http://www.youtube.com/watch?v=ju__z4sdeaE&feature=related
Jack Welch said that to be a great employee and leader, one must first over-deliver the boss' demands. Also, the employee has to look at things from a broad picture, from a different perspective. This is to enable the boss to see things from a different angle, and more importantly, learn something new from the employee.
Second, a boss should find employees with a positive attitude. Nobody wants a black cloud hanging over them. This is very intuitive because a bad apple affects the whole team. Nobody wants to work with an overly negative person.
Third, bosses should look for ambitious people. Employees should have personal goals and a vision for the organisation. However. they should be humble enough not to rub others' off the wrong way. Great employees and future leaders are team players and are often helpful to others. There is constructive ambition and there is destructive ambition. I really like the former and dread the latter. I definitely deslike naked ambition because it almost always drives a person to do wrong things.
I would like to add another advice; I will always prefer intelligent people over sociable people. I am suspicious of people who are very eloquent but are weak in thinking and problem-solving. A great leader surrounds himself with technocrats, not politicians. Technocrats have the best brains to solve problems at hand. They are trained to do the job and recommend the best course of action. I don't need a bunch of "yes-men / women" or people who praise me all the time, although from time to time, I do not mind being complimented. Hence, I generally look first for people with relevant job experience, with proven track records. Second, I will look for people with a Finance degree, a CFA, a Masters in Finance or Economics. Third, I will look for the attitude of the candidate. The candidate must have a positive attitude, a team player, be a problem solver and look at things from a macro perspective. He / she must teach me things, make me smarter.
Hence, it is often difficult to find candidates with the right balance. Some are more form than substance. Others all substance and no form, too raw to hire. Finding the gem in a haystack is always difficult; that candidate who's intelligent, unselfish, mature, business minded. That is a leader in the making.
Monday 26 December 2011
Thursday 22 December 2011
ECB Takes Out the Back-Door Bazooka! Gold May Recover
This is the year where alternatives and gold work the best. ECB today took out a bazooka worth EUR489 billion to warn speculators not to bet against Eurozone banks. This effectively is a larger amount than US Fed's QE2. It is QE a-la Eurozone!
The comical thing is ECB repeatedly said it cannot directly buy bonds from the peripheral countries. Instead it lent unlimited amounts to Europe's banks. This effectively pumps liquidity into the banking system. Any bank in Europe with any form of collateral with government guarantee can pledge it and borrow at 1%. So a European bank can buy a Spanish bond that pays 1.75% for 1 year and pledge it with ECB, borrow at a rate of 1%. Effectively the bank earns 0.75%.
I was surprised that the US stock markets fell tonight. But I believe it will soon rally at least until January 2012. Under such a scenario, I will do the following asset allocation:
30% Amundi Volatility World USD
20% DB Systematic Alpha SGD Hedged
20% Schroder Gold SGD Hedged
30% First State Global Resources SGD Hedged
My focus will be a lot on alternatives. I am still not very convinced that the stock markets will rally because the EU is in a recession and it is hard to fathom that QE, however big can push stocks up. Back in Sep 2010, stocks rallied after QE2 by the US Fed because economic data turned upwards sharply. I am still watching that space.
Below is a picture of Amundi Volatility World. It is one of the few funds that went up by 5 - 10% after May 2 2011.
CTAs like DB Systematic Alpha didn't do very well, but still it's ability to long and short prevented it to drop sharply in Aug 2011. It's still up 1 - 3% since May 2 2011.
I've been heavily buying Schroder Gold this year. It is uncorrelated with the stock market. I've drawn a comparison between Schroder Gold pink, top line, vs MSCI Asia x Japan (orange line) vs MSCI World (green line). It has outperformed equities. I am quite sure that when the new year comes and institutional investors return from their holidays, gold will resume its uptrend and hit 2000 in 2012.
http://seekingalpha.com/article/315252-the-ecb-may-have-brought-some-glitter-to-gold-for-christmas
The second program drawing investor attention is the ECB’s new LTRO (Long Term Refinancing Operations) program. This is an attempt by the ECB to help banks overcome the 720B Euros' worth of funding due to mature next year (and other large amounts in the ensuing years). It provides for virtually unlimited 3 year loans by the ECB to EU banks who have the collateral to offer up. The ECB is encouraging virtually all banks to take advantage of this program in order to reassure the markets of the stability and the liquidity of the EU banks. The ECB does not reveal the individual names of the participants. The ECB said today, Wed. Dec. 21, 2011, that 523 banks requested a total of 489B Euros ($641B) in funding from the ECB. The US market's reaction to this so far has been negative as it is far more than the median estimate of about 300B Euros. Still I think once the market figures out that the EU bankers would have to be morons not to be availing themselves of this program, the markets should rebound.
