Investing Librarian

[Article] Private property prices and rentals at standstill

2012-01-31T04:39:00.001-08:00

Published January 28, 2012

Q4 data hints that market may have peaked; secondary-market volumes are slowing down

By KALPANA RASHIWALA

(Singapore)

PRICE rises for private homes almost ground to a halt last quarter while rental increases also tapered off. The latest official data has sparked a discussion in property circles on whether the market has peaked ...

[Article] The pros and cons of rights issues in Reits

2011-12-05T06:02:00.000-08:00

Business Times - 03 Dec 2011

SHOW ME THE MONEY
The pros and cons of rights issues in Reits

From our research, investors who opted not to participate in the rights issues have come out ahead

By TEH HOOI LING
SENIOR CORRESPONDENT

I RECEIVED quite a number of e-mail and text messages in response to my article last week which talked about how it is a myth to expect real estate investment trusts (Reits) to be a steady income yielding instruments.

The fact is, Reit managers are always on the lookout to expand their portfolio under management. The bigger their portfolio, the more transactions they carry out, the higher their fees.

But there is no denying that some managers do have the contacts and expertise to bag the right acquisitions at the right price, hence benefiting unitholders who chose to pump in more money to participate in the continued expansion of the Reits.

One of the most common questions that I received in response to last week's article was: What would the return be if I don't subscribe to the rights?

Does it pay to subscribe?

I decided to tabulate all the cash flows of the Reits with at least four years' track record. For one set of cash flows, I assumed that the investor subscribed to his or her entitlement of rights shares. For the other set, the assumption was that the investor didn't subscribe and didn't sell the rights shares in the market as well. Some rights shares have market value, and some, like the recent K-Reit rights have zero market value. That's because the exercise price for the rights is almost equivalent to the market price of K-Reit, hence there is no privilege to owning the rights.

Based on the cash flow stream, I then calculated the internal rate of return (IRR) for each strategy.

This is the definition of IRR from Wikipedia: 'The IRR on an investment or project is the 'annualised effective compounded return rate' or 'rate of return' that makes the net present value of costs (negative cash flows) of the investment equal to the net present value of the benefits (positive cash flows) of the investment.

'Internal rates of return are commonly used to evaluate the desirability of investments or projects. The higher a project's internal rate of return, the more desirable it is to undertake the project. Assuming all projects require the same amount of upfront investment, the project with the highest IRR would be considered the best and undertaken first.

'A firm (or individual) should, in theory, undertake all projects or investments available with IRRs that exceed the cost of capital. Investment, however, may be limited by availability of funds to the firm and/or by the firm's capacity or ability to manage numerous projects.'

So how did the Reits do when we take into consideration additional capital injections? And would investors be severely punished for not taking up their rights entitlement?

Out of the 18 Reits, 13 chalked up positive IRRs, but some just barely.

Seven managed to reward investors with IRRs of more than 10 per cent. Ascott Residence and Ascendas Reit are among the top performers. And curiously, it is investors who opted not to participate in the rights issues who have come out ahead. And if these investors managed to sell their rights entitlement in the market, their return would have been even higher.

By not participating in the rights, an investor in Ascott since its IPO days would have registered a 17.2 per cent IRR. For those who forked out additional cash to take up their rights issues, their IRR worked out to 13.4 per cent.

I reckoned that this happened because the appreciation of Ascott's share price has not been as steep since its latest round of cash call last year. And also, very importantly, Ascott's rights issues weren't that dilutive in that the exercise price of its rights was only a slight discount to the then market price of its units.

This was similar for Ascendas Reit, although the difference wasn't that great. The cash calls of Ascendas Reit have been relatively small.

But for most of the other Reits, it was a clear disadvantage if existing unitholders gave up on their entitlement to rights issues which were offered at a heavily discounted price to their then market price.

If unitholders don't have the money to meet the cash calls, they can try to sell their rights shares in the market. This is of course conditional upon the fact that the market is relatively happy with the proposed acquisition of the Reit, and that the market price of the Reit remained higher than the rights exercise price.

If the acquisition is seen as bad for the Reit, perhaps because the price agreed upon for the particular acquisition is too high for the benefits that it would accrue, then the market would sell the Reit causing its price to fall. Sometimes the decline is so big that the market price of the Reit approaches the rights exercise price, or even lower. In that case, the rights issue would most likely not be able to raise its intended amount of money.

So the thing is, as long as the interest of unitholders and the managers are not aligned, there will always be the very real risk that a Reit will enter into transactions which are less than favourable to the minority unitholders. For example, the sponsor may try to offload not so attractive assets to the Reit.

Other cash generating stocks

How about some of the cash generating businesses out there? How do they stack up against the Reits? Well, not too badly it seems.

