TheFinance.sg » DanielXX

A post from a long-lost blogger

DanielXX — Tue, 07 Sep 2010 01:00:31 +0000

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I received another of my Google Adsense cheques just recently, and was frankly quite surprised to get it because I haven’t been posting for more than siz months. To be sure, I haven’t been active for probably more than 2 years with my hotstocknot picks, as my last few postings were more rants on than anything else.

But this shows the quality of my blog, and I’m speaking in all frankness without bragging. The fact that people continue to come back to read my postings on various stocks several years back — and why they should NOT buy it then — speaks for itself. And I am pretty sure more than 90% of the hotstocknot picks have turned out to be right, based on today’s prices as well as how fundamentals for the businesses have turned out. Just look at Raffles Education — a darling when I first posted, and now a reject and a pariah stock. Or look at Lian Beng — a construction stock which was ramped up to 60-70 cents during the heydays of the construction industry. Or how about Advanced, Autron, Biotreat, China Sun, China Petrotech, Cosco, Ellipsiz, Enviro-hub, Federal, Global Voice, Jiutian, Luzhou, Pine Agritech, Sino-Environment, Sky China, Sun East, Unifiber, Yellow Pages? All these are unmitigated “successes” of my hotstocksnot picks. My blog would, in all certainty, have been a short-seller’s treasure trove.

Today since I have some time, I would just like to highlight some of the sectors in the Singapore market I’m optimistic and pessimistic about on the basis of fundamentals and general valuation, but it’s up to the individual investor to decide for himself what individual stocks he would pick for the sector. Here goes: Read more…

CapitaRetail China Trust – An Overlooked High Performance Retail REIT

Resorts World Casino – An Analysis

DanielXX — Wed, 17 Feb 2010 04:05:53 +0000

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This is meant to be an analysis of the casino demand dynamics — not the IR. As far as I’m concerned, the centerpiece of both the developments is the casino, and everything else, including the convention centres or Universal Studios, are but secondary. The casinos are meant to subsidise all the other developments, so if they fail, the peripheral IR developments will be in trouble.

So there’re “crowds and crowds of people queueing to enter the RWS casino”, according to our mass media. Let’s sieve out the opinions and go for the facts.

The consistent number that was reported is that there were 6,000 visitors to the casino as of 6 in the evening yesterday. The casino openeded at 12 noon. At first glance, it’s hard to get your mind around this number to gauge whether that’s sizeable. I read earlier that RWS was planning to open about 500 tables at opening. Assuming that all 6,000 visitors stayed inside the casino over that period of time, that would mean a maximum number of 12 at every table. But hold on — from my experience at other casinos eg. Genting Highlands, at least half, maybe three-quarter, are likely gambling at the jackpot machines or the computerised gambling machines (you can play roulette, tai-sai, bacarrat etc at these gaming terminals with a central dealer manning the counter) — this means maybe a likely average of 5 per table instead. Now everyone who’s been to a casino will know that 5 at a table is pathetic or at best average.

And that’s on the casino opening day with so much inbuilt hype.

For some more perspective. Read more…

How To Make Money in Stocks Part 7: Pick Low-Hanging Fruit

DanielXX — Thu, 21 May 2009 01:00:18 +0000

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Allied to this theme is: don’t try to understand the whole world! (actually that was the original title, but I thought the low-hanging fruit thing sounds more professional)

Actually in my view, investing is a very simple process compared to most other forms of work in the world. Not making money from investing, mind you, but the process in itself. All the talk and academic theories about structuring portfolios, optimising risk-return etc, does it really do anything but add two or three percentage points of return over the market (if one is lucky)? But people actually make a good living out of this, not just fund managers, but also service providers like financial consultants, market forecasters, systems providers, and a myriad of financial-related cottage industries. I look at engineers and the gargantuan structures they come up with: aeroplanes, software, building systems …. and I wonder …. it’s incredible that the financial industry is paid so much for coming up with so little! (albeit they have the uncanny ability to blow these little achievements up into monumental state-of-the-art triumphs).

The point to all the above rambling is that we are all exposed to, and have generally accepted, a certain line of thinking: that to achieve good market returns, we have to accumulate as much knowledge as possible about as many industries and countries as possible, so that we can find and take advantage of potential misvaluations. That is how the output of the broking industry has been structured: daily market research, continuous company reseach reports, economic strategy reports, etc.

While there is nothing wrong with building a competitive advantage based on superior knowledge, it makes more sense to identify a few key trends, what I call inevitabilities, that have a higher-than-average probability of materialising, and then focusing on them.