We have already seen some positive results from this program. The recent Spanish 3 month T-bill auction on Tuesday paid an average yield of 1.735%. This was down dramatically from the 5.11% in a similar auction a month earlier. Why was the effect so dramatic? Short term T-bills are not in much danger of default. Therefore they are acceptable as collateral. This means banks can buy Spanish T-bills for a yield of 1.735% (currently). Then they can assign the T-bills as collateral for the ECB LTRO 3 year loans. The banks will profit by 0.735% per year on the deal if the ECB’s lending rate is 1% (the current rate). What a cushy deal! Any bank not availing itself of the ECB’s largess is falling far behind the pack.
The Euro/Euro carry trade these banks are effectively entering into is pumping money into the sovereigns' economies. It may be only dramatically lowering the 3-month T-bills right now, but it is having a trickle down effect on the longer dated sovereign bonds. For instance, the Spanish 10 year note yield is at 5.1% today (Wed. Dec. 21, 2011). This is down significantly from its November high of approximately 6.7%, and it is down from its recent secondary peak of approximately 5.8%. 5.1% may still be too expensive for Spain’s economy, but it is a significant improvement. Plus this yield may go further down as the ECB’s strategy may eventually make longer dated T-bills acceptable as collateral. This would have an even larger trickle down effect to longer term notes and bonds. Eventually even notes might be acceptable as collateral. This strategy follows the “patience” theme of the ECB.
Further the banks now have all the extra interest to use to try to shore up their finances. When you are talking about 489B Euros, this is not insignificant. It can provide needed liquidity by itself. If the banks treble borrow, the interest on two parts can pay the interest on the part borrowed for liquidity’s sake (and then some). Of course, the banks are already likely getting interest on whatever non-carry trade securities of their own they are using for collateral. If the ECB lowers its interest rate even further, this program will work more heavily in the banks' favor. This may mean it will result in even lower sovereign T-bill yields (and so bond rates). Since this is desirable, one might expect the ECB to lower interest rates further in upcoming meetings -- more QE.
The recently passed, nearly $1T US Spending Bill is still more liquidity for the markets. Plus it ensures that the US government will be funded for the near future. This is a weight off the markets‘ shoulders. With all of the above events, even with the still present credit crisis, it makes sense that we will see a rally in commodities, especially in commodities such as gold used as a hedge against inflation (liquidity). In fact, gold has already started to rally. It has rallied from its recent low of $1562.50/oz. to its current price of $1628/oz. The gold mining stocks have just started following it upward. If the money managers do indeed want a Christmas rally, the above data and other recent positive data such as the US new home data and recent Initial Claims data should help the money managers engineer a Christmas rally. If you believe this is not only a possible, but a probable outcome, you may want to invest in gold stocks for the near term (and perhaps for the longer term).
All of the major currencies have shown signs of weakness. The universal currency -- gold -- is going to become more important (more valuable) instead of less over the next several years. Many will look at it as an important way to preserve value. We may see it fall further in an EU recession, but it will with strong likelihood pop back up to even higher prices with any recovery.
The comical thing is ECB repeatedly said it cannot directly buy bonds from the peripheral countries. Instead it lent unlimited amounts to Europe's banks. This effectively pumps liquidity into the banking system. Any bank in Europe with any form of collateral with government guarantee can pledge it and borrow at 1%. So a European bank can buy a Spanish bond that pays 1.75% for 1 year and pledge it with ECB, borrow at a rate of 1%. Effectively the bank earns 0.75%.
I was surprised that the US stock markets fell tonight. But I believe it will soon rally at least until January 2012. Under such a scenario, I will do the following asset allocation:
30% Amundi Volatility World USD
20% DB Systematic Alpha SGD Hedged
20% Schroder Gold SGD Hedged
30% First State Global Resources SGD Hedged
My focus will be a lot on alternatives. I am still not very convinced that the stock markets will rally because the EU is in a recession and it is hard to fathom that QE, however big can push stocks up. Back in Sep 2010, stocks rallied after QE2 by the US Fed because economic data turned upwards sharply. I am still watching that space.
Below is a picture of Amundi Volatility World. It is one of the few funds that went up by 5 - 10% after May 2 2011.
CTAs like DB Systematic Alpha didn't do very well, but still it's ability to long and short prevented it to drop sharply in Aug 2011. It's still up 1 - 3% since May 2 2011.
