100th Post Celebration and a Happy Chinese New Year, With a More Important Note

Here's wishing everyone a happy and prosperous Chinese New Year. Also, this happens to be my 100th post so it's a double celebration for me. =)

While we're celebrating, I thought it would be good to incorporate some social responsibility as elaborated by the posters below. A picture does say a thousand words anyway.

And while some of you may have objections on shark fin soup. Perhaps the videos below may enlighten you on the importance of their roles in maintaining our environment and life and the danger that they are seriously in. 

Rob Steward's Sharkwater received numerous awards, 33 at current count, and positive reviews, in recognition for all the effort Steward put into making this movie, even putting his own life on the line to capture the truth. In my opinion, it is one of the best shark documentaries I've ever watched. 

I hope you check it out. And give us a chance.

Cheers,

~K

Highly Recommended Videos on the Importance of Sharks

Sharkwater 01/09

Sharkwater 02/09

Sharkwater 03/09

Sharkwater 04/09

Sharkwater 05/09

Sharkwater 06/09

Sharkwater 07/09

Sharkwater 08/09

Sharkwater 09/09

Singpost - What the Analysts are Saying

OCBC

Steady 3QFY11 results

QFY11 results in line with expectations.

Singapore Post (SingPost) reported a 6.3% YoY rise in revenue to S$148.5m and a 0.7% drop in net profit to S$43.8m in 3QFY11, such that 9MFY11 net profit accounted for 74.7% of our full year estimates and 78.5% of Bloomberg’s mean consensus. Excluding one-off items such as amortization of deferred gain on intellectual property rights and benefits from the Jobs Credit Scheme (in 3QFY10), underlying net profit increased 5.1% YoY to S$40.9m.

Growth in mail and logistics businesses. 

Mail revenue grew 7.5% YoY on the back of strong growth in the direct mail business and better economic conditions, while international mail was underpinned by growth in e-commerce activities. More transshipment and vPOST shipping activities contributed to the 10.2% YoY increase in logistics revenue, but operating profit from this division declined as transshipment generally has lower margins.

Diversifying its businesses and markets. 

Management reiterated that it continues to face “formidable challenges” in the postal industry, driven by factors such as e-substitution. With the global trend of declining mail volumes, the group wants to reduce its reliance on mail revenue and diversify its revenue base. Indeed, the mail division’s contribution to total revenue has fallen steadily from 77% in FY08 to 68% in 9MFY11. However, being Singapore’s dominant postal operator, SingPost will still focus on the mail business to meet the changing and growing needs of its customers, while expanding its logistics and retail divisions. The group is also exploring acquisition opportunities to grow its businesses in the region.

Maintain HOLD. 

To accelerate the group’s transformation and growth, SingPost has announced an organizational restructuring in which there will be a CEO in charge of Postal and Corporate Services while another CEO will focus on the international business. We are positive on this latest development as the segregation of duties should result in a sharper focus on both the mail business (faces own challenges in the industry) and the group’s international expansion efforts (essential to seek new growth drivers). Meanwhile, we continue to await news on the M&A front. An interim dividend of S$0.0125/share has been declared, in line with the group’s usual practice. Though the stock has an estimated dividend yield of 5.3%, there is limited upside potential to our DCFbased fair value estimate of S$1.16. Hence we maintain our HOLD rating.

DBSV

New CEO (International) for Regional Expansion

At a Glance

• Net profit of S$43.8m (-0.7% yoy, +10.0% qoq) and quarterly DPS of 1.25 Scents were in line.

• The appointment of new CEO for international business shows regional focus. Regional M&A and share buybacks cannot be ruled out.

• Maintain HOLD with DDM-based S$1.17 TP (cost of equity 7.7%, growth rate 2%). We have assumed that dividends can grow by 2% p.a. in the long term.

Comment on results

Net profit of S$43.8m (-0.7% yoy, +10.0% qoq) was in line. Mail segment grew strongly by 7.5% yoy on the back of direct and international mail, benefiting from higher business activities. This offset the impact of higher terminal dues (about S$2-3m impact in FY11F) and absence of benefits from job credit scheme (S$5m adverse impact in FY11F), which expired in June 2010. 9M11 earnings constitute 77% of our FY11F forecast. 3Q is typically the strongest quarter due to higher mail traffic during the festive season.

New CEO (international) to drive regionalization. As Partner at McKinsey, Dr Wolfgang Baier, has been working with Singpost for the last five years and has extensive experience in Asian and Western markets. He will be driving the logistics and retail business, which can expand further regionally. With S$200m raised through bond-issue in March 2010, Singpost has enough muscle to acquire small companies. Given that Singpost has a mandate to buy 10% of its shares, share buy backs cannot be ruled out either in our view.

Recommendation

We do not see any risk to its dividend payout and recommend HOLD with DDM-based TP of S$1.17.

Kim Eng

Still waiting for fresh catalysts

Event

SingPost did as well as can be expected. In other words, we expected its mail business to reflect the current economic strength, and it did. But the logistics and retail businesses did not do so well profit‐wise due to lower margin components coming to the fore. If this is the best it can do despite the economy firing on all cyclinders, then it needs to move faster on its regionalisation and diversification plans. Perhaps the recent management restructuring will speed things along. Meanwhile, HOLD for the yield of 5+%.

Our View

Net profit of $43.8m was flat YoY. Underlying net profit, excluding one‐off items such as the $2.9m amortisation of deferred gain on IP rights and benefits from the Jobs Credit scheme which ended in June 2010, was lower at $40.9m, though still 5% higher from a year ago. The usual quarterly dividend of 1.25 cents was also declared.