The alternatives are what many people tend to do: (1) try to read as many analyst reports as possible, end up being overwhelmed with the info and betting on the popular themes/sectors of the day; (2) try to enter or exit based on different analyst interpretations of the market outlook ie. market timing; (3) buying and holding stocks based on analyst recommendations of their potential. For (1), the investor tends to be late into the buying process, while passive buying into recommended themes based on day-to-day reports will tend to lead to a bloated and overly diversified portfolio. For (2) market timing based on reports has historically led to being whip-sawed by Mr Market. For (3) the buy-and-hold approach is fine but one must think deeply about the stock and be comfortable with holding it for a couple of years (or else you will end up in the value trap, like Temasek with Merrill Leech/ Bank of Assholes).

One can be inundated with all the information in the world, but there is no point if it cannot be converted into useful knowledge. Different economists, for example, can utilise the same facts and come up with diametrically opposite and yet equally plausible conclusions. Who to believe? Read more…

Expert Stock Screener

City Developments @ 6.01 (Property/ Singapore)

DanielXX — Fri, 24 Apr 2009 02:00:32 +0000

Residential Price Index by Type

Main issues

Weak sector outlook
SOTP valuation is below current price

I have been very bearish on property for quite a while, and this latest hotstocksnot coverage shows that I have not lost this pessimism over this sector yet.

My recent views over Singapore property are well-documented in my Trendspotting blog article in February titled “Continued weakness in Singapore residential housing”. In it I outlined the liquidity situation, supply-demand dynamics and valuation comparison to historical prices and concluded that private residential demand plus prices will remain weak through the next 1-2 years. My views sector-wise have not changed. Though global liquidity conditions might have improved, my understanding is that local banks are only lending out based on 60% of home value, while unfavourable supply-demand conditions will not resolve themselves so fast. There is talk now that HDB prices will be next to fall; that removes a price support mechanism for mass market private residential housing, erstwhile the strongest of all private housing (together with old-money landed housing).

There are three acknowledged property giants in Singapore: Capitaland, City Developments and Keppel Land. Of these, City Developments is generally regarded as having the best acumen and being the most prudent. In particular, it is known for its prudent accounting policy, where it does not revalue (upwards) the valuation of the property landbank on its books, unlike most other property developers.

This is why alone among the big developers, City Developments is trading above its NTA/share. However, a rough SOTP (sum of the parts) valuation of its various segments shows that at the current price, there is little bargain to be had, especially when one surveys the post-Lehman wreckage on the market (even after the recent 25-30% market rally).

In the most recent FY, the Property Development division of CDL contributed ~55% of the profits, the Hotels division (through 54%-owned Millenium & Copthorne) accounted for ~30% and the balance was contributed by the Investment Properties division. These are the three main arms of CDL and my SOTP is based on a balance sheet assessment along these three lines.

First, the Property Development division, for which CDL is most well-known for. This is held at $2.9B on CDL’s FY08 balance sheet. I would like to divide its development properties into two time periods based on their time of acquisition: pre-2006 and post-2006. A look at the URA price index below illustrates the reason for my division: Read more…

The G20 conference

DanielXX — Sat, 04 Apr 2009 02:00:27 +0000

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And so, after half a year of waiting, finally the G20 meeting convenes this coming week. Will it be another NATO (No Action Talk Only) meeting ie. an anticlimax yet again?

I tend to think that this will come to be seen as a key event in the annuals of financial history, because of a few factors: (1) it has been six months in the making, which gives various participants the time to think things over and lobby for support; (2) the economic collapses following the Lehman bankruptcy have confounded even the most pessimistic estimates, hence conferring the political impetus for drastic action; (3)long-standing economic imbalances have long been recognised and this is the best opportunity, amidst a crisis emanating from such imbalances, to “upside the downside” (to quote a famous saying from our of our most articulate local ministers).

I believe there will be a few key issues on the agenda as described below, together with the market implications:

(1) Coordination on fiscal spending by all countries. Related to this is the issue of protectionism. For example, countries like Singapore are dead scared of too much fiscal spending because of the fear that much of this money will leak overseas due to our high exposure to global trade. Even mighty Germany doesn’t want to end up subsidising the exports of EU member countries. Without global coordination along the lines that each country pulls its own weight in fiscal stimulus such that countries will not end up accusing each other of benefiting from the other’s fiscal stimulus, a classic prisoner’s dilemma situation could develop where all parties, in trying to protect their own self-interests, end up all losers. If this coordination works, I would expect protectionism fears to ease and trade-related companies to benefit, particularly commodities (which are needed for infrastructure construction).

