Sunday, August 31, 2014

If something is 10% Insurance and 90% Investment, why do we call it Insurance?



Say "Insurance" one more time. I dare you. I double dare you.

You know what I don't understand? Why do people misrepresent investments as "insurance"? Many people now unknowingly refer to an investment as insurance because of all the butchering of the meaning that has been going around. This has to stop.

Let's be crystal clear about this people: Insurance is NOT an investment.

What is insurance and what is an investment? Let's use Investopedia's definition for it:




Some good and pure forms of insurance that have not had their meanings butchered and masqueraded as "investments" are: Travel insurance, Car insurance and Fire insurance.

Have you ever heard anyone in your life tell you that, last week they met their insurance agent and "invested" in some travel insurance? No right. The word to be correctly used with insurance is "protection". You protect yourself using insurance. You invest using investments. You can't "invest" in insurance.

So why are there so many "insurances" that you can invest in? Well, because they aren't really insurance. Not mostly, anyway. They are investments that are cross-dressed and sprinkled with some insurance so that they can be legitimately referred to as insurance, so you feel better at night sleeping with a potentially dangerous beast.

The problem isn't really with those kind of insurances, nor is it with investments. Like I said, no one goes around saying that they have "invested" in car and fire insurance. Likewise, no one goes around saying they have "insured" themselves by buying some stocks or bonds. The problem comes when there is this grey-area of Investment-Linked Policies and endowment insurances.

Investment-Linked Insurance Policies (ILPs), going by MoneySense's definition is:


So, the line in red is what I would like to draw your attention to.
"... if you are more concerned about getting life insurance... you may need to consider other life insurance products."
Too many people tout ILPs as insurance, which also just so happens to have investments returns. This is intentional misrepresentation because people generally have the notion that anything that is called insurance is "safe" while anything that is called investment is "risky". By referring to ILPs as insurance, it creates this false sense of security that ILPs are low risk products. Hence, people want to invest in this "insurance".

ILPs are more investment than insurance. If an ILP is 10% insurance and 90% investment, what should you call it? Well apparently, if you are in Singapore, you call it insurance. If something is 10% not-bullshit and 90% bullshit, what should you call it? I say bullshit.

Let's be real about what ILPs really are. ILPs are expensive investment tools which just so happens to have an insurance portion to it. You don't invest in this "insurance". You are investing in an expensive investment vehicle (the high costs eats into investment returns) that has an insurance portion to it. It's like the free soup that comes with your chicken rice. No one buys the chicken rice for the soup.

If ILPs are going to be seen, talked and touted as mainly insurance that just happen to be investment-linked, then maybe we should all go to hawker centres and order chicken broth soup that just happens to come with a plate of chicken rice. Where's the logic, please help me.


Now, let me talk about Endowment Insurance. I do not like the title of it at all, not one bit. Even though the MoneySense definition of it recognizes that it is more investment than insurance, they still call it endowment insurance. I find it very misleading.


Once again, they admit that a fraction of the premium paid will go towards insurance protection, while the remainder is invested. Also, if you have enough insurance, they say that you shouldn't be getting this product, because it is just an expensive way to invest! ("you could be paying for something that you don't really need" refers to the insurance portion of the endowment plan)

So, why is MoneySense classifying expensive investment products with a small insurance feature as insurance? Do they really think that these products which are mostly investments should be called insurance?

What is strange is that none of the insurers are unclear about this distinction of what is an investment and what is an insurance. All their ILPs and Endowments are clearly listed under "Savings & Investments", NOT under "Protection". Same for the banks. They all call it "Savings with Insurance".

Don't get me wrong. All these products have their uses. I just think that if something is mostly investments, we ought to call it an investment, rather than insurance. Or at the very least, an investment with some insurance. But definitely not only insurance.

/rant off

Sunday Weekend Roundup: Insurance and Investments ramblings

It's like as if Rennie is reading my blog and wants to whack me again. Like I mentioned last week, The Sunday Times Invest section usually has people that "invest" in insurance. Another week, another article that I get slammed down by stereotyping.

This week's interviewee is Ms Sabrina Gan from Blackrock. She previously worked at Schroder and also EY. She is a CFA and also is very familiar in alternative investment. This lady is clearly extremely financially literate.

"I plan on both fronts - protection and investments" is the clear winning line here. Like most financially literate people, one of the most basic things is to be able to discern between what is an investment and what isn't. I re-emphasize: Insurance is NOT an investment.

Pretty much the rest of the article is quite normal. Her investments go into 5 mutual funds of different asset classes. Definitely a prudent realist, I admire her and her outlooks on life.

On the next page, there is an article by Cheryl Ong. Now, I don't have a thing against Cheryl Ong, but I kind of cringed when I read the line, "I have also since invested in insurance policies, since they are still affordable when I am young and healthy". I sure hope other people that read the newspaper don't go calling their insurance agents asking them about "investing" in insurance policies. Oh gawd.

However, I have 2 points that I agree with her wholeheartedly. The first point is that as boring, mundane, lame and uninteresting personal finance is, if you don't give a shit, you are going to get shit.

Coming from the local university, I would say that my social circle of friends are generally more educated formally than most. But when it comes to personal finance, I think they are worse than average. On top of having (perhaps unwarranted) high self confidence in their ability to earn money, they completely overlook things regarding personal finance. Also, I think that since they have not seen or suffered much financial hardship, they are a bit delusional about money. Don't even talk about investing wisely, close to none even invest anything and there is a large portion that barely even saves. Inflation eroding savings is a moot point if you don't have any savings to begin with. I have quite a few friends that unfortunately do not has this inflation problem to deal with because they have no savings to speak of. I am meeting a friend for coffee later. I hope I can inspire her to start taking some action in her life instead of spending her salary willy-nilly.
The best time to plant a tree was 20 years ago. The second best time is today.
Why should you expect the government or your family to look after you if you can't even look after yourself? No one owes you a living, you owe it to yourself.

The second point that I agree with Cheryl is regarding a nice quote she supplied:
"Money isn't everything, but without money, you have nothing." 
As harsh as it sounds, it is unfortunately the sad reality that we live in today. The accumulation of wealth should not be the end goal, but to have no wealth is to really be nowhere. Money is supposed to help us achieve the things we want in life, but it shouldn't be the thing we want in life. At the end of the day, money is exchange for something that we enjoy, and the money itself just serves as a medium of goods exchange.

Goh Eng Yeow on the next page wrote an entire article about it, but I think it is summarized best at the end of his article with the quote from Seneca:
As in a story, so is life. Not how long it is, but how good it is. That is what matters.
Enjoy life, you owe it to yourself to make sure you've lived a good one.

My Longer Term Case For Gold

I know that a few people think that I'm one of those tinfoil hat fringe blogger, every once in a while talking about gold and other armageddon and apocalypse scenarios. Personally, I believe in market cycles and deep value investing. I can see how it makes sense and works. In essence, I don't care how I make money, I just care that I do. Whether you believe me or not, I'm going to lay out some long term views on gold.

First off is of course Tiho. He recently wrote 2 posts regarding gold here and here. The first article is more recent and talks about how rare the current drawdowns and annual loses of gold is. The second article compares the US stock market to gold in terms of performance, which ends up showing a rather ominous mirroring.

