Using Quant to predict the World Cup

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You might as well applaud such a move as nothing much will get done during the World cup month. Possibly meaningless to Americans, but hey, they call the stupid baseball thing World Series and only American teams are playing???!!!




Whilst this report should be taken with a pinch of salt, we find it an interesting exercise and an ideal opportunity to lightheartedly explain Quantitative techniques and demystify the typical
Quant framework.

I am so fed up supporting England during World Cup tournaments, so I am deserting them and going for the very well balanced Spain side, as well as cheering on all the underdogs: Ghana, Japan, South Korea, North Korea, ... to name a few.

I was having lunch with an Englishman and a Brazilian yesterday (yea, business meeting in HK) and they were giving me a hard time when I said I will be supporting Spain. Geez ... I said that if asians were only "allowed" to support their actual country team, then we might as well forget about supporting any team for the World Cup. I said its lucky for them to be accidentally born in England or Brazil. I then asked them if their country teams did not make it to the World Cup for 10 or 20 years, what then, who would you support? That shut them up.

You will note that the headline of the JP Morgan report has England as the likely winner even though on team's strength analysis Brazil is tops and in betting Spain is favourite. When arguing over World Cup teams, its highly emotive and hence you have to use data only to remain impartial. Quantitative methods will use past data and then project ahead.

Their goal is indeed to highlight potential World Cup winners by applying quantitative or mathematical methodology traditionally used with balance-sheet, valuations and consensus information to data from the football world. To do so, they focused on data including:
• probabilities to win from a range of bookmakers and exchanges
• official FIFA World Rankings
• results from previous World Cup tournaments and qualifying competitions



In practice, Quants tend to use 4 types of information in their mathematical models:
1. Valuation metrics
2. Market and Analyst sentiment
3. Company fundamentals
4. Price trends

J.P. Morgan Cazenove "Normal' Quant stock-picking Model
VALUATION METRICS MARKET
- PE vs the market
- PE vs the sector
- Forecast growth
ANALYST SENTIMENT
- Recent change in analyst sentiment
- Recent change in analyst growth expectations
- Recent change in analyst recommendations
COMPANY FUNDAMENTALS
- ROE
- Company Risk
PRICE TREND
- Long term trend
- Short term trend

Source: J.P. Morgan

They then translate the above Model into a football-specific Model.
J.P. Morgan Cazenove Quant world cup-picking Model
"VALUATION" METRICS "MARKET
- "Market" Valuations
- FIFA World Ranking
& ANALYST" SENTIMENT
- Result Expectations
- Recent Team Shape
"COMPANY FUNDAMENTALS"
- Consistency in Market Sentiment
- J.P. Morgan Success Ratio Indicator
PRICE TREND
- Trend in probability to win
- Trend in FIFA's Ranking

Source: J.P. Morgan

If you can get the report, its a lot of fun. They looked at the actual FIFA world ranking and then looked at the usual probability in winning. Regressed them and somehow, some of the teams' rankings do not match up with their win probabilities. Portugal, Netherlands and Greece offer a disagreement with high FIFA World Ranking and low indicated probability to win the World Cup.

England, Argentina and Ivory Coast also offer disagreement with a low World Ranking and an indicated high probability of winning. According to the FIFA World Ranking Factor, Brazil, Spain Netherlands and Portugal are most likely to win the World Cup.



Hence based on that alone, a betting person should favour England, Argentina and Ivory Coast, ceteris paribus, and go against Portugal, Netherlands and Greece. On a side note, Greece might play luar kulit (out of their skins) owing to the homeland crisis and on the pretext that they may be booted out of EU soon (hence no more invite to Euro championships???!! ; ) )

They then look at bookmakers' odds to ascertain value against what the computer predict as their real value. They then plat charts based on the 6 month trending winning probability and a 3 month trending winning probability - a lot like 30 day MA and 60 day MA. Hey, a trend is your friend, it applies in everything.

According to the Trend in Probability to Win Factor: Slovenia, France, Ivory Coast and Greece are the most attractive options, having received the greatest increase in probability over the past 6 months.