I've been heavily buying Schroder Gold this year. It is uncorrelated with the stock market. I've drawn a comparison between Schroder Gold pink, top line, vs MSCI Asia x Japan (orange line) vs MSCI World (green line). It has outperformed equities. I am quite sure that when the new year comes and institutional investors return from their holidays, gold will resume its uptrend and hit 2000 in 2012.
http://seekingalpha.com/article/315252-the-ecb-may-have-brought-some-glitter-to-gold-for-christmas
"Two of the ECB’s new programs have been drawing investor attention. First the ECB has been saying it will only buy a limit of 20B Euros of sovereign debt per week. However, the committee deciding this limit meets every two weeks to decide the limit going forward, and there has been significant talk of making the limit 20B to 30B Euros per week. With approximately 4.35 weeks in a month, this means the ECB can spend approximately 87B to 130B Euros on sovereign debt a month. Even if you take the 87B Euro figure as the high limit, this is the equivalent of a maximum of approximately $114.5B per month that the ECB can spend on sovereign debt. By comparison, the US Fed’s QE2 program amounted to only approximately $70B/month. The ECB already has the okay to far exceed what the US Fed did. The idea that the ECB is not doing the same kind of QE the US Fed did with its QE2 program is a fallacy. The ECB’s program is potentially several times the size of the US Fed’s program.
The second program drawing investor attention is the ECB’s new LTRO (Long Term Refinancing Operations) program. This is an attempt by the ECB to help banks overcome the 720B Euros' worth of funding due to mature next year (and other large amounts in the ensuing years). It provides for virtually unlimited 3 year loans by the ECB to EU banks who have the collateral to offer up. The ECB is encouraging virtually all banks to take advantage of this program in order to reassure the markets of the stability and the liquidity of the EU banks. The ECB does not reveal the individual names of the participants. The ECB said today, Wed. Dec. 21, 2011, that 523 banks requested a total of 489B Euros ($641B) in funding from the ECB. The US market's reaction to this so far has been negative as it is far more than the median estimate of about 300B Euros. Still I think once the market figures out that the EU bankers would have to be morons not to be availing themselves of this program, the markets should rebound.
We have already seen some positive results from this program. The recent Spanish 3 month T-bill auction on Tuesday paid an average yield of 1.735%. This was down dramatically from the 5.11% in a similar auction a month earlier. Why was the effect so dramatic? Short term T-bills are not in much danger of default. Therefore they are acceptable as collateral. This means banks can buy Spanish T-bills for a yield of 1.735% (currently). Then they can assign the T-bills as collateral for the ECB LTRO 3 year loans. The banks will profit by 0.735% per year on the deal if the ECB’s lending rate is 1% (the current rate). What a cushy deal! Any bank not availing itself of the ECB’s largess is falling far behind the pack.
The Euro/Euro carry trade these banks are effectively entering into is pumping money into the sovereigns' economies. It may be only dramatically lowering the 3-month T-bills right now, but it is having a trickle down effect on the longer dated sovereign bonds. For instance, the Spanish 10 year note yield is at 5.1% today (Wed. Dec. 21, 2011). This is down significantly from its November high of approximately 6.7%, and it is down from its recent secondary peak of approximately 5.8%. 5.1% may still be too expensive for Spain’s economy, but it is a significant improvement. Plus this yield may go further down as the ECB’s strategy may eventually make longer dated T-bills acceptable as collateral. This would have an even larger trickle down effect to longer term notes and bonds. Eventually even notes might be acceptable as collateral. This strategy follows the “patience” theme of the ECB.
Further the banks now have all the extra interest to use to try to shore up their finances. When you are talking about 489B Euros, this is not insignificant. It can provide needed liquidity by itself. If the banks treble borrow, the interest on two parts can pay the interest on the part borrowed for liquidity’s sake (and then some). Of course, the banks are already likely getting interest on whatever non-carry trade securities of their own they are using for collateral. If the ECB lowers its interest rate even further, this program will work more heavily in the banks' favor. This may mean it will result in even lower sovereign T-bill yields (and so bond rates). Since this is desirable, one might expect the ECB to lower interest rates further in upcoming meetings -- more QE.
The recently passed, nearly $1T US Spending Bill is still more liquidity for the markets. Plus it ensures that the US government will be funded for the near future. This is a weight off the markets‘ shoulders. With all of the above events, even with the still present credit crisis, it makes sense that we will see a rally in commodities, especially in commodities such as gold used as a hedge against inflation (liquidity). In fact, gold has already started to rally. It has rallied from its recent low of $1562.50/oz. to its current price of $1628/oz. The gold mining stocks have just started following it upward. If the money managers do indeed want a Christmas rally, the above data and other recent positive data such as the US new home data and recent Initial Claims data should help the money managers engineer a Christmas rally. If you believe this is not only a possible, but a probable outcome, you may want to invest in gold stocks for the near term (and perhaps for the longer term).