Mail business did the best on stronger domestic, international and hybrid mail volume, with EBIT growth outpacing revenue growth. However, Logistics margins were affected by lower margin activities such as transhipment as opposed to higher margin customized logistics, while Retail profit fell on lower agency and retail activities.

Perhaps sensing investors’ impatience with its long‐promised regionalisation and diversification, SingPost recently appointed two CEOs. An ex‐McKinsey consultant will now accelerate its expansion in the region and diversify into non‐postal businesses. Incumbent CEO Ng Hin Lee will lead postal services and strategic acquisitions.

Action & Recommendation

We maintain our HOLD recommendation, mainly for the yield of 5%. Our target price has been raised to $1.29 as we roll over to FY12, still on 15x target PE.

Cheers,

~K

P.S. I have SGX Yield Stocks to thank for compiling the info.

Ever Wondered How the Money Supply Grows in Singapore?

Linking the thought from the video in my previous post, The Real Truth About Fiat Money and the Banking System, I came across an article from the recent edition of the Business Times Weekend explaining how inflation occurs in Singapore. In it the author, Senior Correspondent Teh Hooi Ling, explains that it was through watching the video titled "Zeitgeist-Addendum" on YouTube that eventually lead her to think how money supply in Singapore is created despite the government running a budget surplus year after year.

By definition M2 is the money supply in Singapore consisting of currency in active circulation, demand deposits of the private sector, fixed deposits, Singdollar negotiable certificates of deposits, savings and other deposits. At the end of 2000, M2 stood at S$170.9 billion. By end Nov 2010, M2 had exploded, more than doubling to S$401.4 billion. That's an increase of 8.9% p.a. for the past 10 years. In comparison, the data given in article stated that GDP had grown only about 6.4% p.a. during the same period.

So how does money supply grow in Singapore?

For that I'll leave you to the author herself to explain, extracting a part of the article so you can read it verbatim, highlighting what I felt were the important bits to take note of.

"I came across a document entitled Monetary Policy Operations in Singapore on the Monetary Authority of Singapore (MAS) website. The 32-page document highlights the key aspects of MAS's monetary policy policy operations, and the various factors and considerations underlying them.

The four primary responsibilities of MAS are:

• Implementation of exchange rate policy;
• Conduct of money market operations for banking system liquidity management;
• Management/issuance of Singapore Government Securities (SGS) in support of government initiatives in bond market development; and
• Provision of banking and financial services to the government

MAS's balance sheet looks like this: 

On the assets side, a big chunk is in foreign assets, i.e. the official foreign reserves of Singapore. MAS also holds an inventory of SGS. It also has domestic credits, that is lending to banks in the course of conducting money market operations for liquidity management in the banking system.

On its liability side, the biggest component is government deposits. These are surpluses that the Singapore government run year after year. Also in this pool are contributions of members to the Central Provident Fund (CPF). Also on the liability side is currency in circulation. Under the provisions of the Currency Act, each Singdollar must be fully backed by foreign assets. As we all know, Singapore's monetary policy targets neither the interest rate nor monetary aggregate. It is centred on the trade-weighted exchange rate. As such, the monetary base is also endogenous, and its level is based more on banks' demand for reserve and settlement balances.

So this is my understanding of how the money supply of Singapore has been growing all these years. Say a foreign company wants to set up factory in Singapore because of the good infrastructure here and the convincing marketing campaign by the Economic Development Board.

The foreign firm brings in US$100 million. It needs to convert that amount to Singapore dollars to pay for the construction cost of its building, to pay utilities bills and salaries of its staff.  So demand for the Singdollar increases. If the aggregate demand for the Singdollar far exceeds the supply in the market, the local unit will appreciate too fast and make Singapore exporters uncompetitive. So since MAS's mandate is to manage the Singdollar's trade-weighted exchange rate, it will intervene by selling Singdollar to meet the demand and buy the US dollar. 

That's how money supply in Singapore grows over time. Among other reasons, demand for the currency also rises when Singapore exporters want to convert revenues in US dollars back to Singdollar, or when foreign investors are keen to invest, say, in real estate in the Lion City, given its safe haven status and its emergence as a global city. 

I've charted how Singapore's GDP in current market prices and how Singapore's M2 money supply have grown since 1980. The ratio of M2 to GDP has been rising through the years. Prior to 1998, total M2 had always been lower than the aggregate GDP. But that changed in 1998, and by end of 2009, M2 is 140% that of Singapore's GDP. Is it a wonder then that real estate prices have been so bouyant in the last few years?"

Source: The Business Times Weekend

Title: How Money Grows in Singapore

Section: Show Me The Money

For the curious and those with lots of time to spare, I've linked the Zeitgeist-Addendum video as well as the follow up movie below.

Cheers,

~K

Zeitgeist-Addendum

Zeitgeist-Addendum II

The Real Truth About Fiat Money and the Banking System

Thanks to ffnow for bringing this great cartoon video to attention. I'm putting it here as a easier reference for myself as I feel it's a good simple way to explain the situation at the moment in the US and how it came to that. You can read more great posts at his blog, A Journey Towards Financial Freedom. He has a really nice uncluttered site with lots of good nuggets. Thanks again ffnow.