According to the Trend in FIFA’s Ranking, Algeria, Slovenia, Serbia and Slovakia have the biggest change in World Ranking Points and should be preferred.

But of course, as wonderful the data may be, it still depends on the weightage you assign to each of the 4 factors. Herein lies the problem, JP Morgan assigned equal weightage to all 4.

The very funny part is that the last 2 pages uses the quant models to predict every match. In the quarter finals these are teams, according to the quants:

Netherlands vs Brazil (Netherlands will win)
France vs England (England will win)
Argentina vs Slovenia (Slovenia wins in an upset)
Italy vs Spain (Spain wins)



In the Semis:
England will meet and beat Holland, while Spain will edge out Slovenia.

Ta-dah, England beat the crap out of Spain in the finals. Yea, right!!!??

Applying Oneself In Life

We all should strive to be "successful" in all aspects of life. Too often we only focus on wealth and career. For our intents and purposes, lets look at wealth, career and money for now. We all have heard of the mantras and the sayings of wise people. Most are just crap being regurgitated again and again.



Here are a few better ones, I think:

"You can get everything in life you want, if you will just help enough other people get what they want."

There is a positive side to the saying as well as a negative side. The positive is that we do not only look at what we want, but rather on what others want. It could be our potential clients, our colleagues, our bosses, etc. ... by being instrumental in helping other achieve their objectives, you will indirectly get the returns and benefits accruing back to you. The negative is to regard this mantra pragmatically - i.e. you will only get what you want if you do A, B, C... which may still get you what you desire but the motive on your part will be questionable. Now, many of you will think there is no difference as long as you get what you want, but to me your underlying motives are so much more important for personal enrichment. If your heart is in the right place, you will try to "help others", but even if nothing comes out of it, you are not too disturbed. If your motives are pragmatic, the end result will eat at you, and even when you achieve success - will you smirk that you were smarter than the rest? If you have the right attitude, you will feel that you have been blessed and would not think its all due to your own self. If you feel blessed with success that comes your way, you will also know that you are just a steward of monetary riches, and you will feel the need to do your part to enrich the lives of others.



"Successful people are prepared to do for a short time what others won't, so that they can do for the rest of their lives what others can't."

Herein lies the key word, some may call it execution ability. I have another word for this, its called "focus". Whenever we come across issues, roadblocks, events, targets, deadlines, delivery of performance, KPIs, etc.. many will not be able to execute well.

Our government big projects have often been labeled as brilliant in planning, projections and power point presentations, but somehow we lack the follow through to execute them within the time stated or within the budget specified. Its like we know our ABCs but we kinda skip merrily through the EFGHIJKLs ... and then wonder why we never get to Z but always end up with URSTs. The simple explanantion is that the ABCs are fun to do and thats where the big money is. The EFGHIJKLs are left to the workers who may not be incentivised to get to Z. Maybe the key is to make sure the bulk of the rewards will only be when they get to Z.

Anyway, I digress, back to focus. Sometimes we get torn in 10 different directions. We need to focus on the key issues, solve them or delegate them (with proper monitoring and empowering), revisit continually, change or modify if necessary till its done. If you look at the very successful people, they will focus intently to solve a particular issue or problem or crisis or capitalise on the opportunity. Those who do not will wonder why they are not more successful or what their secret is.


"Great minds discuss ideas, mediocre minds discuss events, small minds discuss people."

This is a very telling saying, and you can find out where a person is by what they talk about all the time. Its gossip, it mindless chatter, its idle stuff, its basically useless ... a little bit is OK but when its mostly what you put your brainpower to, we all know what comes out of it... nothing much. Picking on what topics to discuss or reflect show me how a person's mind is working. Rise above the events and issues and take a big picture view, be wary of the subsequent chain of events.

"Don't judge each day by the harvest you reap but by the seeds you plant."

Everyday you plant seeds whether you realise that you are doing it or not. You can be planting seeds of confidence, seeds of integrity, or you could be planting seeds of discontent and discordance. You are building a resume of what you are doing be it good or bad. In addition the seeds also spread to those around you. In a way it inculcates a culture, a mindset and a sense of expectations. I have another personal saying that I hold with me:

"Bloom where you are planted."

