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.

I am not trying to be a protectionist in any way but clearly Kuwaiti investment houses and merchant families were badly hit during the financial crisis and have started to offload their assets. The government, famously renown for staying at the sidelines, seems to be enjoying that scenery very much!

At a point in time, Kuwait used to be a leader in all aspects and that included telecommunications. MTC, was the first mobile telecommunications company in the region and the first to introduce GSM. The government reduced its share, the company started its expansion phase and enjoyed significant growth until June 2010, when Bharti Airtel completed a deal to buy Zain’s businesses in 15 African countries for $10.7 billion. Zain became structurally impaired as its focus was changed from a global to regional reach. Currently, Zain could be nearing the end of a year-long stake sale saga, with Abu Dhabi-listed Emirates Telecommunications thought to be running the rule over its regional rival for part or all of Al- Khorafi’s 14% direct stake in Zain. Moreover, in 2007, Qatar Telecom (Qtel) acquired 51% of Wataniya Telecom shares from Kuwait Projects Company Holding KSC (KIPCO) group and 2008 marked the arrival of Saudi Telecom’s Kuwait unit, VIVA, which is still not wholly owned by Kuwait.

A couple of weeks ago, rumors spread that Madam Mouza of Qatar showed interest in NBK and was building a stake that would make her eligible to participate in the upcoming capital increase. More lately, rumors have spread  that Al Kharafi have placed half of their 67% stake in Kuwait Food Co (Americana) for sale. Not to mention the sudden appearance of Mr. Mahmoud Haidar and his spending spree.

I recently read an article titled, “Foreign banks eye Kuwait’s $104bn plan” which stipulates that the Kuwaiti government’s KD30 billion development plan interests not only local investors, but also foreign banks.

The plan, which was proposed in April of this year, aims to start a stream of investments in major infrastructure projects such as building new ports and cities and investing to raise oil and natural gas production. The government will finance 50% of the projects and the rest will be financed by the private sector. The government gave the approval for the plan to be financed by the Kuwaiti banks, however foreign banks operating in Kuwait came in and are keen to have a share in the financing.

Financing the world’s fourth largest oil exporter in an unhealthy financial environment is a good deal, as it will decrease NPLs and provisions. I’m not sure how much share each bank will be given, but I would guess that it would be according to competitiveness. If that is the case, foreign banks will have much more room to give lower rates than local banks as benchmark rates in the US and Europe are much lower than Kuwait.

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.

Someone who goes through alot of news pieces a day may not read everything, and might just skim through the headlines. Once he reads a certain headline, he would make his judgment on the subject the article is talking about, or atleast believe what the headline is stating. But this practice is incorrect as headlines can be sometimes misleading. One headline might say that a company has beaten expectations with their earnings, leading a reader to assume that the company is making profits, however, they migh just mean that the loss is less than expected.

The image above is another example of misleading headlines. The first headline on the top left states that Japan maintained its position as second largest economy in the world, while the other two headlines are saying that China surpassed Japan as the world’s second economy. The first headline is from Al Arabiya, while the other two are from Bloomberg and the Wall Street Journal. What is the problem? Is someone lying to the readers? Is Western media more reliable than Arabic media? The answer is simple. The articles use different measures of the size of the economy. The Al Arabiya article uses GDP for the first half of 2010 ($ 2.587 trillion for Japan vs. $2.532 for China), while the Bloomberg and WSJ articles use the quarterly GDP ($1.288 vs. $1.337).

So remeber to not just read the headlines, and read the full article.

P.S. I hope my article’s headline wasn’t misleading.

In a report examining quarterly mobile devices sales, research firm Gartner found that sales of mobile devices in 2Q 2010 have increased by nearly 14% compared to a year ago, with smartphone sales accounting for 19% of worldwide device sales.

What’s interesting in the report is that Android-based devices leaped past Apple’s iPhone to become the third most popular operating system worldwide and analysts expect it to become number two. In the U.S. alone, Android passed the BlackBerry to a 34.1 percent market share, up from just 3.9 percent a year ago. Just a year ago Android accounted for under 2% of the smartphone market worldwide, with just 755,900 units. Today, Gartner says that Android accounts for 17% of the market with more than 10 million units. The extraordinary growth of the Android is the result of the non-exclusive strategy adapted by Google to sell its operating system across many communication service providers and device manufacturers. Moreover, Android OS now runs on HTC, LG, Motorola, Samsung, Sony Ericsson, and many others.

With Apple’s sales hurt by the tight inventory management, the blocking of RIM services worldwide and carriers heavily promoting Android devices, it seems that Android will easily replace RIM as second most popular operating system worldwide.

The Euro showed some weakness after the euro debt crisis as it lost 20% of its value relative to the Dollar in the first half of the year. However, just before the summer vacation began, the Euro recovered 10% of its losses on the back of the general positive sentiment in Europe. The Fibonacci retracement analysis indicates that this rally wasn’t a definite recovery as there has been a recent change in trend and the Euro fell by 3.5% this week.

 The question is, will travel expenses be cheaper in Europe next year?

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/2010/08/09/the-breakfast-index/ http://www.alphadinar.com/2010/08/09/the-breakfast-index/#comments Mon, 09 Aug 2010 06:07:40 +0000 Sal http://www.alphadinar.com/?p=4143

Wheat has plunged for a second day coming off  its 23-month high as some of the panic that had gripped the wheat market subsided. Severe drought and wildfires in Russia, the world’s largest wheat producer, have destroyed a fifth of the country’s crop and sent prices soaring. Since the end of June wheat prices have more than doubled. The dry weather has extended to hit neighboring countries, Kazakhstan and Ukraine, both big wheat producers. In fact, Russia announced that it was banning grain export for the period from August 15th through December 31st. Meanwhile in Canada, the unusual wet weather has prevented seeding and destroyed crops. On Wednesday August 4th, the UN’s Food and Agriculture Organization cut its forecast for 2010 global wheat production by 5m tones, to 651m tones. Premier Foods, one of Britain’s biggest food companies and the owner of Hovis, said the price of a loaf of bread will have to rise, by possibly as much as 10p. Thus sending the price of a loaf, one of the very few staples families buy everyday of the week, to hit a record of £1.29, higher than the £1.27 record in the summer of 2008.

Orange juice futures rose to the highest level in 15 weeks as hurricanes threaten to damage citrus harvest this season in Florida while coffee prices hit a 13-year high, are a result of poor harvests. J.M. Smucker Company, producer of Folgers, Dunkin’ Donuts and Millstone coffee has increased the prices of its coffee products sold in the US by an average of 9 percent.

All taken together, the raw ingredients for breakfast have increased in price by 25% since the beginning of June. It’s good that we’re going into the Holy month of Ramadhan, or else we would end up paying the increased cost.