Market commentary 27 Nov 2011 - European debt crisis dominates

Individual stock picking has not been effective since August 2011. Market movement is dominated by events related to the debt crisis in Europe. When markets make big moves up and down, the source of the news is almost always traced back to Europe. In such a backdrop, macro-analysis makes more sense than bottom-up investing in individual stocks.

The Straits Time Index, along with most global stock indices, bottomed on 5 Oct 2011. A new rally began the next day, topped on 28 Oct 2011 after which it started its decline. From the STI chart, the market went into correction on 18 Nov 2011. It was a short-lived rally.

What happened near 28 Oct 2011 which marked the start of the decline? Global markets anticipated a European rescue plan which explains the rally which started on 6 Oct 2011. After the rescue plan was announced on 27 Oct 2011, global stock market began its descent again. The rescue plan was not enough to reassure the markets. On the day of announcement, global stock indices actually made a massive rally. Then, it looked like the rally that started on 5 Oct was here to stay. On the next day, new worries emerge when Italian 10-year bond yields tops 6%. On Nov 25, 10-year Italian bond yields reached 7.23% despite mighty ECB buying the bonds. This is serious because (1) Italian bond market is the 3rd largest in the world. A disaster there is highly contagious. (2) Greece, Ireland and Portugal were forced to seek financial rescues when their bond yields reached around 6.5%. Italy today is worse (3) Italy has high debt(118% of GDP) and slow economic growth. How can Italian bond investors be confident that their debts can be repaid in full? Besides, further austerity (demanded by Germany) may slow down growth further or even tip country into recession.

One feature of the rescue plan was that investors who bought CDS (credit default swaps) on Greek debt as insurance will not be paid because the deal agreed to was voluntary. Now, investors who hedge their sovereign debt risks using CDS are scared. If investors cannot reduce credit risk by buying CDS as insurance, then they have to reduce credit risk by demanding higher bond yields. I think this is a major reason European bond markets came under increasing attack almost right after the rescue plan was announced.

In the past weeks, every time European bond yields go up, global stock indices will go down. In the coming weeks, European bond yields should be the key indicators to observe for equity investors.

I am waiting for something to happen for global stock markets to have a solid rally. This something is Germany agreeing to print money. Printing money is the least painful way to repay debt. I am not sure whether money printing is a good economic solution because there are side effects like inflation. However, I am highly confident that once Germany agrees to money printing, a global rally in equities lasting months will follow. See what happened in 2009 after massive money printing by the Fed.

The alternative to money printing is austerity. It is by no means superior to the money-printing solution. When debt levels are too high (like the PIGS countries) and requires strong future economic growth to pay down debt, then austerity actually worsens chances of paying off debt by weakening the economy. Furthermore, austerity dampen domestic consumption by cutting spending and raising taxes. Therefore, economic growth must come from strong exports. Problem for Europe is, export to who? If everyone else is   tightening their belts for austerity, who is going to buy the exports? Germany? The great export-machine of Europe to transform into a big import-sucker? European demographics worsen the problem. Too many old people, too few young people is bad enough for growth. Protective labour laws and culture further worsens the situation by protecting the old workers who are hard and expensive to fire at the expense of young workers, many of whom are on contract work, don't get good training opportunities or simply unemployed. Today, Spanish youth unemployment is a whooping 21.2%. When corrective economic measures are too painful, it may cause social riots. The situation can be highly unpredictable and chaotic. The last time a great nation was subjected to great economic pain, the people elected a madman into power. That mad-man was Adolf Hitler.

Of course, the best solution is economic growth from the creation of real productivity from real products/services of high social utility and not financial engineering techniques like printing money. However, you need plenty of good engineers for that. Engineers have bore the brunt of retrenchments in recent recessions. I know because I am an engineer. This time round, I will not be spared. I have received notice I will be retrenched. Today, there are very few students who want to study engineering and many of the best engineers have switched lines to work in banks.  In fact, many engineering students went straight to the banks after graduation without ever working as an engineer.

Eventually, I think Germany will allow money-printing to ease the European debt crisis because austerity is doubtful to be effective. I cannot think of other solutions that politicians can depend on now.