(2) Greater regulation of the global financial system. This is being championed by the Europeans (my suspicion is that they’re pushing this as the top agenda item because they cannot afford to pay for massive fiscal spending like the Americans). Already we’re seeing the imminent clampdowns on tax havens and bank secrecy. Most likely hedge funds, with their massive clout unsupervised by any agencies, will get the next round of scrutiny. Greater transparency of OTC markets involving all kinds of derivatives that have caused great uncertainty will be next. The implication: the financial industry will never be the same again. Therefore, rid your portfolios of all banks. The new index heavyweights will be utilities, back to the good old days. Another word of advice: Singapore should really beware of changes in this arena, because we have positioned ourselves so much for the financial industry, in particular wealth management, in recent years. Monumental changes in banking secrecy and tax haven laws will affect our fortunes greatly. Read more…

Continued weakness in Singapore residential housing

DanielXX — Tue, 03 Mar 2009 01:00:18 +0000

Trendspotting - Residential Price Index

I was thinking which of my blogs I should put this article in and decided that the Trendspotting one is the most appropriate although the article is not highlighting a trend to buy into; rather it is advising against buying into something. Besides, I haven’t written in Trendspotting for some time already.

There has been pessimism over the property market since mid-2008, and justifiably in my view, given the potential looming supply of private homes coming onstream over 2009-10. However, recently there appears to be a wellspring of renewed optimism in the market, magnified through the press, over the successful launches of several mass-market developments, notably Caspian in Jurong East and Alexis in Alexandra. I also notice threads appearing online trumpeting the recovery of the housing market. And of course, you hear again the boss of one of our local big developers declaring his (perrenially) optimistic views about the property market during the company’s results release.

In my opinion this is false optimism tinged with acute conflict of interest from the various parties involved. Let’s get the overall feel of things:

1) One of the key failures in the current global market is liquidity shortage leading to tight credit across the board. The logical thing is to expect demand for big-ticket items that require loan financing to be in the first line of fire from a credit crunch. That is why auto companies across the world are seeing an unbelievable slump in demand over the last 2-3 months, especially when they are considered discretionary items as well. In the US, without government assistance (eg. loan restructuring), things would have been worse in their real estate industry. In Singapore, I have heard people claiming that low SIBOR rates (benchmarks for home loans) are evidence that liquidity is available and cheap. This is not true if firstly, the banks are more stringent in their screening process on who to lend to, and secondly if the premium over SIBOR (typically home loans are quoted at SIBOR + premium) are increased accordingly as SIBOR is reduced. I understand both are happening. Really….. if I were a banker, would I be lending like normal times, and at lower rates than normal to loan seekers now? Get real!

2) The supply-demand dynamics just doesn’t look exciting. Why would anyone want to buy now why there is a large supply overhang. Let’s look at some numbers from URA, the voice of reason (statistics don’t lie):

Click on the picture to make it larger. Basically, the figure as of 4Q08 show that currently total available/completed private residential units number about 230,000-240,000 (mostly occupied of course). The supply in the pipeline is about 66,000, half of which are under construction and the other half being planned. Think about it: there is looming supply amounting to one-quarter of Singapore’s existing private housing stock, the latter of which was built up over decades. That means massive demand has to come in to absorb this supply overhang, and that demand must amount to say, one-quarter of Singapore’s mid-to-upper middle-class (that can afford condos). Are we expecting 25% increase in this population over say, 4-5 years? Of course, there’re the cash-rich enblocers, but common sense tells me they can’t amount to that many; besides they’ll likely want to tighten belts too.

The only reason for people to buy in the face of such an obvious supply overhang, whether for personal dwelling or for investment purposes, will be if prices drop to a sufficiently attractive level….. which brings us to our third point.

3) Price levels are not that attractive. You only have to look at the URA Residential Price Index to make that conclusion: Read more…

Technical Analysis- A somewhat scientific look

DanielXX — Wed, 18 Feb 2009 01:00:40 +0000

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I like reading the Review segment of the Straits Times because there are occasionally interesting analysis, and Andy Ho sometimes has interesting articles. This guy writes extensively on a variety of topics ranging from health to science to philosophy to political systems to economics … all of which interest me (save maybe for health). Saturday’s article in ST is the inspiration for this latest blog entry.

I had read a book on chaos theory some years back, which is the subject of Andy Ho’s article, but had not really made the connection to stock market dynamics then, probably because my market experience then was not too extensive for me to make that connection. But some years later, on reading this article, it struck me how economic and stock market behaviour can be described by chaos theory’s derivative, complexity theory (if it can even be called a theory, since there’re no real quantitative equations).

The story goes that classical mechanics can describe the interaction between two bodies, such that if given a set of initial conditions (eg. position, speed) for both bodies, the equations can predict their future trajectories for all eternity. This is known as a deterministic system (ie. its future is predictable). However, things get much more complicated for a system of three bodies. Where initial conditions vary by a little bit, the subsequent behaviour of the system can vary by a lot. This finding forms the basis for complexity theory, which attempts to describe complex systems.

