Credit Derivatives

Credit Link Notes

A good explanation can be found here:
http://www.barbicanconsulting.co.uk/cln

Investment Banks - Goldman Sachs

The concern with Goldman Sachs

US Government may pass a law to ensure that Investment Banks are split out from Commerical Banks. What this probably entails is that only Commercial Banks will continue to enjoy protection from the government and thus preserve their AAA, AA ratings.

Investment Banks (the likes of Goldman) may lose the implicit government protection and thus results in a rating drop to A. This will increase their cost of capital by 10-80 basis points (comparing treasury bills with A rated bonds).

Looking at their capital base (total liability) of nearly 800b, an increase of 80 basis points will mean an increase in 6.4b interest expenses.

This will reduce their 13b profits to 7b.

Macro Economics

BRIC

China is the key growth engine of the four, through its investment and spending in its infrastructure and its entry into WTO.

With China's economy powering up, India also started up its own growth engine and positioned itself as the 2nd engine.

Brazil and Russia looks more like a commodity trade, benefiting from the growth of China and India.

Thus, the risk of this emerging market play is the collapse of China, and to a smaller extend, the collapse of India


Alpha vs Beta Trade

During the recovery movement from Mar 2009 till Apr 2010, it is more of a "beta trade", as most stocks rise due to the rebound from the collapse of the world markets. Almost any stock will make money and stock selection is not really important.

However, from May 2010 onwards, it has become more of an "alpha trade" as markets move sideways. Stock selection becomes more important. "Alpha trade" entails active portfolio management, much like hedge funds.

Emerging market plays typically also require "alpha trading" to get higher returns.


Volatitility

Bonds - 4 to 10%
FX - 10-14%
Equity - 20-80%

As such bond plays are susceptible to foreign exchange risks while equity players typically do not concern themselves with foreign exchange rates.


Business Cycle
Possible mappings:

Yield Curve

1. Growth periods last longer than recessionary periods (japan exception)
2. Yield curve becomes steeper upon start of recession. Market priced for recovery already.

Miscellaneous

1. Retail investors should behave more like institutions
1. Go for the long haul -> less trades, stablise the portfolio
2. Have a strategy and stick to it
3. Get rid of the emotions
2. Public views = Winning views!
1. It is the price that public perceive that matters, not what the experts calculated

More land sales

Government released more land for sales today. Details can be found here: http://www.ura.gov.sg/pr/text/2010/pr10-62.html

18 Confirmed List sites comprise 15 residential sites [including 5 Executive Condominium (EC) sites], 2 commercial & residential sites and 1 white site. These 18 sites can together yield 8,135 residential units.

In addition, the Reserve List in 2H2010 will have another 13 sites, which can together yield 5,770 residential units. The 13 Reserve List sites comprise 12 residential sites and 1 commercial & residential site where private residential units can potentially be built.

Summary

• Total of 27 residential sites and 4 mixed-use sites where private housing can be built.
• 13,905 private residential units

 List

1. Alexandra Road, 490 units
2. Bishan Street 14, 590 units
3. Stirling Road (Parcel A), 445 units
4. Stirling Road (Parcel B), 445 units
5. Bedok Reservoir Road / Bedok North Road, 580 units
6. Bartley Road / Lorong How Sun, 560 units 
7. Jalan Eunos/Foo Kim Lin Road, 525 units
8. Petir Road, 430 units 
9. Upper Serangoon View, 540 units
10. Buangkok Drive / Sengkang Central, 495
11. Sengkang Square / Compassvale Road, 485 units
12. Hougang Avenue 7, 395 units
13. West Coast Link / West Coast Crescent, 360
14. Seletar Road, 270 units
15. New Upper Changi Road / Bedok North Drive, 525 units
16. Punggol Walk / Punggol Central, 685 units 
17. Pasir Ris Drive 3 / Pasir Ris Drive 4, 380 units
18. Woodlands Avenue 1 / Woodgrove Avenue, 265 
19. Sembawang Greenvale Phase 3, 115 units
20. Punggol Central / Punggol Walk, 810 units
21. Jalan Jurong Kechil, 240 units 
22. Tanah Merah Kechil Road / Tanah Merah Kechil Link, 470 units
23. Tampines Avenue 8 (EC), 525 units
24. Elias Road / Pasir Ris Drive 3, 295 units
25. Elias Road / Pasir Ris Drive 1 (EC), 320 units
26. Punggol Drive / Punggol East (EC), 485 units
27. Jurong West Street 42 (EC), 460 units
28. Segar Road (EC), 570 units

