Category Archives: YZ-BANKS

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DBS – shocks and stress in holding stocks

Today marks the 10th anniversary when Lehman Brothers fell into bankruptcy on 15 September 2008. Despite the on-going tariff war between the US and China, there is a general sea of calmness in the major stock exchanges all over the world.  Back then, scene was very different. For several weeks before 15 September and several months after that, the front few pages of our daily newspapers were full of bad news.

Lehman Brother’s downfall also pulled along with it several big banks and financial institutions. AIG, Citigroup, JPMorgan Chase, Bank of America, Fannie Mae & Freddie Mac were all at risks, and were awaiting government bailout. With the crisis hitting the big financial institutions in the world’s largest economy at that time, it is almost certain that small and open economies, like Singapore, was going to feel the onslaught as well. The STI fell from the high at close of 3,875.77 made on 11 October 2007 to 2,486.55 on 15 September 2008, retreating 35.8%. It did not stop there. As bad news, continued to flush all over the news media, the STI fell further. DBS, a good proxy of the Singapore economy, and a heavy weight on the STI certainly cannot escape from this avalanche. Its share price fell from more than $20 to less than $10 by the end December 2008, retreating more than 50%. Everywhere is fear, and we did not know which blue-chip stock, in particular which financial stock, was going to go under. Fund managers were all selling as redemptions picked up speed.

Perhaps, the stubborn side of me helped. I decided to swim against this tide, buy a few shares, close my eyes, close my ears, go for a long haul, do not sell irrespective of whatever happened, and see how it would turn out after 10 years. In the worst-case situation, I would lose some savings. If I have been wanting to own DBS, this would have been a good opportunity. In a financial crisis of such a scale, huge wealth is transferred one person’s pocket to another’s pocket. Debtors will be punished, creditors will be rewarded. Spenders will become poor, and savers will feel rich. Cash is king. However, cash is still only cash if it remains in the bank. So, this should be the time to put our cash into good use. Splurge and buy up assets that had never been put on such discounts, was the key.

A few weeks after purchasing the stock, came the next bombshell. DBS decided to raise rights, 1 for 2 shares, with a whopping 45% discount at $5.42 based on the last day trading price at $9.85. It literally forced existing shareholders to take up the rights. So, no choice, I dipped further into my pocket to pick up the rights. (I remember, I tried to buy extra rights, but I believe I only managed to get a few shares to round off the lots due to over subscription of the rights.)

In the midst of such a crisis and with a much bigger market float after the rights issue, the share price continued to fall. In fact, the share price went even below $7. It certainly, took some grits and guts to continue to hold the shares. Even at $7, it was still a long way to fall if it was really going to be very bad. My intuition impressed upon me that if DBS were to fail at that time, we would all be in real serious trouble. Our property price would plunge, our car value would be decimated and our Singapore dollars would be very unstable in the forex market. So, whether we are on shares, on property or on cash, it was not going to matter. And, with the US dollars also plunging at that time, the only shelter is probably gold. After all, it was only 10 years ago then that DBS gobbled up POSB. In the minds of those people on the street, POSB was still the people’s bank. It is unlikely that it would be allowed to fail. The epicenter of this financial crisis was in the US. We are only feeling the effects of this financial tsunami. The question was how low could DBS touch, and not whether it would fail. It turned up well, and the fear was quite short-lived. The stock came up back again after March 2009, when STI temporarily went below 1,500.

Was it plain sailing after that? Not quite. I should ask, were there anything along the way to de-rail holding the stock? Certainly yes. When I purchased the stocks, my objective was to go long, and very long and to disregard the share price. So, the only ‘financial benefit’ was the dividend from the stock. At that time, this ‘giam-siap’ (stingy) bank, gave only $0.60 per share as dividend.  When a reliable source, told me that the bond coupon rate of Swiber was at 7%, I felt stupid again. If we invest in the bond at the cost of $250k, the yearly coupon would have been $17,500. A back-of-envelope calculations of the equivalent amount, would have been about 15,000 DBS shares at the prevailing price of between $16.50 and $17.00.  For 15,000 DBS shares, the dividend would only be $9,000. And this stark difference would carry on yearly, for probably 4-5 years, until the bond matured. If one were to chase for the last dollar, it would make sense to sell DBS shares and buy Swiber. So, would it make sense to sell off the shares and buy bond instead? Nobody knows what was going to happen. But, I do believe when the bond yields were high at that time, many people actually switched out of equities and buy bonds as well as other high yield instruments. It was lucky. I chose to remain in equities. The reason was that there was literally no secondary market. If we really wanted to sell, nobody was going to buy from our hands, unless we depress our price significantly. Precisely, at that time, due to liquidity, the corporate bond of Genting was trading at a discount, while the perpetual bonds were trading at a premium. So, if we want to get into it, the only choice was to hold corporate bonds to maturity. It turned out that the decision was right. Swiber defaulted and remain suspended today.  And, DBS was no longer a ‘giap-siap’ bank as it used to be. It doubled its dividend.  And, right now the yield based on the average purchased price would have enjoyed an even higher yield compared to Swiber or the any REITs. In fact, this stock would have become an equity-bond situation mentioned in the book “Warren Buffet and the Interpretation of Financial Statements”, by Mary Buffet and David Clark, 2008. It left me scratching my head what was the term ‘equity-bond’ really mean at that time when I was reading that book. Now, I understand. In a few words, it means to buy an equity, let the share price move up to its intrinsic value. As the dividend starts to move up back-on-the-heels of the equity price, we would have, in effect, enjoyed the yields of bonds.

