Monday, March 03, 2008

Psychology of the Markets...

As a survivor of the Asian Crisis, I have a tendency to believe that any scenario no matter how extreme is a chance of happening. I don't think I'll be able to stomach anything that remotely resemble what happened during the crisis and have reduced my risk exposure considerably in Nov/Dec last year. While something that bad is unlikely, it is a case of preparing for the worst and hoping for the best so that I won't be cleaning table at 80 to prolong my life. The market these days are like a like a movie except you don't know whether you're are watching a Disney movie where the characters get into alot of trouble and find a way to get out OR a Friday-the-13th horror movie where everyone gets killed.

So far the movie has just started but the signs point to the start of a horror movie . Poor ISM numbers, bad inflation numbers, poor unemployment numbers, and an overstretched consumer shows everything in USA economy has turned bad in one quarter. This is like the first part of a horror movie where the audience is given clues that there is a murderous monster lurking around. Then we are introduced to our protagonist, a certain Dr. Ben - first behind the curve suspicious but not convinced ....a few dead bodies later, he looks alot more energetic welding his weapon ready to strike the elusive murderous monster......

I really don't know how this movie will turn out but for the sake of the $20B worth of our tax payer's money invested in potential murder victims, I hope Dr. Ben turn out to be a real hero at the end of the movie.

It is found that many of the most shocking horror movies are made during bear markets and terrible recessions and upbeat happy movies are produced during bull markets.





This year's winner of the Best Picture Oscar award is "No Country for Old Men" a movie with an inconclusive abrupt ending - maybe it is saying something about how this year will end.
When Peter Shiller (of irrational exuberance fame) was asked what he thought will happen to the economy given the housing mess, he said he doesn't know and alot depends on how people behave. Shiller should know he did his Phd in behaviorial economics.

The precipitous fall in the DOW last Friday of 317pts lead me again to relook at the valuations of various companies listed on the SGX. P/E ratios of single digits are common place after the recent falls. While the situation looks far from ideal when has any buying opportunity on the stock market ever "looked good". Be it Black Monday, one day after 911 - the situation is always horrifying enough for people to expect the worse ahead and things to become bleaker. A horror that becomes more horrible.

While I'm no fortune teller and my head tells me things are as uncertain as ever and I may yet turn into the next murder victim in this horror movie, I remember a fat old man from Omaha who is pretty good at investing and he said this:

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” - Buffet.
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I asked myself if others are fearful today (about stocks not that Mas Selemat chap) and the answer is YES. Today I feel a bit greedy and I'm buying the following:
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1. REITs. I never liked them. In fact I hated them when they yielded 5% and investors snapped them up like hot cakes. Now they have fallen and yields have risen to above 10%, nobody seems to want them. I took a quick look and many are lock on to long term leases many in commercial property - if you're familiar with the situation you will know that there is an office shortage regardless of recession in Singapore for the next few years.
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2. Stocks with P/E ratios of rough 5 and dividend yield of 5% or greater. Diversify among these.
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I'm lazy. I keep things simple. No complicated charts, in depth analysis. Note that I'm not putting everything in and there is a real danger things will get worse in the comng months. ....that is what everyone seems to be thinking....there is real and intense fear.

18 comments:

Anonymous said...

Guess Which is the Smartest Gov in the World Unveiled by the Subprime Crisis?

One stock market analyst observes that the current stock market volatility is caused by the lack of mutual trust amongst big financial institutions in the West. They are not lending to each other, not least to troubled banks.

Reason: The subprime issue had been simmering in the background for many years and every bank was playing the same game, pretending all was well because they were raking in big profits dealing in the credit markets - the mortgages and derivatives like CDOs, whatever - that even the rating agencies of their govs could not understand.

And so these corporations do not trust each other now, each know the other is as much a crook as itself.

This looks like a reasonable argument given that international banks are still sending invitations to local businesses to take up collateral-free loans of up to $200,000.

They are obviously flush with money but just not about to help the failing ones except for our GIC and Temasek.

These 2 PAP institutions are obviously the smartest nvestors in the world, boasting that they invest for the long-term ... like may be in a 50 years from now, they will start making some money, never mind that in short and mid terms they are losing big like this :

::: GIC invested USD6.9b in Citibank in Jan 2008
Now only worth 82% .