Ample Supply
Apart from these new releases of 13,905 units, these are the existing supply:

• 63,581 private residential units in the pipeline
• Of these, a total of 42,717 new private residential units are expected to be completed between second quarter 2010 and 2013
• 34,233 units were still unsold
• 22,564 units in Core Central Region
• 19,206 units in Rest of Central Region
• 21,811 units in Outside Central Region

Looks like mass market prices should start to come down a bit and stablise there. This is good news for people who are looking to buy a property.

More on Natural Resources

Source: http://www.bgs.ac.uk/mineralsuk/statistics/mineralProfiles.html

1. Barytes (making drilling mud)
1. China 31%
2. India 26.5%
3. US 13%
2. Coal
1. US 28%
2. Russia 19%
3. China 14%
4. Australia/New Zealand 9%
3. Cobalt (used for rechargable batteries, superalloys)
1. Congo 48%
2. Australia 21%
3. Cuba 14%
4. Copper
1. Chile 30%
2. US 7.5%
3. Indonesia 7.5%
4. Peru 6.4%
5. Poland 6.4%
6. Maxico 5.8%
7. China 5.6%
8. Australia 5.1%
5. Fluorspar
1. South Africa 15.4%
2. Mexico 12%
3. Russia 12%
4. China 8.6%
6. Nickel (making stainless steel)
1. New Caledonia 14%
2. Australia 13%
3. Africa 12%
4. Canada 10.8%
5. Philipines 10.7%
6. Russia 10.5%
7. Indonesia 9.5%
7. Platinium
1. South Africa 75%

What cause DOW to climb?

source: yahoo

Looking at the chart, DOW started a gradual climb from 1985-1995, a span of 10 years.

Then from 1995-2000, the climb was exponential and extremely spectacular.

Question is, how did we achieved such a steep climb?

1985-2000

Notable technology improvement during this period (source: http://inventors.about.com):

• Microsoft windows - started the advancement of computer usage
• Web Wide Web - started the advancement of information availability and dissemination

This period is noted as the golden age of information technology.

Possible Causes

1) It is likely that with better information availability, people starts to be able to track and follow companies and economy news, allowing them the ability to value companies better. As such, companies with cheap valuations were picked up, pushing the markets higher.

2) Effects/Results of the success of financial engineering. Stock markets are pretty much driven by the financial products made available.

3) Better awareness of Value Investing through the well known success of Warren Buffett.

Most importantly in my opinion, the demand for stocks increased (source: http://www.markpeterdavis.com/getventure/2009/03/a-timeline-of-financial-technical-innovation.html):

• 1886: 1M volume
• 1961: 4M volume
• 1992: 200M volume
• 2007: 5000M volume

Note: All these are hypothesis without concrete facts to back them up.

Is the current level sustainable?

Possible yes, as more countries become affluence and their citizens start trading shares (eg. China, India).

Will we have another exponential growth?

Possibly no at this moment. Unless we have new factors that would push demand up exponentially, it is not realistic to expect DOW to keep growing at the rate experiences in the 1995-2000 period.

Property coming one full circle?

Found an interesting chart here: http://singaporerealestate.info/property%20price%20index%201960%20to%202010.htm

The current measures introduced by the government comes from the same arsensal used to cool the previous property bubble.

World's Resources

For more personal finance images visit Mint.com's Financial Blog

The picture shows the ownership of the world resources. This gives a picture of which country has the most resources indirectly.