Then again, were there any more scares along the way? Certainly yes. When China suddenly devalued the RMB in 2016, it was envisaged that China was not doing well on the economic front. That again pushed down the STI. In particular, the bank stocks were hit. All the three banks stocks were trading about 10% below book value. DBS, once again, fell below $14 for the first time in the few years. It had been languishing around $16-$17 per share almost throughout the year 2016. Only in 2017 did DBS share price climb up slowly and steadily, following of several quarters of good financial results. With the announcement of its new dividend benchmark, it has arbitrarily created a floor for the share price. If the bank continues maintain its dividend payout of $1.20 per share, it should help maintain the share price north of $24 per share, giving a yield of about close to 5% per share.

It has come a long way, and will there be more volatility going forward. Certainly yes, the tariff issues between the US and China is still yet to be resolved. Also, for so many years, the interest rates all over the world have been held extremely low. Debts were now at their historical highs once again. If FED were to increase interest rates aggressively, I would not be surprise that another crisis could erupt, maybe, this time, the epicenter is nearer to us. Then again, DBS share price can get hit again.

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the mentioned securities or the indices or ETFs or unit trusts related to it.

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Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Reading too much into news & Wall Street movement can derail our financial plan

Very often we try to check the Wall Street movement and the futures to have an idea of what is likely to happen in the local stock market at the start of the trading day. After all, the Wall Street houses a few largest exchanges in the world. Most of us see this totally out-of-phase time difference as an important leading indicator to position our trades. Big falls are often discussed extensively with a lot of anxiety and anticipation of how low the STI can retreat in response to those falls. Some of us may even be tempted to ‘sell into strength’ at the start of the trading session.

Actually, there were times the STI did not fall in tandem with the Dow Jones or NASDAQ. Just over the last weekend, many were anticipating that the STI would be in for a big fall when the Dow Jones sank 572.46 points from the close of 24,505.22 on their Thursday to 23,932.76 at close on their Friday. But, the STI actually moved up by 7.48 points from the close of 3,442.5 on Friday, 6 April 2018 to 3,449.8.98 at close on Monday, 9 April 2018.

Then on Tuesday, 10 April when President Donald Trump brought out the possibility of aerial strike in Syria, the Dow Jones sank 218.55 points, but the following day, STI advanced 13.38 points. Despite those devastating news, the STI actually advanced close to 100 points (or close to 3%) for the week. For the same period, the Dow Jones also advanced 427.38 points from 23,932.76 to 24,360.14 and the NASDAQ advanced 191.54 points from 6,915.1099 to 7,106.6499. Perhaps, there may be some kind of co-relationship between Wall Street and STI over time, but it does not mean that the STI move in exact lock-step with the Wall Street movement.

Perhaps, those who try to time the sell are not really selling off their stocks for good. It is likely that they wanted to take advantage of the steep fall in the Wall Street to sell and hope to buy them all back when the share prices tank significantly. This could be a wise thing to do if the Wall Street and the STI have perfect correlation on day-to-day basis, but we often find ourselves caught in the situation if our timing is incorrect.

Let us look at transaction cost to assess if the risk is worth taking. Take OCBC for example. Assuming if we were to sell off 1000 shares at the opening bell at $12.77 on Monday, 9 April, and let’s say we were lucky enough to buy back the same stock at the lowest share price of the day at $12.93 on Friday, 13 April, it would still be a loss of about $248 dollars. Even using a priority banking nominee account on Standard Chartered trading platform which is supposedly the lowest brokerage, it still set us back by $220.50. Apart from the trading loss, there is also an end-of-FY dividend distribution of $190 that sellers are likely to miss out given that the ex-dividend date is around the corner. Without considering the loss of dividend, we have to wait till the stock price drop to $12.65 and $12.71 respectively (or a drop of 12 cents and 9 cents respectively) to buy back in order to just break even. With the dividend loss thrown in, the purchase price would have to go lower by a further 19 cents before we can break even. Given that that ex-dividend is drawing near, it is unlikely that the share price retreats significantly for us to cover the transaction cost, trading losses and the loss of dividend. So, the dividend is likely be lost just because of the little folly unless something significantly bad happens from now till the ex-dividend date. Perhaps if investors lost their patience, they may even go ahead to buy back the shares at a higher price. So instead of benefiting in stock investments by simply holding them, we may lose out in terms of the brokerage and all the additional costs in selling and buying them back. Of course, one may argue that the stock price is likely to drop when it goes ex-dividend, but it is still possible that the drop is less than the dividend amount or even creeps up after the ex-dividend. So why leave our fate to chance?

