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Wednesday, December 31, 2008

Keep your wealth for next round

Dec 31, 2008

A tough 2009...but a speedy recovery is possible once Americans start spending again, says Oei Hong Leong

By Lee Su Shyan, Assistant Money Editor

IF ONE word sums up the year just ended for veteran investor Oei Hong Leong, it is 'scary'.
'Looking back, that is the feeling that comes from my heart,' said the multi-millionaire father of four daughters, pointing to the financial firestorm that erupted on Wall Street and swept the globe.

Mr Oei, 60, with a long-standing reputation as a savvy investor, has made some fast bucks through bold moves in the crisis this year, but he has lost money too.

He admitted that he was among the many thousands of investors hit by US investment bank Lehman Brothers' collapse in September, which was a key event in the unfolding meltdown. He had invested in Lehman Brothers' bonds.

'I have been burnt,' Mr Oei told The Straits Times in an interview yesterday, 'and have lost a lot of money.'

But he quickly turned philosophical.

'This is a financial tsunami. One can lose an arm, a leg but don't lose one's head.' He added: 'For the new year, I would advise people to be positive and look after one's health. Spend more time with your family.'

Standing back to size up the unfolding crisis, Mr Oei asked: 'If winter has come, can spring be far away?'

But he is under no illusions about the severity of the winter, while it lasts.

He believes this crisis is '10 times' worse than the Asian financial crisis in 1997 - when only Asia was hit - and even worse than the 1974 oil crisis, which did not involve a financial crisis or credit crunch. OCBC shares fell from $50 to around $4 then, he recalls.

'We have to be ready for our coldest winter yet,' he said. 'If people do not have money, because their jobs are in jeopardy and they cannot service their mortgages, they will not have any confidence to spend.'

He noted that next year marks several key anniversaries of troubled times, the obvious one being the 80th anniversary of the start of the Great Depression in 1929. There is also the May Fourth movement of 1919 in China and with its echo in 1989 which led to the Tiananmen incident. '2009 is likely to make it to the history books too,' he said.

Mr Oei is clearly shocked by recent events. He noted that in the past three months, the Wall Street model of investment banking has disappeared with Merrill Lynch being bought out. The last two to go were Goldman Sachs and Morgan Stanley. Insurance giant American International Group (AIG) obtained a massive bailout, as did mortgage giants Fannie Mae and Freddie Mac.

Citigroup has billions of dollars in off-balance sheet toxic assets. 'What about Bank of America or JP Morgan?' he asked.

So far, most of the impact has been on financial institutions, with the real economy expected to be hit badly next year.

Mr Oei pointed out that AIG had yet to sell its assets, as planned, to raise cash to repay a huge government loan. Hedge funds too, have to sell off their assets to meet redemption calls.

De-leveraging - banks and investors having to unload their vast portfolios to raise money - can only drive prices down further, he noted.

On oil prices, he said: 'I won't be surprised if they hit US$30 or even go below that. The situation now is even worse than 10 years ago.'

If oil prices tumble to those levels, it will likely put the brakes on the various oil-rich Middle Eastern economies which have been powering ahead.

The latest scandal to hit Wall Street is the estimated US$50 billion (S$72 billion) fraud involving Bernard Madoff and his funds.

'This will likely start a big wave of redemptions,' he said. At the end of day, 'the risk is that people lose their trust completely in funds'.

Mr Oei surprised many industry watchers back in September when he swooped in to buy one million AIG shares.

That was at the start of the financial turmoil, as markets watched helplessly as one respected financial institution after another teetered on the brink of collapse.

Yet, with AIG shares at about US$1.80, Mr Oei was brave enough to take advantage of this trading window. The shares traded around this level for only about an hour before recovering at hints of a US government bailout.

About a week later, he sold them at US$5 apiece, enhancing his reputation for good timing. They have since trended downwards over fears the bailout will not solve all AIG's problems and that the US$85 billion will not be enough anyway.

The shares are now around US$1.55. Mr Oei donated the entire proceeds to the Lee Kuan Yew School of Public Policy.

Looking to China, where he has considerable experience, he is not hopeful that a four trillion yuan (S$844 billion) stimulus package unveiled recently will have much immediate impact as he feels the Chinese don't have American spending habits.

Still, the Indonesian-born investor who spent his early years in communist China working in the countryside, and later made money buying state-owned assets to list abroad, is confident of the mainland's long-term growth story.

He is encouraged by proposed legislative changes to allow Chinese rural folk to own property, to take a loan out on their property and to pass it on to the next generation. This will result in the multiplier effect and drive consumption, he said.

Even though 2009 will be tough, Mr Oei is confident that when the US recovers, it will be a speedy recovery.

Consumption is the mainstay of the US economy and since most Americans are poor savers, they will eventually consume, which will propel the economy.

If US stimulus measures can create jobs, then that will help consumption as people will consume once they have jobs and can service their loans. The downside is that there may be rapid inflation.

Singapore is part of the global economy and cannot avoid the effects of the downturn, he said. 'However, we are lucky we have good government, good infrastructure and strong fundamentals.'

One of the most important tasks ahead will be to support small and medium enterprises (SMEs). 'It is better to support and help these SMEs as it will work out cheaper to keep existing jobs than create new jobs,' he said.

The Government has already set aside $2.3 billion to help SMEs deal with the credit crunch and Mr Oei believes that the solution is to help get the money to the SMEs directly. Currently, the banks are reluctant to lend, although it is important to act fast, he said.

As fortunes come crashing down around everyone's ears, he cited an old Buddhist saying. He held out a cup of green tea. 'How long can you hold it? A few minutes, an hour, a few days?' he asked. 'Soon you'll have to put it down.'

The secret to a good night's rest, he said, is to embrace one's problems. 'Face it, accept it, resolve it and put it down.'

Easier said than done, but Mr Oei said that it reminds people not to be too caught up with one's problems.

On a more practical note, he encouraged investors to cut their losses on shares which have been losing value.

'Don't wait until the bank cuts the losses for you,' he said, adding that it is better to have some ammunition in store for when the upturn comes around.

'The stupidest thing to do is to average,' he said firmly, referring to the common practice among investors when the market weakens, to buy more of a certain counter they already own at the lower price, thus lowering the average price they paid for the counter.

That's because many investors are loath to sell their investment at a loss, even though the sale will at least bring in some hard cash.

Mr Oei explained this point with another Chinese saying, which talks about reserving enough firewood for the winter.

'Stop the bleeding and keep your wealth for the next round.'

His resolution for the new year: 'I have lost a lot of money and what I have learnt this time is to be more conservative, more cautious and more patient.'

Sunday, November 23, 2008

Tales of fortunes made and lost in recessions

Sunday, 23 November 2008
Success can be one of life's worst enemies. It engenders overconfidence and, as a result, one tends to let one's guard down - in some instances, to the extent of recklessness


MARKET crashes are the greatest redistributor of wealth. This has been true of previous crashes. But in the current turmoil, there are few beneficiaries, a friend noted. It is more a great destruction of wealth on a global scale so far.

A recession is a good time to start a business as costs are low. Disney, Microsoft, Hewlett-Packard, Oracle and Cisco are some of the companies that were founded in downturns.
Well, okay, some short-sellers may have profited from some of their trades. But many get wiped out in their next trade. Perhaps it is those who are not invested at all and who have the cash to pick through the carnage in the next few years who will really come out ahead. Who knows? Nobody is certain of anything anymore.

A lot of people have been hit hard this time around. There are a few reasons for this. One, prior to this, we've had four years of a bull market where prices had gone in only one direction. Success, notes a friend, is one of life's worst enemies. It engenders overconfidence and, as a result, one tends to let down one's guard - in some instances, to the extent of recklessness. Economist Hyman Minsky sees the cycle of risk-taking in the economy as following a pattern: stability and absence of crises encourage risk-taking, complacency, and lowered awareness of the possibility of problems.

But even for those who are conservative and have their heads centred and feet firmly planted on the ground, the economics just a few months back suggested that being invested was the right course of action. Then, inflation was running at 5 or 6 per cent and banks' interest rates were at less than one per cent.

For someone who didn't want to have his or her purchasing power eroded, keeping the money in the bank wasn't the most logical of options. Which was why a lot of people are invested - and, worse, a lot took loans to invest. If the borrowing cost was so low, and one was expecting to make a return higher than that cost of borrowing, it made sense to borrow.