Essentially, each of them have 1 graph, which is the same. That is the 3-year rolling annual returns of Gold as an investment.


The graph only starts from the 1970s because that was when gold was finally broken from its currency peg and entered the free market.

The argument here is in the 70s, gold reached a bubble twice, and 3 year rolling performance was just as bad as the current one. This is very unusual because usually when there is a deep upward spike, there is a deep downward spike because of overcorrection. We are seeing a deep drawdown although there was not any significant spike to the upside, at least not like anything we've seen twice in history already! This is quite unusual.

Jesse's Cafe Americain is a pretty good resource if you're really into the precious metals. I don't personally follow it because I find that too much information, especially in the gold realm will create biasness.Nevertheless, a good article deserves some attention.


What they have noticed is that the Coppock indicator has just recently flashed a buy signal. The last time the signal generated a buy signal was back in mid 1998 when gold was bouncing around $300 the entire year. Sure, it might have been a bit early and gold only finally bottomed out in mid 2000, but this indicator is really for the long-term investor. The Coppock indicator is best used as a tool to help see the major trend change of a long cycle, which seems quite likely now.


If rolling returns and a fancy indicator isn't your cup of tea, then perhaps a regression with standard deviations might be a bit more convincing. No magic voodoo going on here, just mathematics. Gold is now trading close to the bottom of it's 2nd sigma lower band. What does that mean? The probability that gold goes up is much much much more likely than it going down. Since they are linked, Silver is performing very similarly as well.

Apart from these longer term "technical" cases, the fundamental reasons to own precious metals still stands. I know that I am really swimming against the tsunami at this point of time, but I continue to accumulate precious metals through BullionStar on down days whenever I can afford it. I have created a Silver accumulation plan back in June and I am currently on target. Although I have very strong convictions for precious metals in the long run, my investment horizon is not long enough for me to make a huge bet on it. Therefore, unlike some tactical allocaters with allocations to precious metals in the range of 80% and upwards right now, I am limiting my allocation so that I can diversify my bets in case I need to redeem my assets early. Of course, since the fundamentals case has probably strengthened, it still makes sense to double down and accumulate even more if prices drop.

One of the toughest things about being a long term value investor is that you are often much too early before the fireworks happen. It is not glamourous, nor is it easy to buy into a horribly performing asset and to "miss out" on the rally going on in the asset class that is the flavour of the week. While it does go against human instinct and it is painful to go through, I think that the pain of being wrong and having losses, especially when you shut down your own logic, is much more painful.

Only time will tell.

Saturday, August 30, 2014

[XMM STI ETF Investing] August 2014 Update

As mentioned previously, this will be my attempt at having a monthly update of the small portfolio that I am running for my sister and mother. The aim to have as little downside risk as possible, and maximize returns from there.

No changes to the portfolio this month, I am still playing it safe because the STI doesn't seem to offer any good entry points yet. It looks set for a correction soon, but I just feel uncomfortable buying in longer term at this level.

Here are the current stats of the portfolio as of end August 2014.

29 August 2014       Sister             Mom               Total       
Amount Contributed
$10,072.82
$12,036.31
$22,109.13
Percentage
45.5595%
54.4405%
100%

29 August 2014  Stocks  BondsCashTotal
Amount Contributed
$0
$8,058.29
$14,050.84
$22,109.13
Percentage
0%
35.28%
64.72%
100%

Bonds are in UOB SGD Fund Class A with 4731.82 units.

Cash is earning 2% from filling up the remainder of my OCBC 360 account.

Additional $400 was added to Cash.

1) Calculate end of month stocks / bond / cash value, update both totals
2) Times by contribution percentage to find end of month value of each contributor
3) Add in $400 to both totals
4) Recalcuate new percentage of contribution
5) Recalculate new percentage of assets

[STI Statistics] August 2014

Hi all, this is the third of my monthly post analyzing the STI.

Feel free to send me requests for more statistics, especially if you have the raw data for me to work on. I am looking quite desperately for the old data on P/E and P/B monthly values of the STI before 2008. If anyone can get me the P/E and P/B statistics of the STI OLD from a Bloomberg terminal, that would be greatly appreciated and included.

As of 29 August 2014

STI Closing Value: 3327.09
P/E Ratio: 14.01
P/B Ratio: 1.35

Monthly Data Series from 2008

Mean P/E: 12.11
P/E Standard Deviation: 3.25

Mean P/B: 1.48
P/B Standard Deviation: 0.22

% of time when the STI is cheaper based on P/E: 72.06%
% of time when the STI is cheaper based on P/B: 27.73%

Comments

The P/E and P/B ratios are still telling conflicting stories about the index, however both ratios have come down from from month, which seems to have peaked. The STI looks to be in a topping pattern to me.

Considering how the index has not pulled back substantially yet, I am still waiting for an opportunity to enter some long positions. No rush.

I am still considering constructing, adding and maintaining an STI seasonality chart, which can probably include data all the way back to 1987. I will use data from Yahoo Finance and take construction tips from this guide. I am been rather busy lately though, maybe I can work something out, at least a monthly seasonal would be interesting.


*Straits Times Index values from Yahoo Finance
** P/E and P/B Ratios from SPDR STI as a proxy

***Data Series 2008 - 2014 from Bloomberg
****Data Series 2014 from SPDR STI as a proxy
*****Probability calculated with http://stattrek.com/online-calculator/normal.aspx

Friday, August 29, 2014

[SGX Portfolio] August 2014 Update

As mentioned previously, this will be my attempt at having a monthly update of my SGX portfolio

Here are the current stats of the portfolio as of end August 2014.

                                                                         Lots         Average Price   Dividends Collected
Croesus Retail Trust
1
0.900
-
Saizen REIT
1
0.875
-
CDW
1
0.131
-
Asian Pay TV Trust
1
0.760
-
Lippo Malls Retail Trust
1
0.405
$6.80
New Toyo
1
0.290
-
Chuan Hup
1
0.285
-
Hotung
2
0.149
-
Singapore Shipping Corp
2
0.265
$20.0
OUE Commercial REIT
1
0.805
-
Hock Lian Seng
1
0.270
-
Global Investments
3
0.141
-

Total Cost     $5,972    
Unrealized Gains$288
Realized Gains$3.18
Dividends Collected$26.80

*Realized Gains will take into account the final net profit or loss after including transaction costs to close a long position on a security. Dividends that has been collected(which are realized) are separately counted.

Annual income from dividends is now expected to be about $400 for a full year, but of course I collected some and miss out others. I am expecting 4 of my counters to pay out dividends next month, and they are Asian Pay TV, CDW, Saizen REIT and Croesus Retail Trust.

Based on the dividends I am expected to collect, my portfolio dividend yield on cost is estimated to be about 7.0%.

I am currently working to create a watchlist that only have very fundamentally solid, dividend counters. This will reduce my future screening time and whenever there is broad market weakness, I will look for the most promising counters and purchase them on dips.

I am also looking forward to the drop in share lots from 1000 to 100, because it will enable me to have access to much more companies that used to have a very high capital requirement. However, this will only happen in Jan 2015. I will start checking the fundamentals of the companies that I look to add in my future watchlist though.

Finally, I am also studying more so that I can develop a second style of evaluating stocks. Even though my method has so far proven to be profitable, it is too soon to say because the time period is too short. Also, a new style will give my portfolio diversification since my conclusion to include counters would be based on a totally different methodology.

