Sunday, 23 October 2016

Singapore Savings Bonds – A Year On

It has been a year since the launch of the first Singapore Savings Bonds (SSB) in Oct 2015. How have the interest rates of SSBs changed in this 1 year and how have they performed relative to the more conventional government bonds, namely, the Singapore Government Securities (SGS)?

Fig. 1 below shows the 10-year interest rates of SSBs (red line). The interest rates are computed as the average of the benchmark 10-Year SGS interest rates (blue line) over the previous month. (Note: There is always a confusion over the "month" of the SSB. The SSB announced in Oct is issued in Nov and based on the average rates of the 10-Year SGS benchmark bond in Sep.). As you can see from Fig. 1, interest rates have been on a downward trend, reflecting the eagerness of central banks around the world to lower interest rates, to even negative levels in some countries.

Fig. 1: SSB 10-Year Interest Rates

The highest 10-year interest rate achieved for SSBs was for the second tranche of SSBs issued in Nov 2015. The interest rate was 2.78%. The 10-year interest rate touched a low of 1.75% for the tranche issued in Sep 2016. The interest rate for the current tranche is not much higher, at 1.79%.

If you had bought the first 2 tranches of SSBs issued in Oct and Nov 2015, you would be happy with your purchase, since interest rates for all subsequent tranches have been below these rates. 

However, the performance of the more conventional 10-Year SGS bond was even better. Fig. 2 below shows the price performance of the 10-Year SGS bond since the issue of the first SSB.

Fig. 2: Price Performance of 10-Year SGS and SSB

On 1 Oct 2015, when the first tranche of SSB was issued, the 10-Year SGS benchmark bond traded at $98.61 for every $100 of bond principal. Due to the fall in interest rates, prices of bonds have been on the rise. A year later, on 30 Sep 2016, the same bond traded at $105.09. Investors who bought the SGS bond would have gained a capital appreciation of 6.6%. On top of that, investors would have received another 2.375% in coupons (i.e. interest) for holding the bond. Since investors bought the bond at less than the principal of $100, the coupons translate to an interest yield of 2.41% ($2.375 / $98.61). In contrast, SSBs are capital-guaranteed, which means that their value stays at $100 regardless of whether interest rates are going up or down. Over the same period, investors in the Oct 2015 SSB would have received 0.96% in interest, being the 1-year interest rate of the SSB. In total, investors in SSB and SGS would have received the following returns over the 1-year period.

Capital appreciation - 6.57%
Interest 0.96% 2.41%
Total 0.96% 8.98%

Thus, the 10-Year SGS bond has outperformed the Oct 2015 SSB by as much as 8.02% over the 1-year period. The main reason is that interest rates have dropped from 2.54% in Oct 2015 to 1.74% in Sep 2016. 

Hence, if interest rates are rising, it is better to stay with SSBs as they are capital-guaranteed. However, if interest rates are falling, SGS are a better choice as they will gain in price. By juggling between SSB and SGS, you can gain from changes in interest rates. This is exactly the conclusion discussed a year ago in Getting the Best of Both SSB & SGS.

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Sunday, 16 October 2016

What is My Target Price?

A reader asked me what was my target price for a particular stock in one of my blog posts. I was stumped for a while, and realised that I do not really have a target price for my stocks! I do have valuation limits on what price I could buy or sell a stock, but they are not the same as target prices. Let me elaborate further on the buy side and sell side separately.

Buy Side

Having a target buy price suggests that there is a particular stock that you like to buy but is waiting for the price to fall to the right level. To prevent myself from overpaying for stocks, the maximum price I would pay for a stock is 1.8 to 2.0 times the book value of the stock. It looks like a target price, but it is actually a stock selection criterion. All stocks that fail the criterion would not be considered for purchase. The Price/Book (P/B) criterion works the same way as the Debt/Equity criterion. The stocks either pass or fail the criteria; it is not quite the same as waiting for the price to fall to the right level. The litmus test of whether the P/B threshold is a target price is to consider what happens when the price falls to that level. Nothing happens, until the next review. If, in the next review, the stock is still below the P/B threshold, it would be considered for purchase, assuming it passes all other criteria. Thus, it is possible that the stock is bought at a P/B ratio lower than 1.8 to 2.0.

