearly NTD30 bn from NTD129 bn registered on Monday, indicating renewed interest from day traders and stock scalpers. Odds for a stronger bull-run will increase if the low was accompanied with significantly declined volume, a sign of sellers' fatigue and stable market liquidity.

The lower shadow of 324 points in weekly candlestick would suggest a short-term floor was put in place verging over 8,000 after heavy sell-off since early Feb. Typically, a bottom consisting of a "W" formation, not a "V", will ooze more decisively-bullish omen. Yet, there is no reason to be stubborn and just let the market tell us where the bottom is. A case for it returning to the vicinity to retest support is not ruled out in near future. Up to now, the market is seemingly short of upbeat scenarios involving positive gamma and deep-in-the-money chances for longs. The solid resistant band between 8,550 - 8,700 will be a short-term effective "no-fly zone" for bulls. Questions about market ability to decouple from recently negatively-biased news still remain intact, particularly in face of latest foreigners' relentless dumping. 

Rushing to cash in on disaster, or quake-concept shares is foolish and irrational. A panic sell-off only serves as bottom-fishing opportunity to pick up cheaper big-beta and big-name stocks ridden with decent prospects. Not against all odds, one can manage to profit from rehab-related shares for get-rich-easy chances, but that's "against the God" from a folly scrambling to buy salt or iodine pills to stave off nuclear radiation.  

Strategy: Adopt a risk-aversion attitude

Clearly, no news is good news, or no evil news is better at the moment. Recent deluge of unexpected events are hard for analysts to chew on. Just at a time when global investors are ready to get comfortable with risk and indiscriminately embrace stocks, nuclear disaster and war jittery are back on their radars to make them realign portfolios. Things appear to be heading into the right direction as we expect a cool-off in Japan nuclear crisis. But corporate profit outlook is exactly the opposite, and is about to log a lackluster, far less-than-expected growth at least for 1Q11.

We can avert risk by taking a neutral stance and focus on capital preservation in a murky and elusive market phase. Risk-chasing buying impulse can't push equities higher, and isn't necessitated right now. But a human risk will lurk behind being recklessly wasteful in natural resource. Science brings welfare and fortune to the human, alongside potential misery misguided by its greedy and profligate nature. The nasty genes will accordingly trigger war affairs propelled by jockeying to control resource, and man-made mishaps such as nuclear crisis.

A butterfly flipping its wings in Japan or Libya has already kicked off a repercussion effect on global stock markets. Corridors on Wall Street will not be sparse in coming months, now that western power has showcased its muscle again to oust its currently major enemy, Gadhafi, by bombarding Libya. The West might take the news in stride, as the attack just confirms what many have been already assuming. Whether bulls or bears will roam on the streets will remain as a puzzle for a while. 

"Risk is a choice rather than a fate."   "The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us." -- Quoted from "Against the Gods" written by Peter L.Bernstein.

Help Japan ! They need friends to console their spirits ! ……

Leaving on a jet plane

 - --- All my bags are packed and I'm ready to go,

       I'm standing here outside your door.

       I hate to wake you up to say goodbye.

      But the dawn is breaking, It's early morning.

      The taxi is waiting, he is blowing his horn,
      Already I'm so lonesome.

      So kiss me and smile for me, tell me that you'll wait for me.

      Hold me like you'll never let me go,
      Cause I'm leaving on a jet plane.

      Don't know if I'll be back again, oh babe I hate to go. ----

                  Quoted from lyrics of song – Leaving on a jet plane

                  Written and performed by John Denver

I am not leaving my blog, though. I still want to practice writing in English.

Taiwan Airliners – Phoenix Flying out of Ashes

Patience was finally rewarded toward Taiwan airliners whose rehab efforts paid off significantly last year, in which a record high of nearly 30 mn people traveled to or from Taiwan, 19.5% more than in 2009.

In terms of tourism trip, about 57% of the 9.42 mn outbound trips by Taiwan citizens started with travel to China in 2010, while 14.6% went to Japan. Total tourists visiting the island hovered to 4 mn in 2009, jumping to 5.57 mn in 2010, and hoping to top 6.5 mn this year. It is worth a notice that Chinese tourist arrivals mushroomed rapidly since both sides inked a tourism agreement in July 2008. Last year , 1.63 mn Chinese tourists flew to Taiwan, up an annual clip of 68%. Taiwan has boosted daily quota for incoming Chinese tourists to 4,000 persons from 3,000, and may raise it to 5,000. An upcoming greenlight to allow individual Chinese to travel around the island will add boon to the airline industry.

