Who am I ?

I can easily walk into the council but I cannot walk out with no problems.

I can end the debate inside the council but I cannot end the greivances outside.

I can set my answers for the questions but I am not sure these are the answers of the questions.

I can peg our currency but I cannot peg the price tags in our supermarkets.

I can pay for my political appointments but I cannot pay for the hearts of my people.

I can say to do best of my job but who can I trust to do best for my people.

Can you tell me what to do??

What tempts you to buy from Zara?

Zara, the latest famous brand name in the fashion field, has been growing so fast that no one should miss this name. Their fashions are of big sell that their shops either in London, Barcelona, Hong Kong and many other countries are always seen with people that line up to buy their goods.If you know how they run their business and their size of operations, probably you know why they are so successful.

Zara has more than 400 designers who fly all year round around the globe to grab on every latest fashion trend information on the ground. Their factories in Spain have the size equivalent to 90 standard soccer fields which connected together like the spaghetti on our dish. On top of that, the time from design, manufacture and logistic transportation from factories to the shelves is only 12 days compared with normal cycle of 90 days in the industry.

To beat their competitors, Zara has the well known formula to win by size of operations, in speed of delivery time and designs of products are always up the very last moment. If to beat them back, one must have the competitive advantages over Zara or other values that Zara cannot be delivered. If you know the story about David and giant Goliathe, there is no one in the world that cannot be unbeaten. If not, it is better to join their party.

Why there is a subprime loan crisis.

Last week a friend raised the questions on the subject of subprime loan problems in the US. He asked me why the problems were so serious and said crisis of such size to the financial markets had not been seen for many years. Also, he was amazed why the big names like CitiBank and many other, though reluctant, have to go overseas to seek for capital injection. Also, Bear Stearns bailout by JP Morgan Chase had surprised many.

Though related, I try to avoid discussing on the advanced credit risks models such as JP Morgan Creditmetrics model, Credit Sussie's CreditRisk+ model or Merton's KMV model. It is because they are too complicated and too quantitative for most of my readers to understand. Also, this topic and their extension to the regulatory capital and economic capital of a bank are so wide that a blog is too short for it.

Instead, my blog this time will focus on the qualitative side of the credit risk management. There are five main causes that I think of which account for 85% of the crisis.

The first one is superstitious. There was no real downturn of real estate market since the Second World War. It is because of this long perception, most people believe that the direction of the real estate market is only up and no down that made the bankers were very relaxing in their mortgage lending.

The next is the culture. The shareholders and Institutional Investors of the Banks have a high demand for short term performances. These gradually changed the landscape of lending cultures of the banks by emphasising on short term return and tolerating higher risks on the long end of the balance sheets.

Thirdly is the incentive packages to the bankers. The bonus is normally tied to the performances, while higher returns are commensurate with higher risks. So, to aim for bigger bonuses, the bankers are encouraged to go for higher risks business at the expenses of the shareholders.

Fourthly, most banks are relying on the external rating agencies to assist them in rating the Mortgage Back Securities (MBS) and Collateralized Debt Obligation (CDO)in their investment portfolios. So, if there is a lending problem, it is not just a one to one single problem but it is a problem for all the banks at the same time.

Lastly, the credit derivative markets such as credit default swaps and credit spread options etc have been expanding so fast that the contagion is easily get out of hand. The domino effect could spread quickly from one bank to another which could easily collapse a financial system. That was why the Federal Reserve had to take quick actions to stem the spreading by involving into the deal of Lehman Brothers, yet risking the allegation of encouraging moral hazard among the banks.

Though the subprime problems are still overhanging the financial markets, I think we have seen the worst already. It is a painful experience to learn from it but it does help the bankers to minimize committing the same mistakes again.

If to bet with Stanely why not join his flagship

Sociedade de Jogos de Macau (SJM) is about to launch the third largest IPO so far this year in Hong Kong. It is not a name known by all, but for Stanely Ho, the owner of SJM, is certainly recognized by most of our Hong Kong people. Also, its 19 out of 29 total casinos in Macau and their 1,100 mass market gaming tables and 3,700 slot machines are certainly places that we left some money before leaving this little enclave.