Imagine what happens when you have n bodies! The system will be too difficult to characterise, it appears at first glance. The first thought that comes to the stock market player’s mind will be the parallels to the stock market where you have n millions of players interacting with one another.

However, one of the key findings of complexity theory is that, rather than throwing our hands up in despair, it is possible to find so-called “emergent” properties within such systems. Basically the idea is that although “their futures cannot be predicted, such systems exhibit patterns, so their stability is bounded” (I couldn’t have described it better than Andy Ho, hence the quote).

The example of the graceful flocking behaviour of birds is given, where even though there is no preconceived coordination the herd movement appears elegant when viewed as a whole. In fact, the only rule that has to be followed individually is for each bird to keep constant the distance between itself and the one in front while flying in the same general direction. Extending it to anthropology, the way that people congregate in urban areas and interact gives their cities emergent personalities ie. small-scale interactions among many individual parts can lead to large-scale order.

You can see where all this is going. If we characterise technical analysis as an attempt to identify such emergent patterns within the interaction of millions of bodies ie. a complex system, it may not be too far off the mark. Note the word —attempt — that suggests discretionary judgment and interpretation and hence practitioners should always remember to exercise prudence in implementation.

I used to be more sceptical of technical analysis, primarily because of the lack of true scientific logic and its lack of quantitative rigour. My doubts were expressed in an earlier writeup in 2006 on the subject — Technical Analysis — where I attempt it describe it as a technique for the short-term while fundamental analysis is more effective for capturing market-beating returns over the longer term. I also expressed my views that since the market often priced in breaking news swiftly, it tended to be efficient over the short-term and hence it was more advisable to assess companies fundamentally and position for the long-term. Read more…

TradingView live chart technical analysis tool for finance bloggers

On Temasek Holdings

DanielXX — Mon, 09 Feb 2009 01:00:28 +0000

I do not often like to comment on political issues too vehemently but sometimes I feel so strongly about certain subjects in which I feel I have a reasonable overall grasp, that I have to blurt it out. Temasek is still a political organisation as of now, no matter their claims about how commercial they are (tell me how commercial you are when the former CDF can go straight from the SAF to Head of Portfolio Strategy of the organisation), and I think it will be difficult to shake off the political links. I mean, how can it possibly do so, unless it wants to deny that the money it is handling does not belong to the citizens and the state of Singapore???

So, Madam Ho Ching’s resignation has signalled a recognition of the need for a change in the power structure in the organisation, and hopefully this will lead to a change for the better in all senses. My views about Temasek’s execution through the financial crisis starting from 2007 are as follows:

1) Let’s start from the most recent issue. I have nothing against Ho Ching. In fact, I have respect for the timing that she chose to step down, ironically because it was bad timing. People would more often than not choose to step down when things turn for the better, so that they can look good and save face. The fact that she did not do so and chose to let go to the next better player at this time says something about the lady.

2) But of course, that does not exonerate the mismoves of Temasek from late 2007 onwards when the subprime crisis first broke out. The purchase of big stakes in western financial groups started with Standard Chartered in 2006, but the real missteps were when it invested US$5.8bn in Merrill Lynch and US$2bn in Barclays as the first tremors of the global financial crisis were being felt. As of March 2008, the time of its last financial report, its portfolio was 40% loaded in financials. That stake is set to be trimmed drastically, mainly due to market movements, when its next report is due in March this year. I personally have never understood why fund managers are so captivated by financial stocks. I mean, unit trusts yes, they have to track their benchmarks so it is more understandable, but why SWFs like Temasek? Are banks the best way to play economic growth? I don’t think so. Sector-for-sector, financials are the lazy man’s way to play on economic growth, who claim that it offers diversification. I say that it’s better to identify individual themes, say healthcare, consumer brands, infrastructure etc, and then go for the best-of-breed in each identified category, with an emphasis on not overpaying for the business. Financials should have been the one category to avoid in late 2007, given that the subprime crisis was just breaking, with possible contagion (which has become reality unfortunately). Leveraged institutions like banks would have been hard hit, not to mention the fact that they were in the eye of the storm in the first place. So why? Read more…

Developing An Investment Philosophy Part 5

DanielXX — Wed, 07 Jan 2009 01:00:39 +0000

Photo by MAMJODH

A friend joined a fund management firm recently and was amazed at how the analysts were expected to cover multiple geographical markets simultaneously, since the firm managed several Asia-Pacific funds. How was he supposed to do it, he wondered, since he previously was only familiar with the Singapore market. Indeed, was it even humanly possible for a person to cover many markets at the same time?

To me, there are three distinct aspects to developing one’s expertise and effectiveness in the stock market: depth, breadth and philosophy. Be deficient in one aspect and he will be a much less effective investor by an order of magnitude because of it.