Get risk-free SGD160 from credit card application. Offer valid till 30 Nov 2011

It has often been said that there is no such thing as a free lunch. If something is too good to be true, it often is. Now, I am sharing something which is worth several free lunches and too good to be true. Unfortunately, I am not being paid any commission.

There is a wonderful offer from Standard Chartered that credits SGD80 into your credit card account once it is approved. I applied for two credit cards from Standard Chartered and received SGD160 in total. I just saw SGD160 in my account on internet banking. So, it sounds not only too good to be true but really true indeed.

This offer is valid till 30 November 2011. It is an offer that one simply cannot refuse. At least, I cannot think of a good reason why one should not take up this offer. Can you?

Some may wonder why Standard Chartered Bank is behaving so stupidly. Giving free money away? No, the people working there are smarter than most of us. We should not direct our thanks to SCB. We should thank the people who used their credit cards to spend money which they do not have, pay only the minimum sum on their monthly statement and roll over their credit card debts. Being a selfish man, I urge these people not to follow the advice in the link below, even though I am absolutely in love with the writer.
http://help-your-money.blogspot.com/2010/08/paying-off-credit-card-bills-is-best.html

I dedicate the following song to the invisible credit-card friends who have made this wonderful offer possible. Pay attention to the lyrics.
http://www.youtube.com/watch?v=AUnmTE6ljRg

My favourite life insurance plan in Singapore - Aviva SAF Group Insurance for NSmen

4 Nov 2012: A new update for this plan has been written.

My favorite life insurance plan in Singapore for family protection in the event that I can no longer serve as a breadwinner for the family is the SAF Group Insurance for NSmen from Aviva. I am a policy-holder for several years already.

It is the best deal in Singapore that I know of that fits my criteria. It offers the best value for money per dollar for protection. For an annual premium of about SGD920, you are covered up to SGD600k. The coverage extends to high-risk activities like military training which I do not think is covered by other insurance policies.

There is an advance payment of 50% (limited to SGD100k) if the insured is diagnosed with a terminal illness. There is even a daily hospital cash benefit which pays up to SGD10 for every SGD50k assured. One thing I like about this policy is the partial cash rebate of the annual premium during good years. I know of no other policies that have a similar feature.

For parents with sons who are going for National Service soon, it is a policy worth considering. To my knowledge, it is the only policy that covers mishaps during National Service.

For more details, please visit http://www.aviva.com.sg/pdf/57660_SAF_Brochure.pdf and read the footnotes and the clauses yourselves. My brief summary cannot cover all the restrictive clauses that all buyers should be aware before buying.

If you know of a better deal, please tell me. I am confident none exists.

Please note that there is no savings or investment component in this insurance plan. In other words, you do not get back any money at the end of the day. This is why it is so much cheaper than the endowment, whole-life or investment-linked policies that insurance agents like to sell. It is a pure protection plan which is almost never recommended by insurance agents because it pays very little commission. So, if you want to buy this policy, do the agents a favor. Don't expect them to visit your home for this policy. If they do, it is reasonable that you will have to put up with sales talk for the higher commission products like the endowment, whole-life or investment-linked policies. Submit the application form yourself.

As a general rule, I never liked insurance products that mix investment or income. If I want income, I will go for fixed-income products like government bonds or fixed deposits. Insurance plans that offer income come with projected returns which cannot be relied upon. Ignorant customers can be easily taken in by the aggressive projected returns to lure them into buying. It is easier to analyze fixed-income products with guaranteed returns than insurance plans with projected returns. The insurer actually has an incentive to use unrealistic projected returns to boost sales. Consumers should be aware of this risk when assessing these kinds of insurance products.

Is it risky to put bulk of savings in small, foreign banks?

On a previous post which I talked about my favourite bank account (CIMB StarSaver), a reader commented it was too risky to put the bulk of my savings into a small, foreign bank. It is safer to put our money in a big, local bank.

