Monday, October 27, 2008

Thoughts on recent stock plunge

Stock markets are suffering due to large institutions and hedge funds redemptions from the western countries. The selling originates from financial institutions who want to shore up their balance sheets and cope with redemptions from investors. These firms have massive CDOs that have no market value (no secondary market to trade) and hence, they can only sell other liquid assets such as gold, silver, commodities, stocks, currencies and bonds.

This really explains why even gold and bonds are taking a harsh beating when these safe heavens should theoretically be inversely related to stocks movements.

We also know that hedge funds are de-leveraging by selling assets to pay Japanese banks in YEN. They have previously borrowed YEN as it has very low interest rates and invested in high yielding assets such as Aussie and Kiwi dollars. Stocks and bonds are also not spared in the massive de-leveraging exercise.

Due to the sudden market plunge, many retail investors are forced to sell their holdings in panic and fear. I just checked with my broker and he lamented that many of his clients have sold everything they have and do not wish to visit the market until things “brighten up”. This worldwide phenomenon has toppled the stock prices even lower affecting the confidence of all investors.

Confidence is a powerful emotion that can actualise a self-fulfilling prophecy. For instance, if everyone feels confident that the economy will be good and prosperous, many will start to spend, take up loans and splurge on luxuries. This will translate to higher consumption and GDP growth. The reverse will be true when people start to feel down and stop spending.

As we can see, the above has little to do with the fundamentals of the stock. For instance, DBS earned $2B net profits last year and its share price has retreated by more than 50%. Is the market expecting DBS to have a 50% drop in its net profit next year? The $80M compensation to High Notes investors is less than 10% of its FY 07 earnings.

Keppel Corp has reported higher 3Q (YOY) earnings and FY 08 earnings are likely to be close or higher than last year record $1B net profits. Yet its share prices have come down by 70% this year. Again, this is irrational.

Hence, for investors who are contemplating to sell, I would advise you not to or you are joining the ranks of irrationalism.

How long the selling will last is anybody’s guess. STI seems likely to retract towards 1000 points before the carnage will stop (my guess). In my opinion, it seems to be an opportunity of a lifetime to accumulate excellent blue chips and hold for the long term. How many times in our life can we invest when STI hits 1000 points? It may be the one and only time!

Currently, I save about 50% of my take home pay and save the rest. I do not spend a lot mainly because my hobbies and lifestyle (jogging, reading, playing bridge, watching DVDs and cable tv, Starbucks green tea, weekly restaurants visits with friends etc) are modest and cheap.

I also do not have loans commitment nor marriage plans within the next 3 years. At my current rate of expenditure, I can continue to lead a modest lifestyle while saving for retirement. In fact, I am willing to take a 50% pay cut when I begin a new career next year. I do hope I can continue to save at least 20% of my pay to plan for retirement then.

In case nobody wants sgbluechip as an employee, I guess I will also have to prepare being stuck in my current job until the economy turns for the better. I do hope it will not happen though!

Saturday, October 18, 2008

Fine Singtel

I am rather disappointed by Singtel’s efficiency in slapping late payment fines of $0.50 lately.

Sometimes when I am just behind a month’s payment due date, I would receive a reminder, and my next bill will have an additional $0.50 postage and handling charge for their reminder.

This has occurred several times.

I am a long time subscriber of Singtel services which include landline, broadband before replacing my pager and dial up services.

I also subscribe to Starhub and M1 services. However, I have never received fines from them for being late in payments. Starhub would send me a letter telling me that they understand my busy schedule and are gracious to wait patiently for my next payment.

Of course sometimes I take advantage of that and accumulate months of bills before paying all at one go.

I think it is a nice gesture to allow subscribers more time to pay. Slapping fines to increase revenue and shareholder value is a penny cheapskate, pounds idiotic strategy.

I will be renting the new hubstation to utilise the free internet when my broadband contract for Singtel ends this Dec. After all, it only costs an additional $4/month on top of the usual digital set up box subscription. I get to “watch, surf and play” as well.

Of course, I will be terminating my landline as well.

There will be a $30 monthly savings on my telecommunications costs.

To Singtel:

Nevermind I did not qualify for the red rewards points as my bills do not amount to $100 per month.

Nevermind I did not redeem a single free gift from since 1996 while M1 and Starhub has given me countless movie tickets and Caller ID waivers.

Nevermind I stayed as a loyal customer all these years and never default on any payments.

Nevermind your hotlines are always busy and customer service tellers are often hard to reach.

Nevermind your efficiency in slapping postage and handling fees on us.

Nevermind you lose a customer like me.

Tuesday, October 14, 2008

Good business!

I thought for fun the “recession friendly” businesses that can profit from our current technical recession. I have come up with of a few:

Hawker food

Less people are patronizing the restaurants as we tighten our belts. Hence, hawker fare will appeal to more people. At least we do not have to pay GST, service charge in exchange for poor service and mediocre food.


I will not be surprise if Singpost come out with a better set of quarterly results as we all know that pawnshop business has a negative correlation with the economy. More people are pawning their valuables for short term loans.

Psychiatrist Clinics

As we feel the heat of the recession, many people will be losing sleep over their devalued stocks, impending pay cuts and retrenchments, pushing some to the abyss of depression.
Psychiatrists might possibly profit from higher help seekers.