In fact there are many analogies that I can draw between this and kungfu (which I like watching, and in the mood to indulge in today because of the movie Ip-man) so I’ll use the analogies liberally here. Depth is easiest to understand. If you master a certain kungfu style eg. Snake style or Eagle Claws (in that old Jackie Chan movie), you will know all the intricacies and be in a great position to fight all comers. Ditto for the investor who knows a market (usually his home market) or an industry really well; he will understand what drives it, the industry dynamics and cycles, the key market players etc, from which he can make money with more than even odds. This is what my friend had: depth of knowledge in the Singapore market. Often, depth of knowledge in one market can serve as a good launching pad for expansion into the next aspect — breadth — because the groundwork has been done; one knows what to look out for the second time round.

Just like the single-style kungfu expert who encounters other schools of kungfu. He will find it easier to learn them because he has the basic understanding gained from his mastery of his first kungfu style. And as this exponent encounters more and more different schools of kungfu, he gains breadth of understanding and knows their various interactions and how to deal with and counter each and every school. In the same way, breadth of knowledge of different markets will move the individual investor up another level because it will reinforce his knowledge of how sector peers in different countries operate, and relative valuations provide a guide to whether the particular stock he is holding might still be undervalued or is merely fairly-valued. Personally, I follow a “buy local, monitor global” approach given my limited time; at the same time I recognise the importance of expanding breadth, hence my “monitor global” emphasis (“My Research Routine“). Read more…

CapitaCommercial Trust @ 96 cts (REIT / Singapore)

DanielXX — Fri, 26 Dec 2008 01:00:28 +0000

Main issues

Rents set to fall
Interest expense set to rise
Relative yield valuation is not attractive

And finally I resume my Hotstocksnot coverage. It has been a turbulent year and I have been so absorbed, enthralled and traumatised by the stock market that I preferred to spend time on my own stockpicking rather than highlighting hotstocksnots. Besides, valuations had plunged and it was getting difficult to find overvalued stocks.

CapitaCommercial Trust (CCT) had dived together with the general market, especially with the REIT segment, since the middle of 2008, hitting as low as 60 cents in early December. It didn’t help that it was axed from the MSCI Singapore index in November, which further added to the selling pressure. However, in recent days, it has rallied strongly by over 50% to 96 cents on improved sentiment over property given lower interest rates. It is my view that this is not sustainable and the stock has become a hotstocknot, although it is substantially off its 2007 highs of >$3.

I will address my viewpoint along three main issues: revenue, costs (the difference will of course be earnings), and valuation.

The expected drop in demand for office space as a result of the financial crisis is probably known to all. That is the reason why CCT dived so sharply the last few months. But let’s try to quantify the likely impact on the rents of CCT’s properties, and hence revenue, in order to judge whether at the reduced price of 96 cents CCT might be a bargain.

Of CCT’s portfolio, four properties provide the main revenue stream: 60% Raffles City Trust (30% of total gross rental), 6 Battery Road (24%), 1 George Street (17%), Capital Tower (11%); together they contribute >80% of CCT’s gross rental revenue. The last three are office-dominated properties located in the CBD, with Raffles City being the exception (15% office/40% retail/40% hotel & convention). In particular, 6 Battery Road and 1 George Street are prime CBD office towers with peers commanding the highest rentals of $17-20/mth psf; this segment is also the one that has risen the fastest over the last few years. Capital Tower and Raffles City Tower (the office segment) occupy the second-tier, with peers commanding about $11/mth psf. Note that these estimates were obtained in Aug 2008; that’s right, before all the mess really started.

Three things are worth noting that will have significant impact on future rents at these properties. Firstly, 35% of CCT’s gross rental is derived directly from banking, insurance and financial services customers, while other segments likely to be badly affected (hospitality, property services, fashion retail) could range from 25-35%; effectively two-thirds of CCT’s customers will be hit badly by the looming global recession (though of course, they might not terminate leases).

Secondly, in CCT’s core niche: Grade A downtown core office space, there is looming supply overhang come 2010 onwards: as at May 2008, Singapore had 6.7M sqft of Grade A office space; a walk along Shenton Way will make it clear that this supply is poised to surge, with newbuildings at various stages of completion obvious from Robinson Road to Raffles Place to of course, Marina Bay. For the last one alone, the Marina Bay Financial Centre alone is poised to add 3M sqft when both phases are completed by 2012. Property consultants had expected office rents to soften in 2010 even before the financial crisis, but the looming demand-supply dynamics look positively bleak now.