::: Temasek invested USD2b (S$3b) in Barclays in July 2007 (with further promise to invest another USD2.6b more).
Now worth only 66%.

Now for the Intl Award for the Smartest Investors: GIC and Temasek

Clap, clap, clap.

Anonymous said...

Lee Kuan Yew once said : "I can beat the opposition hands down."

Now he can also say : "I beat other governments hands down in idiotic investments".

LuckySingaporean said...

Today I heard they are putting Buffett on CNBC tonight. I wonder if he will exude his wisdom on those banks again -"they are always finding new ways to loses money as if the old ones aren't good enough".

I have an idea for the GIC & Temasek, instead of hiring so many elites to take care of our money. They can make do with just 3. In fact 3 people is too many but sometimes they have to take leave and in case someone resign you need 3 people. These 3 people will watch every move of Buffet and simply follow....that will improve our GIC returns by leaps and bounds.

Anonymous said...

Beter stil early retirement for all GIC and Temasek fat cats - LKY, Ho Ching included - and pay the likes of Warren Buffett to invest and look after it and Singaporeans will be assured a far better future than the PAP after 40 years of swaggering idiotic tyranny could ever accomplish with our surpluses and CPF savings.

Anonymous said...

Where can you find commercial space REIT that has yield ~9-10%? From what I can see, those with office space in Singapore offers only ~ 5%.

http://reitdata.blogspot.com/

LuckySingaporean said...

anon,

Thanks for the website. Good summary.

From the table, there are commercial/industry REITs that yield about 9+%. But given rental increase of commercial property it should reach 10% if we don't go into a recession.

For me it is strange, I hear of people bragging about their REITs when they were paying 4.5% but when it fell and yields doubled, they don't seem interested in buying them.

I'm not a big fan of REITs but the yields are attractive and a number are trading below its NAV.

Anonymous said...

Actually, why dun u just post the counters (and levels) that u are buying ... with the usual disclaimers of course.

This will be most helpful to keep your young fans (lower to middle income ... the group most vulnerable to stagflation) solvent thru the crisis.

this might actually give them an option to vote wisely during the next election (whoever they think is better) instead of for the sake of desperately needed growth dividends.

NoName

Anonymous said...

Be careful.....


S'pore Reits, feeling credit squeeze, may merge
SINGAPORE'S once booming real estate investment trusts (Reits) may face a round of mergers to weed out the weak who find it increasingly tough to raise funds and refinance loans because of the global credit crisis.
At least six of Singapore's 20 listed Reits are valued below what their properties are worth, as are many trusts in Japan and Australia, which means expansion is hampered by higher financing costs and investor returns are limited.

Some of the trusts will face higher interest payments when they need to refinance their debt in coming months, leading to lower earnings and distribution to unitholders.

'I would expect consolidation to gather pace in the course of the next 6 to 12 months,' said Mr Tony Darwell, head of Asian equity research at Nomura. 'The cost of debt has risen and it is impacting everyone, especially entities that are highly geared.'

For investors, many of whom are already steering clear of property and other assets that rely on debt financing, the takeover speculation means some Reits such as Macquarie MEAG Prime may get bid up to prices closer to book value.

But others such as Mapletree Logistics Trust could see their shares fall further, due to large amounts of debt on their books.

'Singapore's Reit market is still very young and shouldn't have reached the stage for consolidation, but the situation now is quite conducive (to that),' said Credit Suisse analyst Tricia Song.

Singapore's market for property trusts, Asia's third largest, has grown rapidly since 2002 when the first Reit, CapitaMall Trust , went to market. The industry has since grown to 20 Reits worth US$19 billion (S$26 billion), although that number may shrink as at least two players are up for sale.

Acquisition targets include Reits trading at high yields, at large discounts to book value, or with quality assets that bigger funds could be interested in, Mr Song said.

Industry experts say the first Singapore Reits that may be taken over will be those that have ties to firms or property funds in Australia, Asia's biggest property trust market.

Macquarie MEAG Prime REIT , which owns two large properties on Singapore's Orchard Road shopping belt, said it may sell assets or go private after main shareholder Macquarie received unsolicited offers for its 26 per cent stake.