If one were to assume risk, let it be with capital that one will not need for at least 3-5 years. In the meantime, be grateful for what you have - be it your health or time with your family.
Of course, we know now that a lot of people had underestimated or even ignored the risk of trying to earn those extra percentage points of returns.

A friend shared with me some of the horrendous stories of how an enormous amount of wealth was destroyed in the last few months.

Up till last year, one man had $100 million of his worth in only one stock. Towards the end of last year, that stock started to decline. By early this year, the stock was down more than 50 per cent from its peak just a few months before. The man picked up quite a few additional shares - on margin - thinking that the stock had bottomed and would eventually rebound. Since then, the stock has plunged by another 80 per cent. The $100 million is more than wiped out! The stock is Cosco Corp, which went from 10 cents in March 2003 to $8.20 in October last year - an 82 times jump. It is now trading at less than 70 cents.

Another guy had relatively much more modest means. His net worth was estimated at $2-3 million. He heard from 'reliable' sources that a particular company would be taken over by another at a significantly higher price than the stock's then market price. He bet all he had and, if I remember correctly, also took margin financing to buy that stock. The stock was FerroChina, which has since been suspended because it had run out of money to pay its suppliers and debtors.

One value investor thought Thailand was cheap a few years back. One particular company, a very big one, was trading at 1.2 baht - significantly below its book value. The investor concentrated his bet on that company. And, indeed, the market began to recognise the value of the company and the stock tripled to over 3 baht. The value investor's portfolio grew to $26 million. In the last year or so, the stock has plunged to below 0.7 baht. The investor is now down some 50 per cent on his original capital.

Another man was shrewd enough to think that the market was overvalued towards the end of 2007. So he got out of the market, and even shorted it. He was happy that the market went the way he predicted. He was the smartest guy in town.

By June or July, thinking that the market had fallen enough, he loaded up on shares. Like the guys above, he too used margin financing to pick up the shares. As we know, the market took an even more severe turn in September and October. He too was dealt a severe blow.

A friend was also bearish about the market towards the end of last year. He had put in some shorts. Then last October, the market went on to hit record highs. He lost his resolve, and reversed his trades and got hit as well.

Another made quite a bit of money in the Singapore market. His confidence grew. He wanted a bigger stage. He bought US shares on margin. US stocks took a precipitous plunge a few months back. He has had a few rounds of margin calls.

A young banker in his late 20s made $2-3 million from the property market in the last few years. He ploughed all the profits into a $10 million property, and took loans of some $7 million. He's now saddled with a mortgage payment of some $30,000 a month.

Many of the real-life examples above show just how lethal leverage can be. In a rising market, leverage is your friend; in a down market, the blow dealt by leverage can knock one out for good.

Perhaps another lesson is to always take some profit off the table. Today, the valuations of stocks are at levels unseen in years, if not decades. 'It is at times like these, when there is a lot of fear, that one can make three or four times return on your capital,' a friend said.

Yes, we all know that. But so far this year, every time one thinks that fear is at its maximum, it moves up another level. And another problem is that a lot of investors have run out of money to buy. A lot of the 'liquidity in the system' before the crisis was from loans; now, that has dried up.

In any case, whether a stock is cheap or not is still debatable. According to State Street Global Markets, its global Investor Confidence Index® for November fell another 1.4 points to a historic low of 57 points. Commenting on the index, Andrew Capon of State Street said: 'Investors face a difficult dilemma. On the one hand, equities are cheap. Using earnings adjusted for leverage and cyclicality, the equity strategy team at State Street Global Markets estimates that the US price-earnings multiple is 26 per cent below its 147-year average.

'These are levels seen only in periods of extreme dislocation such as the Great Depression, World War II and the 1870s. On the other hand, nobody can be confident that this current economic slowdown will not turn out to be just such a period rather than a more typical recession. 'So far, during this crisis, it is the bleakest forecasters who have been proved right.'

Indeed, we are in unprecedented times now. The euro area and Japan are now officially in recession. Even without the US officially joining this unhappy club, countries representing close to 50 per cent of global GDP are now seeing growth contract, noted Mr Capon. Consensus economic forecasts for GDP growth in the developed world have been falling for 16 months and are at 20-year lows.

Growth in the last seven years or so was propped up by debt-financed consumption from the US. And Asia has built up tremendous capacities to cater to that growth. Now, that consumption has contracted because the enormous financial leverage has to be unwound. That deleveraging process and contraction of consumption will drag on for some time because income has also diminished - if not totally disappeared, given the waves of job losses.

In Asia, companies have to deal with all the excess capacities and the vanishing demand. Many companies will go bust. Jobs will be lost, pay cut. In China, the hardship could trigger social unrest. It could be apocalyptic. We just don't know what will happen in the future.

But the fact is that we are now in the throes of a crisis and that itself may colour our judgment. 'Last year, it felt like the sky was the limit; now, it's like we are sinking into a bottomless pit,' said a friend.

Back to what economist Hyman Minsky says about the cycle of risk-taking: stability encourages risk-taking and complacency. But when a crisis strikes, people become shell-shocked and scared of investing their resources. People also often overestimate the probability of the worst-case scenario after a crisis has occurred.

So, for the optimists out there (if there are still any left), here's an inspiring story.

In 1939, with Hitler's Germany ravaging Europe, John Templeton - who believed in buying into companies at points of what he called 'maximum pessimism' - bought US$100 of every stock trading below US$1 on the New York and American stock exchanges.

Templeton's trade got him a junk pile of some 104 companies, 34 of which were bankrupt, for a total investment of roughly US$10,400. Four years later, he sold these stocks for more than US$40,000! Only four out of the 104 became worthless.

Yet another positive spin. A recession is also a good time to start a business. Costs are low. But it is not a good time to do financial deals - that's for a bull market, an investment banker told me recently.
Indeed, in a downturn, established firms tend to cut back on their growth investments to focus on defending their established core activities. That will create niches to be served by smaller companies. And once the start-ups develop to a certain size and the general economy picks up, there will be no lack of big company buyers that are willing to absorb these start-ups into their fold. That fits into the theory of starting a business in a recession and selling it in a bull market.

Well, here are some of the companies that were founded in downturns: Disney, Microsoft, Hewlett-Packard, Oracle and Cisco. There is no lack of examples in the local context as well. The first Sakae Sushi outlet was set up in September 1997. Financial PR, one of the largest investor relations firms in Singapore, was founded in August 2001.

Over the next year, there will certainly be more people forced to work for themselves because they will lose their jobs and not be able to find other suitable employment. And it will be no surprise if some of the talented people now unable to find work in an investment bank or other big company direct their energies towards creating a new generation of successful start- ups, said The Economist in a recent article.

I'm sure we all know of friends who created businesses which are now worth millions of dollars because they decided to venture out on their own after being retrenched. Retrenchment can be a blessing in disguise for some.

The key, I guess, is not to lose hope - despite how bleak the outlook may seem now. And if one were to assume risk, let it be with capital that one will not need for at least 3-5 years. In the meantime, be grateful for what you have - be it your health or time with your family.

The writer is a CFA charterholder

Wednesday, November 19, 2008

What Happy People Don’t Do

Published: November 19, 2008

Happy people spend a lot of time socializing, going to church and reading newspapers — but they don’t spend a lot of time watching television, a new study finds.

That’s what unhappy people do.

Although people who describe themselves as happy enjoy watching television, it turns out to be the single activity they engage in less often than unhappy people, said John Robinson, a professor of sociology at the University of Maryland and the author of the study, which appeared in the journal Social Indicators Research.

While most large studies on happiness have focused on the demographic characteristics of happy people — factors like age and marital status — Dr. Robinson and his colleagues tried to identify what activities happy people engage in. The study relied primarily on the responses of 45,000 Americans collected over 35 years by the University of Chicago’s General Social Survey, and on published “time diary” studies recording the daily activities of participants.

“We looked at 8 to 10 activities that happy people engage in, and for each one, the people who did the activities more — visiting others, going to church, all those things — were more happy,” Dr. Robinson said. “TV was the one activity that showed a negative relationship. Unhappy people did it more, and happy people did it less.”

But the researchers could not tell whether unhappy people watch more television or whether being glued to the set is what makes people unhappy. “I don’t know that turning off the TV will make you more happy,” Dr. Robinson said.

Still, he said, the data show that people who spend the most time watching television are least happy in the long run.

Since the major predictor of how much time is spent watching television is whether someone works or not, Dr. Robinson added, it’s possible that rising unemployment will lead to more TV time.