The increased air traffic enabled two major int'l airliners based in Taiwan, China Airlines (CAL) and EVA Airways, to perform like a phoenix rising out of ashes last year, in which CAL registered NT$138 bn in sales, up 40% YoY, and EVA posted NT$104 bn, up 42%. Their margins in net profit, ROA and ROE as a whole bounced back to the black as of Sep. 2010. Under the breakdowns, CAL raked in 10.20%, 2.01%, 7.57% gains: while EVA, 20.39%, 4.12%, 14.33%. Their respective EPS took off for the banner 2010, as CAL hauled in NTD3.01 versus a yearly loss of NTD1.04 in 2009; and EVA, NTD4.82 from a loss of NTD1.14. The results were deemed heady, especially after together suffering red inks from 2007 to 2009 in a row.

At present, there are 370 direct flights per week across Taiwan Straits, a number said to be far shy of demand. Additional destinations to China cities will be inaugurated to capitalize on the bumper cross-strait tourism, in a hopefully blistering pace to stave off the headwinds the two airliners will likely run into in 2011–firmer fuel prices and relatively higher comparable bases in earnings.

As much as 2 mn Taiwanese currently have presence there, and of course will return to the island but mostly for festival holidays. To flee the island aiming for bonanza in China will speed up, affected by the already-effective ECFA and the Free Trade Agreement between China and SE Asian countries. With this tariffs advantage, relocation idea and attempt to tap coastal, or hinterland China markets have been unanimous by Taiwan makers of all stripes apparently rushing to jump on the bandwagon. More business trips will benefit the aviation operators in the long haul, making them deserve a status to head the watch list for “buy on dips”, though a problem of capacity shortage remains.

Inflation – Elephant in The Room ?

The specter of import-driven inflation has spooked Taiwanese, as 70% of their consumption is supported by imports. Global food crisis and spiraling commodity prices were blamed for a proposed 8% hike by state-run Taiwan Sugar for its own-brand lineups’ price tags. The move, reportedly forced to be taken begrudgingly earlier but waived afterwards, is much expected to ignite a land mine, bringing about an unavoidable across-the-board  price pickup in fuel and foodstuff.

The government initially responded with a muted note, overlooking that as an elephant in the room, given the fact that the CPI growth rate in Jan. perched at its comfort zone below 2%, sliding 0.01% MoM and climbing 1.11% YoY. Government also urged end-users to coordinate to ward off the inflation woes, wording it had worked to counterattack by whittling down the import tariffs for wheat, flour and milk products for a 6-month period. Further, a withering USD was witnessed to be welcomed to warrant a weakening import cost.

News came as a surprise on late Thursday night that waves of criticism pressed the cash-rich sugar producer, which stashed NTD12.7 bn profit on its bottom line last year, to scrub the plan. The shift of policy earned it an applause. However, a whiff of fresh inflation momentum has been  spread islandwide, following words from another profitable state-run enterprise, China Petroleum, not to freeze its fuel prices. Food makers and bakeries have found it difficult to pass along rising cost when needed to retain their shoppers. In some cases, a mildly growing inflation means an economy is out of the woods, as funding demand is pushed higher. But the phenomenon is not arriving at Taiwan door at the moment yet.

The government still mulls a payroll hike for public servants who might think the inflation worry is simply a small fly on the ointment. Generally speaking, the widening inflation pressure will whack the most the well-being of the financially-squeezed, debt-ridden underprivileged, and the employed who failed to get a lift in wage these few years. Taiwan can not shun worldwide mounting inflation alone, but to probe importers’ illegal hoarding of commodity is necessary. Plus, a stipulated rule requiring state firms in existence to stabilize retail prices must be fully carried out. Said by people: "There is no time like the present living condition worsening by a sweeping outburst in the inflation of entire supply chian, except wage."

Even worse, people are situated to meet a creeping-up of new premium rate by Taiwan National Insurance Pension Fund, which covers those not insured by major national benefit, security systems, from 6.5% to 7% applying from Apr. 1, 2011. The total premium will ascend by NTD4 bn, sourcing from 3.9 mn people who are vulnerable to inflation spike. The increase, so to speak, is designed to help wipe out deficit of national coffers partially. Outstanding national 12-month-plus debt rocketed sharply in Jan. to NTD4,578 bn, up by a whopper NTD105 bn from last Dec. and marking averaged debt burden of NTD208,000 per capita. Currently, a number of 3.6 mn Taiwanese whose monthly income stands below NTD30,000. Among them 1 mn received less than NTD20,000 each month, a threshold for barely getting their heads above water.

