Equity markets around the world surged this week as encouraging economic data from the U.S. and China helped assuage fears of a double-dip recession. Manufacturing in China came in better than expected, thus, signaling that the world’s second-largest economy is in a healthy soft-landing mode. Confirmation of this relieving trend is evident across Asia as Japan’s industrial production beat estimates, India’s GDP increased 8.8% yoy in the second quarter, and Australia’s GDP gained a better than expected 1.2% qoq in the second quarter. Undoubtedly, this positive patch of macro news is encouraging.

Do you guys think the macro picture will continue to improve or not?

According to several sources, Kuwait Investment Authority (KIA) is cutting costs. This is not a bad thing in and of itself. Although this comes at a time when oil prices are at $75/barrel and the KIA sits on $202.8 billion* of assets under management, cost cuts are usually a good thing and point to a disciplined style of management.  However, the alarming fact is that the  KIA is cutting-costs across the board which is an easy yet very dangerous approach. The biggest victim of this approach? Kuwait.

The KIA website states that the authority aims to “contribute to the national development by investing in human resources.” This goal has been more than fulfilled during the previous years as KIA had trained highly qualified Kuwaitis and transformed them into business leaders capable of excelling at the highest levels in both private and public sectors. Moreover, KIA’s yearly MBA scholarship recipients have been steadily joining the workforce armed with unrivaled world-class education from leading universities such as Harvard, Stanford, MIT, London Business School, and Wharton Business school. Such an education enables the youth to emerge as future Kuwaiti leaders.

The shocking news is that KIA is cutting its training budget at a time of economic prosperity, massive multi-billion dollar development plans, and efforts to transform Kuwait into a regional financial hub. On the contrary, we would’ve expected prioritizing the investment in human capital as it is a perpetually beneficial investment considered a corner stone for the prosperity of any country. The training program and MBA scholarships cost KIA less than KD 1 million a year. Is it too much for an institution worth $200 billion? We doubt. Will Kuwait reap benefits from world-class educated and trained individuals? You bet!

In a previous post, we applauded KIA’s Managing Director (Bader Al-Saad) for his relentless reform efforts since the beginning of his tenure. Also, in the most recent parliamentary discussions of the KIA budget Minister of Finance Mr. Al-Shamali requested an increase in the training and MBA scholarships budget. We now call upon them and all parliament members to reinstate the renowned MBA scholarships program and the semi-annual version of the training program. Such an act will not only relieve the Kuwaiti youth, but also restore our hopes of a better future for Kuwait.

* According to the Sovereign Wealth Fund Institute.

Only a couple of months ago there was near consensus in the US that the S&P 500 was heading for a double-dip (i.e. will fall to previous crisis lows). Government intervention and better earnings shattered the dream “shorts” had. Economic data was alarmingly weak and investors feared of the perfect destructive recipe: anemic macro data coupled with soft micro data (corporate earnings). However, earnings came in better than expected and no one talks about Greece anymore. Consequently, the S&P 500 rallied 10% from its recent July low of 1022 pts and is currently up 7% and is at a break-even level for 2010.

So, now what? Will the S&P 500 rally or double-dip? I personally advocate none of the above. One of the most significant intact recovery signs is the recent rise in M&A activity (mergers & acquisitions). This is a clear vote of confidence by corporates and an indicator of cheap valuations. There were around 5 M&A deals during the past week alone. The most critical M&A deal is the proposed acquisition of Potash by BHP Billiton for $40 Billion. Not only that, but an even more encouraging sign is that BHP’s proposed deal is an all-cash offer which suggest BHP sees its own shares undervalued and the return on their cash higher than issuing shares at what they consider depressed levels.

Couple these bullish M&A signs with governments willing and able to intervene and you minimize the chance of a double-dip. I say “minimize” because some idiosyncratic risks such as an air-strike on Iran can easily result in a double-dip. Also technically speaking, a horde of cash is sitting on the side-lines and many people missed the rally so any major pull-back will be bought. However, I don’t see the market surging higher. Big Ben (Fed Chairman Ben Bernanke) stated at the latest Fed meeting that we live at times of “unusual uncertainty.” The high unemployment levels seem to be staying for a while and I don’t see a catalyst for the market to go much higher. Further, I believe the S&P will close down around 5% in 2010.

Making money is no sin in Ramadan. Just like other things, it gets better in the holy month. This isn’t me giving a spiritual speech, but a proven fact. According to Ahmad Etebari, Professor of Finance and chair of the University of New Hampshire Department of Accounting and Finance, stock returns are almost nine times higher in predominately Muslim countries during Ramadan than at any other time of the year! Mr. Etebari’s time period covers 1989 to 2007, and the countries include fourteen countries with around a 90% muslim majority.