I had also added in iron ore, which I think is an important resource too. Source: http://minerals.usgs.gov/minerals/pubs/commodity/iron_ore/  (2010 data)

Summary by Resource

Summary by Country

Barytes (making drilling mud) China 31% India 26.5% US 13% Coal US 28% Russia 19% China 14% Australia/New Zealand 9% Cobalt (used for rechargable batteries, superalloys) Congo 48% Australia 21% Cuba 14% Corn US 42% China 19% Brazil 7% Cotton China 31% India  20% US 16% Copper Chile 30% US 7.5% Indonesia 7.5% Peru 6.4% Poland 6.4% Maxico 5.8% China 5.6% Australia 5.1%  Diamonds Russia 23% Botswana 20% Congo 17% Australia 11% Fluorspar South Africa 15.4% Mexico 12% Russia 12% China 8.6% Gold China 12% South Africa 11% Australia 11% US 10% Peru 7% Iron Ore Russia 18% Australia 17%  Brazil 12% Ukarine 12% China 9% India 6% Natural Gas Russia 26% Iran 16% Qatar 15% Nickel (making stainless steel) New Caledonia 14% Australia 13% Africa 12% Canada 10.8% Philipines 10.7% Russia 10.5% Indonesia 9.5%  Oil Saudi Arabia 20% Canada 13% Iran 10% Iraq 9% Kuwait 8% Platinium South Africa 75% Rare Earth Australia 46% China ?  Rice China 30% India  22% Indonesia 9% Vietnam 6% Rubber Thailand 34% Indonesia 30% Malaysia 12% Silver Peru 17% Mexico 15% China 13% Chile 9% Soybeans US 36% Brazil 28% Argentina 21% Uranium Canada 23% Australia 21% Kazakhstan 16% Russia 8% Niger 8% Water Brazil 19% Russia 10% Canada 7% Indonesia 7% China 7% Colombia 5% Wheat China 18% India 12% US 9% Russia 8%

Argentina Soybeans 21%  Australia Coal 9% (with New Zealand) Cobalt 21% Copper 5.1% Diamond 11% Gold 11% Iron Ore 17% Nickel 13% Rare Earth 46% Uranium 21% Botswana Diamond 20% Brazil Corn 7% Iron Ore 12% Soybeans 28%  Water 19% Canada Nickel 10.8% Oil 13% Uranium 23% Water 7% Chile Copper 30% Silver 9% China Barytes 31% Coal 14% Corn 19% Cotton 31% Fluorspar 8.6% Gold 12% Copper 5.6% Iron Ore 9% Rare Earth ? Rice 30% Silver 13% Water 7% Wheat 18% Colombia Water 5% Congo Cobalt 48% Diamond 17% Cuba Cobalt 14% India Barytes 26.5% Cotton 20% Iron Ore 6% Rice 22% Wheat 12% Indonesia Copper 7.5% Nickel 9.5% Rice 9% Rubber 30% Water 7% Iran Natural Gas 16% Oil 10% Iraq Oil 9% Kazakhstan Uranium 16% Kuwait Oil 8% Malaysia Rubber 12% Mexico Copper 5.8% Fluorspar 12% Silver 15% New Caledonia Nickel 14% Niger Uranium 8% Peru Copper 6.4% Gold 7% Silver 17% Phillipines Nickel 10.7% Poland Copper 6.4% Qatar Natural Gas 15% Russia Coal 19% Diamond 23% Fluorspar 12% Iron Ore 18% Natural Gas 26% Nickel 10.5% Uranium 8% Water 10%  Wheat 8% Saudi Arabia Oil 20% South Africa Fluorspar 15.4% Gold 11% Nickel 12% Platinium 75% Thailand Rubber 34% Ukarine Iron Ore 12% US Barytes 13% Coal 28% Corn 42% Cotton 16% Gold 10% Copper 7.5% Soybeans 36%  Wheat 9% Vietnam Rice 6%

Foreign Currency Fixed Deposits

With the Singapore dollar getting stronger, it may be timely to look at longing foreign currencies as part of diversification as well as cash flow management strategy.

Links to the online rates published by the banks:

1. DBS: http://www.dbs.com/ratesonline/Pages/fdacu.aspx
2. UOB: http://www.uob.com.sg/personal/deposits/fixed/foreign_currency_fd.html
3. OCBC: http://www.ocbc.com.sg/personal-banking/tools%20and%20info/Toi_Rates_FoxFC_Listing.shtm
4. HSBC: http://www.hsbc.com.sg/1/2/personal/deposits/foreign-currency-exchange-and-deposit-rates
5. Maybank: https://sslsecure.maybank.com.sg/scripts/deposit_rate.jsp

Online rates not available for SC and Citi.