With so many news from many major economies happening every day, it would certainly ruin our financial plans in the long run if we keep reacting to the stock market movements. Sometimes just simply doing nothing is the best strategy of all.

Afternote – Just hours ago, US together with its allies, France and UK, attacked Syria over the alleged use of chemical weapons. Care to make a guess of the STI movement for this coming Monday?

Disclaimer – The above arguments are the personal opinions of the writer. It is not a recommendation to buy or sell the mentioned securities, the indices or any ETFs or unit trusts related to the mentioned indices. 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

DBS – The pleasant surprise

Abstract – Two years ago, the sudden devaluation of the Chinese yuan RMB caused DBS share price to fall below its book value. Since then, DBS Holdings share price has been on the rise. In a similar fashion, the share price of OCBC and UOB also fell to below their respective book value. For the past two years, the share prices of all the three banks were rising at unprecedented pace. As of 23 Feb 2018, the share prices of DBS, OCBC and UOB were respectively at $29.59, $13.37 and $28.05 respectively.

It came as a big surprise to many that DBS announced a very generous dividend distribution policy following their internal assessment that they have been more than fulfilled the Basel reform requirements. Historically DBS has never been this generous and their dividend distribution to share price ratio has almost always been lagging behind OCBC. Even during times when they offer scrip dividends, their discount has always been lower than that of OCBC. As their share price advanced, the number of scrip dividends that can be converted from the dividends gets smaller, and it became extremely daunting for people who has been targeting to get, for instance, 500 shares for every year of dividend declared. In simple arithmetic, by the time the share price hit about $20, we need to have at least 15,152 DBS shares before one can get 500 shares of scrip dividends assuming that no discount was given for taking scrip dividends. As the share price goes upwards, it is almost an impossible task as the horses are running well ahead of the chariot.

But that all changed overnight as DBS suddenly moved up the dividend generously from the expected final dividend of 33 cents for FY 2017 dividend to 60 cents and topped it up with a special dividend of 50 cents. In addition, it further announced that the dividend going forward to be marked up to $1.20. This means that we should generally expect the dividend pay out to be $1.20 per share for 2018 and, perhaps, even for the next few years. The whole dividend equation changed overnight. What that has been a more and more distant dream of getting 500 shares for each yearly dividend distribution became an instant possibility overnight. For example, in the above case, we do not need 15152 shares for have 500 shares of declared dividend. Instead, we need to have only 8333 DBS shares to get an equivalent of 500 DBS shares in declared dividend. Fortunately, or perhaps unfortunately, depending on whether one owns the shares or still wanting to buy the shares, the share price never look back. It has been gradually rising two weeks ago from $25.36 on 7 February, the closing price on the day before the results announcement, to $29.59 as of yesterday. This represents a rise of more than $4 or about 16.7% rise within a matter of two weeks, literally unperturbed by the Chinese new year holidays in between. With the newly declared dividend for at least in the near future, it actually helps provide a ‘floor’ share price for the stock.  (For those who wish to have a better idea of the valuation may wish to refer to my on-line course on the investingnote.com platform – Value Investing – The Essential Guide) For example, the share price of $24 would now have been considered a steal when it was said to be ‘extremely expensive’ even at $20/- just twelve months ago.

Apart from the positive effect on its share price, the newly declared dividend distribution by DBS has other pulling effects too. It turned on the pressure for the other two banks to up their dividends going forward as well. In fact, in the latest results announcement for FY2017, both OCBC and UOB have already declared a higher dividend whether in the form of the final or special dividends. As we all know, bank performances tend to move in tandem with each other. So, with the more generous declaration for DBS, it is also likely that the heat for OCBC and UOB be turned on to bring up their dividends as well. Even if that do not happen in the near future, the current perception of a higher dividend declaration would help push up their share prices. Adding to this tail-wind is the expectation of higher net interest margin in the coming months. That means the shareholders of the all the banks would ‘huat’ (prosperous) in the light of this pleasant announcement.

Disclaimer – The above arguments are the personal opinion of the writer. It is not a recommendation to buy or sell the mentioned securities.  

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Walking away from a corporate bond deal

I came across an article on the newspaper yesterday morning that Ezion Holdings will be having a meeting with bondholders this coming Monday to present a debt restructuring plan. It reminded me that corporate and perpetual bonds were selling like hot cakes 4-5 years ago offering coupons between 5-7%. I had a chance to meet a relationship manager of a bank who was offering Swiber bonds at 7% at that time. A quick and dirty at-the-back of envelope calculation showed that the annual coupons would be a whopping amount of $17,500. Compare it with a dividend-paying stock like DBS, the capital of $250,000 to pay for a bond would have bought about 16,000 DBS shares around that time when it was trading at $16 per share. This would translate to an annual dividend of only $9,600. It’s a stark difference of $7,900 and this would recur yearly till the bond matures. This big difference in the yield could have tilted the balance to attract many investors into buying bonds than to invest in equities. Even I was salivated after making the comparison, but my sanity got better of me. There were a few things that made me feel uncomfortable about corporate bonds.