All of the major currencies have shown signs of weakness. The universal currency -- gold -- is going to become more important (more valuable) instead of less over the next several years. Many will look at it as an important way to preserve value. We may see it fall further in an EU recession, but it will with strong likelihood pop back up to even higher prices with any recovery.
Sunday 18 December 2011
Bearish Views from GMO and Prechter
GMO's chart below is a very sobering thought. Their basis is profit margins have been over inflated in the last two decades due to interest rates being too low. The recessions in 2000 - 2003 and 2008 did not even bring stock markets down to trend lines. Given that markets tend to over correct, we could witness 8 more years of lower stock prices, i.e. S&P500 trading at March 2009 lows of 667 until 2020. Their advice is to lighten up on equities when stock markets reach new highs or hit resistances.
Robert Prechter is equally bearish and relies entirely on technical analysis. He feels that S&P500 could drop below March 2009 lows and not recover until 2016. That's because we will witness the 3rd wave down from 2012 onwards. the fourth wave could start in 2013 and the fifth wave down could start in late 2013 and end in 2014.
I tend to believe that we will still give investors false hopes until mid 2012 before the real capitulation occurs. Perhaps the doomsday forecast of the end of the world which coincides with the end of the Mayan Calendar could come true! Most OECD countries could still count on QE because inflation rates are still low, at around 2 - 3%. In the UK, it is already at 4%. But when hyperinflation sets in by mid to end 2012, even monetary policy is out. Money printing always benefit only a small group of people. The investors, the entrepreneurs. Most employees will suffer as wages cannot keep up.
From 2H 2012, stocks will rely on the economic data. I believe austerity measures will continue to bite in the EU. They may be in worse shape than they are now. Just think. All this money printing will only devalue USD and EU against Asian currencies. The EU and US will need to import all sorts of goods, from raw materials to manufactured goods. Rising cost of imports will hit the Europeans and Americans. Wages, which comprise 60% of their inflation indices, will fall, but other parts of the indices will rise at a faster rate than the drop in wages. It will push inflation up to around 4 - 6%.
I don't have a good feel about China's economy. It may land harder than in 2008 because this time, the scope for credit expansion on government investment may not be as great. There will be more reliance on private investments this time and it probably cannot cover the gap left by the government. By mid to end 2012, the US' unemployment rate may have dropped to below 8%. Obama may survive the second term by the skin of his teeth. It may be Newt Gringrich of the Republicans if the US economy continues to fall. But sometime around Nov 2012 and beyond, we could see another dip that will take stock markets down to 900. That will be the 3rd wave that Prechter talked about. It could dip below 900 to 800 even.
Don't forget that the demographics of OECD is not favourable. They will have hundreds of millions of baby boomers retiring in the decade of 2010 - 2020. Pension funds will sell stocks desperately and become insolvent. Governments will step in to fund the shortfall. They will print more money until money becomes worthless. But to fund the pension, they will have to cut social welfare, infrastructure and education. This will cause the young, unemployed to riot. If they cut pensions, the old will protest, although they will be less violent because they are weak! It will be such a dreadful decade for the western world.
Growth is only found in emerging Asia. The stock markets could bottom out in 2013, starting with emerging markets equities. My advice is to stay very safe, very diversified. I think Singapore residential property may not even recover until 2014. We may see it fall 20 - 30%. Frightening thought. I haven't even talked about my worst case scenario, which relates to the end of the Mayan Calendar!
I tend to believe that we will still give investors false hopes until mid 2012 before the real capitulation occurs. Perhaps the doomsday forecast of the end of the world which coincides with the end of the Mayan Calendar could come true! Most OECD countries could still count on QE because inflation rates are still low, at around 2 - 3%. In the UK, it is already at 4%. But when hyperinflation sets in by mid to end 2012, even monetary policy is out. Money printing always benefit only a small group of people. The investors, the entrepreneurs. Most employees will suffer as wages cannot keep up.
From 2H 2012, stocks will rely on the economic data. I believe austerity measures will continue to bite in the EU. They may be in worse shape than they are now. Just think. All this money printing will only devalue USD and EU against Asian currencies. The EU and US will need to import all sorts of goods, from raw materials to manufactured goods. Rising cost of imports will hit the Europeans and Americans. Wages, which comprise 60% of their inflation indices, will fall, but other parts of the indices will rise at a faster rate than the drop in wages. It will push inflation up to around 4 - 6%.