For this overdue IPO, I do not try to restate the facts in the prospectus but do want to highlight the price range values the company at 10.1 to 13.4 times its predicted 2008earnings, which is much cheaper than its major competitors. US-listed Las Vegas Sands is currently trading at 82 times 2008 estimates, and MGM and Wynn are trading at 22 times and 29 times respectively.

I am not asking my readers to risk their money in this stock or saying it is a sure win on the first day of debut but to advise those if to plan for a trip to Macau and try their lucks, why not use the stakes to apply for this IPO. I am always of opinion if to gamble why not to invest, particularly when the counterparty is the same.

For envy, do you know there is a ratio?

Sometimes, I wonder the people are so good at picking names or phrases to catch your eyes or attention. You must be of interest to know what is an envy ratio if you come across this term.

This ratio is used in the private equity acquisition.It is calculated between the price paid by the management team and that paid by the investing institution (usually private equity) for their respective share of the equity in a management buyout/in.

For example if a private equity firm paid $30m for 75% of a company's equity and management paid $5m for 25%, then the Envy Ratio would be 2x.

30/75 / 5/25 = 2x

So, the higher the ratio, the more envy will be.

It has been used in London, but it now seems to be catching on in Asia. Anyway, it is a term worth to remember. It is not surprise if to hear happy ratio, sad ratio or even hungry ratio in the future.

Why Price Book Ratios are used for Bank Acquisition?

With the opening up of the Financial Markets in the aftermath of the admission of China into WTO, there were increased cases in merger and acquisition in the Banking Sector either in Hong Kong and China which poised opportunities to the investors. The valuation methods used for Banks are based on market price against book value ratio (Price/Book) rather than using Price against Earning (P/E) ratio, why is it and what is the rationale behind it?

First of all, what is meant by book value. Book value is equal to total assets minus total liabilities. Since most of the assets and liabilities items on the balance sheet of a bank are monetary items which are highly liquid that can be converted easily into cash if to sell them in the Capital Markets. The market value of these items can be easily identified either by mark to market or mark to model. That is why the Price Book valuation is more appropriate for valuing a Bank than Corporations in other industries. Theoretically, a bank can sell all the assets and paid all the liabilities at market value. The balance of such is equal to the net worth of a bank. So, if there is an acquisition, the minimum price to pay must be at least equal to the net worth of the Bank, otherwise the acquired Bank would prefer to break up the balance sheet and sell them on a piecemeal basis that could ultimately give better value to the existing shareholders rather to sell it to the acquirer.

Hence, in order for an acquirer to succeed the deal, minimum price to pay must be at least equal to the net worth of the acquired bank. How much to pay above the net worth will depend on how much synergies that can be created from the combined Bank. Of course, there are other factors need to be considered such as competitive bids and the level of premium to tempt the shareholders to sell it to the acquirer.

If we take Wing Lung Bank as an example, the 2.9 price book ratio seems quite high but for the acquirer China Merchant Bank (CMB), it may be another story. The price paid by CMB might take into account of growth, synergies and other strategies that the outsiders might not be easily quantified. On the the hand, for the late privatization of CITIC International Financial Holdings (CIFH) , you might be surprised why the price book is 1.6 only if to compare 2.9 above. It does not mean the price is wrong instead it tells us another story. Since the control has been in the hands of Citic Group before the privatization, there is no need for Citic to pay too much premiums for the balance of the purchase. Whether 1.6 is fair will depend on the whole structure of deal such as exchange of shares etc.

As there are many different types of business combinations, it is natural the price book ratio for each deal transaction could be quite different from one another.

Who is greedy?

The Secretary for Food and Health, Chow Yat-ngok York has done a great job to stage a multi billion-dollar buyout of Hong Kong's poultry industry in an historic move that may spell the end of the territory's live chicken trade. The proposed ban on keeping live chickens overnight and recalling of the live poultry licenses, to my opinion, are effective measures to control the deadly virus. The potential economic consequences would be huge if one day there is an outbreak in Hong Kong.

No matter what, the health of the Hong Kong citizens should be put in the first place. Given the virus strains could be changed rapidly, it is right for the Government to step up measures before the fatal virus find their ways to hit into the territory. I feel sympathy to those who worked in the poultry industry, but for the compensation amount of 3 bio demanded by the poultry industry were far too high to be accepted by the taxpayers.