It may well be true that the bigger, local banks are safer. However, bear in mind that the first SGD50k of your deposit in any bank is guaranteed by the Singapore government (Deposit Insurance Scheme). So, to reap maximum interest gain on your savings without compromising safety, you should put at least SGD50k into the highest interest-paying savings account which tends to be the smaller, perhaps riskier banks. In fact, if you want to play safe, spread out your savings across several bank accounts, each not exceeding SGD50k. This way, most or all of your savings is under the protection of the Singapore government.

Another advantage of owning several bank accounts is that you can shift your savings around to whichever account pays the most interest. Banks love fresh funds and they punish loyal customers by giving preferential treatment to fresh funds. It pays to be disloyal customers to the banks, so you should play the game by shifting your money around to whichever bank offers the highest interest. Now and then, banks will come out with promotions to attract new deposits. Just put your money there until the promotion ends. Capital is mobile. Take advantage of its mobility and move it around to wherever yields the highest income. The first SGD50k is insured by the government and therefore risk-free anyway.

I am not too worried about putting most of my savings in a small, foreign bank. All the banks in Singapore I know of are listed on a stock exchange. This is useful because the stock prices provide useful information on the safety of the banks. In 2008, one could tell which financial institution is the next in line to fall just by looking at their stock price (who is falling the most and the fastest?). It is so much easier than reading financial statements. Due to personal limitation, I find banks' financial statements unanalyzable (much subjected to management discretion) and prefer to rely on their market price as a proxy to their safety. Unlike fraudulent S-chips, banks do not suspend trading or go bankrupt overnight. There will be ample warning signs in their stock prices and news media before they go belly up. The moment the stock price drops more than 10% on consecutive days, pull out your savings and get the hell out! Do ensure that a chequebook is available for the account which holds most of your savings so that you can transfer your money out as quickly as possible.

Some will accuse me of being irresponsible by dishing out advice that will cause a systemic failure in the financial system during a panic. Regulators who discourage such panicky behaviour may well be advising the same thing to their closest relatives in 2008. Don't blame me. Blame the design of the banking system. This is a weakness in the fractional reserve banking system. Once confidence is lost, even the healthiest and most prudent bank will fail.

Saving money by bypassing middlemen

Lucky Tan is one of the most insightful socio-political bloggers in Singapore. A lesser known side of him is that he is also a financial-savvy operator. Today, he made a post on how Singaporeans can save money by bypassing the middlemen. With his permission, I am reposting his article on my blog.

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http://singaporemind.blogspot.com/2011/10/why-you-should-try-not-to-sell-your.html

In the book Freakonomics, the authors did a study of prices of homes sold by property agents for their clients and compared it with the price of homes when the property agent is acting for himself i.e selling his own home. They found that the property agents sold their own homes at a price significantly higher than the homes of their clients. The property agents' interest is to earn a commission and to do that they try to make sure transactions go through by persuading sellers to lower their selling price and buyer to up their bid. Many Singaporeans are not aware of this but you can sell your home quite easily without a property agent - the paper work is relatively simple. My father sold his HDB more than 20 years ago without an agent and it is easier to do it now because of the Internet which enables sellers to put up ads for free at various websites. (here is a forum on people sharing their experience of selling their HDB without an agent amd HDB itself conducts a regular seminar on how to sell your home without an agent[Link].

If you walk around the town central of a HDB estate, say Toa Payoh Central, what you will see is one 2nd hand phone dealer after another. Sometimes within an area of 50 meters by 50 meters, you can count up to 20-30 of such small shops. They exist because new hand phones models are introduced by manufacturers every few weeks and your iPhone 4 becomes yesterday's model when the 4S is released. Singaporeans get rid of their old phones through these middle men. The other day I was standing by one of these shop and a young men sold his relatively new phone for $80 to the dealer. I was very familiar with the model as I was thinking of buying one for myself and it was changing hands in the www.hardwarezone.com.sg bazaar[Link] at about $140 or higher. Without much hassle, the seller could have gotten an extra $60. People sometimes sell the stuff at Cash Converters or pawn shops because they need money quickly - the problem is they are actually throwing money away because they get far less than what they can get for their goods at a time when they need money badly. The lesson is not to get into a desperate situation when you have to "fire-sale" your belongings.The proliferation of pawn shops like Money Max [Link] perhaps tells us that more Singaporeans are getting into financial situations where they need cash quickly....and this is exploited by the numerous 2nd hand phone dealers, money lenders and pawn shops.