Thursday, August 28, 2014

Singapore Property vs Gold in SGD: More useful than you think

So lately I've been reading a lot about property. I'm planning on moving out of my family home soon and live on my own. One of the things that I always think about is if an investment is under or over valued, and how can you tell.

Well, following my previous research that I did comparing the STI in terms of gold, I thought I'd do the same with property. I said I wanted to do this quite a long time ago. I even thought I did do it, until I couldn't find any previous post on it.

Instead of using the URA PPI, I have decided to instead us the SRX SPI. Why? For me, the biggest reason is that the SRX SPI is published monthly while the URA PPI is published quarterly. This of course means that the URA PPI is much smoother and a better indicator of the general trend, but it can of course lag by quite a wide timeframe. For further differences, scroll down to point 23 of this page.

Anyway, I used 3 sets of data:
1) SPX SPI (monthly)
2) Gold in USD (monthly average)
3) USD/SGD (monthly average)

Since both gold prices and FX rates go quite a long way back, the only limiting factor to the dataset here in the SPX SPI, which starts in 1995. Below is the chart of the ratio between the SRX SPI and Gold in SGD terms.



Perhaps the chart doesn't look so clear, so nevermind, let me annotate it myself.


Basically, this chart quite accurately predicted the gold highs in 2006, 2008 and 2011/2012. The same for the housing highs, 1997, 2000, 2007 and the current one right now.

Don't believe me? Check out the respective gold and housing charts below:



So has the Singaporean housing bubble popped? I would say yes objectively.

Should you sell your house and buy gold? Well, not that I'm an expert or anything, but if I only had 2 assets to cycle in between each other, then yes, I would sell any investment property I have now and stack precious metals.

Of course, based on the previous study I did with the STI and Gold, I did find that in terms of relative value, the STI seems like a much better buy than gold now.

Anyway, I'm of course holding off my house purchase (what's the rush? this correction look set to be prolonged and painful with the cooling measures, massive supply is going to hit the market over the next 3 years, oh it's going to be glorious). Of course I want to move out, but I will most likely save tens of thousands of dollars just waiting for a year or two for the housing market to reach back to sane valuations. Some of the psf prices on ridiculously small units for midgets which are leasehold are currently just out of this world. I seriously seriously wonder where do all these "Singaporean property investors" think rental demand is coming from.

Until then, I continue to stack precious metals on dips. I'll probably cash out almost all my precious metals holdings once the SRX SPI heads towards the other end!

Now, the more interesting thing to calculate now is what about Property vs STI? And then a 3-way comparisons of STI vs Property vs Gold! Hmmm... well, if people are interested, I might get off my lazy bum and do that research.

Am I Too Bearish?

Perhaps I read way too much ZeroHedge, but I find that the guys there are often right about most of the things they say. The only problem is, the rest of the world is happily collectively wrong about it, until they finally realize it. The world can change in a New York minute.


I think the stupidest argument that pundits throw around is that "The market is still not as historically overvalued as we have seen in the past". Well, duh. The last time the stock market was this overvalued was back in the huge tech bubble. That didn't end too well, in case you are a bit foggy on the history.


John Hampton once again smashes the bull case. I have to give it to him, he is persistent and unwavering. The chart above from Hussman shows how the mania can actually be argued to be worse than in the tech bubble, since overvaluation is much more broad based. He attributes this bull rally mainly to multiple expansion and leverage, and cites marginal higher highs on extremely low volumes, coupled with a wide range of negative divergences to make the short-term move in the future biased to the downside. I find it extremely hard to argue with his analysis and data.

One of the guys that I really love reading is Lance Roberts. He tackles the best arguments that bulls throw out and offer plenty of reasons to discredit the arguments. He's not arguing for the sake of arguing, he's arguing because it makes sense. And the stock market continuing to rally for a long time does not make sense.


He was one of the few people that went against the entire herd and stuck his neck out on the line to say that interest rates will come down. He was beautifully correct. I think it was his article that I read last year that gave me the starting point to do more research and plunge into bonds. The bond portion of my portfolio is holding quite steady with decent gains, I must admit.

Another guy that swims against the crowd is Steen Jakobsen from Saxo Bank. The reason why I like him is because he gives actionable solutions at the end of his thesis, which basically cuts through the noise and make it a bit more binary. What use is it that we have information but we don't know how to use it?

The last thing is a reminder that doing nothing can be better than buying into a diversified portfolio of crap.

All the bulls have are that:
1) "Don't fight the Fed"
2) "cleanest dirty s***" of the developed markets
3) "investors are on the sidelines" (obviously not, refer to chart 2)

Most of the points that the bears bring to the table are hard facts and statistics. Can the mass delusion of investors continue? Sure it can. But this problem is a "When" problem, and not an "if" problem. It's going to come, so I don't mind looking like a fool sitting this part of  the rally out. I refuse to play "Greater Fools" with the rest of the market.

Tuesday, August 26, 2014

STI ETF Showdown: The SPDR is going to kill off Nikko AM

The SGX has 2 ETFs that track the Straits Times Index (STI).

There is the long time player, SPDR STI ETF, which has been trading for years with a standard board lot of 1000 shares.

Nikko AM STI ETF is the newer player that has been trading with a reduced board lot of 100 shares.

Along with the new change in the SGX that board lots for ordinary shares are going to be reduced to 100 shares, the SPDR STI ETF and the Nikko AM ABF Bond ETF are the only 2 ETFs to also drop to 100 shares a lot. This will bring SPDR in direct competition with Nikko AM.

Let's be very honest here. The only reason why investors have been flocking to Nikko AM is due to the simple fact that the capital requirements to invest with them is a lot lower. Setting aside $300 odd every now and then to invest in the stock market is a lot easier than the $3000 plus that the SPDR requires. Not anymore come 19 January, it will now be a fair playing field.

So, let's just take a look at these 2 products and do a quick comparison to find out which is better, shall we? 


Looking at the important tangibles, it has a lower total expense ratio by almost 25% and it also has 4 times more Assets Under Management (AUM). This would affect liquidity and transaction costs, which I will explain later.

Both ETFs distribute twice a year, every 6 months. They just have different distribution schedules. The SPDR has been around much much longer than Nikko AM. However, both of these attributes don't really make a difference if you were deciding between the two.

Hands down, the clear winner is the SPDR STI ETF.

If it was a perfect world, we would assume that 4 times larger AUM would directly equate to 4 times more liquidity. Personally, I think that the liquidity of the SPDR will be immensely more than Nikko AM. This boils down mostly to what I currently perceive as the type of investors that utilize both instruments.

The SPDR has been around longer, so it is much more well-known. SPDR is also a famous brand for ETFs, giving it a good presence in investors' mindset. To me, the SPDR investor is the more savvy, more experienced investor with much deeper pockets.

The Nikko AM is actually defeated by it's own main benefit, small capital outlay. Investors that invest with Nikko AM do not have deep pockets and are most likely not as experienced since the ETF is much newer. The recent popularity of the ETF is also from the POSB Invest Saver plan that DBS/POSB rolled out. This targets longer-term investors and does not contribute to the liquidity on the markets.