It is hard to find a business in the world that the owners can only enjoy the upside profit while the downside losses are left to the others. It is totally unreasonable. For the three years compensation offered by the government, as far as I can see, is a very generous offer. For the demand of 3 bio is too greedy to be accepted.

Some thoughts after reading Freakonomics

Being tempted by the " Freakonomics" is one of the best selling books and discussed widely by circle of friends, I borrowed the book and spent few hours here and there last week to flip through if I can get something out from it.

Those who have read the book mostly share the view that " Economists earn more than mathematicians?".

When we look around, those who can earn big bucks need not to be meticulously accurate. So, why bother to be a Rocket Scientist if your ultimate aim is for the dollar and a better life.

If we have to wait for everything to be exact before carryig out our investment, I dare to say most of the time we will miss the boat. Having said that, prudence and reasonable care are words that we should never forget when we put the money into the market.

Why still we have to invest in the derivative warrants?

While the stock market is quiet, I would like to put some time before lunch to ask the investors in our stock market how many have lost their money in the investment of equity warrants for the last couple of years. I can almost guarantee the number of losers must far exceed those who can win from it. I am pretty sure the big winners are the issuers of these warrants. It can be easily implicated from their advertisements that can be seen everywhere either from TV, Posters or Radio Broadcasting. They are so penetrating that you can feel it anywhere you go. Why, the issuers play the trading and listing rules to their maximum advantages.

We all know the beauty of equity warrants is that small capital outlay can bet for big returns while the downside is limited to the initial capital. Though sound appealing, wonder how many investors really knew or understood the rules governing the issuance of the equity warrants in Hong Kong.

According the consultation paper issued by SFC in 2006, for the derivative equity warrants, no quota system be for both further issues and identical issues. Also,the processing time by SFC was to reduce from the previously 4 days down to 2 days. The objective of this proposal was said to minimise price anomalies caused by shortages in supply of a particular derivative warrant.

In the other words, the supply of same identical warrant or similar warrant could be increased in size any time without limits and down to the market in just two days time. You can imagine how the prices are affected apart from the movement of the underlying. What on earth the game is so one sided that the risk return is out of balance for small investors.

Hong Kong stock market thrives on the derivatives for number of years and now pleased to say to top the world in its volume. Personally, for Hong Kong to be a successful Financial Center, we are not just aiming for the volume. While we let the crocodiles to move around, also fair rules of games have to be set up to protect the investors.I know most big issuers are coming from big houses and have the resources to have bigger say to affect the rules set by the SFC, but wonder if the views of the general investors should also be weighted.

For comments: Please to schan033@gmail.com

What should I do with our our pegged rate if I am Mr. Yam of HKMA?

The responses of Mr. Eric Fan Hung Ling were just restatements of the Government positions when he had an interview with Allen Li on Cable TV last Saturday. Among his responses were topics on Competition Law,the nurturing of the political talents in Hong Kong and the Pegged Currency Rate System.

Today, may I put aside the Competition Law and the nurturing of our future political talents and focus my views on the pegged rate system in Hong Kong.

More than twenty fours years have gone, we are now still functioning on the pegged rate system initiated by our former Financial Secretary John Bremridge in 1983. According to Allen Li, he learned from Mr. Bremridge that the 7.8 was a wild guess by taking the simple average of 5.6 and 10 to one US dollar. The main concern at that time was purely for political reason in bid to stem the heavy out flux of capital in the run up to 1997.

I do admit the pegged rate system had its own merits and let Hong Kong had the plain sailing during our most difficult time in the Asian Financial Crisis and SARs. But now I wonder should we have an open mind in view of the rapid changing of our economy eleven years after the reversion of Hong Kong Sovereignty back to the China.

For many years, when there were speculation on the HK dollars, I have been repeatedly asked by others if there could be delink of Hong Kong Dollar and every time my answers were the same-NO. If there was a delink, it must be related to inflation or recession.

The recent rampant inflation is really hit us now and it seems it is a hollow that we cannot see the bottom. The current inflation has caused hardship not just to the lower class income group but now is moving up the way to the middle class. The Government should take this issue seriously, otherwise it is going to be a serious problem to Hong Kong. The basic causes of inflation are due to sky high oil prices and the persistent strengthening of the Renminbi. I understand oil prices are global issue that we can do little about it but Hong Kong Dollar is a very local issue that can be decided by our Government.