There are also stocks that I wait on the sidelines before buying. However, I am not waiting for the right price, but the right moment. Take for example, Keppel Corp, which I am interested to average down. Based on my assessment, Keppel Corp has not seen the worst of the Oil & Gas winter yet. Thus, if it revisits its low of $4.64 reached earlier this year, I would not be keen to buy the stock. On the other hand, if visibility improves on its business environment 2 years later but the stock then rises to $6, I would be interested to buy at the higher price. The main reason is to wait for the price to reflect fully the business conditions as well as assess whether the company is able to recover fully. All these take time. I view Keppel Corp as a long-term investment, thus it is much more important to understand the business conditions fully than to buy at a low price.

Sell Side

Having a target sell price means that you are waiting for the price of a stock to rise to a particular level before selling. It also means that if the price does not reach the target level, the stock would not be sold. Similar to the buy side, I have valuation limits on when I must sell a stock, no matter how much I like it. The P/B ratio for selling is 3.5 to 4.0 times. However, it does not constrain me from selling even if the stock does not reach the P/B threshold when the need to sell arises. In fact, rarely has a stock in my portfolio reached the P/B threshold mentioned above. Typical reasons for selling include changes in business fundamentals, triggering of trailing stops, or simply risk management.

Having said the above, I have loss aversion bias. There are some stocks that I regretted buying and no longer wish to hold on to them, but the price has dropped below my cost price. For these stocks, I am usually reluctant to sell at a lower price. Thus, the original cost price becomes a target price for selling these stocks. Nevertheless, if the loss is manageable and there are overriding concerns, e.g. changes in business fundamentals or risk management purposes, the stock would generally be sold at a loss. Just last week, I wrote that I had a 19% concentration in Global Logistic Properties but would be happy to reduce the concentration to 15% if the price recovers to my cost price. This is loss aversion bias at work. On reflection, I realised that the position limit on this stock is 20%, which means that I only have a 1% headroom for averaging down if the need arises. I sold 3% at a loss this week. The same goes for the growth stocks in my portfolio which were at the position limit.


Generally, I do not have target prices for buying stocks. On the sell side, I do have target prices for stocks that I no longer wish to hold and are under-water but not for stocks that are above-water. I think it is more correct to say that I have loss aversion bias rather than have target prices for selling stocks. So, the next time someone asks me what is my target price for a particular stock, I will be more confident in replying that I have no target prices.

Sunday, 9 October 2016

How Should I Defend Against the Next Market Crash?

Barely 2 weeks after I wrote The Exit Might Be Narrower Than Expected, both British Pound (GBP) and Gold demonstrated what I have been worrying about. In a space of 1 week, GBP dropped by 3.8% while Gold dropped by 4.4%. GBP dropped after the British Prime Minister announced a timeline for starting Brexit talks with the European Union while Gold dropped on renewed fears of US Federal Reserve raising interest rates on the back of an improving economy. In particular, on Fri, GBP dropped 6.1% within 2 minutes. The sudden drop was rumoured to be caused by a fat finger (i.e. trading error) or computer trading algorithms. Regardless of the actual cause, the fact that the forex markets could not even defend against a fat finger speaks volume about the lack of depth of the financial markets against massive selling volume. It is definitely something that I need to guard against for my own portfolio.

My target asset allocation in the current investing environment is 50% equities and 50% reserves. Although I am wary of the financial markets, I do not believe in holding 100% reserves. During the market turmoil in Jan, I calculated that I need about 35% reserves to guard against a major stock market crash (see Prudence is the Name of the Game). A target allocation of 50%, which is 15% above the minimum required, is considered comfortable and not excessive. Too much cash would lead to erosion of value due to inflation while too little cash would lead to inability to recover from the crash. A rule of thumb that I always use in place of a detailed Value-at-Risk analysis for equities is a loss of 40% at the depth of the crash. Naturally, the loss depends on how severe the crash is and what are the stocks held. During the Global Financial Crisis in 2008/09, the loss was as high as 65%.