Going over to SGX and just looking at the 2 ETFs, you can see a stark difference in daily volume and the value of it. The SPDR is able to absorb much much more money, while Nikko AM could be easily overrun by a few players.

Liquidity is important because it reduces the bid-ask spread and keeps transaction costs low. It also ensures that there is proper price discovery happening. If the ETF is moving up too fast, arbitragers will be able to sell it by comparing the value of the underlying securities. If liquidity is thin, price discovery is not as efficient and the ETF may be selling at discounts/premiums for a while. While discounts might be good for buyers, eventually it will come back and haunt you once you become a seller. Fair value for an ETF is definitely much better. Lastly of course, is the depth of the bid and ask. The SPDR will have a much larger and deeper book, meaning that it will not be easy to manipulate and move the market. This also means that the SPDR will be suitable for large investors willing to make a large lump-sum order. It goes without saying that small investors can also do the same.

At the end of the day, it will really be because of the lower total expense ratio and the higher liquidity that will cause the SPDR to reign. I think that the Nikko AM ETF will have a lot of liquidity drained out of it as investors move out of it and into the SPDR.

Hopefully Nikko AM has enough people subscribing to RSP plans so that it can continue running and be a useful tool to those retail investors who don't bother about the daily ups and downs of the stock market. Perhaps they might even slash their expense ratio to compete?

But until that happens, the SPDR will be the choice ETF for the STI.

[SGX Portfolio] Buy: Hock Lian Seng


I like the backstory of this company. A construction company since 1969 that got itself listed in 2009. They do a lot of civil engineering work for a lot of the infrastructure in Singapore. Think MRTs and expressways. Not bad, right?

Lately they have been trying to diversify away from just civil engineering. I really like that. I believe that businesses need to choose 1 of 2 routes to survive. Either be extremely specialized and be the best in the industry or to remain competent and competitive, but diversify into related or unrelated businesses for stability. I personally think that the latter is the better route that most companies should adopt once their primary business is already quite established. But I digress.

Their business isn't a very complicated one.

Anyway, why am I buying into them, and at this price? I think it is mainly because of their latest quarterly results, which is much better than their annual report.

Based on their half year earnings, they are now generating net cash, so that's good. Now, how much of their Net Assets is cash? 91%. The company is 91% cash. They have enough cash holdings to pay many more years of dividends. Dividend yield at this current price should be a pretty whopping 6.9%

What is their net asset value? $0.267 per share. I decided to stop trying to penny pinch and just enter at $0.27. Like I said, in a few years time, it's not going to matter if my entry price was $0.265 or $0.27.

So I paid $0.27 for a company with net assets work $0.267, and cash equivalents of $0.245. Not bad I think.


The only thing that irks me is the fact that their debts are a huge 65% of total assets. I am not a fan of debt, but I suppose that debt really can't be avoided in certain industries.

So far, my best stock picks has been REITs and Trusts. My normal stock picks like stocks like this hasn't done much!

Monday, August 25, 2014

Get your ES 2000 party hats on, time to celebrate! Or is it?

Congratulations world, we have just seen the S&P500 index reach the magical 2000 number.

Not only was this height reached on low volume, but it is the fact that panic-buying ensued after 2 flashing red headlines - Services PMI miss and Housing miss.

So now the S&P500 is over 2,000. Dow is over 17,000. The Nasdaq 100 is over 4,000. Only the Russell 2000 is being the lagging lame duck.

Rather than to say how crazy this is (it is), and saying it can't be possible (it clearly is possible, here we are), how's about some of Mr John Hampton to share his thoughts about where the market is.

My thoughts? Too much broad-based hopium of stimulus and the final chain of the greater fools changing hands with each other.

I still maintain that the US market is ridiculously overvalued. I remain steadfast in my positioning. It will take the markets at least 2 more weeks to convince me if I should cover my shorts. Will US weakness affect other markets? Investors with many more years should surely hope so.

#timestamp ES 1999.7

The Price of Freedom: Abandoning my birthright to an HDB

One of the big benefits of being a Singaporean citizen is the right to purchase an HDB. HDBs are awesome mainly because they are just so cheap. People I know from the upper class shun HDBs and see it as poor people dwellings. Personally, I love it. I don't think it is too small. I really like the affordability factor though.

However, the only problem is the requirement to buy an HDB. As a Single, my requirements are pretty straightforward, especially if I am buying from the open resale market.

Single Resale Market requirements:
1) Singapore Citizen
2) Over 35 years old
3) Do not own private property

Now, what really affects me is the fact that I want to move out and stay on my own.

Of course, the ideal scenario is that I buy a resale HDB when I am 35, then live in it for 5 years and after that I can go buy a private property to live in until I die. Obviously I'll rent out my whole HDB flat at that point of time and cover most of my mortgage. Sounds good right?

Problem is that I will only be able to comfortably move in and live in my "retirement" home when I am 40. The next problem is what do I do now from the age of 25 to 35?

One solution that many will propose is that I either live with my parents until 35. I do not like that solution. Yes, I save a ton of money on rent, of course. But the main purpose of me even thinking about housing is that I want to move out!

The next solution is renting. I could rent out a HDB studio apartment. That costs about $2000 a month. A condo apartment would be $3500 a month.

Or, I could purchase a $1 million condo and pay $3600 a month based on the higher 3.5% interest rate. CIMB has a ridiculous rate of 1% floating, that comes out to $2600 a month. Even using a more realistic rate of 2%, which is slightly more than the floating average rate now, it would end up being $3000 a month.

If the condo I am looking at is only $800,000 then my monthly payments could drop to around $2000 a month. Compare that to renting a studio HDB for the same price.

Why would I pay $2000 a month to rent out a small studio or $3500 for a condo when I can pay less per month, and also eventually own it? Renters in Singapore fit only 1 profile: foreigners. They do not plan to live here long term or retire here, so they pay a rental premium to have short-term flexibility. And that premium is large. The only other people are house flippers. It makes no sense for someone with a long-term stake in Singapore and planning to retire in Singapore to rent out a place.

If I had to rent a place for 10 years while waiting to be eligible for my own HDB, I would be paying close to $240,000 in rent. And this is not even taking into account the gradual inflation of the rental revision.

If I have decided that I am going to buy and live in a private property, then it makes sense that I should just purchase it as soon as I can instead of putting it off. Do I really need an "investment" HDB flat?

The only potential issue that I see myself running into if that if I get married and decide to start a family. As a DINK (double income no kids) couple, it is still realistic to live together in my private property. And with no kids, there is really no need to rush into marriage. However, when children come into the picture, space will become an issue.

I suppose in that scenario I would have to sell my private property and get a right sized HDB flat. Or conversely I could put off marrying and having children until my finacee is 35 years old and she gets a HDB as a single first, and then we would live in the HDB and rent out my private property!

Sunday, August 24, 2014

Sunday Weekend Roundup: Discussing 3 Myths in The Sunday Times Invest Section

Every Sunday, the Sunday Times will have a section called "Invest" where they talk about personal finance. I decided that like many of the other prominent bloggers that I know, I would also like to have a weekly roundup session where I share my thoughts about recent discussions around the internet and in the real world, though I would say the majority of the discussion would probably fall on the most recent end-of-the-week topics.