Thirdly, and the scariest of all, median Category 1 (ie. prime) office rentals according to URA figures have tripled from $4.5/mth psf in 4Q04 to $13.50/mth psf in 3Q08, and it is fair to say that 3Q08 was near the peak in terms of Singapore prime office rentals. If rates were to even half from the peak, CCT yields would be disastrous. Read more…

Reflexivity revisited

DanielXX — Mon, 01 Dec 2008 04:05:39 +0000

Let’s review the various perspectives about the relationship between stock prices and “business fundamentals” as most people understand it. First, there is the advice given by the Sage of Omaha about Mr Market being manic-depressive and that the prices he/she/it quotes can have a disconnect with underlying fundamentals. Then there is the typical technician’s/efficient market theorist’s view that price reflects underlying fundamentals, even though it might not seem so at the time to the outsider. And then there is George Soros, who advocates that market prices can actually actively influence fundamentals. The last view is known as reflexivity, a term coined by Soros.

Despite Soros’ celebrity fund manager status, reflexivity has never really caught on in popular investment literature, partly because it does not really have mathematical grounding. It is more of a philosophy than anything else, in its recognition of the two-way feedback between price and fundamentals, instead of the traditional view that fundamentals drive prices. But in the aftermath (I hope) of this credit crisis, it deserves serious all-round consideration and recognition now.

First of all, by virtue of the fact that Soros was among the first to recognise the seriousness of this crisis, calling it the greatest financial crisis since the Great Depression, his market ideas and philosophy deserve special elevation. Now everybody knows the current crisis as …. yes, “the greatest financial crisis since the Great Depression”. Talk about parrots. But more importantly, the mechanics and evolution of this financial crisis indeed has the feel of a price-induced death spiral about it.

The most obvious linkage is market confidence. There is nothing that unnerves the self-assured long-term “fundamentals-driven” investor more than to watch the market value (and his net worth) of his investment drop day by day; it has the effect of shaking his conviction to the point of changing his perspective from “Mr Market is wrong” to “Mr Market might know something”. The same applies to the bond investor of course, who will be driven more by credit concerns than earnings concerns (bond investors also tend to believe in market efficiency more).

This is all fine if the stock is trading on the secondary market and the business is self-sustaining without funding concerns, because the business doesn’t really care what price it’s worth according to Mr Market, as long as its suppliers and customers continue doing business with it. Operations-side partners tend to be less market-sensitive; however financial-side partners are hyper market-sensitive, and this is where declining market valuation can feed into faltering confidence. If the company is constantly dependent on financing cashflow (not necessarily from stock market or bond market) to sustain its operations, or if indeed (in the case of banks) market trust is integral to its business model, then the reflexivity effect is particularly influential. Indeed, in Soros’ original illustration of the reflexivity effect, he highlighted the case of REITs, which often funded new property purchases through issue of new units and therefore depended heavily on high market prices of their units to purchase these new properties at above-average yields ….. sort of a Ponzi scheme in my opinion.

Today, REITs face a different market confidence-related concern …. they have trouble rolling over their current debt. Read more…

Stockpicking in a bear market

DanielXX — Sat, 15 Nov 2008 01:00:54 +0000

By: DanielXX

Stockpicking in a bear market can be a hazardous business, because going long in deflationary conditions is by definition an attempt to pick a bottom (whether intermediate bottom or long-term bottom) on the stock price. It is easy to be bloodied by the falling knife, especially if one attempts to catch it naked (eg. contra, no ability to hold). One could thus simply choose to avoid risk and not hold stocks altogether, which is the reason why we have a bear market at all — risk aversion leads to lower volumes and the stock prices drop by gravity due to lack of support. But yet, if we define risk as the potential loss on investment over say 3-5 years, rather than the standard textbook definition of price volatility which I have always maintained is more appropriate for short-term leveraged players than for long-term investors (see my article on risk), then buying stocks during a bear market could be a low-risk proposition indeed (because you are buying at a lower base and hence risk of losing is lessened over the long term), assuming that the bear cycle reverses in several years.

I feel that a good model for picking stocks in a bear market would be to examine the cash bailout potential of a stock over the medium to long term. I build my ideas based on the “cash bailout” concept as espoused by Martin Whitman in his book “The Aggressive Conservative Investor“, which was written in the late 1970s when stagflation gripped the US. The general idea is to view a stock with regard to its potential to allow the holder to eventually bail out; under this umbrella of “cash bailouts”, selling in the open market for capital gains is but one of the bailout exits; other potential exits include dividends and privatisation.

This way of viewing a stock is especially useful in a bear market where most small-cap stocks may be thinly-traded and selling out of them may be difficult. Yet, illiquid small-caps often offer the best potential gains. I adopt a two-horizon approach to picking these stocks in a bear market. Read more…

Structured Products fiasco- What’s reasonable, what’s not

DanielXX — Thu, 13 Nov 2008 01:00:43 +0000

By: DanielXX

It is surprising that this storm has still not abated about one month after it initially started following Lehman’s failure which ignited so-called “credit events” in many structured products offered around the world, most prominently in Hong Kong and Singapore (I wonder why these two countries in particular). With all due respect to the victims, my conclusion is that in Asia, money (and the loss of it) strikes at the raw emotions (and the corresponding activism) of people much more than anything else (eg. intangibles like democracy, politics, environment).

