What slowdown? Large Crowd at PIK 2 Launching.

 Last Sunday, we went to visit the marketing office of PIK 2 property developer at Pantai Indah Kapuk, North Jakarta. We were amazed at the scene of the big crowd there. People were lining up to pick up lotteries to buy apartment units which are priced starting at 248 million IDR to 604 million IDR. They are launching the second tower of Tokyo Riverside apt project with around 1000 units,  with the first tower completely sold according to the saleswoman. This scenery defies the story of property slowdown.  This proves that the demand for cheap apartments is still resilient. We suspect perhaps the big chunk of buyers is newly wedded beside enterprising investors. Concern about the slowdown in property due to tax scrutiny and economic hardship certainly is not evident here. Observing the large crowd at this launching, we should focus on property names with primary target market below 1 billion, such as MTLA (Metland).

Jakarta Composite Index is Not Considered Cheap According to Shiller's CAPE

According to Starcapital's estimation, as of the end of January 2016, Indonesia is not among the most attractive countries in term of equity valuation.  Does this explain why recently JCI fell from its position as one of the best performers globally? Interestingly, Rusia, Korea, China and Singapore ranked as of the cheapest places to invest globally.  You can access global comparison  at  STARCAPITAL Global Valuation Chart as of January 2016

*. The Chart is taken from Starcapital.de website. 

Too Early to Call a “BUY” on United Tractors

We just visited the management of PT. United Tractor Tbk  (UNTR IJ) today, and they are still concerned with the prospect of their coal-related businesses, which according to them, might suffer further from negative production growth and margin decompression due to lower overburden and reduced stripping ratio. The industry itself is still undergoing contraction.  Since coal-related revenue contribution is still very significant - more than 70 percent of the total, we do not foresee any significant upside to the stock price although the consensus is still valuing the stock at ten times forward earnings this year. 

The transformation away from coal-related businesses towards construction-driven model is still progressing slowly. The steps that they had taken so far was to acquire publicly-listed PT Acset Indonusa Tbk (ACST IJ) in 2014. Apparently, PT Acset Indonusa Tbk, which focuses on piling, structure, and building for private sectors, is still an early starter in government infrastructure projects.

They make some progress in co-investing with Sumitomo and Kansai Electric Power in the 2000-megawatt Tanjung Jati B power plant which should cost approximately $4 billion.  Although they are proposing ACSET to involve in the construction, we expect ACSET will only get a minor role. Furthermore, investing in a power plant requires patience as investors can only enjoy their profit after several years of operation.

In conclusion, it is still too early to call a "BUY" in this counter

Comments regarding Presidential system in Indonesia

I took Professor Omri Yadlin's class at UC Berkeley who taught Law and Economics II based on Robert Cooter's book " The Strategic Constitution". It was a very interesting subject going about explaining political processes with theory of economic incentives. It gives me at least a framework to predict political outcomes. Without one, it can be a very daunting task He begins with the assumption that all politicians are rational beings, who through bargains and organizations trying to maximize their collective and individual needs.

Anyway, several important points in the book I see can be applicable to politics in Indonesia:

Indonesia's political system is charaterized by "bargained democracy", direct presidential election, and proportional representation.


"Indirect election of the prime minister unifies legislative and
executive power, whereas direct election of the president fragments legislative
and executive power" (Robert Cooter, page 554)

"Fragmenting power requires government to proceed by bargains, which I
have called “bargained democracy.” By contrast, unifying power can enable the
executive to proceed by commands, which I call “command democracy.“ In the
purest form of bargain democracy, the legislature dominates, whereas the
executive dominates in command democracy" (Robert Cooter, page 555)

The strength for bargained democracy is effecient governing ; for command democracy, decisive governing.
The weakness for bargained democracy is potentially unstable; for command democracy,
unresponsive, possibly dictatorial.

It is difficult for our proportional representation's system to have a "condorcet" winner. A condorcet winner is an alternative that can defeat any other alternatives in pair voting.
A condorcet winner can lose in an election involving three parties. Unlike winner-takes-all plurality, proportional representation can produce election involving three parties. Whereas the smallest party among those parties will be very relevant for political outcome (Robert Cooter, page 79)

Goldman Sachs is preparing to do Secondary Offering, Does it mean market peak?

Goldman Sachs is one of the strongest investment banks (albeit forced into becoming FDIC-insured bank) that has merged out from the financial crisis relatively better than its peers. The last time it went public. It was in height of the market. Their timing to put their Initial Public Offering was impeccably accurate.

Will the history repeat itself? Will this secondary offering mark intermediate high of the market?

The End of Dollar Cost Averaging in U.S Equity Market?

The whole entire retirement industry in US is largely built upon the concept of long term investing in equity market. Most conservative financial advisers will preach that the best way to invest is to follow dollar cost averaging method. Dollar cost averaging means that we invest a constant amount of fund consistently every month to purchase stocks regardless of economic conditions. Overall, we will come out as a winner who pay less that the average market prices over an extended period of time. The assumption behind the soundness of this dollar cost averaging method is that the return of the equity market should be around 6% each year higher than the risk free assets ( treasuries). Therefore, according to this theory, we should not care how the market is going to do tomorrow; in the long run, we should be making 6% better than the risk free assets.

First Reason:
Recently, a paper was published called " "Are Stocks Really Less Volatile in the Long Run?" by Lubos Pastor, a finance professor at the University of Chicago, and Robert F. Stambaugh, a finance professor at Wharton. Basically, the content argues that, while the famous finance professor Jeremy Siegel’s research shows that mean reversion is a definite force over extended periods of time, uncertainty about market volatility also increases as the holding period is prolonged. That implies that the "long term" is risky because its difficult to predict what will happen in the future

Second Reason:
US economy will rebound of course from the current level in the next year or so. However, the fundamentals of what made up the economy have been damaged considerable. Consumers will become savers. People learn from their mistakes of overleveraging and will be more careful in spending. The intermediate growth of the economy t as whole if we are lucky if we can reach more than 4% per annum after the economy stabilizes. Additionally, the recent punishment of risk taking behaviors of our economic participants is profound enough to leave a traumatic mark for years to come.

What is OUR HOPE that can negate this two adverse effects:
US economy is famous for its resilience quality. Almost in every downturns, history had repeated itself. There will be always a creative force that produce a new techology or major inventions that can refuel our ailing economy. Inventions from the previous recession are for example, the motion picture and personal computer industry.

FINANCIALS ARE RUNNING FOR COVER

Today's President Obama's statement talking about GM shed out more values in financial firms than in the automobile-related companies as a whole. The administration will not rule out the possibility of letting go of a company into bankruptcy. His stern message brings back the FEAR once again to the near-bankrupt financial firms that they should not be happy too soon. Surprisingly, for these couple of weeks, the attitude of the administration is to drop money to whoever needs it. Today the story line has changed. Today Mr.Obama is pulling out the stick not the carrot. The banks need to undergo stress test to determine if they can stand a chance to survive this macro onslaught without breaking our taxpayers' wallet.

Jeff Tan