Thus, the problem statement becomes how do I invest the 50% in equities such that they will not suffer too much damage and how do I park the other 50% in other assets such that they can preserve their value.


Looking at my current stockholdings, the elephant in the room is Global Logistic Properties (GLP), which has a concentration of approximately 19%. The stock is a transformational experiment in trying to replicate the success of Warren Buffett. To achieve this, I need to be able to do 3 things: (1) identify a good stock, (2) concentrate, and (3) hold for the long term. Therefore, even if a crash is coming soon, I will not sell out of GLP, unless its business fundamentals deteriorate. Selling out entirely would mean that I cannot achieve at least 2 of the 3 pre-requisites required to replicate his success. Notwithstanding the above, I am happy to reduce the concentration to 15% if the price recovers to my cost price.

The second group of stocks is Oil and Gas (O&G). They are mired in heavy losses currently, but the advantage of this group of stocks is that they have their own dynamics and are less affected by global events. If OPEC were to cut production significantly, it does not quite matter to O&G stocks who wins the US presidential election or when Brexit happens. Over the past 5 months, I have mapped out a model to assess the economics of O&G companies in a series of Oil & Gas posts and will follow the plan accordingly.

The third group of stocks is growth stocks. As their moniker suggests, they grow their earnings over the years. Growth stocks can rise a lot during good times as investors chase after them, making them especially vulnerable to a market crash. However, given their ability to grow over the years, their share prices after the crash should be higher than before the crash.

The fourth group of stocks is dividend stocks. There are 2 types of dividend stocks, namely, those which have a constant payout ratio but the dividend varies with earnings, and those which have a constant dividend. My preference is for the second type of dividend stocks. They resemble closest to bonds that have constant coupons, which give bonds the ability to drop less than stocks, as described in What Can We Learn About Stocks From Bonds. If a stock could give me a constant 5% yield on my historical cost every year, I really would not mind if the stock were to drop 50% in a crash.

A small group of stocks that is worth mentioning is the nothing-to-lose stocks. They are considered nothing-to-lose because the amount invested in them is very small, making them easily written off the moment they are purchased. A brief explanation of them can be found in My Oil & Gas Fightback. Since there is already "nothing to lose" on them, it really does not matter if they were to crash 50% or more.


Most of the time, I only need to worry about the risks on the equities portion. This time round, I have to worry about the reserves portion as well due to the extremely low interest rates currently.

Traditionally, the main instrument for parking excess cash is bank preference shares and retail bonds of good companies. However, ever since the redemption of OCBC's 4.2% preference shares in Dec 2015 and the surprise loss of liquidity in retail bonds in Aug 2015 as described in Sneak Attack on My Cash Reservoirs, this instrument has reduced in importance.

Thankfully, around the same time as retail bonds demonstrated hidden liquidity risks, a new instrument was introduced -- the Singapore Savings Bonds. It has 2 important benefits, namely, easy liquidity and 100% capital protection, making it ideal to preserve value and liquidate for stock investments at the depth of a market crash. The disadvantage is that there is a limit on the amount that can be invested.

The other instrument that I have used to park cash this time round is US dollar. Given the impending rise in US interest rates, USD will also rise in tandem as explained in Getting Ready for US Interest Rate Rises. However, there is a limit on the amount of cash that can be parked in USD, as there is not a lot of USD-denominated assets that can be purchased. My preference is not to switch in and out of USD so as not to incur the bid-ask spread.

All other instruments have more disadvantages than advantages. Singapore Government Securities (i.e. government bonds) will fall in value when interest rate rises. Likewise, Gold will drop when USD rises, as demonstrated this week. There is really not many places to park cash safely.


In my opinion, the current investing environment is tricky. But there are also not many places to hide safely.