Mr. Fan said that the maintaining of the 7.8 is the policy of the Government and afraid if there are any changes of our currency system could lead to heavy speculation that the Government does not want to see. I have serious doubts on these implications rather on Mr. Fan himself as he is simply a spokesman to relay the thinking of the Government.

To be a responsible Government, it should always be in position to review and adjust its policy to the overall goodness of the Hong Kong People. As the rampant inflation is threatening us, Hong Kong Government should not take an inactive role and sit there to do nothing. Our weak currency is not just only because of the weak US dollar but also the very strong RMB that we relied heavily to import our basic stuffs from China.

I do admit any changes could bring about risks but wonder risks could be managed in a controllable way. May I suggest Hong Kong Government and HKMA should study if to broaden the currency band of US dollars by stages-for 3% widening of band every six months interval until the HKD are at par with RMB. You might ask why 3% and on 6 months interval and my answers are 3% is the acceptable margin for business and external trade risks and 6 months could provide some good indications both from the performance of the stock market and the performance of the economy. I have confidence the risks of my suggestions are low as it is not a radical change instead it is just a gradual widening of our pegged rate targets and monitoring on an ongoing basis until to the situation that we are comfortable with the imported inflation from China.

I have to remind the Government that confidence of a currency is difficult to build but could be wiped out easily overnight. No matter how big is our currency reserve, it could bankrupt a Government. So, preemptive measures have to be taken before it is too late to reverse. Mr. John Bremridge had the bold and courage twenty years ago, why not our Financial Secretary of late and Mr. Yam could have the same.

Please send e-mail to schan033@gmail.com for comments.

Is current level a good buy of the Hong Kong Stock?

Before I give a plausible answer, may I ask my readers a question- What are the new driving forces that had changed our market for the last couple of days? We might able to figure out some bearish factors but they are hardly new to us. Threats of persistent high oil prices, inflation and weak dollars have all been with us for some time. Then why the stock market dived deeply this week.

The answer is simple-the market sentiment. Most people are traded on sentiments rather than on fundamental. How long this bearish sentiment could last is hard to say but if the investors shy the marke,it might continue to drift lower. My personal view is the bottom is not too far from now. The P/E now is about 18 for H shares and 15 for blue chips are good levels to buy for the long term investment. It is apparent that the Central Banks are likely to firm up their interest rates in the near future to control the inflation, resulting in a tight credit environment that could hurt the stock market. I can agree no more of this basic inverse relationship between interest rates and the stock market but these impacts are just temporarily. In the long run the Stock Market is self-adjusted following the intrinsic value of the individual companies. As long as the corporations can create positive values after inflation to the shareholders, then the stocks are worth to buy. For conservative investors, I always advise not to put all your eggs in one basket. Try to use average buying approach to minimize the costs and the risks.

If we can remember what were the Hang Seng Index when the level of our one month interest rates say 7% in the 90s or near 0% during the period of SARS, Then you know how to park your money.

For comments please to: schan033@gmail.com

What is the fair level for oil prices

Back to the drawing board, the simple demand and supply theory is easily to be understood by all but in real world how to justify the right price, it is always not an easy game to play. What we can see the veggie sold on the super market or the equity shares listed in the stock market are just reflecting of the fair prices rather than the right prices. Same concept can be applied to the oil prices. There are always price distortions created by asymmetrical information that can be obtained in a fair and transparent way. The speculators are using the missing gap to make their nice profit.

Last week, Jim Roger, the king of commodities, said the oil price could go up to 150 to 200 towards end of this year. Also, Alexei Miller, the CEO of Russian oil company Gazprom told reporters at an event in France yesterday that he expects the price to rise to $250 a barrel by 2009. Based on their stunning predictions, do you want join the bandwagon. If you say yes, I will advise you to bring along your safety belt. I cannot rule out of any outcome, but to reach 250, it is a very remote possibility. We might see 150 a barrel later on but to sustain above this level is not easy. I would say the recent price behavior is just resulting from speculation rather than genuine demand pull.