The net number of new plants reached 342 in 2010, a turnaround from the declined number of plants by 1,316 in 2009 and 489 in 2008. It is good news anyway. But, when local business activities resumed on Feb. 07 after lunar new year holidays, filings for job searching with an on-line site vaulted tenfold to 80,000 cases from an prior averaged daily level. The most available vacancy positions were seen in non-tech sectors - catering services and marketing. The reported pile-ups coincided with official upbeat release that domestic job chances far eclipsed demand. As a race to look for a job heated up, things are  certain that Taiwan fertility rate landed into a record low last year along with a whimper among the poor already.

Taiwan Stock Market – Bears on The Prowl

Taiwan stock market headed for a stumbling start after reopening Tuesday, whipsawed by a drastic selling frenzy. Optimism waned so unexpectedly, in a sharp contrast to pre-holidays, broad-based wish for anther winning streak to revisit the widely-watched 10,000 mark. Steep downdrafts by bellwethers both in electronics, fret over profit erosion by stronger local currency, and over-heated financials, sent investors packing. The extent of the downturn was in part accentuated by eagerness of local brokerage houses to execute sell orders placed for hedging actions against still-floating options. Foreigners hustled for the exits by dumping a net NTD42 bn these past four sessions. Local institutional traders also jumped the ships to wind up last week's wild trading at 8,609 points.

A short-lived technical rebound is due next week, only to form a distribution pattern around the 8,400 level. Trading will be light, so any data surprises, including a rerun of exodus by foreigners, could provide wider swings as bears seem to have retaken the dominance. Just say good-bye to the 10,000 points that may be reclaimed someday, if economic conditions warrant. Believing by government the glass is half-full and 2-year-long rally is bona fide is fine, but a possibly-downbeat bias in private spending and living cost make it a different story. The shockwave triggered by a weekly 536-point free-fall will have folks waver, wondering when bulls will wake up from their hibernations and which way the wind will blow in near future, both fundamentally and technically.

All on Board !

Here is what captains are speaking – "Welcome on boards of CAL and EVA airlines for destinations to China cities, and please fasten seat belts as turbulence will occur in the sky over the island that might encounter ballooning Taiwan makers' departures and volatility in stock market.”

If you are leaving on a jet plane for a flight away from Taiwan, please book the tickets of CAL and EVA to keep their fortunes afloat. In future, we should calmly wait for a return of the masses seemingly unwilling to depart earlier amid a lemming rather than crowded-out effect. They hated to go away from sweet homes for a lonesome journey, as I think. Truly to say, few will part with this beautiful island for a long while, will you? 

Good luck, and have a nice trip on vacations!

Here comes the Sun!

                                   ----- Here comes the sun, here comes the sun, and I say it's all right

                                            Little darling, it's been a long cold lonely winter

                                            Little darling, it feels like years since it's been here

                                            Here comes the sun, here comes the sun, and I say it's all right

                                           Little darling, the smiles returning to the faces

                                           Little darling, it seems like years since it's been here

                                           Here comes the sun, here comes the sun, and I say it's all right -----

                                                   Quoted from lyrics of the song – Here comes the sun

                                                   Written by George Harrison and performed by the Beatles 

Don’t get me wrong. I am not a weather reporter.

With the arrival of lunar new year of Rabbit, an animal said to be jumpy and skittish, stock investors are even placing bigger bets that the market will continue to shine, furthering its rise to grasp the psychologically-critical 10,000 mark on a bevy of positive news both domestic and overseas.

Claiming an extended run for 5th consecutive month in Jan, bulls seem to have long grabbed the upper hand as the market wrapped up the lunar year of Tiger at 9,145 points, a 32-month peak. Optimism is so rife that it can churn higher after resuming trading next Tuesday to repeat a traditionally marvelous feat. In the first outing for each of previous two lunar new years, investors rejoiced at upbeat numbers it achieved. 

Glass Is Half-Full: Improved Employment and Consumer Confidence

The glass is half-full, as voiced by Taiwan government expecting better time ahead for 2011. It opined that local economic recovery is taking on a finely-balanced, sturdy disposition both in export and domestic segments. An official also put a positive spin about Taiwan stock market described "more accurately" as a decently-undervalued laggard as compared with its global peers.

In 2010, the island clocked an upwardly-revised GDP rise of 10.47%, a double-digit high unseen since 1988, mainly due to the explosive export and industrial output last Dec. The GDP growth this year will be however pegged at a slower pace of 5.03%. Most notable prediction comes from a breakthrough to USD21,229 for Taiwanese annual per capita income, albeit the last one among Asian Four Little Dragons to hug a level over USD20,000. Also, healthier shape in global and emerging countries' economies, along with widely-watched enforcement of ECFA (a China-Taiwan free-trade framework agreement), will catalyze an extension of robust export.