Try no to question why you are where you are, but what you do with where you are at. Live your life well, keep an eye to be a "success" in all areas of your life, be a great son or daughter, be a great employee, be a great boss, be a great parent or grandparent, be always in touch with your spiritual side ... and take time time to enjoy life while doing all that.

Some Comments About Hot Stocks

So we now have the debacle on Sime Darby, causing the stock to lose 40 sen. Censuring the CEO is a good move by the board, but the Bakun thing has been around longer than his tenure. The board also has to shoulder some responsibility for not asking for better risk controls years earlier, this did not happen overnight. Are the losses capped? Do we have the full picture? I don't think the board has the full picture, but the moment they do, they should tell all to investors, otherwise the stock will keep falling.



All things being equal the division is only a small part of their revenue and profit base, hence it should be good pickings should it dip to RM7.60-7.80.

As for Transmile, even if Pos Malaysia decides to buy over, its not going to solve Transmile balance sheet. Its NTA is less than 10 sen, go figure. Avoid.

Ascot and Berjaya Group. The license was given and taken back 2 or 3 times already. Why is this time any different? Previously it was just an off course betting for horse racing. This is more for sports betting. One can claim that the deal looks good for B Group because Vincent Tan is already guaranteeing the bulk of its profits. It looks good on paper but the thing should deliver first. There will be plenty of time to buy then. What is the rush?

Tebrau and the Iskandar stocks look like gearing for a move. They did a huge conference in Singapore recently which was overbooked by 3x. News of more signups and project launches in the works. Caveat emptor though.

Unisem may have reached a peak above RM3.00 judging from the newsflow of quarterly earnings from similar industry players in the US. Take profits.

Though I hammer the need for Proton to exists, but as a stock, if it succeeds in a joint venture, will raise fortunes for Proton to above RM6.00. Looks likely to have a wave of positive newsflow.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Need To Empower Independent Directors

StarBiz: In what is seen as the first high-profile removal of the head of a government-linked company, Sime Darby Bhd's board of directors has asked its president and group chief executive Datuk Ahmad Zubir Murshid to take a leave of absence prior to the expiry of his contract on Nov 26, 2010.

Sime Darby chairman Tun Musa Hitam said at a press conference yesterday afternoon that Zubir's leaving was in connection with the cost overruns that the group's energy and utilities division had suffered in carrying out projects in Qatar and the Bakun hydro-electric dam.

Datuk Azhar Abdul Hamid, currently head of Sime Darby Plantations, has been appointed as acting group chief executive.

Sime Darby also said it would take a hit of RM964mil in its second half earnings from losses from its energy division.

Primary Purpose

The Board of Directors has primary responsibility for the governance and management of the Company, and fiduciary responsibility for the financial health of the Company.

Responsibilities

In line with the Best Practices of the Malaysian Code of Corporate Governance, the Board of Directors has the following responsibilities: Review and approve the annual corporate plan for the Group, which includes the overall corporate strategy, business development and marketing plan, human resources plan, IT plan, financial plan, budget, regulatory plan and risk management plan Review and approve strategic initiatives including corporate business restructuring or streamlining and strategic alliances Oversee the conduct of the Group's businesses to evaluate whether the businesses are being properly managed Identify principal risks and ensure the implementation of appropriate systems to manage these risks Approval on nomination, selection, compensation and succession policies for the Management Committee members, Board Committee members and Consultative Panel members and the annual manpower budget for the Group, including managing succession planning, appointing, training, fixing the compensation of, and where appropriate replacing senior management Develop and implement an 'investor relations programme' or 'shareholder communications policy' for the Group Review the adequacy and integrity of the Group's internal control systems and management information systems, including systems for compliance with applicable laws, regulations, rules, directives and guidelines (including Listing Requirements, Securities Laws and Companies Act) Review and approve the Financial Statements encompassing annual audited accounts and quarterly reports, dividend policy, credit facilities from financial institutions and guarantees Review and approve the Audit Committee Report and Internal Control Statement for the Annual Report Review and approve the Annual Regulatory Report prepared in accordance with Section 16 of the CMSA Prepare a Corporate Governance Statement on compliance with the Malaysian Code of Corporate Governance for the Annual Report Review and approve investment policies and guidelines for the Company's surplus funds, asset allocation policy and policy on exposure limits on investment with banking institutions Review and approve the capital expenditure, purchase of fixed assets, operating expenditure, variation order and any other matters in accordance with the Authority Limits Document Approval on appointment of external auditors and their related audit fees

