Sunday, September 27

Genting: Market irrationality on show

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I watched by the sidelines as the market rejoiced at the news of the Genting rights issue. As you might know, Genting proposed a rights issue to raise $1.63 billion and existing shareholders will be given the right to subscribe to a single rights share for every 5 existing Genting shares that they are holding.

Now, in the first place, a rights issue is not good news to me since there are other ways of obtaining capital without penalizing its shareholders. Shareholders will either have their current shareholdings being diluted or they will have to fork out funds to avoid dilution. Besides, it makes no sense for a company to have a rights issue when stock prices are depressed as it will be able to raise a much higher amount of capital during times when stock prices are buoyant without diluting the holdings of its shareholders. Given that interest rates are pretty low now, it makes you wonder why does Genting choose not to raise capital by taking up loans from banks unless the reason is that its financials are too weak to convince the banks to dish out any funds.

I have talked about why a rights issue is deemed to be not good generally. What about the reasons why the market seems to be euphoric over this matter ?

The reasons are pretty easy to find out actually. All you have to do is to ask anyone around what is their opinion about the prospects of Genting and the upcoming integrated resorts in Singapore. What they will probably tell you is that the prospects will be excellent since the IRs will be drawing a lot of people and the casino business will rake in huge profits for Genting. And these are assumptions made by the market in general.

Do note that the reasons above for the excellent prospects of Genting are all forecasts that are made presently and forecasts are events in the future that may not come true. However, the market seems to be assuming that these forecasts will definitely come true. Facts such as the huge construction loan taken for the IRs and the weak ability of the company to finance loans through its operations seems to be ignored by the market.

Given all the above reasons I have stated above, it really makes one wonder why is the stock price of Genting still heading up north ?

Monday, September 21

Swap-based ETFs

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Swap-based ETFs are ETFs that aims to tracks indexes by holding a basket of stocks which may be not related to the basket of stocks that makes up these indexes and it enters into a agreement with a counterparty in which this counterparty will deliver the performance of these indexes.

To explain it simply, the objective of these swap-based ETFs, as with all other ETFs, is to track the performance of a chosen index. These swap-based ETFs will hold a basket of stocks. If these basket of stocks underperforms the chosen index, another party will have to make up the difference in this underperformance to the ETF so as to allow the ETF to fulfil its objective of tracking the index. On the other hand, if this basket of stocks outperforms the chosen index, this difference will be paid to the other party since the ETF is only required to track the index. Nothing more or less.

On the other hand, cash-based ETFs are the traditional type of ETFs. Their model is simpler as compared to swap-based ETFs. Basically, they hold a basket of stocks that replicates a chosen index as closely as possible and this basket of stocks is divided into units where it is traded on the stock exchange.

Why is there a need to understand these two types of ETFs ? This is because there is an additional risk between these two types of ETFs which investors will need to know.

For swap-based ETFs, there is an additional risk which cash-based ETFs does not face and that is counterparty risk. For example, one particular swap-based ETF is tracking an index and for this specified time period, the basket of stocks which this ETF is holding on to, underperforms the index by a significant percentage. As such, the counterparty is required to pay this difference. Now what happens if this counterparty is not able to pay up ? This is one issue which investors of swap-based ETFs may have to consider. However, this counterparty risk is limited to a certain percentage of the value of the fund under regulations so the risk is not that high though it will still be there.

Furtheremore, swap-based ETFs tend to have less transparency. Investors may not know the details behind the swaps such as the value of the swaps and the collateral that are being used for the swaps.
















(Taken from Barclays Global Investors)
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Thursday, September 17

Rent a car instead

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Unless there is a need for you to travel long distances on a very frequent basis such as your workplace being very far away from your home, it may not be worthwhile for you to purchase a car. The money that can be saved from not buying a car can be channeled towards investment, which can reap additional profits down the road. However, some of us may wish to enjoy the perks of a car to drive occasionally, such as bringing your family out or going to a rather inaccessible place. Besides the option of buying an off-peak car, which may not be that convenient in the first place, due to the various restrictions being imposed on a off-peak car, one may consider the option of renting a car from a carpool instead.

