Wednesday, October 14

Is it too late to buy in ?

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Given the recovery in the local stock market, is it still too late to buy in now ? For this question, I did a simple study by referring back to the historical data of the Straits Times Index.

At its current level which is around 2600, the STI is around 78.5% from the bottom made in March this year. I went to compare the 1 year to 4 years return made from buying the STI after it has plunged from a peak and recovered 78.5% from the previous 2 bottoms prior to this current recovery. Those two bottoms took place in March 2003 at the level of around 1213 and August 1998 at the level of around 805. The results can be seen below.


As only the data for 2 bottoms were used, this is only meant to be used as a rough gauge since I would have prefer to analyze more data. Besides, past performance does not indicate that the future will always turn out to be the same way.

It can be seen that it still may not be too late to buy in as all of the returns are positive except for the annual return after 4 years from buying in after the bottom made on August 1998. Given that the STI is still a distance away from the previous peak of 3900 made in October 2007, I still think that it is still not too late to buy in. However, the returns will definitely not be as great as compared to if one has bought much nearer to the bottom but it will be still be rather significant. Do be prepared to ride out any volatility though as the stock market recovers back to its previous peak.

Saturday, October 10

HDB ramping up supply of flats

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HDB ramping up supply of flats
7,000 units will be released over the next three months
By Jessica Cheam
(Taken from the Straits Times on the 2nd of October 2009)

THE Housing Board will unleash about 7,000 flats onto the market over the next three months in an aggressive step to tackle rising concerns over supply and affordability.

The 7,000 homes exceed the 6,450 units released for first nine months of this year.

They also include 2,132 units in 24 estates across the island that have just been finished, or are near completion. They were launched yesterday in what was the Housing Board's single largest sales exercise in recent times.

National Development Minister Mah Bow Tan announced the move yesterday, on a day when new figures showed that HDB resale flat prices rose 3.2 per cent in the third quarter over the second quarter to reach another record high.

The price surge follows an increase of 1.4 per cent in the second quarter over the first three months of the year.

Mr Mah told the media yesterday: 'I want to assure everybody that there are sufficient flats available across the board for every budget.'

The high demand for housing, reflected in the price rises in yesterday's flash estimates, is likely behind HDB's move to lift housing stock.

Industry analysts say the steps to boost supply should have an impact on resale flat prices.

'COV levels will likely dip due to the immediate addition of these flats,' said PropNex chief Mohamed Ismail.

COV refers to 'cash over valuation' - the cash a buyer pays over and above a flat's valuation.

But Ngee Ann Polytechnic real estate lecturer Nicholas Mak says a dip in COV levels is unlikely to be sustained if the buying momentum continues.

'It will slow down the pace of price increase only temporarily. In the past three years, an average of about 3,200 resale flats were transacted each quarter, which is about 50per cent more than the 2,132 flats offered for sale,' he said.

HDB's move to increase supply comes amid growing discontent among buyers priced out of the market by high demand and limited supply.

HDB resale prices have risen by a hefty 31.2 per cent in the past two years.

An online petition to Mr Mah started circulating last month to collect 1,000 signatures calling for lower flat valuations and more affordable homes.

As of last night, it had received 1,079 names.

The minister added yesterday: 'The Government has made a commitment to provide our people with quality, affordable housing.

'This is a commitment that we will keep... and if there is a necessity, we will step up the building programme even further.'

The new flats earmarked for the rest of the year are being released under two main schemes.

Flat supply under the build-to-order (BTO) scheme for the year will be ramped up to 9,000 from about 8,000 announced previously.

About 5,000 units under the BTO programme will be launched for sale in Punggol, Sengkang, Jurong West, Sembawang, Bukit Panjang and Dawson.

The highly-anticipated 1,700 flats by award-winning architects at Dawson estate in Queenstown, which were to have been launched last month, will now be released in December, said HDB.

The Housing Board also unveiled a new scheme called Sales of Balance Flats (SBF), which will replace the existing balloting, quarterly sales and half-yearly sales exercises.