1.       Corporate bonds were extremely illiquid. Certainly, when the bond coupon is high with a relatively short maturity period, potential bond-holders would want to keep them till maturity. My guess was that most of the potential bond-holders were former property owners who had sold off their properties and had parked the money in the bank. Perhaps illiquidity was not really an issue to them. After all, properties are also illiquid, and they may take months to sell off. Perhaps, many people have overlooked the fact that a property could hold value better than many other types of assets. Even when the price is no good at that time, there would always be a next opportunity to sell some time in future. However, when a company is in distress, the bond value can fall very fast once the bad news goes public. The maturity date may be a further inhibition because potential buyers could calculate the number of expected coupons to maturity. On the buyer side, my inference was that there were not likely many too. Corporate bonds are mainly opened to the high net worth individuals (HNWI) and are not marketed to the mass market. That gave me some inkling that during the times of need, the sellers may have to depress the price significantly in order to attract a buyer. It is unlike a unit trust, whereby there is always a ready counter-party such as an asset management company or the bank, to buy over the financial product at the net asset value. 

2.       The second thought I had was – if the coupon offered was so good, then why the banks were not taking the first bite on the cherries. In all likelihood, the banks have made loans to these companies to the hilt and that all the company’s assets have already been pledged. This meant that bondholders had no recourse when things go wrong. How much could a company cough out to pay bondholders when there were no unencumbered assets to sell? Even secured lenders like the banks could be affected when the pledged assets could only fetch a fraction of their book value during fire-sales.

3.       Then there was another mind-boggling question. Why was the company prepared to pay bondholders at 7% when the banks were paying depositors less than one percent for their deposits? Bond issuers are not charity organizations to dangle a 6% difference in interest just to attract investors to buy their bonds. They probably could have made do with 3-4%.     

4.       Next is a personal finance question. Most of the target customers were probably HNWI who had sold their properties and parked their deposits in the banks awaiting the next investing opportunity. Or perhaps, they are business owners who had earned enough and parked their money in the bank. For a person, who was not born with a silver spoon or made from property sales and have to work hard to earn every single dollar, it would be difficult to part with a quarter of a million just for a single investment. Frankly, we do not have many quarters-of-a-million to spare to make sufficient diversifications for our portfolio. This would end up with a lob-sided risk concentration. It is really not a way to create a defensive portfolio.

5.       When I inquired about the effect on the company if the oil price tumbled, I did not seem to get the comfort that the RM was able to answer me adequately. Of course, at that time, I did not expect the oil price to tank so fast and so drastically from more than $100 per barrel to less than $30 in about a year. It was a naïve question as a time-filler during the conversation, but in hindsight, should have been a pertinent question to ask.

All these thoughts made me think twice about investing in bonds. Given that I still need bonds to beef up my portfolio, I decided that perpetual bond was probably the way to go. While there is no maturity date for perpetual bonds, without the $250k requirement would help me able to apportion out the amount to buy several perpetual bonds or a mixture of perpetual bonds and stocks. After all, there were several perpetual bonds on offer around that time. Genting perpetual bond was one of them. The bonds were offered in two different tranches first to institutional investors and then to retail investors one month later.  The coupon rate of 5.125% may not be as attractive, but casino operation is a cash business and it should be less risky compared to an engineering project or service company which is purely dependent on the oil price and the up-stream oil payers.

 

It has been well and good now that things have fall in place. DBS shares price have appreciated by 25% since then. Also now that Genting has decided to redeem both the institutional perpetual bonds and retail perpetual bonds by September and October 2017 respectively.

On the other hand, many issues related to corporate bonds, especially those related to the offshore and marine sectors, have still not been resolved. To date, most of the bondholders were forced to take deep haircuts. When there is no money on the table, it is likely that all the bondholders and even shareholders may be forced to swallow some bitter pills. As I know, so far two companies namely, Nam Cheong and Ausgroup have proposed to convert the bonds to equities. Perhaps, Ezion would also do likewise in the coming meeting.       

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Striking the football with two legs, not one

Several days ago, The Straits Times published an article entitled “Singapore stocks pay best dividends across Asia”. Indeed it is true. Even with the current market run-up, many blue chips companies have been paying a nominal dividend of about 3-4% at today’s market price. Should one had bothered to explore further and bought into an undervalue stock some time ago, the return could have been much higher offering both capital gains and good dividends such that one would not even bother to sell them. A lot of these shares could even displace high-yield instruments like REITs and perpetual bonds that offer a yield of around 5%-6% on average. While REITs and perpetual bonds offer comparatively good yields for investors, they do not have much buffer in terms of liquidity. REITs, for example, have to distribute 90% of their income to avoid the corporate tax. When there is a credit crunch or when there is a need for funds, they either have to sell off the properties or to raise funds by issuing rights.