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Sunday, 2 October 2016

What is Holding Up US Share Prices?

If you had read my previous post on What Have We Got After 8 Years of Easy Money?, you would know that the US equity market has gone on an 8-year bull run even though many industries (at least those in Singapore) are facing poor business and/or low margins. Fig. 1 below shows the performance of S&P500 index since 2012, which is mostly on a straight upward trendline.

Fig. 1: S&P500 Index Since 2012

Yet, when you look at the earnings of S&P500 companies over the same period, they have been relatively flat. See Fig. 2 below (source: Cash Piles at American Companies Are Shrinking). This is due to the lacklustre global economy since 2012.

Fig. 2: Flat Earnings Since 2012

Thus, on one hand, we have flat earnings, but on the other hand, we have rising share prices that have increased by about 73% since 2012. The main reason is of course the massive liquidity unleashed by 8 years of low interest rates and multiple rounds of Quantitative Easing by central banks around the world.

However, it is not just investors who are taking advantage of the cheap and plentiful liquidity to bid up asset prices. Companies themselves are also taking up loans to fund share buybacks and dividends. See Fig. 3 below (source: U.S. Profit Recession Means Debt Fuels Most Buybacks Since 2001). Notice also the bottom chart of the figure which shows the flat EPS growth since 2012, which is consistent with Fig. 2.

Fig. 3: Debt-Fueled Share Buybacks and EPS Growth

Share buybacks can provide a boost to share prices in the short run, but when earnings are flat and companies have to take up loans to fund these buybacks, they may not be sustainable. In the short run, share prices can be out of sync with earnings. But in the long run, the 2 must converge. This is another reason why I am not optimistic about the investing environment moving forward.

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Sunday, 25 September 2016

The Exit Might Be Narrower Than Expected

As expected, but disappointingly, US Federal Reserve did not raise interest rates on Wed. The reasons for my pessimism for the current economic conditions are explained in What Have We Got After 8 Years of Easy Money? Unless we see evidence of coordinated fiscal stimulus from governments around the world to increase aggregate demand, more liquidity via easy monetary conditions will only lead to more value destruction as we have seen so far. Given the precarious investing environment, I have been gradually taking money off the table and building up my defences, before everyone else starts to rush for the exit. Based on the experience of the last 12 months, I believe the exit might be narrower than most people expect.

12 months is not a long time. However, over the same period, we have had at least 3 market declines, namely:
  • Aug 2015 - China's renminbi devaluation triggering worries about China's economic slowdown
  • Jan 2016 - China's stock market circuit-breaker meltdown and oil price collapse
  • Apr/May 2016 - "Sell in May and Go Away" syndrome?

In all these 3 episodes, the declines were fast and furious. See the figures below for the extent and duration of the decline. Note that the no. of days in the figures refers to the no. of trading days.

Fig. 1: STI Decline in Aug 2015

Fig. 2: STI Decline in Jan 2016

Fig. 3: STI Decline in Apr/May 2016

In fact, these 3 episodes are not the only times the stock market has declined so rapidly. As far back as Jun 2013, when then Fed chairman raised the possibility of slowing down and scaling back its bond purchases under the Quantitative Easing programme, the markets had also gone into a tailspin, triggering the famous Taper Tantrum. However, neither the extent or the speed of decline matched those that we observed in the last 12 months.

Fig. 4: STI Decline in Jun 2013

A summary of the declines is shown in the table below.

No. of
Avg Daily Decline
22 May 13 - 24 Jun 13 3454.37 3074.31 22 -11.0% -0.50%
24 Jul 15 - 24 Aug 15 3352.65 2843.39 19 -15.2% -0.80%
31 Dec 15 - 21 Jan 16 2882.73 2532.70 14 -12.1% -0.87%
21 Apr 16 - 6 May 16 2960.78 2730.80 10 -7.8% -0.78%

The purpose of this post is not to encourage anyone to sell. Perhaps the market might climb the wall of worry and rise further. However, for those who believe that they can wait until the last moment and run faster than the rest, they might wish to take the above findings into consideration. The exit might be narrower than most people expect.