As to domestic consumption, it is projected to soar 3.73% this year, up from 3.43% in 2010 and an evidence that economic pick-up is well in place. More people are anticipated willing to open their wallets to spend, partly on the back of improved unemployment rate which stood at 4.67% last Dec and is planned to be checked under 4.9%. A crop of 520.000 people are out of works at present, with the level programmed to be trimmed by 100,000 this year. There is some silver lining to the clouds of this beastly jobless figure as official data indicate the multiple of effective jobs supply over those qualified leapt to 1.3X from a low of 0.6X hit in global mortgage crisis couple years ago. The tide has altered, after latest tough years we've struggled through. Bravo !

A palpable sense of optimism pervaded among foreigners, who overall posted a net buy of NTD90 bn in Jan. They had raised targeted upside of Taiwan market index over the 10,000 mark in general. The most rosiest picture is to paint a muscular charge to 11,200 points. A heavyweight foreign house reportedly on Feb.10 is slated to realign again its index weighting covering emerging markets, with more added to Taiwan bourse. The shuffling, if finalized, is speculated to pump more-than-NTD100 bn into the island, a reassuring blessing to the market in the long run.

Concerns Remain: Annoying Inflation and Public Debt

The market’s more optimistic view is understandable, yet investors have to rethink their euphoria a bit. Domestic banking liquidity decelerated in Dec. when M1b money supply grew 8.77%, representing a 10th straight month of declines. That means the potential capital flow into market would have stalled. Inflation pressure, another prevailing bête noire of the jobless and low-income labor, will cast a pall over private sector spending. The CPI in 2011 is estimated to inflate 2.04%, up from a moderate 0.96% a year ago. A reading over 2% will strengthen the case for government to be vigilant and proactive, and that over 3% will carry implications that it will be forced to activate an austerity attitude at any moment.

Even the government survey finds employers set to bring on more full-timers, but, for the lucky, gainfully employed, wages seem likely to keep stagnant with odds for a hike perceived shallow in the immediate future. It has been severely criticized that real per capita disposable personel income in Taiwan was pushed back to the range 10 years ago thanks to unbearable inflation. The weakening buying power can't fuel or sustain any apparent snapback for private spending. Most of regional countries have been vexed by skyrocketing property prices, readying themselves for a foreseeable bubble pop, and Taiwan is not an exception.

Hopes are swirling that Taiwan exporters will enjoy a whopping windfall so long as implementation of ECFA, effective this year, moves as scheduled, though there might be bumps along the way. Both sides have slashed respective import tariffs to boost trade. Under the improved tie, there'll be some standouts, particularly financial issues which now scramble to venture into China to jockey for good positions. Notwithstanding the frenetic growth strides, Taiwan will face limited advance in tax revenue coupled with souring fiscal status, as articulated by Fitch Ratings Ltd which cut Taiwan long-term local-currency rating to AA- from AA on Jan. 27. As of Sep. 2010, outstanding debt of central government totaled NTD5,701 bn, translating into a portion of 42.16% over GDP and exceeding the officially-set uplimit of 40%.

Sell into Peak

Complacency currently looks high in Taiwan market which has long taken its cues from overseas markets. A prolonged bullishness in US market will likely act as a catalyst to prompt a push over the 10,000 points, but a wild card is related to portfolios pruning among foreign traders. In Jan. alone, they snapped up Taiwan shares in a net amount nearly equivalent to 16% of 2010 figure around NTD500 bn. Whether fully-loaded or not, they will take money off the table swiftly, once local currency, NTD, halts its appreciation, or the market starts to top out at which they predicted – higher territory over the 10,000 ground.

Taiwan market in the past cleared the 10,000 hurdle but only to witness sharp nosedives subsequently for three times, each in 1990, 1997 and 2000. The message we receive now from foreigners and government is: buy, buy, buy; here comes the sun on a big price spike. I am not always a doomsayer neither, but where there is a positive, there is a negative. How long can you suspect a market's ongoing rally, mainly driven by hot money, not to be tripped up amid a less-exciting 2011 outlook for economic growth? It won't come as much of a surprise for the government to descend a slope of hope in an island striving for lifting annual per capita income, and fixing the grim jobless and inflation displays. But can it finally pull a rabbit out of the hat to attain those ends?

Just adopt a risk-off approach, if you are a Johnny-come-lately missing last year party hosted by the jaunty, dancing Tiger that had already shown its claws. Then, smiles will be on your face.

Happy Lunar New Year, Good Luck, and Good Trading!