On another related news, this short review in the Business Times Weekend caught my attention as well. Do read it, it'll take less than 30 seconds to make you wonder about the truth about the video. In an even briefer briefing, the important point to note is that spending isn't slowing and the deficit is heading to a mind-blowing US$1.5 trillion! Just had to bold it for emphasis heh.

Cheers,

~K

US federal deficit heading for record US$1.5t

Far from slowing, the US government's deficit spending will surge to a record US$1.5 trillion this year, the Congressional Budget Office estimated, blaming the slow economic recovery and last month's tax-cut law. What is more daunting for President Barack Obama is that it estimates a nation-wide unemployment rate of 8.2% on Election Day in 2012.

The Real Truth About Fiat Money and the Banking System

Identifying Your Fund Manager Styles

Reading the Business Times this week, I came across an article within that had some pointers on creating an investment portfolio. While reading it though, it came across as quite generic and brief. As such, I pulled out the only section that I felt had some value - a section on knowing your fund managers investment style. 

Why is this important?

The author, Mr. Edmund Teo, regional director, investment solutions, Asean, Hong Kong, Taiwan, and India at Russell Investment, says that "investors need to understand the style of different managers in their portfolio, and why they under or outperform in different market conditions. Employing manager and investment style diversification is critical for reduced volatility across market cycles." Perhaps, it may be good to give them a ring to find out their approach.

In the article, Mr. Teo listed 3 types of styles. I would like to add a fourth. 

1) Growth managers

These managers focus on companies whose earnings are growing faster than average. Often, these fast-growing companies will reinvest their profits back into their business, so the dividend yield (if any) could be lower than market average. But note that if growth slows, their stock prices are more likely to fall harder than average. 

2) Value managers

These managers look out for and invest in undervalued companies whose true value has yet to be recognized which therefore gives the share price potential to rise upon realization by the market. They believe in the saying, "buy low, sell high". Often these companies are solid, but not spectacular performers with good cash flows and at times with dividend yields above market average. The risk of investing in undervalued companies is that these companies may remain undervalued for extended periods of time with no indication when share prices may rise.

3) Market-oriented managers

These managers focus on themes within the market and the economy to decide on the companies to invest in that should outperform market averages. For example, if the manager feels that the Singapore dollar is about to rise, he or she might focus on increasing positions in companies that import goods while reducing holdings in companies heavily reliant on exports. The risk of this style is that themes can have short lives and catch investors unaware.

4) Momentum managers

These managers look out for hot stocks and for stocks that though have risen a fair amount still have fuel to rise even higher. They believe in the saying, "buy high, sell higher". They look for companies that have made new highs, and/or show strong upward trends based on technical analysis. Constant positive earning surprises is one other criteria these managers scan for. The obvious risk is that prices are constantly undergoing corrections when prices rise too drastically. As such, momentum investing could go against managers who mistime the entry of their purchase.

Hey, if any of you know of any more styles than is listed here, pls feel free to leave a comment below. And if you're willing, it'd be great to hear your investment style as well. =)

Cheers,

~K

Inflation Kicking In

A report on the Edge caught my attention today. Inflation seems to be starting to hit after all the money printing. 

Singapore CPI rise beats expectations, economists flag: Update
Monday, 24 January 2011

© 2011 - The Edge Singapore

Despite the measures expected to curb inflation here in sunny, maybe too sunny, Singapore, it's apt to be mindful that some countries don't seem to be curbing inflation anytime soon, primarily U.S.. As precious metals, oil, and other commodities are traded in U.S. dollars, with rising prices due to rising inflation, perhaps investing in these may turn this "trend" into a friend.

The precious metals for example, have had a rather sharp fall last week and seem to be correcting still. However, to anyone thinking it's the end of the metals bull market, that's not true. Not yet at least. The major trend is still up. At a seminar I attended this evening, a professional trader who trades the silver markets as well, gave his opinion that prices were only correcting. Also, in the latest copy of the Edge, Jim Rogers comments that gold is long overdue for a correction. But we're still looking at a likely rise in prices in the coming decade. If we look at the charts for both gold and silver, I totally agree about the correction being long overdue. However, this correction may provide the ideal opportunity to finally get exposed to the precious metal.

Other ways would be to invest in either a precious metal ETF that tracks a basket of metals or to invest in  precious metal-specific ETFs, like copper ETF, platinum ETF, or silver ETFs, or even the mining company ETFs, or the mining company shares directly. A final way to profit is to trade the metal futures itself.

Aside from precious metals, other commodities like rice, cotton, corn and any other agricultural produce will also rise if and when inflation kicks in. As such, one may profit by either looking into ETFs that track a basket of commodities and agricultural products, ETFs that are agricultural-specific, owning shares of agricultural companies or as mentioned above, trading agricultural futures. 

Do note that like all investments, there are risks involved so I would ask you to seek more comprehensive advice from your brokers. Personally, I prefer investing in silver at UOB bank. However, on the downside, I do wish they sold physical silver instead of paper but I'll make do with what they have. It's just a nice feeling holding physical silver coins in your hand.

Cheers and have a great night,

~K

Learning to Trade

Slightly more than a week ago, I decided to try an experiment with myself. As I've never tried trading before, I wondered how I'd fare in the attempt so I decided to test out my ability. 

This led me to scan a couple of stocks and "stock pick" so to speak, based on indicators. Each transaction is noted down in an excel sheet to allow as accurate a record as possible.