2nd hand businesses

As reported in the news, some people are selling their cars at fire sale to 2nd hand car dealers. This will translate to lower prices of cars. In general, for middleman buying and selling 2nd hand goods, I believe they are in for a bumper year.

Education industry

As people get retrenched and are unable to find jobs at the moment, many will go back to school to upgrade themselves while getting ready for the economy to recover. Some people will go ahead with courses to stay relevant in their industry and prove their relative higher value to the management to avoid the axe.

Safe box manufacturers

As we know, credit is tightening for all as banks do not trust each other as much as before. There might be a bank collapse while I am blogging this article. Hence, safe boxes will be in demand as people buy to keep their cash/gold at home, safe from banks and full time robbers.

I do hope there is no increase in demand for MRT cleaners to clean the bloody tracks though!

Friday, October 10, 2008

100% guarantee on deposits?

Many financial advisors and investors have advocated MAS providing a guarantee on Singaporeans’ bank deposits. Currently only the first $20,000 is recoverable in the event of a bank failure.

Actually, I do not think it is a prudent move for banks to insure 100% of deposits.

Firstly, it will bring about a huge influx of cash into Singapore from other countries. Singapore banks will be seen as safe heavens for cash. This would ultimately increase demand for Singapore dollar and Singapore exports will suffer. GDP will go down even more as we lose our competitiveness. Do not forget Singapore is an export oriented economy.

Secondly, it will discourage people to invest. Many would believe money in the bank is even safer than keeping it under the pillow since it is 100% guaranteed. This does not bode well for the local equities market and for risk adverse investors. Remember, your deposits will definitely be eroded by inflation, slowly but surely.

Thirdly, it is not cost effective. The depositors will ultimately pay for the insurance. It may be in the form of service charges, lesser interest or just an insurance fee.

Fourth, it might encourage irresponsible lending since the risk of defaulting on its bank deposits is borne by third party. Imagine that I borrow money from A and if I do not pay A, B (insurer) will have to pay. Would I exercise necessary prudence to return money to A? Am 1 less likely or more likely to take on more risk? Answer is clear.

Lastly, we are already compensated to deposit money in the bank through the interest payable to us. The risk of default is small, which explains the low interest rate on our deposits in the first place!

I feel that bank should offer an optional insurance scheme to those who wants to seek a 100% guarantee on his/her deposits. The premium can be 0.1% (per annum) of amount insured. This would save all the debate going on. Of course the insurer can be anyone but the bank itself!

SPH FY 08 Results

SPH has declared a final year tax exempt dividend of 19 cents per share, a notable feat in current financial turmoil.

It has reported a set of decent results:

Revenue had exceeded $1.3 billion, a record high.

Operating profit grew 17.5 per cent to $502 million.

Due to a 67.3% dip in investment income together with an impairment charge for SPH’s investments in associates, net profit decreased 12.4% to S$437 million.

It is worth noting that the dividends paid out will be tax exempt, compared to the usual 18% company tax the previous year. As such, dividend payout actually increased by more than 1 cent this year.

I have adjusted my expectations of dividend cut for FY 09. However, it is likely SPH will at least retain its 27 cents dividend payout for FY 09.

At last traded price of $3.5, the yield is 7.71%.

Take note that SPH has increased its dividend payout for 5 consecutive years. If the economy worsens, government might even cut corporate taxes to support the economy. However, I am not betting on our government to help, but newspapers being a near staple necessity will continue to earn a decent recurring income for FY 09.

Sky@eleven will continue to recognise income till 2010 and there should be larger amount of profit recognition in FY 2009.

SPH has a quick ratio of 3, a rather healthy debt ratio especially when credit is tight now.

Going forward, I will continue to hold on my 49 lots of SPH dearly and reinvest the dividends received.

For those who have sold down the stock due to fear and panic, I think it is rather overdone.

For those who have bought more SPH today, congrats! The dividend payout is likely to give you a great Christmas! I am unable to join you as my cash at hand is too tight!

SPH will XD on 09/12/2008, the dividend will be paid on 23/12/2008 (eve of Christmas Eve).

Wednesday, October 8, 2008

Where to put our money?

One Singapore dollar to 1.02 Aussie dollars. This rate has never been seen for years!

Today I quickly sms my friends and asked them if they would like to go Australia in Dec, in time for their summer farm stay. Of course, the rates were the highlights. After I sold my Aussie dollars at $1.29 last year, Aussie has been coming down especially after the recent 100bps rate cut.

The fall in commodities prices and unwinding of YEN carry trade has brought down major currencies and indices to their multiyear lows.

Indeed, nothing is safe other than gold these days. Putting our money in Singapore dollars deposit will yield nothing more than 1.8% even if you are depositing a million dollars in UOB million dollar deposit promotion.

Of course, the personal banker might sell you something that yields more, but at current market and prevalent fear, no one would dare take it.

Most would rather suffer a real loss of 5% after adjusting for inflation.

Mr. Oei Hong Leong estimated that market would go down even more, as it is the end of the beginning. He recently made headlines buying AIG at rock bottom and selling for a $7 million dollars profit, before donating it.

Fear is clearly prevalent in the market, everybody is anticipating the market to go down further. However, today, I bought 5 lots of STI ETF (CPF) when STI nearly reach 2000 points. Although 90% of the investors are probably selling, I do know that like all crises, this one will eventually be resolved and the bull run will resume.

Human greed is never ending, there will be more market run up and crashes to come.

Do not despair. Rather, find the courage to be greedy now.