1) Sunday Times Interview with Aviva CEO: Insurance =/= Investments

The running joke that I constantly tell my friends is about how EVERY Tom, Dick and Harry that gets featured in the interview section of the Sunday Times Invest section will answer the bread and butter question of "What financial planning have you done for yourself? What do you invest in?" with insurance.

I'm bloody sorry for all the people who were conned into taking up whole life insurance, limited pay insurance or ILPs. Insurance is not an investment. If it was, it would be called an investment, duh. Even if you can encash out and have a cash value to it, congratulations, you have just paid a high price for an investment that returned less because of all the costs involved. You had an underperforming investment.

Anyway, my friend read the Sunday Times article and chided, "Wa, Aviva CEO with no Aviva products... sounds funny, right?". My friend got it right, but for the wrong reason. His intention was to say that Aviva products must be lousy, which is why their own CEO does not "invest" in Aviva products. But, it is my friend that is the silly person. NO insurance CEO would ever "invest" in insurance. Because it's not investing. Duh.

Which is why THIS week's interview with the Aviva CEO is so important. I salute Rennie Whang for getting to interview him, just to slap me in the face and say "Hey, not everyone thinks that insurance is investment, okay?". I think what makes this interview even extra special is that I knew Rennie in my school days. It's nice knowing that people I used to know are going places. But I digress.

Oh gawd. If there is one myth that is holding many Singaporeans back from the holy grail of the elusive "financial freedom", it is the HUGE FALLACY AND DELUSION that insurance is an investment. Please understand. It. is. not. period.

2) Investing is a bit of Gambling, Richard Ng's commentary

There is another Sunday Times article written by Melissa Tan titled "Investing is a bit of a Gamble". Richard Ng briefly talks about it and gives his views as well.

I politely disagree with both of them.

When you are gambling, the odds of winning the game is usually just under 50%. This is the LONG-TERM infinite number of tries probability. The house will have to have a small advantage, which is how they make their money in the long run.

Investing, is not the same. For this, I quote some statistics from the book that I am currently reading titled "Value Averaging" written by Michael Edleson. You might not agree with the strategy of value averaging, but the point here is about the statistic that I am going to reveal.

The dataset is from 1962 to 1991, which is when he published his book. He showed a table looking at investment horizon and percentage of positive returns. This is his findings.

Daily returns: 55% positive
Weekly returns: 57% positive
Monthly returns: 62% positive
Yearly returns: 74% positive
Four-Year returns: 91% positive

I hope that I made my point clear. In a casino and gambling, you can only win in the short-run if you were lucky early on. In the long run, you will lose more games than you win.

For investing in the stock market, you can lose money in the short-run if you were unlucky. But the longer you play the game, the much higher chances you have of winning.

Investing isn't a gamble if you are looking at a long-term time horizon. If you time horizon is short, then yes, you are gambling. But that is because you are trading, and not investing. They are two different things.

3) Diversify or Concentrate? No simple answer

Big Fat Purse wrote an interesting article with a philosophical theory that I loved when I first read about it early on, which is "The Ship of Theseus". Although the main point of his article was about Buffet's new style of value investing vs. Graham's old style of value investing, my takeaway was a particular quote from Buffet.
Diversification is protection against ignorance, it makes little sense if you know what you are doing. - Buffet
This links to something else which I found similar, which is an interview with an ex-Mob boss from New York City. Again, although his main point was that much of Wall Street is shady, he thinks stocks are in a bubble and that physical gold is awesome, I got a different message.

An anchor asked him about his view on diversification, and his answer is just golden.

Q: As a retail investor then, what about diversification? That is what is drummed into everyone's head.
You have to have knowledge in what you are diversifying in, and not trust someone else to pick those spots for you - Michael Franzese
Too many people are looking for the golden goose, the holy grail. Again in the Sunday Times, there is an article interviewing the AllianceBernstein's CEO. He mentioned how so many investors don't care about the backstory.

"My question is X, please answer X and don't give me a history of the issue. Focus on the issue."

Honestly, if you don't care where your money is going, then you also shouldn't care when you lose that said money. It is much better to know what are you doing, and why that "investment" will actually be able to grow money. Sure, you can be one of those many people that start-up a company and run a business. If you don't know what you are doing, you are going to fail. Starting up a business isn't a bad idea. It is, if you don't know what you are doing.

Investing isn't a bad idea. It is, if you don't know what you are doing.

Well, that's it for my first weekly roundup. I don't know how many people actually care about the stuff I write and my opinions, but at the end of the day, I don't really care. I just have to pen down my thoughts on all these issues, if not I can't get closure. You don't have to agree or disagree with me, but of course I would love to hear anything that anyone has to say regarding these issues that I touched on.

Friday, August 22, 2014

My Confession: Leverage and Trading is hazardous for health

In August of 2013, I started trading with CFDs with real money. Before that, I was only practicing with a demo account and I was doing quite well with my different strategies. Needless to say, virtual money and real money are quite different because of the reality of it.

Since I went live with real money, CFD trading has been a mixed bag for me. The very first month, I was up about 140% of my capital. When you read those advertisements in the shady column of newspaper or online ads, they aren't really lying. It is really possible to accomplish such feats, but only with leverage. Leverage though, is a very dangerous beast. While it obviously magnifies gains and losses, they don't tell you that when you increase your leverage amount, your risk-reward ratio actually drops.

Anyway, given my giant ego back then, I thought I was a market wizard. What did I do? Naturally, increase my capital. When you count gains in raw percentage, you can get a bit greedy. What is better than a 140% gain on $100 capital? A 140% gain on $1 bazillion dollars of course! I didn't have a bazillion dollars, but I did increase my capital, and boy did it vanish quickly.

It is very addictive, really. My friends ask me why I don't like to play casual card games for a bit of money or why I don't hit the casino. The truth? It's not that I don't like gambling. I just like gambling in the financial markets a lot more. I can do it at home, in front of my computer, in underpants, listening to music, watching TV and having a snack. Any time of the day. Well, as long as the markets are open.

After feeling all those "max pain" moments, I think I did become a better trader though. When I started trading, I would watch the 5 and 15 minute charts and sometimes drop to the 1 minute chart. I stayed up late all night watching the markets. If I was underwater, I wouldn't be able to sleep. If I was above water, I'd be so anxious to defend my unrealized profits. It was really quite horrible. On top of all of that? I was losing money. I kept changing strategies and I was trading too often.

These days, I trade just a few instruments. I hold my position for a couple of days, sometimes weeks. I don't feel so anxious or jittery anymore, even when I am underwater. I am a lot less emotionally affected and I don't think about my open trades every minute of the day.

One of the best things for me was to join and sit in a trading room. I didn't pay for any trading course by any special guru or anything like that. This was just a free chat room that traders just sat around, shared charts and talked about market news and opinions. A very nice older, experienced trader helmed the room and he really gave very good and sagely advise. I probably spent a few months sitting in that room every trading day, hearing stories from all sorts of different people. From professional traders with hundreds of twitter followers, to stay-at-home mom's trading out of boredom and to earn some pocketmoney. It was a really diverse group of people. However, it was in that room that I realized a lot of things about trading, and patience being the most important factor of all.

Slowly but surely I improved. I started to block out all the "noise" that you can hear from news channels, websites and blogs, and just started trading with a fairly simple but logical strategy. At the lowest point of my trading career, I went from 100% of my capital to a mere 18% of my capital. I had lost 82% of my capital! For me to get back to 100%, I would have to gain 455% from where I was!