As to the names of the stocks I'm too bashful to say at this time. I've "added" another 2 counters over the last two days though. Suffice to say that in a week plus, the portfolio seems to be performing quite well. Well, better than I expected anyway. Nonetheless, It's just a personal test, with nothing to boast about. A personal challenge. 

My aim in this private experiment is:

1) To see how well indicators work and which indicators work for each stock (and for me)

2) To experience what it's like to trade

3) To learn what is important to do for each trade

4) To build up some confidence in the trading area

Like most experiments, there are limitations. First of all, there is no actual money involved so my emotions are held in check without much trouble. I realize this. That said, even if I do do really well, I'm not going to plunge into it and bet the house. I also realize it's a gradual process of being able to handle each trade with a sum of cash that isn't going to cause me to lose sleep over. Secondly, I'm also not going to be able to learn to handle loses, which is more important than handling winnings, so I've read in many articles, blog posts and books. This is why if and when I do decide to trade on a month to month basis, I'll start in small amounts to further build up my confidence and competence.

I will be fine tuning this little experiment along the way the more I learn. So hopefully, in time, I'll be proficient at another way to generate income. 

Wish me luck,

~K

P.S. By the way, any tips on how to start trading efficiently or trade in general would be most appreciated so feel free to leave as many comments as you please. Many thanks in advance. =)

Robin Griffiths: What's Keeping the U.S. Market Afloat and Other Issues

To continue from the last post, here's an earlier interview (dated Sept '10) before the broadcast at King World News that I posted earlier. Though this is 4 months delayed news, you can still learn quite a bit from Robins Griffith.

In it, Robin Griffiths touches on several issues. 

On the Best Sept and What's Keeping the U.S. Equity Market Afloat

00:30 : One of the things keeping markets afloat "is something called Permanent Open Market Operation ... (POMO) ... what happens is the Fed buys treasuries off the banks pushing the money into the banks. The bank pushes the money into the market. They do about US$6billion a day when they do this."

00:50 : "That amount of money turns the algorithms up. Then all the algorithmic trading hits the market. Real life human investment managers are not doing this buying. They know that after the rally that we've had, we're back to where we were first in 1998."

01:07 : "Equities are for losers and if you're priced in dollars, you're down 30% over that period." 

01:12 : "So real life equity market [investors] still don't want to buy the S&P. Is still being affectively goosed up by what we used to call the Plunge Protection Team. Well they can keep doing this for a bit longer but I'd only be completely wrong if they do it so much that they take out the April high. According to me, that April high will not break and we are going to inevitably go down."

The U.S. Economy, the Recession and What's In Store

01:40 : "Last week we heard the president say in clear words that although we had ... an economic institution saying the recession was over 9 months ago he accepted that for many Americans the recession is still an ongoing reality. And secondly all of those Keynesian stimulus didn't work. We're changing the entire game plan and what's going to happen is the Fed is going to be printing money and pumping it into the economy to try and let it down slowly.

On Bonds and Bubbles

02:12 : On 30yr bonds, "the yield is going to go down. Now if you buy the 30yr treasury bonds as the yield goes down, you make money."

02:23 : "There's an old saying that goes don't fight the Fed. Well now the Fed is going to guarantee that your bonds go up."

02:42: "They've backed up. They had to back up. If you missed when the yield was approaching 4%, you aren't going to double your money as it approaches 2%. But even now you should be buying bonds and not equities. And it's not a bubble."

02:57 : "It will be a bubble when your viewers all write in and say we've all got bonds what do we do now?"

03:03 : "And the bubbles never burst when wise heads in media tell you its a bubble that's going to burst. It burst when they've given up on that and tell you ah this time it's different. So you should in fact be in bonds and not in Western equities."

On the Bovespa and Emerging Markets

03:29 : "These are the markets you should have been in. Where the American market has gone virtually nowhere for the last decade, the [Brazilian] Bovespa has been up 1000%."

03:37 : "Including China and India ... these are where you should be putting your money."

03:50 : "This is the real deal where people have been working hard to take themselves out of poverty, succeeding, and we can back them and we can invest in them. These are equity markets that are real bull markets and that are making all time highs where the ... Western markets aren't going to do that."

04:13: "The Bovespa "is rising at a rate of a 1000% per decade."

Check out the video below for the complete interview, most of which I've already transcribed here. =)

That said, this is the current chart of the S&P500:

I've marked the resistance back in April'10 and we can clearly see that stock prices have gone way beyond that. So was Mr. Griffiths "completely wrong" as he put it in his interview?

That remains to be seen. 

I'm of the opinion that although he may have been wrong in his prediction about the stock market not breaking its April high, if his explanation on why the equity market is propped up is correct and with all the printing of currency, then this still is bad news for the future with the debasement of purchasing power. And to me, the way to protect that it is in physical assets. However, I'm not suggesting you to go all in into physical assets -- no no -- as the future is so unpredictable and we can never be certain who is right and who isn't until the event is over. However, it is recommended that one has about 5 - 10% of his/her portfolio in precious metals and to rebalance every yearly or two. 

Having said that, this video below shows that some of the most well-renowned investors are still piling into gold - Jim Rogers being the most famous. It also explains why gold is still a viable investment asset and why it is still demanded in today's society. As Gold Core Limited is a company, they may have a bias to promote the metal. As such, it is best viewed with an open mind and like attempting a jigsaw puzzle, you have to piece the different parts together to make your own conclusion.