Picking stocks is the wrong way to go

Published November 19, 2008


ASIAN investors should wean themselves away from the illusion that they can pick stocks and time markets. Says Saxo Bank Group chief investment officer Steen Jakobsen: 'I think 80 per cent of readers should not invest in markets themselves. You need to treat investing as the most difficult thing in the world. Why are there more heart surgeons than successful traders?'

Markets are undergoing a 'paradigm shift' which should result in investment options that are low cost, more transparent and based on asset allocation principles. Against such a backdrop, structured products - notoriously non-transparent in risks and fees - have no place. 'Individuals need to realise that the allocation between equities, bonds, alternative assets and real estate is the biggest choice that they make. Whether you buy Singapore or China stocks, in the long term it makes no difference. The ability to pick stocks is (rather) useless. The discrepancy between the best 25 per cent of fund managers and the worst 25 per cent is less than 200 basis points . . . You should just be indexed. Spend time to get the allocation right. Finding the right stock is like a lottery ticket.'

Asia, he says, has fallen victim to structured products offering high yields. 'I'm a sophisticated investor. I would never buy a structured product. It has no transparency and a lot of fees. Every time you buy one, you're 5-6 per cent down at the start. As an investor, I only buy if there is transparency.' He himself writes a blog where he discusses the moves of the global macro fund he runs.

Mr Jakobsen, who has been trading since he was 17, says he follows three key principles. One is to recognise capital preservation is important - something investors often pay only lip service to. Second, have a true understanding of compounding in rising and falling markets. 'I know if I have $100 and I lost $10, I'm down 10 per cent. But if I want to go from $90 to $100, I have to make 11.1 per cent. That means I'm not willing to lose a lot of $10 bets.' The third is to understand you can't predict the future nor time markets. 'If I'm very convinced of something, I'm 60 per cent for and 40 per cent against. If I get to 100 per cent conviction, I'll be wrong. There are 100,000 people smarter than me trying to do the same thing.'

As an investor, he also scrutinises opportunity costs. 'I have 75 per cent in fixed income and cash. Every week I measure how much it costs me to be so defensive relative to the market. I'm gaining because I have positive yield carry. Investors can commit to a strategy but they need to measure the opportunity cost of doing something else.'

Also: 'Control your ego. When you make money, you think you're God; when you lose, it's everyone else's fault. It's not so. Whether you make or lose money, it's partly you but also partly random. There is a gravity in the market. Mathematically, if you speculate, you go bankrupt.'

Monday, November 17, 2008

Copper Drop Deepens as China Growth, Housing Falter

By Millie Munshi, Glenys Sim and Lee Spears

Nov. 17 (Bloomberg) -- Not even $586 billion of emergency spending by China can slow the plunge in copper, the worst- performing metal since the commodities market crashed in July.

Global inventories more than doubled in the past four months as the economic slowdown spread. U.S. auto sales slumped 32 percent in October to the lowest level since January 1991. A report this week may show U.S. builders broke ground on the fewest houses in at least a half century, curbing demand for cables, wires and pipes. China, the world's biggest copper user, is heading for its slowest growth in almost two decades.

``The raw materials sector had come grinding to such a screeching halt that this plan doesn't turn the outlook around immediately,'' Chip Hanlon, who oversees $1.5 billion at Delta Global Advisors in Huntington Beach, California, said of China's stimulus program. ``I'm leery about global growth right now. At the moment, I would still not want to be in base metals.''

Copper is an indicator for the world economy and sets the pace for other industrial metals because an average 400 pounds (181 kilograms) are used in homes and 50 pounds in cars, according to the Copper Development Association. Prices collapsed after rising as high as $8,940 a metric ton on the London Metal Exchange July 2. The International Monetary Fund in Washington said the U.S., Europe and Japan will fall into a recession simultaneously for the first time since World War II.

China is the key to commodity prices because the country is the largest user of iron ore, aluminum, zinc and copper. The nation's economy may grow 7.5 percent or less next year, Morgan Stanley and Credit Suisse Group AG say. That would be the slowest pace since 1990, data compiled by Bloomberg data show.

Chinese Demand

Demand from China helped copper prices more than double in the past six years. Now, the price may fall 37 percent from the Nov. 14 close to $2,400 a metric ton next year, said Andrew Keen, an analyst at Sanford C. Bernstein & Co. in London, the second most-accurate forecaster in the weekly Bloomberg copper survey.

Catherine Virga, an analyst with CPM Group in New York, expects the metal to fall to $2,550 and Adam Rowley, an analyst at Macquarie Group Ltd., forecasts about $3,300. Three-month futures on the London Metal Exchange slumped as much as 3.3 percent today to $3,695, and traded at $3,710 at 11:37 a.m. in Singapore.

Zinc may drop as much as 18 percent to $985 a ton, lead may lose 12 percent to $1,185 and aluminum may slide 7 percent to $1,800, Virga says.

Commodity prices, measured by the Standard & Poor's GSCI Index of 24 raw materials, plunged by more than half from their record on July 3 as the global credit crisis threatened to push the world into a recession, reducing demand. Crude oil has slumped 57 percent in four months.

`A Bubble'

``It was a bubble,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an interview Nov. 13. The last one was in the early 1970s when ``you had the same type of global growth boom that we've had in the last 4 1/2 years,'' he said. ``The boom has gone to bust. The global economy is growing at 2 to 2.5 percent, less than half the pace we've been running at.''

BHP Billiton Ltd., the world's biggest mining company, has dropped about half in Australian trading from its intraday peak of A$50 ($32) in May as commodity demand slowed and traded today at A$25.06. Rio Tinto Group has tumbled by 55 percent to A$70.36.

Leaders from the biggest developed and emerging nations agreed to further steps at the weekend to prop up the global economy. The Group of 20 cited the potential for more interest- rate cuts and fiscal stimulus. Federal Reserve Chairman Ben S. Bernanke said Nov. 14 central bankers are prepared to take additional action as needed to unfreeze credit markets.

Slowing Output

China faces a ``formidable challenge,'' Mu Hong, a top planning official, said Nov. 14. Export growth and inflation slowed in October. Industrial output grew at the slowest pace in seven years and money supply expanded by the least since 2005.

Steel output in China, producer of a third of world supply, dropped 9.1 in September, the Brussels-based World Steel Association said Oct. 22. Power production fell in October from a year earlier, the first decline since February 2005, the China Securities Journal said Nov. 7.

``We are in a period of very severe production cuts as mid- stream industries such as steel reduce both raw material and product stocks, with massive reverberations through raw material markets,'' Macquarie Bank Ltd. said Nov. 10.

China has pledged ``fast and heavy-handed investment'' in housing and infrastructure through 2010 and a ``relatively loose'' monetary policy in a plan unveiled Nov. 9. The package offered funding for housing, infrastructure, railways, power grids, social welfare and rebuilding. The country plans thousands of kilometers of highways and railroads as it speeds development of the resource-rich western regions.

Seeking the Bottom

``The Chinese are very pragmatic,'' said Richard Elman, chief executive officer of Hong Kong-based Noble Group Ltd., a supplier of iron ore, coffee and grains. ``They will revitalize the economy. We've seen a leveling of steel prices internationally. We're encouraged that the bottom may be here,'' he said in an interview Nov. 11.

More money is being pumped into second-tier cities, Robert Theleen, chairman and co-founder of investment capital firm ChinaVest Ltd., said in a Bloomberg Television interview Oct. 29. As the economy slows, more factories will shut, unemployment will climb and people will return to the countryside.

``Those are the issues that are going to cause indigestion in Beijing,'' he said.

Home Slump

The U.S. housing recession at the heart of the economic decline shows no signs of letting up, signaling copper demand may stay depressed. New-home starts in October dropped to a 780,000 annual pace, the lowest since records began in 1959, economists said. The Commerce Department reports on Nov. 19.

Industrywide U.S. auto sales fell for the 12th straight month in October, extending the longest slide in 17 years and hurting demand for metals. October total sales dropped to 838,156 from 1.23 million, according to Autodata Corp.

General Motors Corp. said this month it may run short of funds before the end of the year and Chrysler LLC said survival would be difficult without aid.

Friday, November 14, 2008

China: At Its Most Attractive Level In The Past Decade

November 14, 2008

Author : Eddy Wong

The China equity market, represented by the Hang Seng Mainland Composite Index (HSMLCI), continues to drop sharply in 2008. The HSMLCI saw a 19% (in SGD terms) drop in October. In fact, the index dropped to a 3-year low and closed at 1794.24 points on 27 October 2008. This means that the index had dropped 36.7% (in SGD terms) during the first 27 days in October!