I applaud the board of Sime Darby, its a big decision but what is more interesting is that this development is viewed by investors as out-of-the-norm. We should be seeing boards taking more proactive decisions like this. We have had reams of articles and high level meetings on corporate governance, and it would take a misguided person who believe that the majority of board of directors of listed companies on Bursa are truly carrying out their duties, and have teeth. I dare anyone to prove to me otherwise.

All listed companies should do an internal evaluation of the "strength and independence" of their board of directors. As we have many family owned companies on Bursa, many of these boards may still be beholden to the owners of the companies. More importantly, the independent directors may not be as "independent" as the word would suggests.

Do we have a body that oversees the performance of directors, in particular, the independent directors? I think the SC has that role. There are plenty of companies rolling into PN17, and seriously, I think the independent directors could have been more vigilant in many cases. A company does not run itself to the ground overnight. If you look at the the roles and responsibilities stated above, I wonder how many are truly carrying out the tasks properly.

I still think there is plenty of room for improvement. I think especially for those family owned companies in particular. If there is stricter enforcement and regular "request for independent directors to clarify and explain" from SC, I think we will see a tremendous culture change. We need boards to be empowered as they are really supposed to look out for things on behalf of minority shareholders. Confidence in the impartiality of directors is paramount, especially for independent directors.

Country Default Risk Updated

Bespoke: The European aid package announced over the weekend has helped boost global equity markets across the board, and it has also caused sovereign debt default risk to decline significantly over the past two days. Below we highlight 5-year credit default swap prices ($, bps) for a number of countries around the world. For each country, we highlight where default risk stands now, where it was last Friday before the bailout, and where it was at the start of 2010 and the start of 2008.

Heading into the weekend, Portugal, Italy, Greece, and Spain (PIGS) had seen huge spikes in default risk in 2010, but they have all seen declines of 30% or more over just the last two days. Default risk for Portugal and Greece has basically been cut in half. CDS for other EU countries like Germany and France had also spiked significantly prior to the weekend, but they have since returned to much more normal levels.

Venezuela and Argentina currently have the highest default risks in the world, while Germany, Australia, and the US have the lowest default risk. The US hasn't seen a big decline in default risk this week, but that is because it barely moved higher even in the face of volatile markets last week (why the US even has CDS is a different topic).

My Take: Malaysia is at 90.9. Its a meaningless figure unless you look at where you stand or rather whom you are standing next to. Japan is at 80.1, surprisingly we are above Chile which stood at 87, I guess they have lots of oil. Take comfort in that Thailand is at 120. UK drew closer to us at 85. Indonesia is at 178. Belgium is at 88.7. The Philipines is at 169. China is at 72. We are lower than South Korea which came in at 101.



Sometimes we get into a lot of internal bashing and politicking, and we are not thankful enough of where our country is fiscally. Yes, I agree wholeheartedly that we could have been so much more and so much better. Still, it is gratifying to note that we are not in "real danger" of a country default - OMG, can you imagine if we are at 200 or 300.

Here are some notables: Dubai at the ominous 444, Vietnam at 252, Argentina at 921 ....

Funnily though, with the World Cup coming soon, most of the participating nations are also the ones with the more perilous debt ratings:
Argentina 921
Brazil 127
Mexico 125
South Africa 153
Portugal 229
Greece 533
Spain 165
Italy 145

So, the key to having a great footballing team is to be fiscally irresponsible???
; )

Let's Take A Walk With The New "Apek" On The Block

I will go through the entire exercise of reading the prospectus and noting the important points of this China-company listing on Bursa, K-Star Sports. This way, we all can discuss on how we should be evaluating the whole thing.

Yes, you guessed it correctly, its another shoe maker. Why is it that shoe making industry is the only industry being keen to list on Bursa? That's another question for another time.