 

As pointed out in the last post, many investors got into stocks were partly because the interest offered by banks had been too low for too long. So, buying into REITs and perpetual bonds appeared to be no-brainer due to their high payout. Hopefully somewhere in the future, they are able to recover their investments through the dividends they received…..the higher the better. (See Figure 1) The setback is that when the interest rates start to perk up, these investments are likely to be beaten down more drastically. This could result in capital loss, thus offsetting the higher dividend payout.

  

Stocks tend to have more leeway when comes to dividend distribution. Usually the payout is in the region of around 35-60%, depending on the discretion of the directors. There is usually more room for paying out higher dividends when the company has no urgent need for funds. They could even tap into their cash hoard should there be a need for expansion. In fact, I was a little surprise that 15-18 months ago, many blue-chips counters at their lows against the declared dividends in the previous year. For example, DBS was trading between $13 and $15 per share, resulting in a dividend yield of more than 4% based on the declared dividend of $0.60 per share in the previous year. By the same token, OCBC was trading between $8 and $8.50 per share when the declared dividends in the previous few years had been $0.36 per share. The dividend yield would have been more than 4.2%. The gap between the blue-chips had been too close, and it would be either that blue-chip trading price to increase or REITs price to fall going forward. Today, the share price of DBS and OCBC is around $19 and $9.60, and still offering a relatively good yield of 3.15% and 3.75% respectively.

 

For both capital appreciation and dividends, I never forget about how this stock darling – Cerebos Pacific. It is a company that sells the Brands of Chicken. The stock is relatively illiquid with the main shareholder being the parent company Suntory Ltd. The free float was only 15%. (Note: it is important to note that holding illiquid stock is not necessary a good thing. If we wish to hold illiquid stock, our mindset should be to hold as long as it needs.) My purchase price averaged around $2.50 per share by 2003 after consolidation. The dividends had been 9 cents standard dividend and 16 cents special dividend. That went on for a total of 9 years from 2003 to 2012, providing a yield of 10% over an uninterrupted period of 9 years. The special dividend was given every year so much so that shareholders think that the 16 cents special dividend was considered to be a new normal. Needless to say, by the 6-7 years down the road, existing shareholders were collecting dividends and laughing all the way to the bank. At the same time, the share price has been creeping upwards. All these happened in the midst of the global financial crisis in 2008/2009 and also when the company was setting up a new plant in Thailand also around that time. By the time, Suntory took the company private, it had already paid out 9 nominal and 9 special dividends over the 9 years. That would have enough to cover 90% of the initial investment. The buyout price in 2012 was $6.60 per share, offering yet another 6-digit return with little money down. It was like a 10-year bond paying a coupon of 10% and paying the 260% of the capital invested. David Clark in the book “Warren Buffet and the interpretation of financial statements” would have called this equity-bond. It is a form of equity, but it works like a bond from investors’ perspective.

Happy investing!   

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

The local banks – DBS, OCBC and UOB

The local banks have just released their financial results for the financial year 2016. All the three banks suffered a decrease in profit for FY 2016 compare with FY 2015. OCBC seemed to have it worst, while UOB did comparatively well. Before the results were released, it was widely expected that the banks would suffer a decrease in profit in view of the flagging economy, and most importantly their exposure to the offshore and marine industries that had turned sharply for the worst following the sharp decline in the crude oil price last year. For almost whole of last year 2016, we have seen several major defaults and major loan re-structuring exercises in this sector. Surely, in such a scenario, it would be a miracle if the banks can go through the year unscathed.

One interesting thing to note, however, is the impairment charges that the banks set aside in FY 2016. OCBC and DBS increased the impairment charges by 48.8% and 93.0% respectively, while UOB decreased it by 11.6%. One deduction, I can make is that UOB felt that it had already accounted for all the problem loans, and there was no longer a need to make further provisions. Meanwhile, OCBC and DBS were still making provisions for loans that might deteriorate in time to come. One possibility is that they are pre-empting the possibility of Ezra that can go in the path of Swiber or Swissco. Due to this significant impairment charge, the EPS of OCBC and DBS were marked down by 13.7% and 3.0%. The drop in the EPS of UOB is mainly due to the higher operating costs for the year, and is a different nature from the other two.

For the net interest margin (NIM), the fate is entirely different for all the three banks. OCBC’s NIM remains unchanged at 1.67%, UOB decreased from 1.77% to 1.71%, while DBS increased from 1.77% to an uninspiring 1.80%.

On the whole, the business risk for the banking sector has increased. Asset qualities were decreasing, and decreasing at a very fast rate. In the meantime, the share price for the banks has been on the uptrend for several months. All this translate to the fact that the ‘margin of safety’ continues to get thinner as the days passed.          

 To know more, register at on bpwlc.usefedora.com. Registration is free. Paid students who are attending the stocks review master program on 11th March 2017 are entitled free access for the online courses.  Passwords will be sent to your emails to enable your access to the modules.  Courses are other sectors are also available.      

 Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

If we missed the best stock upsides

Today marks a little more than one month after Donald Trump won the US election. When he first won the election, the market at first reacted negatively, followed by a strong rally and then tapered off in the last two days. The banking stocks, in particular, were the biggest beneficiaries of this rally. DBS has advanced from about $15.20 to a high of $18.32 and then settled at $17.83, an increase of $2.63 or about 17.3%. Similarly Overseas Chinese Banking Corporation (OCBC) had also advanced $0.73 or 8.6% from $8.53 to $9.26. United Overseas Bank (UOB) also showed a significant increase of $2.31 or about 12.4% from $18.59 to $20.90. Of course, if one holds the bank stocks, the return for this month alone is extremely significant.

Despite the rally, many people still asked the same question just a few days ago– DBS bank, can still buy now? Does it mean that these people missed boarding a stationary wagon and is now chasing a moving one? Actually, if we look at the bank stocks, in particular DBS, it has been parking below $16 for many months, right from the beginning of the year or even before. Why do we need to wait for it to move up to chase it? Why can’t we buy it at our own pace and wait for the rising tide to raise our boat?  It appeared logical right now in hindsight, but seemed to be an irrational decision when the share price was oscillating between $15 and $16 per share for a long time. Very often, when a stock or the market rallies, the onset is often the sharpest and this is when the smaller players start to take note. By the time when one start to confirm, double confirm, triple confirm, a significant part of the upside has already been priced in the stock. So by the time retail investors start to buy into the market, perhaps there is only the last 20-30% upside. We always come across a statement to the effect that if we missed the best 10 trading days, our stock performance would just appear ordinary. Worse still, it could even be negative performance despite that the STI moved up significantly. To me, stock market has a place for both big and small players. Big players cannot play like a small player and a small player cannot afford to play like a big player. Big players buy into the market to cause the market rally, but the advantage of small players is to be able to buy into stocks without causing big ripples in the stock market. That’s where we should play to our advantage. Remember that our wealth is not just measured by the amount of money we have in the bank. Our wealth is measure by the sum of our cash, stocks, properties and whatever assets that we possess.  So, there is no need to be in cash all the time. It is important to engage the stock market all the time than to wake up only when the rally has already been well underway.

Happy investing!

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Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Yield hungry? We need to change of our investing paradigm

The much anticipated interest rate hike in December had caused a sharp recent drop in the price of REITs recently. Many REITs are now trading at the 2016 low, retreating generally about 7-10% from its peak level at 2016 high and around 15-20% from their all-time high. During the low interest rate environment like in the past few years, many have seen buying into REITs as a no-brainer investment, with yield of between 5% and 8% of passive income, depending on the type of REITs. With the recent falls, many people see them as opportunities. Whether, these REITs are going to be good investments…well, seriously, I do not know. It is too early to tell. There are actually several other factors apart from the REITs price itself to determine if one is buying into a gem. The income of a REIT can fall drastically because state of economy or a change in the customer mindset, resulting in a drastic fall in the DPU going forward. The REIT manager could also take advantage of the generally depressed property price to add more properties into the REIT portfolio or it could be the REIT has some issue with re-financing such that it has to issue rights at depressed price to get existing unit-holders to support the corporate action. All these could happen with swipe of a pen, to get existing unit-holders to fork out more funds instead of the note-holders getting passive incomes out of the REIT.

In fact, by now many bond-holders or note-holders have experienced rude shocks of bond prices falling off the cliff. Several offshore and marine notes are now trading 35-40 cents on a dollar, erasing two-third of the value. Yes, the note holders had enjoyed 6%-7% in the last one or two good years of coupon distribution, but these returns simply are not able to offset the huge fall in the bond price. Many note-holders are now having legal tussles with the note-issuers. These tussles will take months and even years to resolve with no guarantee that note-holders can get their money back.  After all, it is a situation of a willing buyer and a willing seller when the transaction was made. The promise of high return is bundled together with the risk that the issuer could get into a default.

With the local low interest cycle apparently coming to an end, there came a herd of companies trying to tap into pockets retail investors by issuing notes and perpetual bonds with seemingly high coupon rate ranging between 4.5% and 6% in the first half of the year. These companies are highly indebted. The reality came when Swiber Holdings default its coupon payment in July 2016 and all these bond prices are now trading below the IPO issued prices. Even before the first coupon was issued for all these bonds, the yield has already shot up showing that retail investors are probably paying too much in exchange for the risk assumed. In fact, those that missed the over-subscribed IPOs enjoyed a better yield by buying from the open market. However, the crux of the matter is whether any of these companies will default. It is still too early to know. But we do know that these companies are highly indebted and may get into serious financial trouble when the interest rate perks up.   

 

With the spectre of interest hikes coming up soon, investors are now off-loading interest rate–sensitive financial assets in exchange for safer assets such as bank stocks, which are said to benefit when interest rate rises. After all, the bank stocks just one week ago, were trading either below book value or close to book value. But again, this is just a flight to safety. While the banks delivered fairly good results in this quarter, it is not expected that they would perform extremely well going forward given the state of the economy and their exposure to the offshore and marine sector. But still, over a short span of a few days, the banks shot up between 3.5% and 8%. While I am generally happy with this situation due to the components of my portfolio, the interest rate increase may be a double-edged sword for the banks. It’s not the time to be too aggressive.