I don't have a good feel about China's economy. It may land harder than in 2008 because this time, the scope for credit expansion on government investment may not be as great. There will be more reliance on private investments this time and it probably cannot cover the gap left by the government. By mid to end 2012, the US' unemployment rate may have dropped to below 8%. Obama may survive the second term by the skin of his teeth. It may be Newt Gringrich of the Republicans if the US economy continues to fall. But sometime around Nov 2012 and beyond, we could see another dip that will take stock markets down to 900. That will be the 3rd wave that Prechter talked about. It could dip below 900 to 800 even.
Don't forget that the demographics of OECD is not favourable. They will have hundreds of millions of baby boomers retiring in the decade of 2010 - 2020. Pension funds will sell stocks desperately and become insolvent. Governments will step in to fund the shortfall. They will print more money until money becomes worthless. But to fund the pension, they will have to cut social welfare, infrastructure and education. This will cause the young, unemployed to riot. If they cut pensions, the old will protest, although they will be less violent because they are weak! It will be such a dreadful decade for the western world.
Growth is only found in emerging Asia. The stock markets could bottom out in 2013, starting with emerging markets equities. My advice is to stay very safe, very diversified. I think Singapore residential property may not even recover until 2014. We may see it fall 20 - 30%. Frightening thought. I haven't even talked about my worst case scenario, which relates to the end of the Mayan Calendar!
Gold is Near the Bottom. Return Risk Ratio Now Favourable.
Gold tumbled to USD1560oz two days ago. Yesterday, it recovered to USD1596 oz. The last time gold tumbled more than 30% was back in 2008, when the credit crunch hit the world. The start of the QE in the US reversed gold's drop. This week, we witnessed gold falling 19%. I calculated that if it were to replicate 2008's fall, it will reach around USD1470 - 1370 oz. That's another 8 - 15% drop. So buying it at 1560 or 1600 may not be the lowest level. But I will buy in stages because it's attractive. History never repeats. It rhymes. According to Mark Twain.
OECD countries are attempting to inflate their way out of debt. Printing money is the only way to meet the credit crunch and feed the budget deficits. The alternative is war, which thankfully the developed west cannot inflict on us this time. It was possible just 100 years ago, but I suppose the nuclear capabilities of China, India, Pakistan and Russia have balanced the power. We we turn into a deflationary spiral, you can be sure cenral governments will print money to prevent that. Check out the weekly chart of XAUUSD below to see how much gold has risen over the last 4 years. The correction seen now is similar to the one in 2008. This correction may not have run its course yet.
But I recently witnessed a short term reversal. See the daily chart below. A rebound is due and we may see a 7 - 12% rebound before hitting resistance again. I expect 2012 to be the start of another major rally.
Gold could rise until mid 2012 or mid 2013. Thereafter, we could witness hyperinflation and governments being forced to hike interest rates. With austerity measures in place, a deep and long recession may then take place in 2013 or 2014. This means that we are about to face a financial Tsunami never seen before in the last 60 years. Stagflation will mean a synchronised recession across the western world.
I believe though that all is not gloom and doom. Emerging economies will overtake the US and EU in size and will drive growth from 2014 onwards. 2015 could be the start of a tremendous boom in global economy, but with commodity prices at hightened levels.
Hang on tight. Keep lots of dry powder. Invest in CTAs like Winton and Amundi Volatility if you can because not even bonds can protect you again stagflation.
Tuesday 13 December 2011
Gold Fell 3.5%
http://seekingalpha.com/article/313124-precious-metals-pullbacks-in-perspective
Read the above hyperlink. Gold fell to USD1667 oz today! It is on the 200d SMA. It has already fallen 14% from the high of USD1930 oz. I reckon the worst it can get is 1470 oz, which is another 12% downside at most. The return risk ratio looks increasingly attractive and I would buy more at this point.
USDSGD shot up to 1.301 today. AUDUSD to 1.008. Risk aversion is back and it seemed to suck some air out of gold. The fear is that ECB will not print money like the speculators expect.
When gold last fell by 31%, it was during the deflationary times in 2008, before QE came in. But when QE started in Oct 2008, gold started to reflate. This is the likely scenario for 2012 - more QE from the US, Japan, UK and the EU.
Read the above hyperlink. Gold fell to USD1667 oz today! It is on the 200d SMA. It has already fallen 14% from the high of USD1930 oz. I reckon the worst it can get is 1470 oz, which is another 12% downside at most. The return risk ratio looks increasingly attractive and I would buy more at this point.
USDSGD shot up to 1.301 today. AUDUSD to 1.008. Risk aversion is back and it seemed to suck some air out of gold. The fear is that ECB will not print money like the speculators expect.