On History Channel, there is a TV show called Pawn Stars[Link]. The show follows the going ons in a Las Vegas pawn shop operated by a family. Given the subject matter, the show is surprisingly successful and has a large following since its debut in July 2009. The show sometimes gives you a hint of the economic malaise in USA as some of the people were pawning away their family heirlooms passed from one generation to another to make ends meet. People were selling their belongings to raise money for medical treatment, rent and so on. The Harrison family running the pawn shop makes a good living buying and selling....they are all overweight from sitting around in their shop ...here's a clip from the show:





A woman walks into the pawn shop asking $2000 for a Fabergé brooch. Mr. Harrison being a man of conscience knowing the real value of the brooch offers to buy it for $15,000. The truth is this :if the brooch is genuine Fabergé , it is worth something in the region of $80,000-$250,000. Either the woman walked in with a fake and cheated the pawn shop or the pawn shop just made something like $100K from a $15K sale. So even a middle man with conscience like Rick Harrison of Pawn Stars is not averse to making excessive profits off people who are ignorant and too lazy to double check the value of what they are selling. Next time think twice before you go to a middle man to sell something specially if you don't know how much it is worth!

Even if you are rich and don't need to squeeze every dollar from the 2nd hand stuff you're selling, you might want to consider selling it direct to buyers....you're doing a favor for them and yourself. If your price is good (still higher than what you can sell to the middle men) many buyers are willing to drop by your house to pick it up and that is more convenient than bringing it down to cash converters or to a 2nd hand phone dealer.

Websites on the Internet where you can offer your 2nd products for sale:

EBay : http://www.ebay.com.sg
Hardware Zone: Market Place : http://forums.hardwarezone.com.sg/forumdisplay.php?f=250
Phing : http://www.phing.com/
88DB: http://sg.88db.com/
ST701:http://www.st701.com/
Gum Tree:http://singapore.gumtree.sg/

Favourite bank account in Singapore - CIMB StarSaver account

Starting 14 Oct 2011, Singapore's largest banks DBS and POSB are cutting savings interest rate for the first SGD100k from near zero(0.125%) to almost zero (0.05%). (Source) It cannot get worse.

Don't be too quick to condemn the bankers as greedy and all out to squeeze profits out of small depositors. Big banks like DBS/POSB which are flushed with cash deposits are not as keen to attract more deposits as the smaller banks. Understandably, too much cash can be burdensome to the banks if they are not able to allocate the huge cash deposits into investments with returns that beat the savings rate. Therefore, it is a win-win situation that we depositors allocate more of our savings to the smaller banks who not only offer higher interest rates but also do a better job at putting our savings to better use because capital allocation is easier when capital size is smaller.

Currently, my favourite bank account is the CIMB StarSaver account. It simply beats the competition hands-down. It is a no-brainer to open this account with CIMB. The lowest savings interest rate start at 0.5% which is already 10 times more than DBS's 0.05%. Depositors enjoy up to 0.8% rate if they make regular deposits of SGD500 monthly. Please go to the website for details.

There is no fall-below fees and no minimum deposit requirement unlike most other bank accounts I came across.

Another feature that makes it superior are the free cheque books provided. The other banks I know of charge SGD2 a month (SGD24 annually) for maintenance and SGD15 for each new cheque book. If someone knows of a better deal, please inform me. A cheque book is a necessity for people who need to withdraw substantial sums of money from time to time. These are usually the people who make their own financial investments.

With the highest savings rate and the free cheque book, I keep the bulk of my savings in CIMB StarSaver account.

There are disadvantages with this bank account to take note. CIMB has very few ATM machines and only 2 branches in Singapore as of today. So, it is not convenient to withdraw money and do face-to-face banking with them. You can still do internet banking with them. To work around this problem, I put the bulk of my savings with CIMB but keep a smaller amount of money in the local banks to make use of their vast network of ATMs and branches. On this aspect, our local banks are superior to the foreign banks in Singapore.