Check it out:

Cheers,
~K

Robin Griffiths on U.S. Dollar Printing, Commodities, Gold, Silver and His 2011 Outlook

Quote of the Week:
"The downward trend in the dollar is awesomely powerful. It's vital to get yourself out of the dollar long-term on any significant rally. Continuing to own a currency that is going to be printed virtually into oblivion ... is crazy."

"I think not owning gold is a form of insanity, it may even show unhealthy masochistic tendencies, which might need medical attention."

~ Robin Griffiths

Background:

Robin Griffiths is Cazanove Capital Management Private Wealth's Technical Strategist. He has 44 years of investment experience and is considered one of the top strategists in the world. Cazenove as a group now manages £15 billion on behalf of their client base and is one of the oldest and most respected names in the financial community, tracing its origins back to the 17th century. Robin developed his own system, analyzing stocks and market trends. Robin is followed globally because of his groundbreaking work on world stock markets, bonds, currencies and commodities.

Here's the complete video to hear his take on the dollar printing and his view on the highs commodities have been making recently that led to the quotes above.

In another interview too, Mr. Griffiths was extremely bearish on the outlook of 2011.

Here's the article:

Cazenove's Robin Griffiths: The October Dip Will Be Nothing Compared To The 2011 Crash

Source: The Business Insider -- Click here for link
Date: Oct 2010

Cazenova Capital Management's Robin Griffith sounded incredibly bearish on a radio interview with King World News. 

He even thinks the September Effect will be validated -- because the real negative historical trend lasts from mid-September to mid-October.

The collapse in the next few weeks will be similar to the collapse from April to July, Griffith says, putting his target for the S&P500 at 940.

If you think that's low, wait till the Alt-A mortgage rate reset in March. "The dip this year is modest. The dip that occurs next year is the one that risks taking major indices right back to where they were in March '09," Griffith says.

The Cazenove strategist has a bearish election prediction too. The market-friendly Republicans will win, but the loss will be so "catastrophic" for the Democrats, it will make Obama an immediate lame duck, hurting the economy.

Oh yeah, and he thinks the plunge protection team was the only thing keeping the rally going in September. 

Broadcast at King World News

Related to the article above, listen to this broadcast of his interview at King World News, dated 02nd Oct 2010, for the complete interview.

The line that caught my ears, "Silver might even be a 10-bagger from here." aka ~$200 per ounce. 

Current price/oz: US$29.25.

UOB current price/oz: S$37.37

Although that may be an exaggerated amount, even a 5-, 4-, or 3-bagger would be a huge delight.

Question of the Day: What are you waiting for?

Cheers,
~K

7 Reasons to Expect a Bear Market in 2011

While it seems that a lot of analysts and people are bullish about the new year, here's an article that states the contrary. 

Cheers,
~K


Taken from an article written by Mr. Claus Vogt of Money and Markets, entitled "The Contrarian View"

7 Reasons to Expect a Bear Market in 2011

1) The stock market is highly overvalued. It follows then that stock investments are nearly guaranteed to deliver poor, long-term returns.

2) The rally since August 2010 isn’t based on sound and sustainable economic factors, but on unsound and fragile faith in the Fed’s ability to inflate asset prices.

3) Longer term interest rates have risen considerably since the Fed’s first announcement of QE2. In the past, bull markets were usually on borrowed time during a rising yield environment — even when fundamentals were much sounder than today.

4) Stocks are extremely overbought when momentum indicators and the number of stocks reaching new 52-week highs stay below their cyclical highs, thereby not confirming the current run up.

5) There is a debt crisis brewing, not just in Europe, but also in Japan and the U.S. The U.S. municipal bond market is already under pressure.

6) The financial sector’s problems have not been solved, but only papered over with money printing and a suspension of mark-to-market (fair-value) disclosure.

7) In China a huge bubble economy has developed. Since Beijing has already implemented a turn in monetary policy, this bubble is prone to pop in 2011, posing a major threat for a still very fragile global economy.

3 Signs the U.S. Market is Approaching Danger Zone

A recent article by Claus Vogt of Money and Markets highlights three danger signs that a crash in the U.S. market may be approaching. I'll summarize below.

Danger Sign 1:

A Major New Debt Crisis Striking Thousands of Local Governments Throughout the United States

To highlight a section from the article, Mr. V states that,

"In prior debt crises, a major central government or bank came to the rescue. This time:

• The Federal Reserve has neither the authority nor the will to come to the rescue; and
• The U.S. Congress is even less inclined to open the Pandora's box that a city or state bailout would involve.

... This one is striking at the very heart of the U.S. economy!

Result: A big threat to the U.S. GDP growth in the second quarter AND to the U.S. credit markets at the same time."

Danger Sign 2:

A Major Divergence in the Stock Market

A key indicator pointed out is "the number of stocks hitting 52-week highs.

• During a healthy, durable bull market, as the major indices move to new highs, there should be an increase in the number of stocks making new highs, as growing number of issues participate. And for the rally to continue, stocks must repeatedly hit new cyclical highs. But ... 
• At the tail end of the bull market, this picture starts to change. The breadth of the move weakens. More and more stocks enter topping formations or start to roll over. And the number of stocks making 52-week highs levels off or actually declines.

...Although the broad indices are still making new highs, fewer stocks are doing so. In other words...

The whole rally depends on a shrinking number of stocks!"

The "negative divergence" is obvious from the evidence presented in the two charts below:

To quote, "As you can see the current move to new index highs is not confirmed by the number of 52-week highs...

The indicator's high for the current cycle was way back in April 2010. So the market is actually showing multiple divergences: A succession of higher highs in the index and ... at the same time ... a succession of lower highs in this indicator...