As this issue is covered almost every day in the papers, I cannot help but be saturated by all the reports. And I cannot help feeling that while there are obviously certain points that buyers of these Lehman minibonds/DBS Hi-Five/Merrill Jubilee notes (to name three of the most prominent) have strong reasons to be indignant about, there are other points that were raised which do not really hold any ground. I discuss a few of each below:

What’s reasonable (ie. the investors have reason to be indignant about)

Terminology used: The misleading terminology used to market these products is one of their biggest bugbears, and rightly so. As I’ve said before, I never would have understood that there was a difference between capital-protected and capital-guaranteed until the shit hit the fan in the last two months. And calling the Lehman products “minibonds” certainly hints of an intention to lull the target audience into complacency. A rose by any other name is just as sweet (and the reverse applies for a pile of shit), but certainly the name is supposed to convey a certain first impression and underlying meaning.

Lack of understanding of products by sales personnel: For the level of complexity of the structured products which had even some experienced finance professionals struggling to comprehend the prospectus, it is highly debatable whether they should even have been made available to the masses. One thing is clear, and that is that many of the sales personnel were not equipped to explain their complexity to retail customers. There is anecdotal evidence on the part of the aggrieved customers, and partial acknowledgment of this fact on the part of the selling financial institutions. In my view, the caveat emptor principle is more valid when the investor is the one actively sourcing for investment targets to purchase; it is reasonable then to expect that he should do his own research. However, where the seller is conducting aggressive selling tactics, I feel it is their responsibility to explain the upside and downside of the product to their customer to give a complete picture. Most agree that it is doubtful that the sales personnel were even in an enlightened position to explain the risks of these products.

Poor financial advice: In the old days, the easy money was to be made in “widows’ and orphans’ money” — it was easy to target the money of the most vulnerable. Anecdotal evidence suggests a key target for these structured bonds were the elderly looking for fixed deposits. This is not wrong in itself, except a key tenet of prudent investing — diversification — was ignored when a big part of these customers’ money (several hundred thousand dollars for many) was eventually funneled into one or two structured products. However safe a product might be deemed to be, surely it was unwise to put all the eggs in one basket? Perhaps the money could have been spread among several structured products? Read more…

Screening S-stocks

DanielXX — Sun, 28 Sep 2008 03:23:38 +0000

By: DanielXX

DanielXX’s intro: The below is extracted from the Nextinsight share investors’ site, a no-nonsense website whose founders include a former business journalist and a head of a well-known local investor relations agency. The article is written by Sim Kih. The writeup was in turn based on a lengthy JP Morgan report on the dangers of S-stocks.

The reason for my highlighting this article is that it offers many key insights on what things to look out for when stockpicking S-chips, or so-called “warning alerts”. An article worth archiving for future reference. It is my belief that once you know what red flags to spot and what stocks to avoid, you will have controlled your downside pretty well. Why else do you think JP Morgan is one of the survivors, or some might even say a key beneficiary, of the current credit crisis?

One thing to note: the valuation screens used can be moving targets. There is no reason to claim that say, a PE<10 means a good stock pick, if most other peers are trading at <5X. In other words, one has to watch the relative valuations available on the market and cannot use rules-of-thumb blindly. Read more…

Understanding stock valuation

DanielXX — Thu, 11 Sep 2008 01:00:06 +0000

By: DanielXX

To me, understanding valuation, or why the stock is priced the way it is over an extended period, is one of the, if not THE, key risk management method for the stock investor/trader. This is as opposed to the approach of many traders who use technical analysis, momentum trading, cut-loss etc. Indeed, if I may generalise, the upside gains from an investment comes from astute understanding of business dynamics and growth potential, but management of downside risk comes from understanding of the valuation.

There are several issues on valuation that I’ll discuss here. First of all, understanding what type of valuation technique drives the price of a stock is winning half the battle. The favourite technique is PE (price earnings) but I am incredulous when people quote PE for companies which should more accurately be valued by their balance sheet assets eg. property stocks. PE is more relevant for companies which enjoy steady and sustainable growth in their core earnings because it is predicated on projecting a certain level of earnings growth into the future, and hence it’s imperative that these earnings are predictable. Indeed, it’s worth noting that often the best time to buy cyclical companies is when their PEs are high or even negative, because it will be at the bottom of the business cycle when this happens (ie. the market-timer can catch it at its bottom).