When gold last fell by 31%, it was during the deflationary times in 2008, before QE came in. But when QE started in Oct 2008, gold started to reflate. This is the likely scenario for 2012 - more QE from the US, Japan, UK and the EU.
Saturday 10 December 2011
Buyers' Stamp Duty. Bravo Singapore Government!
The latest buyers' stamp duties surprised all. Many touted it as the final nail in the coffin of residential properties. Immediately, agents, so-called property commentators who wrote books like "Real Estate Riches", developers and speculators poured scorn over the measures. They all have their agenda.
Agents:
If you think sell-side analysts cannot be trusted and are overly bullish, property agents are the worst of the lot. I've met more than my fair share of agents who have very little knowledge and will tell you anything just to make a sale. With the latest measures, if prices don't drop, transaction volumes surely will.
Developers:
They cried wolf that the government's measures should have targeted foreign developers. They claim that foreign developers bid up land prices and compete against local ones. This is akin to begging the government for protectionism. Why can't foreign developers compete against local developers? If competition increases, standards might increase. What the developers are unhappy about is that it diminishes their already fat margins.
Mind you, property development has made many rich. If they buy land at 900 psf ppr, construction cost is around 250 psf ppr, their breakeven price is around 1150 psf ppr. They sell it at 1300 psf. You might think their margins are very thin, earning something like 150 psf or 13%. But you must know that developers borrow to the hilt. They could borrow as much as 80% or put down as little as 230 psf. So 150 of profit against 230 means an ROE of 65%! Their cash flow is further improved by launching the units way before any construction starts. Often, they collect back their downpayment on the land within several months of the purchase of the land!
Then the other part of the scandal is the "creative" marketing by the developers. The balconies are as much as 10 - 15% of the property, which they did not pay for when they purchased the land. The bay windows, air con vent may account for another 10 - 15% of the property. So altogether, if you think they only sell you at 1300 psf, they could effectively sell you at 1690 psf if you count the "livable" area. This represents a margin of 235%! a profit of 540 psf on an investment of 230! If you ask agents what is the effective, livable space, most wouldn't know. But in developed countries, such information is transparent.
Foreigners
Why do they want to park their money here? I cannot explain the precise reason but one can only guess! If they are allowed to buy any property unchecked, prices will shoot through the roof. What happens when the party ends? Will we end up like Macau or like HK where prices rise and fall like yo-yos? Many fortunes may be lost and found with volatility caused by foreigners. I am afraid that those who lose their fortunes are likely to be the unknowing Singaporeans who live in one home and have their bulk of their wealth locked into one property. Those who profit will be the smartest Singaporeans and foreigners. The rich will get richer, the poor just become beggars.
Why the Policies By Government Were Correct
1. Affordability Index Almost at 2007 Levels
In 2007, mortgages accounted for 38% of Singaporeans' average household income. Then, mortgage rates were 4%. Today, mortgage rates are 1/4 of it, around 1%. Yet affordability is at 35%. What if interest rates start to normalise starting from 2013? We will fall into hard times again. It is this data that tells the government that property prices are a ticking time bomb that will plunge many Singaporeans into hardship as early as 2 years later.
2. Rental Yields Have Fallen to 2007 Levels
As a rule, buy when rental yield rises beyond 4.5%, sell when it falls below 3%. Rental yield is an indication of whether prices have risen beyond economic sense. It is a valuation indicator. Today's rental yield is around 3%, indicating that prices have risen too fast.
3. Increasing Number of Shoeboxes in Outskirts
I seriously cannot believe in the gullibility of Singaporeans who buy shoebox units in outskirts. I believe shoeboxes of between 400 - 700 sq ft is liveable in central regions because people like to live where they work. You can save quite a bit of costs doing that because you hardly drive, you save time by travelling less. I have been living within walking distance from my work place for the last 2.5 years and I love it.
But I have lived in houses as small as 700 sq ft before and I must tell you it's bad for your emotional health. I had to throw away a lot of my furniture when I moved in. The living room was so tiny that I couldn't put my favourite sofa in. When I moved into my present apartment at Clark Quay, which is 1012 sq ft of pure space (NO BALCONY, NO BAY WINDOWS), I felt so relaxed. I could fit in a piano, some gym equipment etc. It felt like home. I told myself that the next house must be over 1200 sq ft.
So I don't understand why anyone would want to pay money to live in a shoebox in Balestier or St Michael when the same amount could get you a nice HDB flat that's 1200 sq ft, fully air conditioned. Do you really need the gym, swimming pool or squash court? I hardly use the pool. I run around my area. It's really over rated living in a condo just for the facilities.