...the number of 52-week highs is a time honoured indicator. Historically, it has given important warning signs well before a major bear market commenced. Just look at 2007 and you'll see an example of a negative divergence similar to the one we're experiencing now!" 

Danger Sign 3:

Great Overvaluation

This line says it all. 

"The U.S. stock market is severely overvalued ... possibly by 50% or more!"

Put the three signs together and it's wise to invest with caution in the year ahead. What's that latin saying again? Oh yes...

Caveat Emptor,

~K

P.S. If you're interested in the complete article, it can be found here.

Facebook's Expected IPO

By now I'm sure most of us have heard about the expected IPO of Facebook by latest 2012. I too was interested as my opinion is that Facebook is probably going to be to social networking sites what Google is to search engines. 

Why do I think so? Because firstly, I never liked social networking sites but for some reason I sold out and am now on Facebook as well. It's like back in the days of Altavista and Lycos search engines. I used to keep using Altavista despite Google's appearance. And for some reason I just decided to switch over. Google even became a word as in "Don't know the answer? Try googling it." And now, Facebook seems to be used in that context too. "Oh yeah I uploaded my pics. You can facebook 'em if you wanna take a look." or "Yeah, I'll be facebooking later. I'll add you then." That's a second sign of the importance this social networking site is becoming.

If I had known about investing back then in the days of multiple search engines, that would have been a big signal to invest my money in Google. That said, I think Facebook may grow like Google eventually for the reasons above. However, would the IPO price be a good price to buy in? For that I like to refer you to this article below written by Ed Pawalec of the Tycoon Report which I found most informative.

Enjoy!

~K

Another Brick in the Wall: Fool's Gold or Value Play?

by Ed Pawalec

News of Goldman Sach's investment in Facebook has been all over the news, so I thought I would play with the numbers a little to see if an impending IPO would end up being a scam or a value play when the company does go public.

The exact financials are vague at best at this point, and can only be guessed at by reports in the financial press, but we can have some fun with this anyway.

The value of the company according to a variety of reports is in the $50 billion range, which some have said is ridiculous. In fact, The Wall Street Journal quoted one former Goldman partner who was offered a piece of the action as saying, "Google's trading at 7 times sales. I'm not going to buy Facebook at 25 to 50 times." Interesting.

The valuation is based on the portion of the company to be purchased in a joint investment by Goldman Sachs ($450 million) and Digital Sky ($50 million) for $500 million. However, Goldman is also reported to have been putting together an additional $1.5 billion through a Partner Private Opportunity Fund, so how they come up with $50 billion is a little unclear. Nevertheless, I'll go with the $50 billion number.

Now, Mark Zuckerberg (Facebook's founder and CEO) is trying not to go public, which requires these investments to be bundled into Special Purpose Vehicles (SPV) so as not to go a foul of the SEC's 500 investor rule. Essentially, this requires any company that has 500 or more shareholders and $10 million in assets to file their financials with SEC, thus making it public information. This rule is rumoured to have been the motivation for Google to go public in 2004. If you have to report publicly anyway, why not do an IPO?

According to the rule, a company that exceeds that threshold must begin reporting within 120 days of the close of the fiscal year in which it reaches 500 shareholders. Since the current offering from Goldman, which could put Facebook over the 500 shareholder mark, is occurring in 2011, and Facebook's fiscal year ends on December 31, the expectation is for an IPO no later than April of 2012.

This might be avoided if the SEC accepts Goldman's SPV as a single investor. The SPV is, in its simplest terms, a group of investors clumped together as a single entity, which then invests in Facebook and is counted as only one investor. We will see how that works out. 

Enough with the background, lets jump into the numbers.


Who says a dollar isn't worth what it used to be?

For 2009, Facebook is said to have earned $200 million on revenues of $777 million -- a tidy 25% margin. For the first 9 months of 2010, reports are that the company is up $355 million on revenues of $1.2 billion -- an even better 29.5% margin. For all of 2010, estimates are for $500 million in earnings, which would suggest revenues of $1.6 billion.

Based on a $50 billion estimated market capitalization, that puts a PE ratio of 100 on Facebook. Seems a little rich by most standards. That being said, stocks frequently trade based on how fast they can grow their earnings and, assuming we can take the $500 million expected for 2010 at face value, Facebook grew earnings at 150% year over year. Maybe 100 times isn't too ridiculous if you make the assumption that they can maintain that growth rate.

Internet World Stats numbers Facebook subscribers at 517 million plus (as of Aug 30, 2010) compared to recent estimates of 600 million. I have to admit, either number is impressive. But, if you think about it: $500 million net income divided by 600 million subscribers means that each subscriber is worth $.83 to Mark Zuckerberg and his investors -- just under a buck per year.

Zillions of man hours wasted on Facebook each year so some 26 year old nerd from Harvard can make $.83 on each user.

Think about that.


Critical Mass

But you have to give the guy credit for finding 600 million people he could squeeze $.83 out of.

Hold on a minute! How many people are on the planet?

Well, recent estimates are in the neighbourhood of 6.8 billion. By 2020 there will be about 7.7 billion people, and most of these would need to be worth at least $.83 for Facebook to be fairly valued at $50 billion today. But you can't have Facebook without the internet, and not everybody in the world is wired ... at least not yet.

Unsurprisingly, the growth in the number of internet users has dropped considerably over the years ...