After the crazy sell-down in September and October, we believe that China equities are at their most attractive level in a decade, and we have therefore decided to upgrade China to 5 Stars, the best possible rating!

Chart 1: The HSMLCI dropped more than 50% this year!

Markets have collapsed since October 2007. After a painful market slump for more than a year, we believe that China is one of the best markets to buy at this point due to its attractive valuation. A sharp slowdown in the global economy seems likely in the coming 12 months. Also, we have seen a huge correction in commodities over concerns from the impact of a global recession. This suggests that the future demand for commodities could decline.

As wealth growth slows and demand softens, investors may be concerned about the possibility of a “hard landing” in China. We agree that China’s economic growth will slow further. Having said that, we are not expecting China to experience a “hard landing” in 2009! We think that investors could be overly pessimistic when they worry that China will head for a “hard landing”. Equities are facing a huge sell-off even when valuations are extremely low. We all know that “Buy Low and Sell High” is the ultimate goal for every investor, and now that the market is so low in terms of valuation, there is no doubt that it is a good time to invest in China!
No “Hard Landing”!

“Hard Landing” refers to the economic growth of a country shifting from a period of expansion to contraction within a very short period of time. For the case in China, since its economy has been expanding at a relatively high speed, we consider that the economy may undergo a “hard landing” if it expands at a rate of less than 6% year-on-year. The 3Q GDP growth is only 9% year-on-year, the slowest pace in more than 5 years. In fact, China’s economy expanded 9.9% year-on-year in the first three quarters of 2008. Economic expansion dropped to below 10%, so what does that mean?

It simply means that the Chinese economy is affected by the credit crunch across the world and hence its economic growth has dropped from a skyrocketing pace. But its growth rate is still faster than its Asian peers.

According to the International Monetary Fund (IMF), the world is estimated to expand by 3.7% in 2008 and 2.2% in 2009. In Emerging markets, the estimated growth is 6.6% for 2008 and 5.1% for 2009. However, China is estimated to grow by 9.7% in 2008 and 8.5% in 2009. Since the Chinese economy is still growing at a rate faster than its peers even during a global economic slowdown, it would be a more attractive investment destination than the other emerging markets such as Russia or India.

Table 1: The World Is Slowing

Source: IMF, World Economic Outlook, November 2008

If we look at the breakdown of the contribution to China’s GDP growth from net exports, consumption and investment, we find that the possibility of having a “hard landing” is nearly impossible. In 2007, the contribution to GDP growth by net exports, consumption and investment were 22%, 39% and 39% respectively. In the first 3 quarters of 2008, the contribution by the net exports dropped from 22% last year to only 12.5%. In fact, the Chinese economy expanded 9.9% in the first 3 quarters in 2008 vis-à-vis the first 3 quarters in 2007. It means that the net exports contributed 1.2% to the growth in China’s GDP in the first 3 quarters of 2008. As the demand for Chinese goods is expected to drop in late 2008 and 2009, we believe that the contribution by the net exports will continue to decrease. Even if contribution of net exports to GDP is reduced drastically, we expect the economy to grow more than 7%.

Another supportive factor for economic growth would be that Chinese households tend to save excessively in banks. As a result, it is not surprising that Chinese consumption has remained relatvely resilient, despite the sharp decline in the stock and property market. Retail sales increased 22% year-on-year in the first 3 quarter in 2008. A pick-up in domestic demand is going to play a more important role in supporting the economic growth.

On Fixed Assets Investments (FAI) - it increased 27.0% year-on-year in the first 3 quarters in 2008. Real estate development continued to slow and increased by less than 30% year-on-year in August and September 2008. At the same time, due to the increasing railway transportation spending by the government, FAI continues to grow strongly. Investors may worry if “hot money” stops flowing to China, or could even leave the country.

According to Alliance Bernstein, there was an estimated modest speculative inflow of around US$5.5 billion in the 3Q 2008, compared with more than US$60 billion and US$20 billion in the 1Q and 2Q 2008. Although credit has tightened sharply in the 3Q, monies are still trickling through to China and we do not expect any significant outflow of monies in the coming future.

After a full body checkup of China, we believe that a “hard landing” is not likely to occur in 2009. However, we do agree that economic growth will slow, affected by the external factors such as decreasing in demand for Chinese goods. Hence, corporate earnings may be hurt as well. If we are not expecting a “hard landing” in China, we should be able to examine the attractiveness of the Chinese equity market by looking at valuations.

Stimulus Package
On 9 November, the Chinese government announced a stimulus package with 10 measures to boost domestic demand growth. A total of 4 trillion yuan (US$586 billion) will be spent by the end of 2010. Plans include support for low-end and public housing, infrastructure in rural areas and building more railways, highways, airport etc. This package and the aggressive rate cut by the People’s Bank of China since September can help to support domestic demand. As we mentioned above, consumption is one of the most important contributors to China’s economic growth. We believe that the bottom line for the Chinese government is to maintain its growth at higher than 8% in 2009.

It is all about valuation!

Chinese equities used to trade at higher than 15X PE since November 2003. However, the PE level has dropped significantly from about 34X in October 2007 to about 10X in October 2008. According to our estimates, the PEs for the HSMLCI index are 10.3X and 9.1X for 2008 and 2009 (as at 7 November). It is the lowest since the index was launched.

In fact, we believe that the index already bottomed at 1794.24 on 27 October 2008!
Despite all this pessimism and the recent downward earnings revision, we have upgraded the China equity market to 5 stars – Very Attractive. We believe that current valuations have overpriced the negatives, resulting in an undervalued Chinese equity market. Another important component for examining the attractiveness of a market is the estimated earnings growth. The estimated earnings growth for 2008, 2009 and 2010 are 11.7%, 13.9% and 17.6% respectively. It is one of the strongest amongst Asian countries.

Chart 2: PE hit all time low!

There is no denying that China is not insulated from the global credit crunch. However, we believe that China has strong fundamentals to withstand this financial tsunami. When we look back at the basics of investing, valuations of Chinese equities look extremely attractive. In addition, we believe that the market has hit bottom in October, and hence, we have upgraded China to 5 stars – Very Attractive.

We saw panic selling in September and October. The best investment strategy is to buy when others are panicking and sell when others are too excited. Are you panicking and waiting for the market to shoot up? Or are you investing now to obtain the huge potential upside with a limited potential downside risk? I belong to the latter group of investors. How about you?


Thursday, October 30, 2008

It's About Letting Go!

(Adapted from an article written by Dr Lai Chiu Nan.)

Posted on 30 October 2007

Let go and make room for what's new and what's next.
Let go and enjoy the excitement of not knowing what's next.
Let go and open to all possibilities.
Let go when it's time to yield.
Let go and, by so doing, gain freedom and breathing room.
Let go and surrender to greater peace of mind.

The following tips on relaxation are adapted from an article written by Dr Lai Chiu Nan.

Relax your forehead, eyebrows and corners of the mouth
Let us relax! Sit up straight and relax our forehead. Once the forehead is relaxed, the whole body will relax. Next relax the eyebrows, then the mind will relax. Normally when we are troubled, the eyebrows become knitted together. Therefore, if we remember to relax the eyebrows, the mind will naturally relax. Following that, relax the corners of the mouth and put on a smile. Having done so, our emotional tension will be at ease. When we relax the corners of the mouth with a smile on the face, it is indeed not possible to get angry.

We must at all times remind ourselves to relax our forehead, eyebrows and the corners of the mouth.

Breathing Exercises
Our emotions are affected by our body. If we could, during breathing exercises, remain completely at ease and do things leisurely, we would be able to feel unhurried and calm. Thus, when you meet with a frightening or troubling situation and are about to loss your "cool", immediately slow down your breathing. You will realise that your reaction is different.

Using your abdomen to breathe
Now, observe how you are breathing, are you using the chest or abdomen to breathe? If you breathe with your chest, that is, if your chest moves up and down while you breathe, then your breath is not deep and you must be quite easily tensed up. If you use your abdomen to breathe, then you would be more relaxed. Thus, if you can change your breathing method to that of using abdomen, you will naturally be able to experience a more relaxed way of life.