K-Star will offer 15.32 million new shares at an issue price of RM2.15 per share with 3.4 million shares allocated for the Malaysian public and the rest of 11.92m for selected investors. OK, the size of the offering is not too big at all. The thing to watch out for is the placement to selected investors - if its a huge allocation to selected investors compared to the public, then maybe the promoters and lead underwriters are NOT THAT CONFIDENT on the issue at all. A large sized placement to selected investors may be negative as well, remember MultiSports and Mr. Quek.

Some may think that its a good thing that its all new shares issued. I think if its an ACE company, then that is OK, but for an established company churning decent profits, that is myopic and naive. You should have some sort of moratorium but you should also be upfront with shares that owners might want to sell. I would rather that they sell 20% of their shares to the public and 5% to selected investors - and then the rest of the shares be placed on a moratorium for 6 months, and only sell another 10% from 7-24 months. That way, they can go and concentrate on running the business but with some sort of buffer on being listed. You cannot and should not deny entrepreneurs from some cashing out after having growing the company to a listing.

The IPO exercise is expected to raise RM32.94mil out of which RM9mil will be used for raising the company's production capacity, RM5mil for sales and marketing network expansion, RM4.5mil to enhance product design and development capabilities, RM3mil on branding and advertising efforts and the rest for working capital and listing expenses.

The company, scheduled for listing this May 31, recorded a revenue of RM294.4mil and a pre-tax profit of RM45.54mil last year (StarBiz made an error in taking the RMB figures for RM). Here is the key, it makes RM45.54m a year, and yet it is only raising RM32.94m??? There is absolutely no need to get listed, is there? Generally, a company should be making much less than what it is trying to raise - that way, it is to channel additional capital to fund growth. When you already make more than what you are trying to raise, you MUST HAVE OTHER BIGGER OBJECTIVES on your agenda.

Hence, the bullshit about increasing capacity, marketing network expansion, enhancing product design, branding and working capital are all plain bullshit (and it smells too).

I am not saying you cannot list when the amount you are raising is a lot less than your annual profit but you got to be more upfront-la, not so many idiots running around. I would be a lot happier if the company says that its also to allow for some early investors to cash out - there is nothing wrong with that at all, but don't try to pull a fast one. We all need entry and exit strategies, and its an accepted process for capital to invest and divest, so that the process can be repeated, its the whole mantra of investing and capitalism.ol

K-Star has been in the apparel industry for twenty years and its product range include athletic footwear and leisure wear. They are also the original design manufacturer (ODM) and original equipment manufacturer (OEM) for international brands including Umbro, Diadora, Kappa, Le Coq Sportif, Die Wilden Kerle, Canguro Cosby and Bridgestones, as well as PRC footwear brand, Double Star. This is good stuff, proven deliverables across a wide section of reputable clients. It has four production lines and produces four million pairs of shoes in-house annually.

Back to valuations, RM45.54m based on 89m shares is a net EPS of 51 sen. At IPO price of RM2.15 thats a remarkably cheap PER of 4.2x. However, we should do a comparison: Xinquan, for year ending June 2010 should be making 35.7 sen, at RM1.17 it is trading at 3.27x PER. Why do you want to list on Bursa when you get PER valuations between 2x-5x???

Look at the 2010 PER valuations for similar China sports apparel companies: Anta in HKSE 17x; Dongxiang in HKSE 15x; Li Ning in HKSE 19x; Hongxing in Singapore at 8x. The key difference besides the different exchanges is the size of the companies. Anta, Dongxiang and Li Ning all have a market cap of above $3bn. Even Hongxing in Singapore has a credible market cap of $338m. Xinquan's market cap is just $103m. As for K-Sports, its market cap on listing 89m x 2.15 =RM191.4m / 3.2 = $60m.