Greed-Fear Index

A friend just showed me this interesting chart - Greed-Fear Index. It attempts to show if we are now in the region of extreme bearishness, or extreme bullishness.

From the website, is says "The Greed-Fear Index uses a blend of global emerging markets as the benchmark for the greed side of the equation. These emerging markets are Brazil, China, South Korea, South Africa, Russia, India, Israel, Chile, Hong Kong, Thailand, Indonesia and others which make up less than 10%. The mix of these markets is uneven and proprietary and may change without notice."

I've posted the link to it in the right panel, so that you can refer to the most updated chart regularly:
http://www.greedfearindex.com/charts/plot_GFI_behavioral_finance_bullish_bearish_market_sentiment.php

Coincidentally,  i posted a link to market harmonics earlier. Check out the equity put-call ratio:

The put-call ratio also attempts to indicate extreme sentiments.

Essentially, they are both screaming out the same message - Oversold!

Keppel Corp

Took the opportunity to initiate another small position in Keppel Corp.

Reasons:

1. Together with SempCorp, they are the market leaders in the world Offshore and Marine.
2. Other than Offshore and Marine, Keppel Corp has stakes in the rising property market and growing its infrastructure business as well
3. It has strong free cash flow since 2001 (did not check earlier than 2001)
4. Based on the total dividends given in 2009, its dividend yield is over 6% at current stock price
5. Divident policy: 50-60% PATMI
6. Owns portion of M1, K1 Ventures, Senoko waste, Tuas Waste, NeWater, K-REITS, Green Trust

Downside risks will be associated with oil and property prices, as well as the global economy situation.

Views are my own. Please do your own due diligence before committing the investment =)

BP PLC (ADR)

Last night I initiated a small position in BP (ADR).

Reasons:

1. Max loss estimated is $15B. Given that 1 ADR is equivalent to 6 shares, there are 3B outstanding shares. As such, every $1 loss in stock price = $3B loss in equity value of the company. A $15B damage should rationally be translated to $5 loss in share price. Since the accident happened on 22nd April, BP share had dropped from $59 to yesterday's $47, a loss of $12. This is over-reacting
2. This lost is likely to only pay out many years later, referencing Exxon's case: http://en.wikipedia.org/wiki/Exxon_Valdez_oil_spill
3. BP's PE ratio of 8 is the lowest in the industry
4. BP has positive free cash flow for the past 5 years (i did not look further than 5 years)
5. BP is unlikely to fail because of this $15B loss, which is about slightly less than 2009's PROFIT.
6. BP has high dividend yield of 6%
7. BP is trading at slight below book value

Views are my own. Please do your own due diligence before committing the investment =)

How to value a Property

It pains me to see so many people over-paying for property.

The problem lies in over-zealous calculation/valuation of property, or simply the lack of such valuation.

Instead of relying on past transactions, which tends to feed on itself, one should value the property based on cashflow - cashflow from rental, even if it is for your own stay. Because, you never know when you might choose to rent it out and stay in another place. So, don't cut off your options.


Valuation

So, how to value the property? A simply formulae is:

(Rental Income - Expenses) / Required Returns


Eg. Suppose a property is able to fetch $2,500 rental per month (thus $30,000 p.a), and expenses is $500 per month (thus $6,000 p.a), and you desire a return of 5% p.a, then the value of the property would be:

(30,000 - 6,000) / 0.05 = $480,000


Expenses

These are some expenses that one should factor in:

1. Property Tax
2. Insurance
3. Repairs and Maintenance

What about Capital Appreciation?

Yes, there might be capital appreciation. However, it is not easy to determine the upside. You can project growth in the rental income, but you will be taking on this upside risk.

Also, our calculation did not factor in months where there are no rental (vacancy rate), as well as we are projecting the rental income as perpectual (and not 20 years or some other fix time duration).

As such, the calculations offered would be a good trade-off for potential capital appreciation.


Of course, if you are a speculator (or a fanciful so-called invesculator), then you probably won't be interested in all these calculations, as you are feeding off sentiments.