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Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

What can we expect from the American election?

Now that the American election is over, and Donald Trump has been announced to be the president-elect. The inauguration is scheduled to be on 20 January 2017. As a biggest economy in the world, we can expect big event changes to have a bearing on the many smaller economies. Certainly, the promises made by Donald Trump during his campaigns would be closely followed, as they may become the new government policies during the term of the new president. Of course, one may argue that these may be promises, and they may not be fulfilled or at most partially fulfilled after looking at the cost-benefits of all these promises. After all, until the fate was sealed on last Thursday, Donald Trump had been an underdog in this neck-to-neck race with Hillary Clinton. To change the odds of winning this election, he might have to resort to populist promises to win votes.

 

However, as investors, we tend to make anticipations of the future to guide us in our buy or sell decisions. So the closest or best clues would be to go along the lines of his background as well as to rely on his promises during the campaigns. As it is, he has been a real estate magnate businessman with zero political back-ground, many would have expected that he would be especially focused on infrastructure developments. These constructions would likely to bring about inflation resulting in FED hiking up interest rates more aggressively. So in all likelihood, our bank interest rates would also perk up in time to come. As it is in the last few days, the local bank stocks such as DBS, OCBC and UOB were holding up relatively well while many local stocks were on a down-trend. In particular, DBS advanced $1.20 or about 8% in the last two days on Thursday and Friday. Conversely, the interest rates sensitive stocks such as bonds, REITs, property counters as well as many debt-laden companies were hit quite badly. Many emerging market currencies are also affected as funds are expected to repatriate back to US in search of higher interest rates. Thus many Asian currencies have also been on the downward trend. In fact, companies, especially the debt-laden ones that borrowed or purchased goods in US dollar are likely to be hardest hit. Consequently, many Indonesian company stock prices fell very hard. They purchased goods in US dollars and sold locally in rupiahs. Stocks like Jardine C&C, which held 50% of Astra shares, had already retreated about 10%. This situation is likely to continue as long as the spectre of interest rate hikes remains in the mind of investors.

 

The other significant factor mentioned in his presidential campaign was pro-American, pro-white policies that point toward protectionism. This means that many economies depending on US for trade will be also affected. These countries include Indonesia, China, Taiwan, Malaysia, South Korea, Philippines, Vietnam and even Singapore. Furthermore, with their respective currencies retreating against the US dollars, it is likely to make things very expensive for these countries. Certainly the respective stock markets are not going to be spared as well. The fear factor should likely continue to weigh on the Asian stock markets in the short term.

 

While the situation looks grim, it is only based on anticipation. The reality may not turn out to be this way after more detailed review of those promises. It could even be that the President may decide to soften his stance on free trades after his inauguration.

 

So, end of the day, it is still important to continue to stick to our long term-plan in building our stock portfolio. The fear factor may even present interesting opportunities for us to buy stocks that are beyond our reach during euphoria.      

Good luck!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Buy-and-hold strategy does not mean buy and don’t sell

For those who may not know, buy and hold strategy is a proven strategy and is used by long-term investors in hope to benefit from the capital appreciation of the component stocks in a portfolio. It is often associated with Warren Buffet (WB)’s style of investing, especially when he mentioned that the holding period for the Berkshire Hathaway portfolio is FOREVER. It is probably a sweeping statement, but many people had taken it to the extreme that when we buy a stock, we should not sell it. Of course, if we look at the ST index from its all-time high and compare it with today closing of 2869.74 as of 30 September 2016, one would have thought that by adopting the buy and hold strategy, one would have lost more than 25%. But does it really mean that buy-and hold strategy does not work anymore? Not quite. Otherwise, why would fund houses and insurance companies still continue to adopt such a strategy? Remember, these are big fund managers and when they hold a stock, they do not just own 2,000 shares. They probably own 200,000 shares or even 2,000,000 shares even if it means $20 per share. For the fact that they continue to use this strategy means that it is still relevant even with the advent of high-frequency trading computers. In my opinion, if it works for big funds, it should also work for individuals as well. And because big fund managers hold large quantity of stocks, we simply cannot expect them to empty their portfolio of, say 200,000 of OCBC in one day, and then buying it all back on another day on a short-term basis. In fact, most of the time, their portfolios do not change at all. In the way, they are practicing buy-and hold strategies. These fund managers have to think long-term in order to pay the clients and retirees, who are long-term stake-holders. The key here is to think long-term. (Sometimes, I am quite bemused by people who mentioned “Aiyo, must think long-term ah!”. Thinking long term does not mean that we do not sell a stock at all!)

 

Given the relevance of buy and hold strategies for large funds, can small retails players like us mimic the actions of these fund managers to make money? Certainly yes. The fact that we do not hold too many lots per stock, it is sometime easier for us to manoeuvre better than the fund managers.