In the morning when you wake up, you can lie on the bed to practise breathing with the abdomen. Place a book on your abdomen; when you breathe in, the abdomen will raise up the book, and when you breathe out, the book will lower.

You can also place your hand on the abdomen, when you breathe in, see if you can push your hand up with the abdomen; when you breathe out, press the abdomen down with your hand. Repeat the breathing in and out exercise. Now, when we breathe in, count to eight; hold your breath for another eight counts; then breathe out to the count of eight.

This method of breathing can be frequently practised so much so that it becomes a habit; then you would be constantly relaxed both in body and mind.

Changing Our Frame of Mind
Our perspective of life, of ourselves, our belief, and health have a very intricate and close relationship with others.

The first step is to know ourselves, and to perceive what is beneficial or harmful to us. At the same time, we should adopt a positive attitude and render services that benefit ourselves and others.

The second step is to adopt different methods of repentance to expel the defilements in our minds. Any action that are not motivated by a loving mind are defiled, whether the object is a human, animals, insect, event or ourselves. Repentance is a simple beginning but often brings unexpected benefits : when our defilements are reduced, our moods will improve, things will go smoothly for us, and our 'luck' will also improve.

The third step is to deeply contemplate the objective of life, to seek our aspirations and goals. We will discover that when we are of service to others, we are at the happiest. This goal is not short-term but rather permanent and of complete service to other.

As a result, we will naturally progress along the path of liberation.

Material life cannot bring eternal and true happiness. Sharing and helping others to overcome hardship and suffering will provide invaluable experience in life and set the path to true happiness and establish your purpose of life.

Simple Eyeballs Movements
The movements of the eyeballs are closely related to the brain activities. When we recall an event, our eyeballs naturally move upwards and downwards or sideway. If we liken the rotational area of the eyeballs to the face of the clock, the position of the eyeballs will give an indication to the type of senses we are recalling.

When we try to recall a smell, our eyes will be at the 6 or 12 o'clock position. Any thoughts relating to sound is at 3 or 9 o'clock. When we are visualising a past event, our eyes will be at the 1 or 11 o'clock position. However, when we are recalling past emotional memories, our eyes will be at the 5 or 7 o'clock position.

By rotating the eyeballs to the right 3 times, one can easily access our past memory. If you wish to erase any bad memories, what you need to do is rotate the eyeball to the left many times. This is a simple way to dissolve bottled up emotions and any disharmony. Jack Schwartz, a naturopathic therapist with special abilities, helped his student removed his hatred towards another person by getting the student to recall the hatred he had towards that person. Then intentionally dissolve the hatred by rotating the eyeballs to the right thrice and then many times to the left. The student who was initially full of anger started to roar with laughter and he was not able to recall the hatred after this exercise. This method has been used by many psychologists on their clients and with miraculous success.

When we are depressed, we could also use the same method.


Friday, October 24, 2008

'Biggest Bubble of Them All' Is Globalization: Chart of the Day

By Michael Patterson

Oct. 24 (Bloomberg) -- The 90 percent tumble in the global benchmark for commodity shipping costs since May exceeded the Dow Jones Industrial Average's plunge during the Great Depression, signaling globalization is ``the biggest bubble of them all,'' Bespoke Investment Group LLC said.

The CHART OF THE DAY shows the rise and fall of the Baltic Dry Index, a measure of freight costs on international trade routes, along with three other bubbles during the past decade identified by Bespoke: The Nasdaq Composite Index of technology stocks, the Standard & Poor's Supercomposite Homebuilding Index and the CSI 300 Index, a benchmark for Chinese equities.

The Baltic Dry Index's drop from its peak just five months ago surpassed all of those, along with the Dow's 89 percent retreat from 1929 to 1932, according to Bespoke.

``The Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the `globalization' trade,'' Paul Hickey, co-founder of the Harrison, New York-based research and money management firm, wrote in a report yesterday. ``It now appears that like any `new thing,' the globalization trade went too far.''

The Baltic Dry Index fell yesterday for a 14th straight session as the freeze in money markets curbed traders' ability to buy cargo on credit.

The Nasdaq plunged 78 percent from 2000 to 2002 as investors concluded high-priced Internet stocks weren't supported by profits. The S&P index of homebuilder shares has dropped 82 percent from its 2005 peak as the U.S. suffers its worst housing slump since the 1930s. China's shares have fallen in the past year as slowing economic growth and new regulations prompted traders to shun stocks that had climbed to the most expensive valuations among the world's 20 biggest markets.

Thursday, October 23, 2008

The Swimming Dragon: Exercise for Beauty and Health

The Swimming Dragon:
The Chinese Way to Fitness, Beautiful Skin, Weight Loss & High Energy

by Tzu Kuo Shih

The Swimming Dragon is an ancient Chinese Qigong exercise that comes to us through the Taoist tradition. If practiced diligently and regularly, it has the power to improve our health, enhance our physical appearance, and improve our general well-being. It is especially celebrated for its ability to improve skin tone and control weight without dieting.

The Swimming Dragon is a self-contained exercise that is generally practiced by repeating a short cycle of movements in sessions lasting from five to twenty minutes. Each cycle of exercise takes about one minute. It is easy to learn and perform and brings pleasant and beneficial results as soon as one begins to practice it.

During the exercise, the body smoothly and evenly rises and lowers and, at the same time, swings to the left and right. The movements are simple and the swinging movements fully stretch out the body. The spine is twisted in an "S" shape and extended to its maximum length. It requires the entire body, especially the waist and abdominal area, perform large scale swinging movements. In moving the body from side to side with legs together while shifting the pelvis stimulates the groin area. This in turn stimulates the endocrine system.

The Swimming Dragon is actually a comprehensive system of care for the internal organs, spine and meridian systems, In particular, the movements have beneficial influences on the intestines, stomach, lungs and kidneys and encourage relaxation.

  • reduces weight without dieting & stimulates metabolism
  • increases & balances energy
  • creates beautiful skin & helps eliminate wrinkles
  • reduces tension by relaxing the body & calming the mind
  • improves muscle tone & enhances flexibility in joints
  • adjusts & stretches the spine.
  • sends energy to vital organs by stimulating meridians
  • naturally improves posture.
  • massages deep muscles all the way to the bone
  • frees and deepens breathing

  • Videos:

    Graham's Quick Checklist for Defensive Investor's

    1. Has market share of at least 25% in the history
    2. current asset ratio > 2
    3. Long term debt < net current assets (or working capital)
    4. Debt-to-equity < 0.5
    5. 10 years of profits
    6. EPS grown by one third in 10 years
    7. 20 years of dividend payments
    8. Average PER in last 3 years < 15
    9. Current price < 1.5 times book value

    Monday, October 20, 2008

    The Singapore Market Is Nearing A Bottom

    October 20, 2008

    by Terence Lin

    Fear gripped the Singapore bourse as the FTSE Straits Times Index (STI) lost 15.2% in the week between 3 October and 10 October 2008. Concerns over an escalating financial crisis led investors to sell riskier assets in a flurry of panic, and the STI lost 7.4% on Friday (10 October) alone. As at 10 October 2008, the STI had lost 44.1% year-to-date, closing 49.7% below the all-time high made almost exactly one year ago. We are certainly in the most turbulent of times, and fear is the overriding sentiment of the hour. At this juncture, we feel that it is appropriate to take a step back and look at the recent decline in a more historical perspective.

    Chart 1 : Straits Times Index (STI)

    No Stranger To Bear Markets

    A bear market is commonly defined as a market which has experienced a fall of 20% or more from its peak. The Singapore market is clearly in bear market territory, but is this really such an unfamiliar place? The strong bull-run from 2003 to 2007 saw the STI gain 219%, and this long period of prosperity has left investors with clouded memories of troubled times in the past. From 1985 to 2007, the STI has entered bear market territory six times, with the current bear market marking the 7th time in the past 23 years (See Chart 1). Market downturns are part and parcel of the market cycle, and taking a simple average, we would expect to see a period of downturn for the Singapore market once every 3.3 years, more frequent than many investors would expect!

    The past 23 years has taken us through bear markets of varying lengths and severity. Some of us have felt the impact of these incidents first-hand, while others have heard stories related to these events. Mention events like SARS (Severe Acute Respiratory Syndrome), the bursting of the technology bubble and even the Asian financial crisis, and you will likely evoke strong emotions from older investors. Table 1 shows the falls of the STI in the past 6 bear markets.

    Table 1 : Historical Straits Times Index bear markets


    Source: Bloomberg, iFAST Compilations

    The STI Is Nearer A Bottom Than A Top!