It offers flats from earlier BTO exercises, the Selective En-bloc Redevelopment Scheme and repurchased flats and will be launched as and when sufficient flats accumulate, said HDB.

The aim is to simplify the flat application process and provide buyers with a wider choice of flats across a range of locations in one exercise.

The 2,132 flats launched yesterday fall under this new scheme. They range from studio apartments to executive flats, priced from $97,000 to $643,000.

Analysts are expecting a rush, especially as the prices of three-, four-, and five-roomers are about half of their respective resale prices, noted Mr Mak.

Home buyer Lynn Koh, 28, is one person preparing to apply.

'COV has risen in Whampoa, where my parents live, so I hope to be successful,' she said.

As of 5pm yesterday, HDB had received 2,038 applications for the 2,132 flats. Applications close on Oct 14.

jcheam@sph.com.sg

Wednesday, October 7

The danger of buying stocks with a low free float

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The stock market has been buzzing with news recently over the privatization attempt of CK Tangs by the Tang Family and this counter happens to have a low free float or public float. Basically, the free float of a counter is the number of shares that are held by the public and not by any institutional investors or any majority shareholders. So what is the danger in buying stocks with a low free float ?

1. Low Liquidity

Stocks with a low free float tend to have a low liquidity. As such, you may have a problem selling your shares on the the stock exchange. Furthermore, you may be not able to get a good price since the spread, which is the difference between the buying and selling price, for counters with a low free float is likely to be significant.

2. Privatization Attempt

Any counters with a low free float that has a majority shareholder in it, runs the risk of being taken private by the shareholder. Typically, this will happens when the stock market is depressed, making any privatization attempt to be much less expensive since the share price is likely to be low when the stock market is depressed. As such, the shareholder is not likely to offer a high price to buy over the shares that are held by the public. If you are an investor who had bought such a stock at a higher price and is waiting for the stock to recover after the stock price is being depressed by the stock market, you may be forced to take a realized loss during such a privatization attempt since the offer price in the privatization attempt may be lower than your buying price.
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Thursday, October 1

New insurance law addresses pitfalls of trusts

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New insurance law addresses pitfalls of trusts
By Lorna Tan, Senior Correspondent
(Taken from the Sunday Times on the 27th of September, 2009)

Life has just become a lot easier for holders of life policies, thanks to a new law that has simplified the rules governing the process of nominating beneficiaries.

The Insurance Nomination Law, as the regulation is known, came into effect on Sept 1 and is a vast improvement over the previous regime, which created irrevocable (trust) nominations - an area that has caused much heartache over the years.

The pitfalls of such trusts were obvious.

An irrevocable trust was created when you nominated your spouse or children as beneficiaries of your policy.

This meant you had set your policy in stone in that you could not change the beneficiaries or cash out the proceeds without the consent of all the nominees.

Many policyholders were unaware of the undesirable consequences of establishing an irrevocable trust and realised their predicament only when they were caught up in a divorce. To their horror, they found that their former spouses still had claims on their plans.

Confusing matters further, insurers allowed policyholders to nominate people other than a spouse or children as beneficiaries, such as parents and siblings, but these were not legally binding. Many policyholders made such nominations without realising that their nominees had no legal claim.

Indeed, the controversies surrounding such nominations prompted the insurance industry to do away with nominating beneficiaries in life policies in 2002. Most policyholders who still wanted to name beneficiaries were encouraged to draw up a will.

There was an exception for policies bought from insurance cooperative NTUC Income. It came under a separate Act that allowed a cooperative member to nominate such people as spouses, children, relatives and friends as beneficiaries.

The new regime allows for both revocable and irrevocable (trust) nominations. Unlike previously, revocable nominations of spouses and/or children as well as other entities are allowed. It means you can change your nomination at any time without your nominees' consent.