As some of you may aware, inflation has already caused social unrest in certain countries, oil prices are no longer simply entertainment shots on the TV screen rather they are topics high in the agenda of respective Governments. If the recent reports that there are no substantial shift of real supply of demand of oil is right, the gradual stronger dollar could soon let the fair prices of oil settled around 100 to 120 level for not too long from now unless dollar are unable to find their way to move northwards.

What a nice pay to be "politically stupid"??

The current controversy on the issue of the Under Secretary and the political Assistant could hardly come to an end even with the line up of the Under Secretary & the Political Assistant and the apology from the Chief Executive in front of the cameras yesterday. The average citizen like me has already put a question mark on the capabilities of our Government Officials in this current affair.

Put the passport and right of abode aside, just on the pay, it is hard to convince oneself that it could not affect the morale and the mentality of the senior civil servants and the legislators. I expect there will be a lot of silent conflicts behind the scene which could lower the overall efficiency of the Government. Though I am coming from the private sector and have never put my hand or foot into any political affairs in Hong Kong, I do understand a simple concept of equality and opportunity. Mr. Lam Sui Lun said that most of the appointees are coming from good academic background by either graduating from top universities in UK and US and worth the price to pay out from the public coffer. Does it mean academic background is equal to ability?- I have serious doubt of it. I tend to agree good academic background could stand a good chance to perform better later on, but does it mean we need to pay such a high remuneration at the very beginning to one who are without the actual experiences on the job and the future performances are yet to be seen. I wonder what is the future bench mark of the performance of these appointees??? Could the Government let us know??? Also,I have an impression these appointments are based on the close relationships with certain officials rather than going through an unbiased process of selection.

I understand the motive of the appointment of the second tier of Undersecretary and the political assistant is to help to sell policies to the public and legislators in an effective and promising way. The political selling strategy is to let the second tier to pit the field fist and if the lobbying fails, the first tier then comes into play. As such, the game hopefully could last a bit longer with a higher successful rate. It sounds logical but the real stumbling block is ignored. In fact, the real issue is coming from the relationship between the Legco, Execo and the Administration. The increase of the number of tiers or even the incumbents are selected from the big political camps from the Legco, in my opinion, could not help to improve in the current political environment that can save the hazzle of the Government. How to improve, will inform you later on.......

As said before, in the past up to end of May I was an advocate of the pro-government camp but now put I have second thought in the upcoming Legco election in Autumn.

What is going to happen between 4 to 4.10 in HK stock market

HIghly likely we will not see much changes. The market is going to behave normally.
As there are so many eyes that are now ready to spot on any single movement of the trading, the crocodiles are going to take their naps.

What on earth the citizens have to pay for something uncertain

This is my first time to write on blog, hope I can bring something interesting and new to the readers in the future. At least for the first day, it is just a test of water.

I am quite of an upset to the Tsang's Government and their latest moves of appointing the newly officials.

The faces on the TV can tell how happy are the newly appointed Bureau undersecretaries and political assistants outside the chief secretary's residence in Mid-Levels after a gathering with journalists. It is far from expected of the officials who hired them initially think these new appointees could help them to relieve part of the tough challenges of facing the public have to face the music first and have to take up the early fights for their babies in the cradles.

Worse enough, not to mentioning of double allegiances on the passport issues, according to the latest public opinion, without any yet to be proved performance, the pay is far too high than most expected. When to compare with the Legco members who are almost burnt out from their looks, are big contrasts in terms of pays and experiences, stand alone of their long contributions to the society. After all, the recruitment and the pay to each appointee are far too opaque for the public to scrutinize. Personally, I do not think money is the big attractions to these new comers. What they can get in the social status and future prospects are outweighing the money return on the equation of the formula. It is true that Mr. Chan Tak Lam said that a political appointment cannot be easily quantified, but why there is such a big pay gap between the Legco members and these new born appointees.

I have long been a loyal follower of the pro-government camp political parties but I think I will change my mind after this incident in the next legco election. We should need someone in the Legco who can really help us to monitor and provide a stronger balance and check to the Executive Council and the Government. At least not to lavishly spend the hard earn money of the average citizen which can be of better use for other purposes. I hope others can follow my same thought too.