Mr. Etebari reasons that “Ramadan is really a fundamental shared experience by Muslims.  In a sense, it gives Muslims a sense of social identity and it is embraced by just about everyone.  The rituals enhance their satisfaction with life and create optimistic beliefs.  So, essentially we borrow from research in psychology that shows that religion affects believers’ moods, happiness and risk-taking attitudes.” Further, he elaborated that happy muslims in Ramadan could underestimate risks.

What do you guys and gals think? I will revisit this theory at the end of Ramadan and verify it.

مبارك عليكم الشهر

]]> http://www.alphadinar.com/2010/08/11/ramadan-stocks-effect/feed/ 3 http://www.alphadinar.com/2010/07/18/what-kuwaiti-stock-exchange/ http://www.alphadinar.com/2010/07/18/what-kuwaiti-stock-exchange/#comments Sun, 18 Jul 2010 05:57:08 +0000 Keynesian http://www.alphadinar.com/?p=4040

Of the 227 listed companies in the Kuwait Stock Exchange, 94 are currently trading at/below their 100 fils PAR value! This translates into a whopping 40% of all companies. Something is deemed to be done. I believe the Central Bank of Kuwait should run stress-tests on all companies. Depending on the results, companies should either recapitalize or get “the boot.”

In addition to all this “fungus” (Al-Qabas articulately uses this term!) created by the ailing companies, we have not much to offer. The banks have no projects to finance and no real worthy private sector to extend credit to. Their exposure to prone-to-fail companies and a real-estate bubble are alarming. As far as operational companies, the ”beautiful world” of Zain was sold and so was the company’s future expansion. Doesn’t that remind you of another company? Does Wataniya Telecom ring a bell? Many investors were hoping Agility would be the light at the end of the tunnel, but the US government’s contract dispute crippled the company. What’s left? Nothing much. A bunch of derivative plays on the Kuwait Stock Exchange heavyweight companies. What happens to derivative plays when the underlying collapses? They explode.

Nevertheless, there is still hope that we, the next generation, will force change.

Proponents of the “invisible hand” theory coined by Adam Smith will respond with a screaming “Yes” to the notion that the market issues will eventually resolve themselves. I was reading Al-Qabas daily today when I stumbled upon another proponent of the invisible hand theory; It isn’t Milton Friedman, but our Deputy Prime Minister for Financial Affairs. He too proposes that the Kuwait Stock Exchange cleanse itself. I personally oppose such a stance not only because my nickname is Keynesian and I advocate a more prominent government role especially in a market failure situation, but also because I believe our stock market doesn’t have the necessary structural elements to cleanse itself. For example, there are no bankruptcy laws and we don’t have a Capital Market Authority yet.

Where do you guys stand?

It was a disappointment not only for avid NY Knicks fans, but also for investors who bet that ”King James” would join the NY Knicks. Yesterday, LeBron announced he will instead join the Miami Heat from the Cleveland Cavaliers. Madision Square Garden is a US-Listed company that owns the Madison Square Garden arena, Radio City Music Hall, the New York Knicks basketball team, the New York Rangers hockey club, and the MSG regional sports cable-TV networks. Shares in the company witnessed heavy speculation with volumes rising 5x the daily average ahead of LeBron’s decision. MSG shares fell 10% during the past two days.

What was more intriguing to see is the action in the options. Below are the calls & puts expiring in July and August respectively. The action in the July 20 & 22.5 calls is massive as investors speculated as to where LeBron will go. Compare this to the less active August calls and June ones (I don’t have the June ones here). Also worth noting is the tilt towards calls vs puts as speculators bought calls equivalent to triple the number of puts as is evident from the open interest figures. Thus, investors betting LeBron joins the NY Knicks have two reasons to be sad!

LeBron’s mom was the only one who knew her son’s decision beforehand. If she would’ve told you, you could’ve made money selling a ton of these calls. Of course you shouldn’t do that since it is an example of the type of ethical lapses we discourage and oppose here at Alpha Dinar!

I found this chart very interesting.  It currently doesn’t matter what stock you are in because of the high correlation. Attached is a chart that perfectly illustrates this concept. Correlation is currently at 0.75. This figure is up 50% from more normalized levels of around 0.50 and is only 0.05 pts shy of the 2008 peak in correlation.

Let’s hear it for Volatility! The VIX (Volatility Index considered a market fear gauge) has been on an upward surge for the past month. Yesterday’s S&P 500 rally pushed it back to 30, but that is still a very elevated level. Is the current level of fear instilled in the market warranted? Should we be afraid? I guess the market is thinking this way: What if Greece was Bear Stearns, and Lehman and its sibling troubles are still ahead? The unemployment numbers this Friday will either assuage market fears or send the VIX soaring. A major reason the it is maintaining the current elevated level is the strain seen in credit markets. Even after yesterday’s rally, LIBOR-OIS and TED spreads, and 2-year yields in Germany were little changed. Would you go long or short the VIX? Sorry bulls, I’m currently a bear!