Allco Commercial Reit, which owns office properties in Singapore and Australia, is being closely watched as its Australian parent, Allco Finance , is trying to sell assets to meet debt repayment deadlines.

'The yield is so high at 9 percent; Allco Reit can't raise capital and their debt is due soon. They need to do something soon,' said a hedge fund manager, who asked not to be identified.

Downgrades
Allco in November dropped plans for a $150 million share sale due to weak markets. In January, Moody's cut its credit rating to Ba1, or junk, from a Baa3 investment grade rating, citing potential problems in refinancing $550 million in short-term debt due in July.

Other Reits downgraded or placed on review for downgrade this year include MMP, Mapletree Logistics Trust and Suntec Reit, on concerns of refinancing risks.

Suntec Reit last week closed a 5-year convertible bond issue worth $250 million at a 4.25 per cent yield to maturity, much higher than its average financing cost of 3.13 per cent as of end-December.

'Credit spreads have widened significantly over the past month. We believe this is likely to place pressure on both the cost and availability of future debt,' Merrill Lynch analyst Melinda Baxter said in a note to clients last week.

Aside from Macquarie and Allco, other Singapore Reits that could be privatised or sold include Cambridge Industrial Trust and MacArthurCook Industrial Reit, which lack a strong parent to block any takeover bid, analysts said.

'There are some independent Reits out there and there could be some M&A activity,' said Mr Mark Ebbinghaus, head of Asian real estate investment banking at UBS. 'I wouldn't say that there is going to be wholesale M&A in the sector.'

Despite the difficulty in raising equity and the need to refinance debt, acquisition talks have helped lift Reit share prices. MMP's share price has rebounded 30 per cent from record lows in January, while Allco is up 26 per cent.

But finding the right buyer could take time.

Tycoon Kwek Leng Beng, who runs Singapore's second-biggest property firm City Developments, declined to confirm talks with Allco or MMP, but said he would only consider buying if the sale includes the Reit manager, which he sees as more profitable.

'We'll be happy to look at it. But if you sell me a Reit without the management company, I say goodbye to you, I'm not interested,' said Mr Kwek, Singapore's fifth-richest man.

Consolidation would leave a sector with fewer, but larger Reits that have greater financial capacity to expand abroad.

This development would follow Australia, whose Reit market expanded from 20 listed trusts in 1994 to 51 in 1999, and has since shrunk to 34 trusts that have three times more assets.

'Singapore is not going to take 40 years to get to where Australia is. The Reit market will mature at a much faster rate, although there is still a lot more scope to grow in total size,' said Nomura's Darwell. -- REUTERS

Anonymous said...

Lucky,

Just my 2-cent worth here on investment:

The current global stock markets situation has been described by investment professionals in a recent investment seminar as neither bear nor bull but volatile.

This seems like an apt description given that stock markets have been fluctuating violently from day to day, triggered by Dow Jones performance.

The time does not seem right to go long-term and heavy stock investment.

Instead of equity, some have gone into commodity which in the past was not open to the ordinary investor. Nowadays funds of the latter kind are available and are found to be quite attractive e.g. 10% growth in less than 2 months.

Historically such commodity stocks also are not correlated or inversely so to equity performance.

Still some equities are attractive - for the time being - like unit trusts on Brazil, Thailand and Taiwan. These have been surging over the few months.

Just that one should not go long-term and big but go short-term and in small tranches, a kind of diversification so to speak.

Under the current circumstances this appears to the better option in stock investment unless one prefers to put the money all into slow-performing but safer bonds.

Anonymous said...

Hi Lucky

Your readers need specifics.
They seems to know the theory but obviously has not actually gone thru a major recession.

NoName

LuckySingaporean said...
This comment has been removed by the author.
LuckySingaporean said...

anons,

I'm not going to name stocks because I only took a quick look at their earnings numbers and a few financial ratios when I bought. I bought a basket to guard against my own stupidity. They are mid to small caps and I'm sure out of the basket there will be 1 or 2 that run into trouble 5 years from now...blue chips don't sell so cheap but you can under diversify and get away with it.

anon 2:28,

Have you noticed stocks are volatile in the very short term and are actually flat when your time reference is 2-3 weeks. We are about where we were 2 weeks ago, or 1 month ago. Usually there is a mathematical relationship between mid-term and short term volatility, this is probably broken. Usually higher short term volatility results in medium term volatility.