Update on market commentary on the stock market collapse that began on 2 Aug 2011

This is an update to http://help-your-money.blogspot.com/2011/08/market-commentary-on-stock-market.html

I made a post on 14 Aug 2011 of my belief that a strong rally will come before the market collapses further due to the huge amounts of cash sitting on the sidelines, insider purchases and strong earnings despite the market rout. I acted on my belief and deserved the painful consequences. Based on recent market action, I have been proven wrong and suffered losses. From 12 Aug 2011 to 23 Sep 2011, the Straits Times Index has fallen more than 5%. This is the criteria which I use for being wrong. In investing, I regard losing money as equivalent to being wrong. No point in using excuses like "I am a long-term investor" (as if the stock will surely bounce back later), "The market is irrational" (as if everyone else is stupid except myself), "Short-term fluctuations do not bother me" (self-deception? Losses always hurt)

The global financial markets have grown too dependent on money-printing from central bankers like drug addicts. When QE1 (quantitative easing) neared its end around middle of 2010, global markets slumped like a drug addict as the drug effect wore off. Then, Bernanke administered a fresh dosage in QE2. Global markets rallied in September 2010. The drug effect wore off again after the middle of this year. Come QE3, also known as Operation Twist. Unfortunately, the drug dosage is not enough this time because the appetite of drug addicts grows with every dosage. The immediate negative market reaction is evident of this fact. The bullishness of the precious metals market is a measure of the amount of central bankers' money-printing activities. Look at how Gold and Silver crashed after Bernanke announced Operation Twist.

Operation Twist aims to lower the interest rates of long-term debt by selling short-term Treasury securities and buying the longer-term ones. What else can the Federal Reserve do? The short-term interest rates of US Treasury securities is already near-zero. How to lower the short-term rates further? This is why Bernanke could only work on longer-term interest rates this time. I am not quite sure how to interpret the market's reaction to Operation Twist. Should one interpret the recent market crash as the Fed not doing enough or the Fed has lost the ability to do anything to stimulate the economy? When short-term interest rates are near zero, monetary policy has clearly lost much of its power as an economic tool. Therefore, the US economy has to look towards fiscal policy for stimulation. The recent US debt-ceiling crisis shows that political bickering has paralysed fiscal policy. When one party says taxes are too bloody low and the opposing party says spending is too bloody high, stimulative fiscal policy is impossible because taxes cannot be cut and spending cannot be raised. Actually, the rich world does not have much room to stimulate the economy using fiscal policy given high government debt levels and persistent budget deficits. Austerity is the only way out. If austerity is chosen, the near-term prospects for financial markets will be terrible and uncertain in the longer-term. If fiscal austerity is abandoned in favour of the more political palatable monetary money-printing, then inflation will follow. In this scenario, the financial markets will do well even if fundamentals are poor. When you have too much money chasing too few assets, asset bubbles will be formed. Holding cash in such a situation will be disastrous. Seeing the American politicians in action during the debt-ceiling crisis point towards money-printing being the preferred option.

Indeed, Operation Twist may boost speculative activities, particularly in the property market, by reducing longer-term mortgage rates. Already, the loose monetary policy in the US is being exported to Asia and creating bubbles in our property market. In 2008, we had the US banking/real estate crisis. Come 2011 and 2012, we will suffer a full-blown European sovereign debt crisis. The nightmare scenario is that in 2014-2015, it may be Asia's turn to suffer a financial crisis when the property market bubble burst in China, Hong Kong and right here in Singapore.

There is an even darker nightmare. It is the social instability that persistent high inflation and unemployment will bring. This is chaotic and totally unpredictable. High inflation in China in the late 1980s created the conditions for the Tiananmen protests that led to the massacre. Hyperinflation in Germany gave us World War II because the German people voted Hitler into power out of anger.

Most of what I wrote will probably turn out to be empty worrying. It is a habit borne out of worrying about the downside before investing. By the way, I will still be buying stocks however pessimistic. As the macro-picture worsens, it is likely that even good stocks will go down further. However, the chance of permanent impairment (go down and never recover) is quite low when buying in times of recession/depression.