    On an average in the previous 6 bear markets, the STI lost 44.8% from peak to trough, over a period of approximately 360 days. Also, 4 out of the previous 6 bear markets coincided with Singapore recessions. With this in mind, let us examine how the STI has performed in the current bear market of 2008.

    At the intraday low of 1902.28 on 16 October 2008, the STI has lost 50.9% since peaking in October 2007. This is more than the average 44.8% decline, and is on par with losses seen in the period around the Black Monday market crash of 1987 (-54%) and the technology slump in 2001 (-52%). Also, the Singapore economy has also fallen into a technical recession, with consecutive quarter-on-quarter economic contractions in the second and third quarters of 2008. (See Table 2)

    Once again, this is nothing unusual as 4 out of the previous 6 bear markets occurred near or during periods where the Singapore economy entered a recession.

    Table 2 : Current Singapore bear market in 2008


    Source: Bloomberg, iFAST Compilations

    Things certainly look gloomy at the moment, with credit markets in disarray and the global economy slowing. However, this is not the time to panic and sell out. The current market decline is in-line with prior falls of the past 23 years, and only the Asian financial crisis in 1997/1998 saw a much steeper fall of 62%. As of 16 October 2008, the Singapore equity market is 371 days into the current bear market, slightly longer than the 360 day average. The duration-to-date of the current crisis suggests that the STI is possibly near the end of the bear-phase.

    As we stand, the stock market has already fallen significantly and investors who sell now are likely selling out nearer the bottom than at the top. With this in mind, let us take a look at the periods of market recovery.

    Time to focus on rebound upside

    Data on the market slumps since 1985 may be interesting, but we believe investors should be more focused on opportunities in a rebound. We examined the recovery periods from each market bottom, and looked at how long it took for markets to regain previous market peaks, as well as the returns generated in the process.

    For the 9/11 attacks and technology slump in 2001, we chose a partial period of recovery up to the peak made on 19 March 2002. The recovery from the 2001 trough was marred by the impact of SARS which led to the STI making a new low in 2003. Instead of looking at the 2001-2003 period as a single bear market in entirety, we chose to look at them separately as there was a significant rebound of 46% from the 2001 market bottom.

    (The full recovery from the 2003 bottom to the peak made in January 2000 took 1302 days and the index gained 114% in the process. Inclusion of this data skews the average recovery period to 1.9 years and the average return to 101%)

    Table 3 shows the results of our study of the 6 market recoveries. On average, it took 444 days (approximately 1.2 years) for the STI to regain its previous peak before the trough (except for 2002, which was a partial recovery). During these recovery periods, the STI returned an average gain of 81%. This already represents significant upside potential, and provides us with a good reason to be buying in a crisis.

    Table 3 : Market Recoveries


    Source: Bloomberg, iFAST Compilations

    Aside from just a retracement of previous losses, investors may forget that bull markets begin where market bottoms end. Table 4 shows the returns of previous bull markets which returned 178% on average. The average length of these bull markets was an incredible 956 days, which works out to about 2.6 years!

    Certainly, investors who invest near a market bottom gain an incredible amount of upside potential, and get to experience a lengthy period of market gains. Investing during a crisis begets great rewards, and investors would do well to buy low and sell high. Of course, no investment decision should be made without consideration of a market's valuations.

    Table 4 : Bull Markets start from market bottoms


    Source: Bloomberg, iFAST Compilations

    Seeking Value

    Value investors are finding no lack of promising ideas in the current market downturn, and valuations of the Singapore market are extremely compelling. As at 16 October, the STI trades at just 6.3X of 2007 earnings, and at just 1.16X price-to-book (PB). Both the historical P/E (price earnings ratio) and PB are at the lower end of the historical scale, suggesting that the Singapore equity market is highly undervalued at present.

    Slowing global growth may weigh down on future earnings, affecting the historical P/E valuation measure. Our estimated 2008 and 2009 P/Es for the Singapore market are 9.5X and 8.7X respectively. However at a PB ratio of just 1.16X (as at 16 October 2008), the Singapore equity market is being valued at little more than its book value, a measure of its assets net of all liabilities. On a price-to-book basis in the past 15 years, the STI has only been cheaper during the Asian financial crisis in 1998 (See Chart 2).

    Chart 2 : Valuations

    Market Bottom In Sight?

    In the past, we have survived recessions, terrorism fears and even an outbreak of a fearsome disease. Each time some new problem arises, it sends investors scrambling for the exit. "This time it's different!" they exclaim, but every time the market bounced back. Our market has even survived the Asian financial crisis, which saw Singapore's economy contract for 4 consecutive quarters. Given the problems we are facing in 2008, we do not see why it will be any different.

    It is unfortunately impossible to call a bottom on the Singapore equity market. We are not proponents of market timing, which is an art best reserved for lucky people. However, placing the recent market declines in a historical perspective, we believe that we are much closer to the bottom than we are to the top. After 371 days, we are likely in the later stages of the current bear market which means the risk-reward trade-off now favours risk-taking.

    Valuations for the Singapore equity market are already at historical lows, suggesting that markets have priced in a huge amount of bad news. An often cited but very apt quote from legendary investor Warren Buffett springs to mind at this point: "Be fearful when others are greedy and greedy when others are fearful". While market volatility is expected to continue, we believe upside potential outweighs downside risks at this point and it is probably time for investors to start being greedy again.


    Thursday, October 16, 2008

    Buy American. I Am.

    Published: October 16, 2008

    THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

    So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


    A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

    Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

    A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

    Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

    You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

    Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

    Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

    I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

    Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

    Sunday, October 12, 2008

    Identifying Capitulation: How to Tell We've Hit Bottom

    Posted By:Daryl Guppy
    October 12, 2008

    Are we there yet? This is the key question and it relates to finding the bottom of the market.

    In many ways it's a pointless question. Even if we could identify the turning point in the market with a high level of certainty, there are very few people with the courage to enter at these low points.

    The more important thing to look for are the features that will help to identify, first, the end of the market fall and second, the development of a market recovery. These two events may be separated by a few months, or by many months.

    There are two important features that identify climax selling. The first is the rapid acceleration in the speed of the market fall. Like a Stuka dive-bomber, the market first rolls over slowly and then plunges in a vertical dive. This is fear at work.

    The second feature is a massive increase in volume. This is panic. Ordinary people are desperate to get out of the market. Generally the funds and institutions got out of the long-side of the market many months ago. The selling in January and February was dominated by institutions and funds. The current panic selling is thousands of small orders from retail investors desperate to get out of the market.

    During the bear market collapse, volumes decline. Fewer people want to buy stock so volatility increases because small trades have a disproportionate impact in a shallow market.

    This selling climax shakes out all the weak hands in the market. It kills the margin speculators. It wipes out those who have finally lost patience. It removes the speculative money in the market because people think the risk is too great. This is also called capitulation. Everybody gives up - and it influences the thinking of a generation. My parents, who lived through the depression, could never entirely shake the idea that the market was a dangerous place.

    The activity in the Dow Jones Industrial Average and other global markets shows an acceleration of downwards momentum. The massive increase in volume has not yet developed and this suggests the market bottom is not yet established. There is a high probability that markets will see a selling climax in the next 3 to 5 days.

    But here is the important difference. The recovery rally after climax selling is temporary. It is part of a longer-term consolidation pattern that may last months, or even a year, and make more new lows before a new sustainable uptrend can develop. The potential shape of the recovery is shown in the chart. The bull market rebound rally follows a temporary selloff. A bear market rebound rally follows climax selling. It is a relief really, but it is not part of a sustainable trend change.

    After a bear market, volumes remain low. When you lose trillions of dollars it takes a long time for spare change to start rattling around the economy again. Spare change drives the bull market because money is available for speculation.

    In the immediate bear market recovery period the market is dominated by professionals. Finance industry professionals are already being laid off. The least effective are the first to be let go. Only the best will survive the employment washout in the industry and these will be the ones defining the behavior of the consolidation and recovery market.

    When you trade in these market conditions you are most likely trading against these professional survivors. Education, not money, is the most important premium after the bear market.

    CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

    © 2008 CNBC, Inc. All Rights Reserved

    Friday, October 10, 2008

    Charts on GCC Stocks

    Charts on Abudhabi Securities Market(ADSM), Bahrain Stock Exchange(BSE), Dubai Financial Market(DFM), Doha Securities Market(DSM,) Kuwait Stock Exchange(KSE), Muscat Securities Market(MSM), Saudi Stock Market (TAST)

    Thursday, October 9, 2008

    7 Steps to Ride out the Financial Storm



    WHAT can we do to handle the current eco-
    nomic crisis?