Well, that was a few months back for me. I have since bounced back and steadily pushed up from 18% to hit back to a high of 68%, before slowly sliding. I'm back down to 36%, but hey, if you think about it, I made a 100% gain from my lowest point!

My ultimate goal isn't to be a professional trader. For me now, I would just like to slowly but surely "breakeven". I know what is sunk costs, however but I refuse to accept defeat. I just want to breakeven, so that I can say to myself, "Yes, you paid your tuition fees, but the knowledge that you gained from that tuition have already paid for themselves".

People should know that trading and investing are 2 completely different things. It requires massively more skill and emotional tenacity to succeed as a trader. People get confused that investing is just like trading. Or they get confused that investing IS trading. It really isn't.

My final thought on trading and using leverage: Limit your total exposure. My maximum exposure was only 10% of my assets at the point of my highest greed and addiction. Since then, I have accumulated more assets, so that percentage figure is down. I aim to comfortably keep it below 5% of all my assets. Basically, this 5% of my assets is my casino gambling money. There is upside, but a capped downside. Any silly or crazy trades that I decide to act on in my trading account prevents me from messing around with the other 95% of my assets. I really run that 95% bulk of my assets with a medium-long term perspective about at least 3-5 years to infinity. Basically, only gamble what you can afford to lose. If you are losing sleep at night, that means you are overleveraged and should cut down on the amount of money in your trading account.

I hope any prospective traders might learn a few things from my experience. All the best trading!

Thursday, August 21, 2014

RSP WARZ: POSB vs OCBC vs Phillip

Following a post I read from the Teenage Investor and our short conversation, I thought I would like to look at the 3 main RSP options that is available to all retail investors - POSB, OCBC and Phillip.

Of course, the comparisons of these 2 or 3 investment schemes have been done to the death. The best resource that I found was by BigFatPurse. The next are by Calvin Yeo and the Turtle Investor.


Although BigFatPurse made his own table which is pretty much a splitting image of this, I wanted to create my own table just for the sake of doing one myself.

Now that the basic facts and comparisons of each other 3 plans are out there, how do you pick which plan for yourself? My answer: depending on the investment amount.

I wanted to make a fancy graph, but I'm too lazy to do it in excel and my drawing is horrible.

As long as you're investing between $100 to $500 a month, you should pick POSB as transaction costs as a percentage of total investment is minimized. This will be between $1 to $5 depending on your regular investment amount.

If you're investing between $500 to $3333.33 a month, you should pick OCBC to minimize transaction costs. This will be within the range of $5 to $10 a month depending on your regular amount.

If the amount is above $3333.33, then POEMs is the way to go, as transaction costs will be minimized to just 0.2% of the investment amount. The minimum transaction cost will start from $10 since that is the point of indifference from OCBC.

So, to summarize:


Your investment amount should actually dictate which plan is the most optimum for you. Unfortunately, most investors interested in these kind of plans are not able to commit large amounts of capital, therefore in theory only the POSB and maybe the OCBC plan is viable.

Personally, I would not choose any other underlying investment other than the STI ETF. Diversification is really paramount and this route of investment is more about safely investing for the long-term. Picking individual names is making an active decision (which most investors are often poor at) and also throwing away the benefits of cheap diversification out of the window.

However, those that want to actively punt on certain names and accumulate fractional lots of some of the expensive tickers should consider OCBC for that. At the end of the day, for $10.70, your holdings from this RSP can be transferred to your CDP account for proper management. With the promotional minimum transaction cost of $5 temporarily waived, it makes OCBC more attractive. However, promotions that are not permanent are just gimmicks to draw and lock in lazy capital. I would rather stick with POSB unless I have more than $500 to squirrel away every month.

I personally find that OCBC is the best of the 3 plans, with the glaring exception of a minimum investment of $500 to be cost-effective. The minimum of $500 is sadly a deal breaker because I find that amount too large personally.

POEMS is actually also not too bad, but the commission is always slightly higher than OCBC until $3333. The good news is that POEMS will automatically reinvest dividends, and neither of the other 2 plans do. If reinvesting dividends appeals to you, starting from $600 onwards, POEMS becomes cheaper than POSB, so it would make sense only if you have such large regular capital to invest.

At the end of the day, I think POSB is the only practical plan. If you ever need to liquidate your entire holdings (which is the only option for POSB), you can cash out and use what you need and then take advantage of SCB and purchase lots of Nikko AM STI ETF. Hopefully then, your financial situation will be much better that it is, so it would be feasible to purchase single lots directly through SCB.

Since I have enough capital to buy a lot of Nikko AM STI ETF, and I am completely not bothered at all by manually going into my brokerage account and purchasing lots from the exchange, these plans do not apply to me. However, if I had any friends who are starting out and are looking for a simple way to start investing, I would point them to the POSB Invest Saver.

Tuesday, August 19, 2014

POEMS 0% SALES CHARGE PROMOTION!!!


Hey yall!

I know unit trust might not be for everyone, especially people who think that the management fees and expense ratios are too high.

Well, good news, Phillip is having a promotion, 0% sales charge on all their unit trusts!

While many of their bond funds have been having a long running 0% sales charge promotion, this new promotion will apply to all unit trusts that they have... RIDICULOUSLY AWESOME!

Why go through any of the banks when their normal sales charges are anywhere between 2-5%? Even without any promotion, the one-time sales charge with Phillip is just 0.75%.

Unit trusts can be a good way to get simple exposure to asset classes. To do away with the hassle of direct ownership, currency management and of course diversification and individual investment selection, you will have to pay a small expense ratio. Yes, it is expensive. I do not think that it is cheap at all. If unit trusts could drop their management fees by 50bps or more, I would honestly not bother too much about ETFs and minimizing trading costs.

But honestly, in the grand scheme of things, the decision of the asset class is MUCH more important than the vehicle used to play that asset class. 

Ie. It is more important to know that you should have entered the US stock market 5 years ago, rather than if you should do it through an ETF, an index fund or a fund manager. The SPY has gained 95% over the past 5 years. Even if you picked a horrible manager, you will still get most of the gains.

Currently, I am thinking of adding funds to purchase unit trusts in EM bonds and Russian equities. Long-term, I don't see either of these 2 asset classes running into any major issues that will hinder it from performing well while offering low correlation to the common asset classes.

Anyway, time take to decide what sort of asset class exposure you might be interested in. After that, compare the different funds available, since usually there are a few funds that will be offering that same exposure. Finally, don't wait around too long, this promotion will end at the end of September!

Monday, August 18, 2014

Hmmm... These Stocks Trading Below NAV

Buying stocks that go lower just because they are cheaper, not a very sound strategy. But hey, it's definitely better than buying stocks that go higher just because they are going higher. Distance to the ground is definitely less.

However, if you couple cheap stocks together with some screens based on some "risk" factors, you can weed out your lot so that you throw out the trash and can find the gems.

So, here are my picks of what looks tasty to pick up based on recent weak price action:

Hock Lian Seng
Low Keng Huat
New Toyo
Noel Gifts (very illiquid)
PEC
SATS
Second Chance
Sing Inv & Fin
Sing Shipping
Stamford Land
Super Group
UOB Kay Hian
Wing Tai

Anyway, all these stocks have had horrible price action in the 1-2 weeks. Can they get lower? Of course they can.