Sunday, 18 September 2016

What Have We Got After 8 Years of Easy Money?

2 unusual events happened in July. The first was the Brexit referendum, in which Britons unexpectedly voted to leave the European Union, but the stock markets, equally unexpectedly, did not crash. Within 4 trading days, the Straits Times Index was back to where it was before the vote. It turned out that the markets had correctly predicted that central banks around the world would rush to loosen monetary conditions further to avoid a market crisis from developing because of Brexit. The second was the yields on 10-year Singapore Government Securities dipped below the interest rate of a 1-year fixed deposit that I had placed barely 3 months earlier in Apr. Granted that we are talking about different time periods (Apr vs Jul) and different credit risks (corporate vs government), but the fact that a 10-year government bond could not beat the yield on a 1-year fixed deposit simply amazes me. Is this a warning sign that the financial markets are close to a top?

Actually, both these 2 events are related. Because of a rush by central banks to loosen monetary conditions, which were already very loose, yields on government bonds dropped further, to the extent of going below that of a fixed deposit. Since the Global Financial Crisis (GFC) in 2008, central banks have kept interest rates at historically low levels. US interest rates are now only 0.25% to 0.5%. Several countries, such as Eurozone, Japan, Denmark, Sweden and Switzerland have even taken the unprecedented step of dropping interest rates to negative levels since Jun 2014! As if low/ negative interest rates are not sufficient, US and other central banks have carried out multiple rounds of Quantitative Easing (QE) to flood the markets with cash since Nov 2008!

Back in Nov 2008, if someone had told me that interest rates would remain at historically low levels for 8 years and central banks around the world would take turns to implement multiple rounds of QE, I would have predicted a booming global economy at risk of overheating and a raging bull run in the equities and bond markets!

Yet, 8 years later, what have we got? Sure, in the financial markets, we have a very long bull run in US equities and global government bonds. In Singapore, however, the STI did not even come close to breaching the level achieved prior to GFC, stopping at around 3,500 points versus the peak of around 3,800 points in Oct 2007.

In the real economy, the picture is even worse. Instead of a booming economy at risk of overheating, we have poor business and/or low margins in industries ranging from Oil & Gas, agriculture, commodities, shipping, shipbuilding, properties and banks. In the REIT space, almost every sector ranging from office, retail, hotel and industrial are facing challenges, due to either oversupply or changing demand. In some of the industries mentioned, some companies have even entered judicial management. Banks, being the barometer of the general health of the economy, are facing rising Non-Performing Loans. This is not a picture of a booming economy, but rather, a picture of an ailing economy.

Some people might argue that the reasons for the economic difficulties are OPEC countries flooding the crude oil market, property cooling measures and slowing global economies, especially that of China. These are valid reasons. However, aren't low/ negative interest rates and QE supposed to revive the slowing global economies? With the exception of the US economy, 8 years of low interest rates and multiple rounds of QE have not been able to add to the overall demand in the global economies. Instead, the flood of easy money have added to the overall supply by making it easy for companies to borrow money and build capacity. Ironically and in spite of the flood of easy money, what we have is not more money, but a fairly wide-ranging destruction of value across many industries. Investors who have lost money in stocks in the above-mentioned industries, despite a long-running US equities bull market, would understand best.

The value destruction described above affects companies and investors. Losses are, after all, part and parcel of investing. However, what is of major concern is that the same scenario seems to be playing out at the individual consumer level in the area of residential properties. On the one hand, we hear stories of a glut of completed properties and difficulty in finding tenants. At the same time, we also hear news of some new residential properties selling like hot cakes. Properties are not cheap these days. Without $1 million, you cannot buy a private property with enough space for a family of 4. Yet, there is no shortage of buyers for such properties. The situation is reminiscent of Offshore Support Vessel (OSV) companies which took on huge debts to expand their fleets of OSVs rapidly when oil price was high but are now having difficulties finding charterers to hire their OSVs. For these OSV companies, they will have to significantly tighten their belts and slowly pay down their debts for many years in order to stay afloat. If the same situation affects residential properties, many people will have to likewise tighten their belts and pay down debts. The local economy, which is predominantly services-based, will grow fairly slowly for several years.