With the number of users doubling every year during the heyday in the late 1990's, things had to cool down. Over the last five years, growth has steadied to a strong 13-15% annual rate. Again, according to World Internet Stats, nearly 2 billion people have internet access. Almost 29% of the world is wired for the web and 26% of them use Facebook, each worth $.83. 

Now if internet access continues to grow at a 13% rate for the foreseeable future, sometime during 2021 every person on earth will be connected to the web. Yes, you will be able to check your Facebook page from anyplace in sub Saharan Africa, as long as there are people, by 2021 ... maybe not. 

Since Facebook is just about 7 years old, its growth rate has been exponential. For argument's sake, however, let's just say that it can grow subscribers at a 25% annual rate. By early 2023, everyone on earth, who has already had the internet for two years, will now be available for friending on Facebook. 

While this is clearly something to look forward to, stay with me -- I do have a point. In this outlandish scenario, with the world population valued at $.83 a head, and if Facebook kicks all of its earnings back shareholders, it becomes a perpetuity. This means that the present value of the company can be determined simply by choosing a discount rate. Since we are talking about just over 10 years, the approximate 3.4% rate on the ten year note is as good as any. And the calculation goes:

(World Population in 2021 x $.83) / 3.4% =

(7,900,000,000 x .83) / .034 = $192.85 Billion

Before you deem this exercise silly, think about a more feasible scenario:

If by 2021, half the world is wired and half of them use Facebook, using this same crude calculation the numbers come to $48 billion, which happens to be darn close to the $50 billion number being bandied about these days. 

The point here is that Facebook is a unique company in that it actually has the potential to reach the entirety of the internet capable world and therefore, to its detriment, it does have a maximum value that can be calculated. I realize that the company could increase its per subscriber value and that the discount is somewhat arbitrary, but I found it interesting how doing some back of the cocktail napkin math came so close to the value ascribed by the pundits and analysts. 

In any event, at least now you have some idea what it would take to make this company worth $50 billion today.

I Thinketh! - Do Children Today Fear Failure?

It's a week after New Year. School has started. My girlfriend had to go back too. She teaches. The week past by fine. Then on Friday, something happened that left her thinking, which she told me about. That left me thinking. 

Once orientation's done in the first two days or so, lessons start. On Thursday, she was relieving a couple of periods for a teacher who was away for some reason or other. It was math class. After explaining the steps of the new topic and giving out the assignment to the new batch of primary 1 students, two students cried. One after the other. Apparently, they were afraid of making mistakes in their work. And that bothered them enough to cry. Needless to say, she had a lot of reassuring to do. So that was the incident that left us both thinking.

Why are kids afraid to make mistakes? As a child, these are the times to make as many mistakes without shame. It's their learning years. They're entitled to their fair share of mistakes. 

Or are they? 

This led to a sensitive and controversial question. Are kids being raised to feel ashamed of making mistakes? 

And to end the questions: If they're so afraid of making mistakes at their young age, how about when they're older? How will they handle their personal challenges that require some guts be it in career or in relationships?

Mistakes are part and parcel of how we learn and improve. Observing the failures of others also helps better ourselves. To paraphrase a quote I remember reading once, "A smart man learns from his mistakes. A smarter man learns from the mistakes of others." 

To conclude this little thought with a personal opinion, kids need their parents' support and assurance that it's perfectly fine to make mistakes. As long as they learn, pick themselves up, dust themselves off, move on and try again, it's alright. In doing so, they learn a lot more than just the lesson of the task. They get additional lessons in determination and letting go. Lessons in dealing with success and failure.

It's how we live. 

It's how we grow.

I learnt to cycle that way.

Food for thought,

~K

Buying Your First Home - CPF Talk

The ache of home lives in all of us, the safe place where we can go as we are and not be questioned.

~ Maya Angelou

I totally agree with Maya. Been longing for a place of my own too.

Anyway, just doing my bit of free advertising. If anyone's interested in buying property, there'll be a talk held by CPF Board.

The details are as follows:

Title of Talk: Buying Our First Home

Date/Day: 15th Jan 2011, Sat

Time: 2.30pm - 5.30pm

Venue: 6 Shenton Way, DBS Building Tower 1, DBS Auditorium Level 3, Singapore 068809.

Cost:

1 person - $8.00

2 persons - $5.00 each

3 persons - $6.00 each

4 persons - $5.00 each

(In case you're wondering, I've no idea about the weird pricing.)

That said, you can register here for the talk and refer to it for more details.

Cheers,

~K

7 Ways to Improve Your Finances in 2011

2011 is upon us. In a couple of hours, fireworks will light the sky and parties will last till the wee hours of the morning. In the spirit of making the coming year a good one, here's a list of things that one can do to financially improve oneself.

1) Set a Budget for the Month

At the start of every month, withdraw your "allowance" and stash it at home, setting yourself a spending limit per day. Cater an additional sum for transport, fuel and parking coupons if you drive, handphone bills, and whatever monthly bills you have. Personally, I tend to top up a $100 into my MRT (that's our train here for non-local readers) card each month regardless whether I finish up the previous $100 or not. This ensures that I'll always have enough to travel should I run out of actual cash.

Also, try to set aside an emergency amount per month too, which acts as a buffer for unforeseen circumstances. At the end of each month, any leftovers can either be used to treat yourself and/or loved ones to something or to add into your 6- month savings account.