 

Allow me to go back into my history. After falling and recovering from the bad experience in the Asian Financial Crisis (AFC). (Click here for the detailed history), my aim was to hold this great stock called DBS. On my record, I purchased 1000 shares at $14.80 in February 2004. (In fact, it was less than 10% below yesterday’s closing at $15.39 considering that they are more than 12 years apart.) My long term plan was to have at least 10,000 shares in 10 years. Based on this objective, my shortfall was 14,000 shares. The period between 2004 and 2007 was a fantastic time for stocks because the ST Index advanced all the way from below 2000 to its all-time high of 3,875.55 in October 2007. The global economy was doing so well that one very significant local political personnel was said to be saying “All the pistons are working at full force”, pointing to the perfect functioning of US, Europe and China. (Of course, we know in hindsight that Global Financial Crisis (GFC) came one year later and everything got imploded.) Needless to say, in between 2004 and 2007, if one were on the buy side and sold 1-2 months down the road, or simply buy and hold all the way, he should be able to make money. This is especially true for DBS, which is a good proxy to the stock market. Even though I have a long-term plan to continue to accumulate DBS in the long run, the speed of price advancement was so rapid that each time when I bought it, it became attractive to sell it off some months down the road. In fact, it was prudent to take money off the table because rapid advancements are very often met by rapid pull-backs. In such a situation, I could even say that I was trading, though not exactly short-term trading because each time my holding period was a few months. The share price of DBS in the period between 2004 and 2007 advanced from $14.80 when I bought it to a peak of $25.00. By the end of 2007, however, my shareholding in DBS did not increase at all because I had sold just as much as I had bought it. It was probably with some luck that the Global Financial Crisis (GFC) came along that I was able to pick up a lot more shares and subscribe more rights at $5.42. While I did lost some money on paper on the 1000 shares that I kept, it had been more than offset by the capital gains in the ‘trading’ that I made off from the DBS shares that I had bought and sold along the way. Furthermore, the GFC was probably a once in a lifetime chance to accumulate DBS. It came glistening right in front of my eyes. Such opportunities should not be missed at all cost. This was even truer for someone who had been bashed badly during the Asian Financial Crisis (AFC), and only to see opportunities slipped through the fingers from a low of 805 on the ST Index to more than 2000 within a matter of 15 months or so. (Click here to view my background).

 

Of course, one may argue why I did not even sell off my 1000 shares that I had been holding. The reason is simply that I am not GOD. (There is a Cantonese saying – 早知就没黑衣) I can’t predict the future. If I could predict the future, I would have even sold my 1000 shares and bought it back at the peak of the crisis. My long term plan, however, was clear that I needed to accumulate DBS shares in the long run, and the GFC provided me an opportunity to do so.

 

Then another opportunity came knocking again. After the GFC, DBS advanced again past $20 by late December 2014. Having come up from a relatively low base during the GFC, I managed to sell some shares at $18.50 in October 2014. At this share price, it would have translated to more than the market capitalisation of DBS before the GFC when it was at $25.00. (The reason was that DBS raised rights of 1-for-2 shares during the GFC.) I would have thought that the share price would not go beyond that point, but the general optimism pushed the share price further up to past $20. I sold again at $20.20 in December 2014. It finally reached $20.60 in early 2015. Of course, the crash in the oil price and a series of ‘scares’ in the last 18 months or so, made the share price of DBS came tumbling down again to less than $16, which now becomes a super strong resistance level. When it reached a level of around $13/$14, it allowed me to buy back those quantities and even more than I had sold.    

 

In a similar way, I have been reducing my SPH shares for the past 1-2 years because I felt that the fundamentals of SPH are weakening. It is not because of bad management or SPH was making wrong investments. In fact, I believe that the management has been quite good, peppering shareholders with good dividends. That was why the share price has been quite well-cushioned enabling me to sell a bulk of my stocks off at above $4.00, except for the last 2,000 shares which I sold recently.  The fact is that media and publishing business is under a huge threat from the internet, which is highly accessible locally. The threat is beyond their control and that is why the profit from the print business is dwindling. The only thing that probably helped them along is the SPH REIT, which probably had already hit a plateau. Of course, SPH is not sleeping and is on a look out for fantastic investments that may pop out along the way, but until today, it is still not there yet. Of course, when the price becomes attractive again, Perhaps, I may be back in again.  

So in summary, buy-and-hold does not mean buy and don’t sell. Sometime, it is prudent to sell and take money off the table even if the stock has not reached its full potential. Very often, there is a need for stocks to digest a bit before they can climb further. In fact, as it is DBS is now hovering for the past six months or so below $16. If I had not sold anything and stood only on the buy side from 2004 till now, I probably would have made only from my dividends and not too much from the capital gains. It is the long-term strategy and, of course, some luck that counts. It does not mean buy and don’t sell.

Good Luck!

 

Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned here-in. These are past performances. They do not reflect future performances. 

 

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.