    This financial storm will pass us by, but
    the important thing is to hang in there. This
    is what I try to live by

    1 Try not to delve too much into what is being
    published. Read just enough to stay abreast
    of what is happening round the world. Read
    motivational books rather than the negative
    news to stay on top of the situation.

    2 Stay positive always. Remember that as in
    previous financial catastrophes, banks and
    corporations have a way of bouncing back.
    The same will happen for our economy: Be

    3 Stay lean. Cut back on unnecessary expendi-
    ture. But if you smell a bargain and if you need
    it, why not make the purchase? In good times,
    the same dollar may not get you the same
    product. Shop smartly for good deals.

    4 If you are out of work, focus on getting back
    into employment. Register with the Commu-
    nity Development Council (CDC) employment
    arm nearest you - there are five such CDCs
    spread round Singapore. They also provide
    financial assistance for a limited period if
    you qualify.

    5 If you are being hounded by banks for
    repayment of mortgage or credit loans, stay
    steady and face up to the credit officers.
    It is best to arrange for a meeting to explain
    your financial situation. Most banks are sympa-
    thetic and will even arrange for the interest less
    the principal to be paid over a limited period
    before the situation improves for you.
    The worst thing to do is to "hide" from
    them. Once a lawyer's letter is issued, the banks
    may not be so willing to negotiate then.

    6 Network more, especially in these lean
    times. I managed to find employment after 911
    through networking with a long lost friend.
    Even though it was part time work, at least
    I had income coming in and I got my self es-
    teem back. With that experience, I found full
    time employment with another company six
    months later.

    7 Stay fit. The body is wired to the brain and
    vice versa. Those who handle downtime bet-
    ter are those who manage their physical and
    psychological health well. When we feel good
    about ourselves, we will approach a crisis
    better prepared. It's time to take out those
    running shoes again!

    The writer was unemployed for two years from
    2001 and writes this from personal experience.

    Sunday, October 5, 2008

    ST Reader's Favourite Hawkers

    ST Reader's Choice Favourite Hawkers' Poll
    The Sunday Times Oct 5 2008

    Top 20 stalls

    Who: Thasevi Food Famous Jalan Kayu Prata Restaurant
    Where: 235-239 Jalan Kayu

    Who: Hill Street Fried Kway Teow
    Where: Block 16, Bedok South Road, 01-187 Bedok South Road Market & Food Centre

    Who: Nam Sing Hokkien Fried Prawn Mee (Hougang)
    Where: Block 51, Old Airport Road, 01-32 Old Airport Road Food Centre

    Who: Tian Tian Hainanese Chicken Rice
    Where: Maxwell Road, Stall 10 Maxwell Market

    5. PRAWN MEE
    Who: Beach Road Prawn Noodle House
    Where: 370 East Coast Road

    Who: Ji Ji Wanton Noodle Specialist
    Where: Block 531A, Upper Cross Street, 02-49 Hong Lim Food Complex

    Who: Tong Ji Mian Shi
    Where: Block 505, Beach Road, 01-100 Golden Mile Food Centre

    Who: Katong Oyster Omelette
    Where: Geylang Lorong 9, Xin Lai Lai

    Who: Chey Sua Carrot Cake
    Where: Block 127, Toa Payoh Lorong 1, 02-30 Toa Payoh Lorong 1 Food Centre

    10. NASI LEMAK
    Who: Selera Rasa Nasi Lemak
    Where: 2, Adam Road,
    Stall 2 Adam Road Food Centre

    11. MEE REBUS
    Who: Goody N Jolly
    Where: 80, Marine Parade Road B1-113 Parkway Parade Shopping Centre

    12. MEE SLAM
    Who: Goody N Jolly
    Where: 80, Marine Parade Road, B1-113 Parkway Parade Shopping Centre

    Who: Sabeena's Indian Rojak (Halal)
    Where: Block 270, Queen's Street, 01-152 Albert Centre

    14. YONG TAU FOO
    Who: Shun Li
    Where: Block 115, Bukit Merah View, 01-397, Bukit Merah View Market & Food Centre

    15. FISH SOUP
    Who: Blanco Court Fried Fish Soup
    Where: 341 Beach Road

    16. MEE GORENG
    Who: Sabeena's Indian Rojak (Halal)
    Where: Block 270, Queen's Street, 01-152 Albert Centre

    17. NASI BRYAN!
    Who: Singapore Zam Zam Restaurant
    Where: 697-699 North Bridge Road

    18. BAR RUT TEH
    Who Founder Rou Gu Cha Cafeteria
    Where: 347, Balestier Road

    19. KWAY CHAP
    Who: Zhu Jia Pig Organ Soup
    Where: Block 504, Bishan St 11, Stall 9 S11 Food Court

    20. LAKSA
    Who: 328 Katong Laksa
    Where: 216, East Coast Road

    Friday, October 3, 2008

    Eight pearls of investment wisdom for these volatile times

    #1 Volatility is not something to fear, but something to embrace

    Why do we fear stock market volatility so
    much? As an airplane’s wings must bend during
    turbulence to prevent them from snapping, so too
    must shares fluctuate, sometimes gently, other
    times wildly. Of course, severe turbulence during
    a flight can be an uncomfortable experience but
    we have no choice but to sit tight, knowing deep
    down that we’ll reach our destination. But in the
    world of investing there is little to stop us bailing
    out at the slightest wobble as our emotions get
    the better of us. Try then to welcome volatility.
    Shares do not go up without it.

    #2 Think long term

    All stock price movements are a combination
    of unpredictable noise on the one hand and the
    meaningful pattern of business performance on
    the other. Over short periods price movements are
    as good as random, while over long ones business
    performance dominates. As an investor, you should
    align your time horizons accordingly. If a factory,
    for example, is expected to provide at least ten
    years of returns, so should your shares.

    #3 Know the difference between gambling and investing

    We all like to have fun once in awhile. A trip to the
    casino is an excuse for a good time, but approach
    the stock market in the same way and you’ll
    quickly find yourself in trouble. Successful investing
    is hard and often dull, requiring discipline and
    lots of study. For that adrenaline rush, few things
    beat watching the roulette wheel spinning. When
    it comes to making good investment returns,
    however, owning the casino itself tends to be
    more profitable than entering it. Think about it.

    #4 Be contrarian

    We have a tendency to do or believe something
    just because others do. It makes us feel normal,
    part of the group. Occasionally, however,
    such behaviour is counterproductive and even
    dangerous. Rush for the exit in a crowded market
    with everyone else and you risk getting trampled.
    The same applies to behaviour in the stock market.
    Selling – or buying – behind everyone else is a sure
    formula for poor investment performance. Warren
    Buffett teaches us to “be fearful when others are
    greedy and greedy only when others are fearful.”1

    #5 Consider the difference between price and value

    In the real world, the distinction between price
    and value is frequently apparent. Given the choice
    between a $10,000 car and a $10,000 tee shirt,
    it’s pretty clear that the car is better value. In
    the investing world however, it is much harder
    to discern the difference. Unlike a car, whose
    economic utility is something we can understand
    and even evaluate, the value of a company is
    somewhat intangible and thus a tricky concept to
    grasp. Guru stock picker Philip Fisher noted that the
    stock market is filled with individuals who know the
    price of everything, but the value of nothing.2

    #6 Be humble, the stock market is smarter than you

    Overconfidence might help to secure a job
    promotion or the attention of others at a nightclub,
    but in the investing world, an over-inflated opinion
    of yourself can be disastrous. You may think that
    you are in a position to predict the direction of
    the market or a particular stock over the next few
    months but remember that there are millions of
    others doing the same thing. Apply a little humility
    and ask yourself honestly whether you are really
    smarter than all of them. As the father of modern
    economics and successful investor John Maynard
    Keynes noted, “Successful investing is anticipating
    the anticipations of others.”3

    #7 Avoid things you do not understand

    The world is an increasingly complex place and
    one often finds oneself blinded by science or
    confused by complicated arguments. With
    investing, it is important to understand precisely
    what you are buying, at least so that you can
    sleep soundly at night. Think about shares as
    you would a book: if you don’t understand it,
    put it down. Peter Lynch recommended that if
    you cannot summarise in just a few sentences
    why you’re investing in a company, then you’re
    probably looking at too much information.4

    #8 And finally…

    If you place bets proportional to their market odds
    on every horse in a race, you’ll come out slightly
    down, after the track’s take. This is a pointless
    strategy, particularly if you know more than others
    about horses. It is important to understand where
    you have an edge and, when you have one, to use
    it to your full advantage. We never forget Buffett’s
    tip, “Wide diversification is only required when
    investors do not understand what they are doing.”5

    1 Warren Buffett, Chairman’s letter (2004) to shareholders
    2 Philip A. Fisher, Common Stocks and Uncommon Profits (1958)
    3 Isms (2006) by Gregory Bergman
    4 Morgan Housel, Keep It Simple, Fool (2008)
    5 James Altucher, Trade Like Warren Buffett (2005)

    Wednesday, October 1, 2008


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    Monday, September 29, 2008

    10 Degrees of Investment Risks

    Mon, Sep 29, 2008
    The Straits Times

    By Lorna Tan

    It is natural to feel disheartened after a bad experience. Still, even if you are one of the hundreds who lost money in now-worthless structured products linked to failed United States investment bank Lehman Brothers, do not go to the other extreme and lose your faith entirely in investments.