Recent history starting about 1 year ago, we see many sharp short term moves. I've been looking at them, I believe it is related to the expansion in short term derivatives trading. These include CFDs, options, futures, and more exotic stuff. These short term moves have a tendency of reversing on themselves and are actually meaningless for those who invest longer term.

Last Friday's 317 pts move was attributed to AIG losses + US recession fears. These 2 pieces of information is already known- Anyone don't know that US is in recession by now?...maybe Bush and we already expect various finance companies to announce writedowns from time to time. But short term traders simply acted on them to pound down the market - it helps that the market had a short term rally before that so the short term players were probably hammering other short term players that have gone long.

All this is just noise and blips. For someone who buy to hold for 2-5 years, it doesn't matter the market goes down for a week then rise for a week etc.

As for picking stocks...My experience is many stocks especially small caps bottom out long before the blue chips because they are dumped first as investors flee. Many will drop 60-70%, some will never recover while others do. I usually buy a basket because I can tell for sure which are the diamonds and which are the stones.

Anonymous said...

U do realise that your "quick look" is 1000 times more indepth than 99% of the investors? what a pity. inept investors like myself could sure use ur sharp analysis.

looks like without your guidiance, your young fans are wondering into the more exotic\attractive world of commodities\emerging markets... hope they get lucky :-)

NoName

Anonymous said...

Bernanke is a scholar of the great depression, he is doing what the Fed fail to do then when the credit market seized up, with the cancerous effect of banks collapsing one after another, savers felt their money isn't secure in any of them. The aftermath is the economy contracting, falling into entrench deflation, exacerbating the monetary policy then, was the gold standard.

One can at least reason why the Fed is taking the stance of allowing a weak dollar to prevail, for the moment, modest rise in inflation, working to reduce the deficit, bolstering US exporter as a way out of this recession.

Academic as he is, I am of the impression he is a better guy to managed this crisis then Greenspan, though maybe he needs a bit more backbone.

LuckySingaporean said...

Poor Bernanke. Hmmm...I wonder if Greenspan timed his departure to give the new Fed chairman a "challenge".

Remember when Greenspan was the new chairman he was greeted with Black Monday. His response was to cut rates...and the market rallied back. Black Monday was a "faster crisis", you almost think the whole world collapse on one day.

This credit crisis is like "death by a thousand cuts"....happening at a time when markets have gone berserk with rampant speculation. $103 oil - can you believe it?! Some people believe the entire financial architecture has to be revamped. I guess we won't be revamping anything until the day it collapses.

As for the weak dollar allowing the US to export its way out, not really happening...manufacturing is down.

Anonymous said...

Not necessary the case...

See:
http://online.wsj.com/mdc/public/page/2_3024-indicate.html
ISm non-manufacturing index shows the contraction has slowed, while the manufacturing index shows a continued growth in production and continued increase in exports.

But how much weight to put on this as a net benefit to the GDP growth to fend of recession? Please consult an good Astrologer

LuckySingaporean said...

anon 7:20am,

Forget the US economic numbers. It is going into recession for sure or already in one. There is no doubt in my mind at all. Like what Buffett said on Monday by all common sense measures US is in recession.

Talking to friends in US there is one bright spot is the IT industry which remaind unaffected and still hiring. The rest of the US economy is in pretty bad shape.

The stock market is not going to get up and start surging. It will have bad days and decent days. When the recession is fully discounted, people will start looking at individual companies.

The market will bump around or even go down as we are in a rough patch. One thing I'm looking at is the US housing stocks, not to buy but to observe and learn. While financial stocks are still making new bottoms in the US, the housing stocks appeared to have formed a bottom in Jan 08 and well off that bottom. It says something about what is going on. The epicenter of this whole mess is the housing slump but the stocks bottomed(?) in Jan and seems to be holding up. Housing got US into this mess, I guess housing will be the one taking them out. It isn't improving but it can't get worse for the home builders...

Anonymous said...

The equity markets are probably overreacting but the picture that hedge funds are painting is pretty scary. Maybe even self-fulfilling?

Sadly the financial world still needs US leadership and the US elections cannot come early enough to kick out Bush and his cronies.

NoName