It’s also interesting to observe how valuation technique can change at different points in the market cycle. In an up market, PE is often used because earnings are seen to be on a steady growth trend in the foreseeable future. Read more…

Understanding Stock Market Risks – Financial Fraud Risk is real! (4)

My Investing Journey: Hurricane Katrina

DanielXX — Wed, 03 Sep 2008 01:00:49 +0000

By: DanielXX

If late-2004 and early-2005 are remembered for the corporate debacles of CAO, Citiraya and ACCS, the later part of 2005 will be remembered for the attention that centered on oil and refining. The catalyst was Hurricane Katrina, which was the worst-ever storm to hit the Gulf of Mexico and caused extensive damage to the refining facilities in the region, exposing the deep global capacity crunch in refining capacity.

Katrina formed over the Bahamas in late August 2005 and due to the unpreparedness of the authorities, caused severe destruction along the Gulf of Mexico coast from central Florida to Texas in the form of a Category 5 storm, with the most severe loss of life and property damage occurring in New Orleans. Of more interest to oil traders was the damage to the oil production/refining infrastructure in the most important offshore oil production area of the US, where numerous oil platforms were destroyed and refineries were forced to close; approximately half of the Gulf’s oil production was shut over the subsequent 6-month period.

Oil prices making new highs had been the talk of town throughout 2005, but Hurricane Katrina brought into focus the glaring global tightness of refining capacity. Simple and complex refining margins spiked up several dollars per barrel after Katrina which bloated the profits of refineries across the world for 2H05.

Allied to this tale is the story of SPC. The story is told in my writeup on “Bull stock: SPC“. Struggling with razor-thin margins and stagnating revenues in its refining business in the late 1990s when oil prices were in the pits, it was a massive beneficiary of the burgeoning demand for petroleum products after 2003 that translated in steadily rising refining margins from 2004 onwards. Read more…

My Journey to Financial Freedom

How To Make Money In Stocks Part 6: Identify spread divergence

DanielXX — Tue, 05 Aug 2008 01:00:53 +0000

By: DanielXX

As a fundamentals-based investor, I am always looking to find bargain buys on the basis of value and I often try to spot trends (see my blog Trendspotting) which could lead to a re-rating of particular stocks. Once one has identified a particular trend, he can find companies which have particular leverage to that trend. A useful framework for finding good companies is identifying a divergence in its revenue-costs spread, which is of course an elaborate way of describing the income.

The spread is simply the numerical difference between A and B (ie. A-B). The spread will widen/diverge if (1) A goes up while B remains the same; (2) A remains while B decreases; (3) A rises more than B or declines less than B. The most divergence is of course when A rises while B drops. A concept that is easily applied to the earnings framework for companies.

The key benefit for thinking about earnings as a spread between revenue and costs is that it compels the investor/trader to think about the components of income individually insofar as they contribute to the spread (which is also the profit margin). Often, the fundamental factors driving revenue are independent of that driving costs. Identifying stocks where certain trends favour revenue growth while other particular trends point to cost decrease ie. a form of spread divergence, could suggest a stock with potentially explosive profit margin growth.

How To Make Money In Stocks Series
How To Make Money In Stocks Part 1: Back to the Basics
How To Make Money In Stocks Part 2: The Time Horizon Premium
How To Make Money In Stocks Part 3: The Illiquidity Premium
How To Make Money In Stocks Part 4: Keeping It Simple
How To Make Money In Stocks Part 5: Learning to sell

What wage-price spiral?

DanielXX — Mon, 04 Aug 2008 04:00:01 +0000

By: DanielXX

Inflation is in the air, and Singapore has not been spared. Indeed, as one of the most open economies in the world, we are seen as particularly vulnerable, even a precursor to what the rest of the world will experience several months later due to our lack of subsidies for many common products that typically shield consumers of other countries from immediate price impact.

Given the price pressure faced by people in their daily necessities as a result of imported inflation, it has become necessary to communicate the linkages between wages and prices. No less than two full ministers have come forward to explain the intricacies of inflation and why a wage-price spiral must not be allowed to develop — which means wages must be controlled.

I sympathise with them because it must be politically difficult to explain to people that their income cannot rise in-step with their expenditure. Before we go further, let’s briefly look at what wage-price spiral means. Essentially, it is a classical inflation phenomenon where wages are allowed to chase prices upwards. Prices, in turn, will be positively influenced by rising affordability (rising wages) and hence its upward momentum is not checked, leading to a positive reinforcement cycle. In a sense, inflation begets further inflationary expectations.

But let’s look at it more closely. I am in no position to discuss it quantitatively, but let’s reason things out qualitatively. Two key points on why I doubt a wage-price spiral will occur even if wages are allowed to rise: Read more…

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