Realistically, I think Xinquan is more interesting because if you ascribe an 8x PER (like in Singapore) for Xinquan, its market cap would be close to Hongxing. But even at 3.2x PER Xinquan only paid out 5.3 sen in dividend, presenting a yield of just 4.7%. If you are really generating so much cash flow and you are concerned on your share price, then maintain a strong dividend policy. Xinquan should make RM109m for year ending June 2010 and is only likely to pay out 5.3 sen gross dividend. They have 307.3m shares but they are paying only RM16.3m in dividends. Do this, declare that you will pay 50% of net profits as annual dividends. RM109m x 0.5 = RM54.5m = 17.7 sen. At RM1.17, thats a gross dividend yield of 15%. Once you declare a firm dividend policy, watch your share fly. I am sure using 50% of net profits is more than sufficient to grow the business.

K-Star directors said in the prospectus that they intend to pay 10%-20% of profits in dividend. At RM45.54, assume 20% = RM9.1m / 89m = 10.2 sen. At RM2.15 thats a yield of 4.7%. So tell me what K-Star is doing that is any different from Xinquan??? The controlling shareholder will retain 58.4% of shares upon listing, the key again is who holds the rest?

One hint, the conversion of a S$6.105m loan into 13.32m K-Star shares. This amount may be fluid and could be early sellers, maybe.

Sales to two major customers, namely Xiamen-Waitu Import Export and Qingdao Double Star Celebrity Industrial accounts for 40% of sales. I need not tell you that that is a significant risk, but still acceptable. Other financial metrics such as inventory turnover period of 13 days and receivables turnover period of 80 days are quite positive.



Overall, its valuations are attractive but will suffer the same fate as the rest. Initially you probably have to clear 15.32m + 13.32m shares = 28.64m shares. After that, maybe the share price can find some traction.

I would strongly advise that these companies come out and declare 50% profits payout as dividends; and Bursa put in my recommended moratorium on the owners and promoters. Only then will confidence be back in these shares, and you need confidence to be back if we are to be a viable alternative. You can have hundreds of meetings and brain storming sessions - these will be your best weapons.

Let's be honest here, even if we do all the right things, these shares will probably get between 7x-10x PER valuation max because:
- they will always be benchmarked to those listed in Singapore and HK
- the discounts for smaller China companies listed overseas are justified judging from the "shenanigans" concocted by some of the red chips in Singapore
- they list in Malaysia usually because someone had the bright idea of either cleaning up the books and/or inject fresh capital to dress up the company and/or hammering together a few smaller companies to make it listable and/or ... you get the drift ... when that's the case, usually the ideas man would want to cash out quick

Asset Class Returns As At end-April 2010

April was relatively uneventful for the major asset classes in terms of total returns—with one exception. REITs scored another outsized gain last month, posting a strong 7.7% total return, based on the MSCI REIT Index. Real estate securities are also far ahead of the pack for 2010 after advancing by nearly 18%, or about twice as much compared to the next-best performance for U.S. stocks in the year-to-date ranking.

The fact that almost all other asset classes were flattish indicates that investors are probably equally bearish and bullish at the same time. Despite the troubles in Euro zone, all asset classes are like marking time. Safe to say that a large number of investors have stayed in cash for the time being but not totally out of it as it could very well rise another 10% from here for no apparent reason.

As I have said a number of times, its prudent to stay about 70% cashed up for the next month or two. The World Cup in June is not likely to bring much activity in all markets bar the US, as soccer still does not wield the delirium there that the rest of the world go through willingly.

In the wake of the price surge in real estate recently, the yield on equity REITs fell to 3.49% as of April 29, according to data from the National Association of Real Estate Investment Trusts. That’s slightly below the 10-year Treasury’s 3.76%. Is that a sure sign that REITs are set to correct? No, although it raises the risk in the asset class.

It’s worth noting that in the past, when the equity REIT yield overall dipped below the 10-year Treasury yield, it’s signaled rough times for real estate stocks. During 2006 and 2007, the yield on the 10 year exceeded the REIT yield. After REIT prices were crushed in 2008, the yield premium over Treasuries soared, reaching more than 7 percentage points over the 10 year in early 2009.Hence you may safely take REITs out of the performing asset classes by next month, and you are basically left with nothing positive, really.

Despite the lush levels of liquidity in the global system, commodities are still working off inventory. That does not bode well for growth emerging markets. Its a standoff for a couple of months.