Renting a car from a carpool has its advantages. Some of the carpools that are available in Singapore includes the NTUC Car Co-op and Whizzcar. Typically, these carpools operate a fleet of cars in car parks which are located in selected locations around the island. For a start, you will have to register with these carpools first. Subsequently, when you wish to use a car for a certain period of any day, you can book that specified period online or through the phone. Once this is done, you can go the a selected car park where these cars are parked in to collect your car and you are ready to drive. If you need to top up petrol, a card will be given to you at selected petrol stations so that the petrol that you have topped up will be charged to the carpool. At the end of the specified period that you have booked in, you will have to return the car.

The charges usually goes by the hour and with each hour, some amount of free mileage will be given to you. If you exceed this amount of free mileage, you will have to pay additional charges which often goes by per km. There may be special packages which are available such as a fixed rate for a 24 hours booking.

Thus the option of renting a car can be cheaper than buying a car if you do not use your car frequently. Furthermore, you will not have to worry about other fixed charges which are associated with buying a car such as insurance, maintenance and loan payments and still be stuck with a depreciating asset.

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Wednesday, September 9

Disability Income Insurance

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For the majority of us, our main source of income is from work. As such, if we are not able to perform our work due to any mishaps such as medical reasons or injuries, this can be financially devastating. Now some of you may think that since they have bought some form of insurance, the insurance company should be able to cover this. However, if you have only bought life or term insurance, you must satisfy the criteria of total and permanent disability which I have covered in an earlier post here before the insurance company will make any payout and this criteria can be very difficult to be satisfied. So what happens if you are injured and you are unable to work ? Are there any insurance plans out there in the market that can cover this gap and provide you with income for the period which you are not able to work ?

The answer is disability income insurance. Currently, only Aviva and Great Eastern have disability income plans and they are known as IdealIncome under Aviva and Paysecure under Great Eastern. Typically, these plans insure 75% of your current income. In the event that your employment income is terminated if you are unable to work due to any injuries or sickness, these plans will kick in to replace 75% of your income after a period of time following the start of any disability. This compensation from the insurance company can be continued up to your retirement age depending on the type of plan that you have bought. Furthermore, if you are unable to achieve your previous income being drawn from your work prior to disability, these plans will also supplement your income after your disability if you managed to find employment.

As such, if you are dependent on your employment income, it will be prudent to take up this type of insurance policy. In my opinion, this is the most important insurance policy one should have besides your medical plan. There are minor differences between the two plans offered by the two different insurers so it will be good to seek the advice of a qualifed financial adviser, who can advise you on which plan to choose.

The opinions expressed by the author in this article is provided for your personal information only and should not be constituted as financial advice. It is recommended by the author that one should seek the advice of a qualified financial adviser with any issues or questions regarding financial matters.
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Wednesday, September 2

Property Bubble

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A few months ago, I gave the view that the property market is likely to come crashing down soon as the property market correlates strongly with the stock market and the economy and the property market oftens lags behind the stock market.

The current property market has taken me by surprise indeed since it has only tumbled slightly not long ago and now it is near its previous peaks again despite of the economic doldrums. As such, I am of the view that the current property market is a property bubble in the making. Why is this so ? Here are some of the reasons below.

1. Divergence of the property market with the economy.
This is rather self-explanatory. The economy is still not booming yet but the property market is near its previous peaks.

2. Packed crowds at condominium launches
This is best illustrated with the example of Optima@Tanah Merah, which is a new condominium. Apparently, there was a queue waiting three days earlier of the actual launch date and they were prepared to wait there for three days.

3. Sky-high prices
With reference to the Optima@Tanah Merah, this project was sold on an average of $810 psf. Casa Merah, which is right behind it was only released at an average price of $588 two years ago. To add on, Centro Residences which is situated in Ang Mo Kio was sold at an average psf of around $1150 and this price are more typical of projects near the edge of the city.

4. Advertisements
I'm not sure if you notice it but on the last page of the Straits Times nowadays, it is always a full page graphic advertisement of a new condominium up for sales.

5. Rock-bottom interest rate
The current SIBOR rate is around 0.7% and this is very near to the all-time low rate of 0.56% back in June 2003. This makes home loan packages to be very attractive to prospective buyers.

As with all bubbles, it will burst eventually. But the question is that when will the bubble burst ? I shall make no attempt to forecast it since it is not crucial to know when it will burst and no one can forecast this accurately. A bubble can last for a very long time just like a bullish stock market can remain irrationally bullish. The most important thing is that one should not pay inflated prices which is way above the true value or worth of any assets or investments.
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