The US Federal Reserves will meet to discuss interest rates in the coming week on 20 and 21 Sep. I doubt they will raise interest rates at this meeting. However, after witnessing the widespread destruction of value across multiple industries, I am in favour of raising interest rates.

Interestingly, despite 8 years of low and even negative interest rates, it requires the occurrence of an extraordinary event with economic significance, the Brexit referendum, and the equally extraordinary absence of an accompanying shock to the stock markets, for me to realise what is happening. Having said that, it does not mean that the financial markets will crash soon. It has been 3 years since the taper tantrum of Jun 2013 when then Fed chairman raised the possibility of scaling back its QE bond purchases, but the financial markets have gone on to achieve new heights. However, I have no wish to invest further in such an environment and will shore up my cash position when the opportunities arise.

If you wish to have a second opinion on the state of the global economies, you can refer to the writings of Rolf Suey.

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Sunday, 11 September 2016

Bye Bye, OSIM!

OSIM has been officially delisted on 26 Aug. This post is a compilation of 2 short stories to remember it. Both are follow-ups from my previous post on OSIM, which you can read at No, I Didn't Buy OSIM at 6¢ During GFC.

The first story is about buying OSIM. When I wrote the post last Nov, 7 years after the depth of Global Financial Crisis (GFC), I never expected I would ever buy OSIM, especially since I did not buy it at 6¢ during GFC. At the time of the post, it was trading at $1.36. As things turned out, OSIM continued to fall from its peak of $2.90, until at $1.025, I decided it was sufficiently undervalued given its past growth records. Thus, the stock that I hesitated to buy at 6¢ during GFC, I had no reservations about buying it at $1.025, 17 times above the price at which I gave it a miss!

Fig. 1: OSIM Share Price

At 6¢ in 2008, I hesitated to buy OSIM because it was losing a lot of money due to a poor acquisition in US at that time. Subsequently, OSIM went from an all-time low of 5¢ to an all-time high of $2.90 for a 58-bagger. However, despite its astronomical rise, I have not regretted giving it a miss at 6¢, for reasons explained in No, I Didn't Buy OSIM at 6¢ During GFC.

At $1.025 in 2015, I decided to buy OSIM because it had fallen from a high of $2.90 to $1.025. It was facing declining business, but given its past growth records and acquisition of TWG Tea, I considered it as an fallen angel. The fact that I had missed out on a 58-bagger did not bother me. What mattered most was whether OSIM could get back to its former growth path. As things turned out, OSIM's founder decided to privatise the company in Mar at an eventual price of $1.39. I made 36% in a short span of 4 months, which covered the difficult period in Jan when stock markets around the world crashed. But like all good stocks being privatised, I was reluctant to see it go and would not get to see if my premise that OSIM could return to its former glory would be correct.

Thus, same stock, but different times, different prices and different actions. There is no emotional baggage involved.

The second story is about other stocks like OSIM. In the same post last Nov, I nearly wanted to quote another stock that had also fallen significantly like OSIM in 2008 and ask readers whether they would buy the stock at 10¢ in Nov 2015, in the hope of finding another multi-bagger like OSIM. The stock in question was China Fishery. See the figure below for China Fish's share price at the time of the previous blog post.

Fig. 2: China Fish Share Price

As things turned out, China Fish went into provisional liquidation barely 3 weeks later. Thus, buying stocks that have fallen significantly does not always produce multi-baggers like OSIM. For every OSIM that rebounds strongly, there are always other stocks that sink deeper!

Like OSIM and China Fish, Oil & Gas stocks have also fallen significantly. Which path would they take subsequently? At the time of this post, Linc Energy, Technics Oil & Gas and Swiber have all gone into voluntary administration/ judicial management.

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