Developers love it because they could increase the psf price by as much as 50% for a shoe box. Gullible Singaporeans buy it because the total quantum is below 1m. So silly. One day the shoeboxes will be empty and people will be dumping it like rats infested plagues.
Curbing Speculation in Commercial Property Next
I strongly urge the government to curb speculation activities in commercial properties next. Rental yields have already fallen from 7-8% in 2009 to 3-4%. It is a bubble. If Singapore does go into a recession, many of the tenants will default. Already, many F&B, retail businesses are laboring under the burden of high rentals. it adds a lot to the cost of doing business.
Already, many of the buyers of commercial properties are in for not just speculative activities, but to store their cash. The government needs to tighten checks on the purpose of such transactions. If commercial property bubble bursts, we it could affect local banks because the LTV given can be up to 80%. Some of our local banks have been the most aggressive in lending to commercial property buyers.
Stock Market Going Down for a Week
Most people are optimistic creatures. Or their jobs require them to be optimistic. Like property agents, most dealers are bullish too. Their clients don't know how to short, or are averse to shorting. So they need to constantly talk up stocks. Look at the chart below of STI. Lower high, lower lows. It's time for another correction.
Credit spreads are at 460 bps. TED spreads around 55bps (2010 was 15 bps). 3month US LIBOR - OIS at 44bps (2010 was 20 bps). Things are not quite right and I believe it will get worse in 2012 before it gets better. The European situation is very long drawn, mind you.
Saturday 3 December 2011
Calm Before Storm in Residential Properties and the World Economy
Lately, a report on Singapore's residential property by Standard Chartered Bank has caught the attention of many. The report said that residential property will probably drop 20 - 40% between 2012 - 2015. It cites issues like over supply which will peak in 2015, slowdown in population growth and rising interest rates from 2013 onwards.
Credit Suisse came out with another report to say that the over supply can easily be absorbed by another influx of immigrants, the government can easily tear down old HDBs to reduce supply.
I do not think highly of the report from Credit Suisse. Singapore's property index has undergone tremendous swings in the last 30 years. There is a tendency for sell-side research to be always positive because the investment banking arm gets deals from the companies they analyse. Don't believe me? Read "Confessions of a Wall Street Analyst" by Dan Reingold. http://www.amazon.com/Confessions-Street-Analyst-Daniel-Reingold/dp/0060747692 It was the same kind of pressure that I faced in my stint as an analyst between 2001 - 04.
Back to Singapore's property index. We now have 5.1 million residents (PR + citizens). If I assume that we increase by 100,000 every year, we will reach 6 million by 2020. Assuming 4 people per household, we can comfortably absorb 25,000 public and private homes completed. Just in 2012, this number will be surpassed. By 2013, completed homes will hit over 30,000 and by 2015 a staggering 50,000. The government can remove the old HDB flats to bring down net supply for sure. But I'm not sure how many they can do every year. Even if they start tearing down old flats, can they afford to do so at a rate of 20,000 per year from 2012 - 2015? I believe what the government wants is to stabilise HDB primary sale prices and bring down the resale prices. Mass market condominiums will definitely follow.
What about foreigners buying Singapore property? They now account for 20% of purchasers. This number could disappear if China's property market drops. Already, analysts are talking about 20 - 40% plunge in property prices in China. The tycoons from China who wish to park their wealth here may just repatriate some money back to China to shore up their flailing businesses. The existence of foreign buying, when uncontained, will increase the price swings.
Then there's the stock market. Will it be bull or bear market in 2012 and 2013? The Singapore residential property correlates somewhat with the stock markets. I said "somewhat" and not "strongly" because there are periods like between 2003 - 2005 where stock markets rallied worldwide while the property remained at the trough. The reason is supply plays a big part.
If we have a recession in the EU, slow growth or a mild recession in the US, a hard landing in China, bringing global GDP down to 0.9% in 2012, will property price fall in 2012? Let's say if stocks rallied from now until beginning 2012, and the US followed up with QE3 in 1Q 2012 and the EU deciding to fund EFSF, would stocks not rally until June 2012? Wouldn't this disconnect with economic realities?
My thoughts are: short term, we are likely to see a stock rally. In 2012, the world will focus on economic data. Any further plunge in PMI in China, ISM in the US will probably trigger another 20% plunge. During this time, value hunters will come in. The Federal Reserve may also help. and stocks may rally 25% from thereon.
So the first half of 2012 could be a volatile one, with the S&P 500 fluctuating between 1300 - 1000, the STI between 2400 - 3100.