I am not buying any stocks now, though if I had enough capital to deploy, I would love to pick up 1 of each lot and just sit back and relax!

Some of these counters are really not talked about in the local scene, which is why I quite like them. Of course, I haven't looked at what is under the hood and analyzed it closely, but they all have rather straight forward businesses that seem likely to last in the long run. They are all dividend stocks too, by the way. If I am not wrong, they all yield at least 3%. Probably more likely like 4+%.

My personal favourite picks from the list? I like the ones trading at discounts to NAV.

Wing Tai - 50%
Sing Inv & Fin - 40%
PEC is about - 35%
New Toyo - 20%
Noel - 15%

Hock Lian Seng, Low Keng Huat and Stamford Land just under NAV.

Why are these stocks trading under NAV? Well, I don't know. But if you told me that I could buy over a business for less than what it owns, meaning I essentially get all the business functions, experience and expertise for free? I would probably look a bit more carefully to make sure this isn't one of those deals "too good to be true". If it all checks out, I would definitely consider buying them! Of course, with what little capital I have and through SCB, since there is no minimum commission!

Any thoughts on any companies on my list? Any "toxic" news that might be causing their prices to be depressed?

Sunday, August 17, 2014

Gold and Silver Blind Test: Who is the cheapest dealer in Singapore?

The reason for me conducting this blind test today is to see who are the cheapest dealers in the market today for physical precious metals. As some may know, I keep my own personal holdings with BullionStar. This is my form of "audit" on them to see if they deserve to have my continued business.

Since it is a weekend, it is good for me to do this test. All prices are "frozen", since exchange rates and metal prices are not moving. This makes it much easier when I go around to all the different websites to see what is their current price right now if I decided to go immediately purchase from them.

I visited an array of websites so that I can get as many quotes as possible. I tried to put in very similar products to each category to make them comparable, but it is not that easy. Many of the dealers also do not sell every particular weight size as well.


So, here are the reference gold and silver spot prices, as well as the prevailing exchange rate.


So here I am looking at Gold in the different sizes of 10g, 100g and 1kg bars. As per usual, the small weights have a much larger price premium while the larger weights have a much smaller price premium. Simple economics of scale.

As you might notice, BullionStar and GoldOnline are consistently the cheapest dealers, with GoldSilverCentral always trailing behind in every weight. GoldOnline is the cheapest for 10g and 100g by a tiny fraction, while BullionStar sweeps the 1kg by quite a large margin.

The reason why the Umicore 1kg bars that BullionStar carries seems very cheap is perhaps because Umicore is one of the lesser known refiners for the Asian investor. It is a huge company that does not focus on refining metals, hence the lower brand awareness. Not a real issue for me, though I don't have $50k to buy a 1kg bar yet.


Now turning to Silver, the first thing that you might probably see is that GoldOnline is now the worst seller of Silver! From being the cheapest gold dealer, they are by far the worst silver dealer, by a LARGE margin. It's not even funny. Silver AG does have good prices, but their product line is very limited. BullionStar again is just a hair's length behind from being the market leader in terms of silver pricing.

Conclusion

This isn't the perfect test to tell which dealer has the best price, but I think has done a pretty good job to paint a realistic picture of the physical precious metal prices and premiums of local dealers.

BullionStar was not the cheapest dealer for both Gold and Silver, but it was only slightly behind the cheapest dealers. Since it really offers a comprehensive one-stop solution for all my precious metals investing needs, I give it my thumbs up and #1 ranking. I will still continue to keep my holdings with BullionStar as well as continue my purchases with them.

I have written a full review about them before and I must say that I have been very pleased dealing with them so far. Continue the good work BullionStar, you are being monitored, but so far so good! Congrats! 


Full disclosure: If you enter BullionStar through my site, and you buy anything, I get a small commission.

This is my main source of blog revenue. I prefer this to asking for "donations" because I rather you get something that you want as well, instead of a tip.

Whether you buy at BullionStar directly or enter from my site, the price you pay does not change.

My personal precious metals investments are stored with BullionStar and I pay the same fees as any other regular customer.

Weekend Invest: Credit Cards and Insurance

Although I tend to blog and jump all over the place, going from macro viewpoints to specific economies to even individual stocks on the SGX, the heart of this blog is really personal finance.

If you are just as interested as I am about personal finance, I am sure that the Invest section of The Sunday Times is a must-read for you as well. I like read the weekday Money section, but I find that the weekend Invest section is much more.... generalised, broad and useful.

Today they talked about the rise of debit cards. Even the person being interviewed said that he does not even use credit cards at all because having debt is bad. I disagree.

From an economic point of view, everyone should have a credit card, as long as they pay off their outstanding balances. Why? Many credit cards offer discounts and promotions - this means you are paying less for something that you would be purchasing anyway. Also, having a credit card means that you are starting your credit history.

Don't get me wrong. If you have control issues and a weak mind that can lose easily to temptation, DO NOT get a credit card. If you are a reasonable person that will just replace your debit card with your credit card, you will realize that you are now enjoying a lot more savings for your same consumption. Depending on your purchase categories and your credit card, I think most people can realistically look to save about 5% a month from switching to a credit card from a debit card.

On top of that, by having a credit card it means that you are now officially starting your credit history. Why is your credit history important? Well, if you have a good credit history, you will be able to get the cheapest kind of financing when it comes to it, like for your housing mortgage. The difference between being a credit-worthy borrower and a risky credit borrower can be thousands of dollars! And to get the highest credit rating, I've been told that you need to have a good credit history, which means starting early helps.

Anyway, to each their own I suppose. If not having a credit card helps you to sleep better at night and removes the psychological temptation and uneasiness, then by all means don't have a credit card. But understand that you are potentially spending an extra 5% for all your purchases. However, I think that most responsible people that are serious about reigning their finances will find that having credit cards can help reduce your finances if you are prudent.

That aside, I have been noticing a trend of interviewers saying that they "invest" in insurance. I do not believe in investing in insurance, but that is probably due to the fact that I know a lot more about investing compared to any insurance agent that I have ever met. I just clearly do not trust my investments with them and their products.

I do believe that "investment" insurance can be good for people who really cannot be bothered with investing or are not financially educated enough to make such decisions. Then in those circumstances, sure, go for investment insurance. You are paying for your laziness in the commissions that the insurance agent takes home at the end of the day. If you are fine with hundreds and possibly thousands of dollars being flushed away, that is your prerogative. The investment portion of the insurance is not anything special that cannot be proxied or even entirely replicated by another product at a cheaper price. Anyway, for people in this group, the most important investment decision you will have to make is what is the feeder fund that your insurance is channeling your investment portion to.

Basically, for people that are even reading this blog post, this means you are looking to be your own master of your financial destiny. You might already have reached a proficient level or you are working towards it. In either case, you will realize that insurance and investments do not mix. They are often bundled and talked about together, but they are separate issues.

Anyway, that's enough for my rant about this. I am looking forward to hear the PM's speech today. I am very sure that he is going to announce some changes regarding CPF.

Saturday, August 16, 2014

Singapore and her Recessions

I might be wrong, but from my quick research around the internet, I think Singapore has had only 4 recessions in her lifetime since the 1965!