    Instead, take a hard look at the risks and potential returns of the underlying assets in your portfolio. It is unwise to put all your money under the pillow and in bank deposits just because they are very secure. Your purchasing power will be reduced by inflation.

    A sensible combination of products with varying risks levels can provide good returns. Mr Leong Sze Hian, president of the Society of Financial Service Professionals, suggests that the most effective way to optimise risk is a globally diversified portfolio of different assets like equities, bonds and commodities.

    For those who are confused over the potential risk levels of different asset classes, here is a general guide, from the safest to the riskiest sort of investments available.

    1 Cash

    Pros: This is the most liquid form of financial asset.

    Cons: You do not earn any return from holding idle cash. The purchasing value of money diminishes over time because of the effects of inflation.

    Best for: Investors are encouraged to keep at least six months' worth of expense money to tide them over rainy days.
    Generally, there is no need to keep too much cash because there are other assets like deposits, bonds, stocks and unit trusts that can be liquidated within a short time, with little or no penalty, depending on the prevailing market conditions.

    2 Bank deposits

    What: Cash that is deposited in banks to earn interest depending on the account type and tenure.

    Pros: It is a liquid asset, easily accessible and earns some interest. In Singapore, deposits are relatively safe as depositors are protected by the Deposit Insurance Scheme - administered by the Singapore Deposit Insurance Corporation - which insures each depositor up to $20,000 per institution they bank with. This covers an individual's Singapore-dollar current, savings and fixed deposit accounts.
    The scheme provides depositors with peace of mind and they can expect to be compensated within three weeks of an order by the regulator to pay out from the Deposit Insurance Fund.

    Cons: Bank deposits in excess of what is insured by the Deposit Insurance Scheme might be lost in a bank run. Also, current bank interest rates, which range from 0.2 to 1 per cent, are unattractive. They are also unable to beat inflation, so the monetary value of deposits will diminish over time.

    3 Money market funds

    What: A money market fund invests in high-quality short-term instruments and debt securities. The latter are loans sold by firms and governments to borrow money.

    Pros: It is a good alternative for investors who are looking for a stable, low-risk instrument with potentially higher returns - ranging between 1 and 2 per cent - than banks' savings deposits. Such funds often have no sales charge, although they come with a low management fee of about 0.5 per cent per year.

    Cons: Although most money market securities are considered very low-risk investments, there is a possibility that the borrower will not repay the loan as promised. However, such a default risk becomes non-existent if it is a government bond.
    Also, the interest rate earned usually does not exceed inflation.

    Best for: You can use it to park money that you want to keep safe and available for spending in as short a time as a few months to as long as several years. Therefore, it is suitable for all age groups, particularly for retirees.
    Still, not all money market funds are the same. When shopping for a money market fund, read the fund's prospectus and annual reports. Check to see what kinds of debt instruments the fund invests in.

    4 Bonds

    What: They are also known as fixed-income instruments. Issuing a bond is one option for a firm to borrow money from individual investors. It is a debt security where the issuer typically offers regular interest payouts and is obliged to repay bond holders the principal at maturity. Bond holders are debt holders. As such, they have priority over shareholders on the company's assets in times of liquidation.
    Unlike money market funds, bonds have maturities that exceed 12 months from the date of issue.

    Pros: With a range of potential returns from 2 to 5 per cent, bonds give a higher yield than bank deposits and money market funds. They provide regular fixed interest income.

    Cons: The returns may not keep pace with inflation. Bonds are also subject to default risk of the issuer.

    Best for: As they are considered a relatively safe and low-risk instrument, bonds can help bring stability to an investor's portfolio. The proportion of bonds in a portfolio is dependent on the investor's risk profile. The lower the risk appetite, the higher the percentage of bonds in the portfolio and vice versa. It is common for retirees to hold a higher percentage of bonds in their portfolios, said Ms Irene Ng, investment analyst at Alpha Financial Advisers.

    5 Unit trusts

    What: When you invest in a unit trust, you are pooling your money together with many other investors. For a fee, a professional fund manager invests this pool of money in bonds, stocks and other instruments to reap returns consistent with the stated investment objectives of the fund. The potential returns vary from 6 per cent to double-digit figures.

    Pros: Your investments are managed by professionals. Through unit trusts, you are exposed to a wider pool of equity stocks and gain better diversification.

    Cons: Ms Ng cautioned that unit trust investments are not without risks and capital can be lost. The minimum investment amount is low at $1,000.

    Best for: It is often recommended for new investors and those who want to gain diversification at lower cost.

    6 Equities/Shares

    What: Equity investment refers to the buying and holding of company shares. Income from such investments comes in the form of regular payouts and capital gains, when the shares are sold at a profit. When the investment is in a start-up, it is referred to as venture capital investing and is generally understood to have a higher risk than investments in listed firms.

    Pros: Equity investors have the potential for higher returns.

    Cons: Investing in single company shares is riskier than a unit trust investment because of low diversification.

    Best for: Savvy investors who do their homework and monitor the companies they invest in.

    7 Complex structured products

    What: These are innovative products that offer investors a return that is linked to the performance of some financial instruments such as equities, foreign exchange and derivatives.

    Pros: They offer an opportunity to participate in a shared investment view. For example, you may have a bullish view of a market or security.

    Cons: Your money is tied up for three to 10 years and the underlying structure is usually difficult to understand. You may lose all your capital.

    Best for: Savvy investors who understand the mechanics of the underlying structure and the instruments and are comfortable with the issuer, reference entities and risks.

    8 Futures

    What: Futures are derivative products - that is, their values are derived from the underlying asset, for example, commodities like coffee, metals and gold, and foreign currencies.
    A futures contract is a standardised contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price.

    Pros: It requires a low outlay with potential for high returns. It is useful for hedging certain risks and carries a low transaction cost.

    Cons: It is not meant for everyone as losses can be huge.

    Best for: Derivatives are only for professionals and savvy investors.

    9 Forex trading

    What: The foreign exchange (FX) market refers to the market for currencies. Transactions in this market typically involve one party buying a quantity of one currency in exchange for paying a quantity of another.

    Pros: It is a 24-hour market and a forex trader can generate profits in good and bad times, said Ms Ng.

    Cons: Constant monitoring of the FX market is required. Due to the high volatility of currencies, it requires intensive research.

    Best for: Recommended only for professionals and savvy investors.

    10 Hedge funds

    What: These are investment funds where the fund managers have a far wider range of investing options available to them than managers of unit trusts.
    For instance, hedge funds can try to take advantage of a falling market by selling financial instruments they do not own yet - a technique known as short-selling. They can also borrow money to use as capital, or invest.

    Pros: The greater investment flexibility provides an opportunity for exponential returns.

    Cons: There is a lack of transparency on what the holdings of the funds are. The performance of hedge funds is highly dependent on the fund managers' strategies.

    Best for: High net worth investors who have capital to invest and the ability to withstand losses, said Ms Ng.
    Retail investors who want some exposure to hedge funds are advised to invest in a 'fund of hedge funds', which is a hedge fund that invests in other hedge funds, so as to lower their risks. For example, DBS Absolute Return Fund gives investors the opportunity to invest in a portfolio of hedge funds managed by more than 20 specialised hedge fund managers.