Policies with trust nominations incepted before Sept 1 are not covered by the new law, which is not retrospective, but if you have an existing policy with no trust nomination in place, you can now nominate beneficiaries.

Here are eight things you need to know.

1. Why making a nomination makes sense

Making a nomination is not compulsory, but the new regime provides a simple avenue to ensure that your policy proceeds are paid out to the right person at the right time and in the right amount. Compared to the alternative of writing a will - which costs around $300 or more - the new rule is a clear and affordable legal means to distribute policy benefits to your nominees.

2. Revocable nominations

Under the new law, those who take up life, accident and health policies with death benefits can create either a revocable or a trust - also called an irrevocable - nomination.

A revocable nomination means you retain full ownership over the policy, including the ability to change, add or remove nominees at any time without their consent.

Only death benefits are payable to the nominees. All living benefits such as the one that should be paid if you contract a critical illness go to you.

If you have only one nominee and he dies before you, a revocable nomination is automatically revoked. If there is more than one nominee and if one dies before you, his portion will be added to each surviving nominee's share of the benefits.

3. Trust nomination

This form of nomination - also called an irrevocable nomination - is inflexible and you should consider it only if you are prepared to give away the insurance proceeds completely to your nominees.

A policyholder relinquishes all rights to the policy, meaning all benefits, including living and death, belong to your nominees but you must still pay the premiums.

It also means that you need to get the written consent of all nominees before you can revoke the nomination, make any change, surrender or take a loan under the policy.

When a nominee dies before you, his share of the policy proceeds goes to his estate.

One advantage of a trust nomination is that the policy proceeds are protected from creditors.

4. How to nominate

You must be aged above 18 to make revocable and irrevocable (trust) nominations. The policyholder must specify the percentage share of the policy proceeds that each nominee will get. Two witnesses aged above 21 must also be present.

5. Policies excluded for nominations

Trust nominations are not allowed for policies bought under the Central Provident Fund Investment Scheme and Dependants Protection Scheme, as rules dictate that you must retain control over your retirement funds as long as you are alive.

Trust nominations also cannot be made under the Supplementary Retirement Scheme as the use of savings in this programme is restricted to products that have the potential of growing your own pool of retirement cash.

Policies with a trust nomination facility do not fulfil this criterion as you will no longer have control over the policy proceeds during your lifetime.

Both trust and revocable nominations are not allowed for annuities bought under the Minimum Sum Scheme as any residual money from the policies upon your death or policy termination must be refunded to your CPF Retirement Account for distribution.

6. Options for existing policyholders

The fact that the new law does not apply retrospectively is creating some rather complicated situations for people who already had policies in place before Sept 1.

Given this complex backdrop, the Life Insurance Association encourages policyholders to check with their insurers before making fresh nominations.

Here are some of the possible scenarios you might confront:

  • If you own policies bought before Sept 1 and have never made any nominations, you can now make a revocable or trust nomination under the new law.
  • If you named your spouse or children as beneficiaries, you have created a statutory trust under Section 73 of the Conveyancing and Law of Property Act and your nominees will continue to be recognised. The new law does not apply retrospectively, so it has no impact.
  • If you had named people other than your spouse or children as nominees, the new law will let you make fresh nominations in your plan.
  • If you had named your spouse or children and other people or relatives, your ability to make nominations under the new law will depend on the status of these nominations and the terms of your existing policy. You may have to seek legal advice.

7. If you do not make a nomination

In the absence of a valid nomination, the insurer may pay up to the first $150,000 of proceeds from a policy to a proper claimant. The balance will form part of the deceased's estate and will be distributed according to the intestate law or a will.

8. What to do before making a nomination

First, decide whom you want to name as your nominee(s). Also use the right form and specify the proportion of benefits you want each nominee to receive, ensuring that they add up to 100 per cent of the policy proceeds.

Ensure all details of each nominee are accurate and that the witnesses meet the requirements set out in the form.

And lastly, notify your insurer that you have made a nomination and send in a copy of your form.

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 ?
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