For the second half, inflation may start to flare up. EU's inflation could hit 3 - 4% if the ECB yields to pressure. Same as in the US. So QE and money printing option will be out. Will it then crash towards the end of 2012? It could capitulate. Property, which has been stubbornly stable until then, could finally fall 10 - 30%. I feel that S&P500 will at most fall to 800, STI to 2100.
2013 could be a year of recovery. Global GDP could rise to between 1.8 - 2.2%. I feel that property will continue to trend down until mid 2013 before stabilising. Second half of 2013 could be the year stocks start to rally while property remain stagnant.
The question is, oversupply is going to get worse for property while we expect economic recovery in 2014. Which factor will prevail? I sense that we could see a period of stagnation and slow rise in property for 2014 and 2015. We went through 7 good years before 1997 for property. Then we went through 7 very bad years between 1998 - 2004. This is followed by 7 very good years between 2005 - 2011. 2012 - 2018 may not be a very good period for real estate. I may be wrong. But we'll see.
Credit Suisse came out with another report to say that the over supply can easily be absorbed by another influx of immigrants, the government can easily tear down old HDBs to reduce supply.
I do not think highly of the report from Credit Suisse. Singapore's property index has undergone tremendous swings in the last 30 years. There is a tendency for sell-side research to be always positive because the investment banking arm gets deals from the companies they analyse. Don't believe me? Read "Confessions of a Wall Street Analyst" by Dan Reingold. http://www.amazon.com/Confessions-Street-Analyst-Daniel-Reingold/dp/0060747692 It was the same kind of pressure that I faced in my stint as an analyst between 2001 - 04.
Back to Singapore's property index. We now have 5.1 million residents (PR + citizens). If I assume that we increase by 100,000 every year, we will reach 6 million by 2020. Assuming 4 people per household, we can comfortably absorb 25,000 public and private homes completed. Just in 2012, this number will be surpassed. By 2013, completed homes will hit over 30,000 and by 2015 a staggering 50,000. The government can remove the old HDB flats to bring down net supply for sure. But I'm not sure how many they can do every year. Even if they start tearing down old flats, can they afford to do so at a rate of 20,000 per year from 2012 - 2015? I believe what the government wants is to stabilise HDB primary sale prices and bring down the resale prices. Mass market condominiums will definitely follow.
What about foreigners buying Singapore property? They now account for 20% of purchasers. This number could disappear if China's property market drops. Already, analysts are talking about 20 - 40% plunge in property prices in China. The tycoons from China who wish to park their wealth here may just repatriate some money back to China to shore up their flailing businesses. The existence of foreign buying, when uncontained, will increase the price swings.
Then there's the stock market. Will it be bull or bear market in 2012 and 2013? The Singapore residential property correlates somewhat with the stock markets. I said "somewhat" and not "strongly" because there are periods like between 2003 - 2005 where stock markets rallied worldwide while the property remained at the trough. The reason is supply plays a big part.
If we have a recession in the EU, slow growth or a mild recession in the US, a hard landing in China, bringing global GDP down to 0.9% in 2012, will property price fall in 2012? Let's say if stocks rallied from now until beginning 2012, and the US followed up with QE3 in 1Q 2012 and the EU deciding to fund EFSF, would stocks not rally until June 2012? Wouldn't this disconnect with economic realities?
My thoughts are: short term, we are likely to see a stock rally. In 2012, the world will focus on economic data. Any further plunge in PMI in China, ISM in the US will probably trigger another 20% plunge. During this time, value hunters will come in. The Federal Reserve may also help. and stocks may rally 25% from thereon.
So the first half of 2012 could be a volatile one, with the S&P 500 fluctuating between 1300 - 1000, the STI between 2400 - 3100.
For the second half, inflation may start to flare up. EU's inflation could hit 3 - 4% if the ECB yields to pressure. Same as in the US. So QE and money printing option will be out. Will it then crash towards the end of 2012? It could capitulate. Property, which has been stubbornly stable until then, could finally fall 10 - 30%. I feel that S&P500 will at most fall to 800, STI to 2100.
2013 could be a year of recovery. Global GDP could rise to between 1.8 - 2.2%. I feel that property will continue to trend down until mid 2013 before stabilising. Second half of 2013 could be the year stocks start to rally while property remain stagnant.
The question is, oversupply is going to get worse for property while we expect economic recovery in 2014. Which factor will prevail? I sense that we could see a period of stagnation and slow rise in property for 2014 and 2015. We went through 7 good years before 1997 for property. Then we went through 7 very bad years between 1998 - 2004. This is followed by 7 very good years between 2005 - 2011. 2012 - 2018 may not be a very good period for real estate. I may be wrong. But we'll see.
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