2) Pay in Cash Where Possible

Studies have shown that people are less likely to spend when they use cash versus credit cards because they feel the pinch when handing over their cash. This allows a higher chance that we buy only the things we really need or want and not spend blatantly. Also, spending by cash allows you to see how much you have left thereby allowing you to figure out how to stretch your cash till the end of the month.

3) Save for Big Things

We all have our wants. A simple way to fulfill this is to set aside a monthly amount that is catered to this. Therefore, when the item of our desire presents itself, be it a new wallet or a branded bag, we'll have the cash ready for it.

4) Make Use of Promotions. Use Loyalty Cards and Discount Coupons

Make use of specials and promotions to stock up on things you need monthly. This includes facial products, nail polish and whatever knickknacks which helps reduce your spending in the long run as you'll be saving on things you need. Note the word "need".

Points gained from loyalty cards will also help offset expenses. Discount coupons, normally found in the mail though intended to make one spend, is most welcomed if they refer to things you would normally spend on anyway. 

However, that said, beware of the trap of buying things that you do not need or buying just because the item is on discount. You'll end up broke much quicker. A discipline approach is necessary.

5) Delay Spending

Try to put off buying an item for a week or two. This allows you to think about the purchase more preventing impulse buying. 

6) Choose the Cheaper Alternatives

Spending time with friends and/or family needn't be a wallet breaker. Instead of spending time at the neighbourhood Starbucks, a hang out at the coffeeshop or a cheaper cafe may prove just as or even more satisfying. Also, you could decide to hang out at free public spots such as the beaches and parks, where the money saved could be put to better use. 

For drivers, Orchard and town area carparks differ in charges. A bit of research into the charges at each venue will help you plan where to park thereby reducing unnecessary spending.

7) Set Up a Savings Plan

I cannot fully emphasize the importance of saving. As hard as it may seem to do, having a stash of cash lying somewhere is crucial especially in times of emergency. 

One painless way is to set up an automatic deduction that transfers a portion of your pay into a savings account. By doing this every month, you'll realize you're not missing the cash and sooner or later, you'd have amassed a substantial amount. You'll feel most achieved when that happens I guarantee.

To your 2011.

Cheers,

~K

I Thinketh! - Christmas Spring Cleaning Reflection

Christmas is not a date. It's a state of mind.

~ Mary Ellen Chase

He who has not Christmas in his heart will never find it under a tree.

~ Roy L. Smith

It's one week to Christmas and my back's killing me. I'm stiff all over. I've spent the last week cleaning and cleaning and cleaning, mainly because my family's invited for lunch on the 26th. About 5 hrs a day throwing unwanted junk out, performing the most amazing wipedown of my life and using superhuman strength to do a one-person shifting of my room - cupboards, bookcases and all. The record being working for 8 hrs straight. I'm gifted I tell ya. Not bad for a skinny fella.

As my girlfriend puts it, they should call Christmas, Cleanmas or Cookmas, as that's what we all seem to spend the majority of our days leading up to Christmas doing. It is our day of celebration after all. Of course someone else commented that we could even call Christmas, Drunkmas or Eatmas because that's what we end up doing on the day itself.

On the occassional break from my superheroic cleaning duties however, it's on to more exciting stuff called Christmas shopping. Now as you can imagine, shopping with aching knees from constant kneeling on the floor to wipe down the books and statues in my library is no easy feat. Heck! Being a guy and going Christmas shopping is no easy feat, so you can imagine the amount of superheroic strength and determination this calls for. And I still have yet to buy the presents. My strength faileth me.

As with all people with great destinies, difficulty and strife must be overcome - in order for the hero to get the girl, for Jack to get the hen that lays the golden eggs from the giant up the beanstalk, for the world to keep on turning, for Obama to get his tax cuts passed, yadayadayada. So now looking at it, my room is looking tons better. Oh it's not perfect yet and there's still a mess on my table but I've yet to figure out what I want to do with them. See how difficult life can be for us people with great destinies? We encounter one problem after another.

However as all superhero stories go, there's always an epiphanic triumphant moment and the hero become a better person because of it. I found mine this season. Whether I become a better person however, remains to be seen. But the thought that came to mind and stuck with me as I scrubbed, wiped, lifted and grunted was if we spent so much effort making our exterior look better for Christmas, why don't the majority of us spend at least a fraction of that making our interior look better too?

As someone once said to me, "in order for good things to enter, you must first throw out the bad." Or as paraphrased from a popular story, "how can anything enter when a cup is filled to the brim?"

And with that realization, I think this Christmas is going to be more meaningful this year for me. My superhero triumph and feat.

So said Charles Dickens, "I will honour Christmas in my heart, and try to keep it all the year."

With that I leave you with that popular story I read ages ago entitled "The Cup".

Wishing you and your family a meaningful Christmas and festive season,

~K

The Cup

Once there was a university professor who decided that he wanted to study zen. He travelled to a local monastery. He was shown in to the abbot’s study. The abbot was about to pour himself some tea. The professor stood before the abbot who looked up. The professor explained that he had been studying and teaching in the univeristy for many years and that now he wished to add to his knowledge and learning by studying zen.

The abbot nodded and began to our himself some tea. The professor watched as the teacup filled to the brim and, apparently failing to notice the full cup, the abbot continued to pour. The cup overflowed and still the abbot poured. The professor was reluctant to embarrass the abbot but finally said, "Master, your cup is full and overflowing. It can hold no more tea."

"Yes," said the abbot. "And how do you who come here with your cup so full expect to fill it with the teachings of zen?"

The professor nodded and smiled and bowed before the abbot.