Based on information from the Ministry of Trade and Industry, they said that Singapore went into recessions 4 times. They "consider a recession to be characterised by at least two consecutive quarters of negative GDP growth on a seasonally-adjusted basis and to have ‘ended’ when positive sequential growth in seasonally-adjusted GDP is observed.". If I am not wrong, their definition of a recession is the same as the EU and I think it is a pretty good way to start my research. (link to short observation of the 2008/9 GFC impact on Singapore's employment)

The 4 periods of recession were:

1st: 1984/85 Government policy induced recession
2nd: 1998 Asian Financial Crisis
3rd: 2001 Dot-com Bubble
4th: 2008/2009 Great Financial Crisis

Finding quarterly GDP data is a real challenge. From 2007 onwards, data is available from TradingEconomics. The easier way to tell is to look for 2 quarters of consecutive GDP growth under 0%.


From the graph above, I think it is quite clear to see how the 2008/2009 GFC recession produced 4 data points of negative GDP growth. Since then, we have had 3 close calls in 2010, 2011 and 2012. The economy looks to be at an important turning point now. Unfortunately, the quarterly data does not go back any further, though I wish it could. The next best data series is the annual GDP figures which you can also get from TradingEconomics or SingStat (look under Time Series).

One extremely interesting article I found was from a paper published back in 1998 regarding the forecasting of GDP using monthly trade statistics. Sounds nerdy much? It is. In the paper they mention the ADF test, ARIMA, MAPE and RSME, along with a lot of models. Not the bikini kind, but the graph kind. Math nerds, are you ready to get jiggy?

Perhaps the most interesting thing is the final graph that showed their forecast and overlayed with the actual GDP for that period. (page 7 for not lazy people, picture below for lazy people)


What I like about the forecasting model is that because monthly data is being used. Anyway, I think most people are totally not interested in these kind of things. I think I'll ask my Math major friend to take a look at this and maybe she could help me build this model?

One of the reasons why I wanted to blog about this is because it is always good to learn about history so that we know what we might expect from the future. That being said, Singapore has had quite a fortunate past to not have had so many recessions in her lifetime. With the last recession ending in 2009, we have been without a recession for almost 5 years now. Recessions in the US over the past 150 years usually occurred once or twice a decade.

Personally, with the rest of the other countries posting such horrible GDP numbers, along with so many structural problems with their economics, I feel a bit nervous. Add that to the fact that Singapore thrives based on global trade, we might be very badly affected this time around if people realize that the problems in today's world is systemic and a global recession is prolonged.

Whether you like it or not, Singapore will have a recession. Recessions are vital and essential for economics to purge away dying businesses and capital misallocation. The only question is will it come sooner or later? And what would you do when it comes?

Friday, August 15, 2014

Why The Stock Market Will Go Only Higher

... is because it is totally irrational.

For each of the 2 pictures below, ask yourself: Is this bullish or bearish?

Inflation adjusted S&P500

4 different valuation metrics

These 2 charts come from a post by John Hampton at Solar Cycles. I know I've been playing the bearish tune for quite a while now, but I really see the market as very richly valued!

This Zerohedge post lists down 14 reasons why the US stock market may head lower. Ominous? It should be. I rarely hear any bearish sentiment out there, which makes me even more fearful.
#1 The U.S. junk bond market just experienced "a 6-sigma event" earlier this month.  In other words, it is an event that is only supposed to have a chance of 1 in 500 million of happening.  Billions of dollars are being pulled out of junk bonds right now, and that has some analysts wondering if a financial crash is right around the corner.
#2 The last time that we saw a junk bond rout of this magnitude was back during the financial crash of 2008.  In fact, as the Telegraph recently explained, bonds usually crash before stocks do...
Will the same thing happen this time around?
#3 Retail sales have missed expectations for three months in a row and we just had the worst reading since January.
#4 Things have gotten so bad that even Wal-Mart is really struggling.  Same-store sales at Wal-Mart have declined for five quarters in a row and the outlook for the future is not particularly promising.
#5 The four week moving average for mortgage applications just hit a 14 year low.  It is now even lower than it was during the worst moments of the financial crisis of 2008.
#6 The tech industry is supposed to be booming, but mass layoffs in the tech industry are actually 68 percent ahead of last year's pace.
#7 According to the Federal Reserve, 40 percent of all households in the United States are currently showing signs of financial stress.
#8 The U.S. homeownership rate has fallen to the lowest level since 1995.
#9 According to one survey, 76 percent of Americans do not have enough money saved to cover six months of expenses.
#10 Rumblings of a stock market correction have become so loud that even the mainstream media is reporting on it.  For example, just check out this CNN headline from earlier this month: "Is a correction near? Wall Street on edge".
#11 The civil war in Iraq is spiraling out of control, and Barack Obama has just announced that he is going to send 130 troops to the country in a "humanitarian" capacity.  Iraq is the 7th largest oil producing nation on the entire planet, and if the flow of oil is disrupted that could have serious consequences.
#12 As a result of the conflict in Ukraine, the United States, Canada and the European Union have slapped sanctions on Russia.  In return, Russia has slapped sanctions on them.  Will this slowdown in global trade significantly harm the U.S. economy?
#13 The three day cease-fire between Hamas and Israel is about to end, and Hamas officials are saying that they are preparing for a "long battle".  If a resolution is not found soon, we could potentially see a full-blown regional war erupt in the Middle East.
#14 The number of Ebola deaths continues to grow at an exponential rate, and if the virus starts spreading inside the United States it has the potential to pretty much shut down our entire economy.
Unfortunately even for investors that have no exposure to the US, the US is the more important financial market in the world, for now. That means, if the US tanks, you can be rest assured that it is going to drag down the rest of the world, in varying degrees for varying durations.

Sure, maybe all the recent geopolitical news is clouding my judgement. The US sure loves getting themselves involved in other people's problem. Globo-cop? I think that the problem in the Middle East, both in Isreal and Iraq are 2 huge problems that will not be resolved quickly, with Iraq being the much bigger problem. Ukraine has another set of issues, and although I doubt things would escalate to have direct military intervention from other nations, things there looks unlikely to get better any time soon. Add that to the stuff going on because of what happened in Ferguson, and now you've got plenty of stuff to worry about. But sureeeee, you could discount all of that and say that those issues are getting better, but then let's look at raw data.

(OT: Someone made a comment about the death of Robin Williams that was sadly so true: "Thousands of innocent people are being displaced and killed in places like Ukraine, Syria and Iraq.... but then one celebrity dies and it is suspected suicide, and now suddenly the whole world talks about how sacred life is." No disrespect to Robin Williams, but the hypocrisy of people is just disgusting.)

GDP figures have been coming out lately, and it has not been looking good so far, no no. The recent French, German and Japan figures speak for themselves. Europe looks set to fall back into recession mode with the problems from Portugal and Greece starting to resurface. Add that to the fact that the Russian counter-sanctions on EU is likely going to slap them in the face, the macro picture really doesn't look good to me.

With all major indices surging for what seems to be bad news and on thin volume, it really makes me wonder why it feels like I am the only silly person being bearish all the risk assets. Why all the panic-buying? I am seriously confused.

I believe that short-term, the markets are overbought on ridiculous news. I have added on more shorts to the Russell 2000, Nasdaq and the DAX.