I tallied up the cash flows of StarHub, SingTel and SPH since 2002. StarHub has just been a mean cash-generating machine since its IPO in 2005. An investor who invested at its IPO would have chalked up an IRR of 30 per cent, beating all the Reits out there, and with no risk of any cash calls to beat.

SingTel has not fared too badly with an IRR of 13 per cent since 2002. Despite its constant cash distribution, SPH - which is perceived to lack growth and hence chalked up little capital appreciation - has managed an IRR of only 5 per cent since 2002.

Advice from fund manager

For investors who are keen on Reits and other business trusts, here is some advice from a fund manager friend on how to go about picking the right ones.

'Industrial properties usually have 30-year leases, or 30+30. Assuming a 30-year lease, it means it depreciates at a rate of 3.3 per cent pa, versus one per cent pa for a 99-year lease for a retail or commercial building. So the yields for industrial Reits have to be up to 2.3 per cent pa higher than retail or commercial Reits. Usually however, it is less due to the time discount factor.

'Ships are usually scrapped after about 25-30 years. I think typically they are depreciated over 15 years or so. Even if ships are scrapped after 30 years, shipping trusts should command a higher yield than industrial Reits because the ship lessee can 'disappear' with the ship, but not the industrial building tenant.

'Hospital Reits like Parkway Reit is a rare breed as its revenue is based on a consumer price index formula. You can think of it as having zero vacancy rate (but the main issue is counterparty risk). So given the same counterparty risk, it should trade at a lower yield than retail Reits, which should trade at lower yields than commercial Reits, given the same tenure (because it's easier to lease out retail units).

'In turn, commercial Reits should trade at lower yields to industrial, which should trade at lower yields to hospitality (as vacancy rates of hotels/service apartments can be quite high during recessions).

'Hospitality Reits should trade at lower yields to shipping.

'But note that industrial can trade at higher yields to hospitality as the former has shorter tenures.

'As for Hutchison Port Holding Trust and SP Ausnet, I would value them as companies rather than Reits, as usually the rates they charge are prone to fluctuations - unlike Reits and shipping trusts which usually lock customers up for years.

'SP Ausnet is not structured even as a business trust and pays its dividends out of net profit rather than cash profit. I think every year, it pays out the same dividend per share even though its earnings fluctuate. I would value it the same way I value SingPost.'

So here you have it. I hope that we all are now a little clearer about the nuances of the various instruments out there.

The writer is a CFA charterholder

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

[Article] US Postal Service on brink of default

2011-09-06T08:19:00.000-07:00

Business Times - 06 Sep 2011

US Postal Service on brink of default

It may shut down this winter unless Congress steps in

(WASHINGTON) The US Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a US$5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilise its finances.

'Our situation is extremely serious,' the postmaster general, Patrick R Donahoe, said. 'If Congress doesn't act, we will default.'

In recent weeks, Mr Donahoe has been pushing a series of painful cost-cutting measures to erase the agency's deficit, which will reach US$9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers, nearly one-fifth of the agency's work force.

The post office's problems stem from one hard reality: it is getting squeezed on both revenue and costs.

As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail.

At the same time, decades of contractual promises made to unionised workers, including no-layoff clauses, are increasing the post office's costs. Labour represents 80 per cent of the agency's expenses, compared with 53 per cent at United Parcel Service and 32 per cent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.

The Senate Homeland Security and Governmental Affairs Committee will hold a hearing on the agency's predicament today. So far, feuding Democrats and Republicans in Congress, still smarting from the brawl over the federal debt ceiling, have failed to agree on any solutions.

'The situation is dire,' said Thomas R Carper, the Delaware Democrat who is chairman of the Senate subcommittee that oversees the postal service. 'If we do nothing, if we don't react in a smart, appropriate way, the postal service could literally close later this year. That's not the kind of development we need to inject into a weak, uneven economic recovery.'

Missing the US$5.5 billion payment due on Sept 30, intended to finance retirees' future health care, won't cause immediate disaster. But sometime early next year, the agency will run out of money to pay its employees and gas up its trucks, officials warn, forcing it to stop delivering the roughly three billion pieces of mail it handles weekly.

The causes of the crisis are well known and immensely difficult to overcome.

Mail volume has plummeted with the rise of e-mail, electronic bill-paying and a Web that makes everything from fashion catalogues to news instantly available. The system will handle an estimated 167 billion pieces of mail this fiscal year, down 22 per cent from five years ago.

Congress is considering numerous emergency proposals - most notably, allowing the post office to recover billions of dollars that management says it overpaid to its employees' pension funds. That fix would help the agency get through the short-term crisis, but would delay the day of reckoning on bigger issues.

Mr Donahoe's hope is to cut US$20 billion of the US$75 billion in annual costs by 2015. To do that, he wants to close many post offices and slash the number of sorting facilities to 200 from 500 and trim the agency's work force by 220,000 people, from its current 653,000.

The postal service has the legal authority to close facilities, although community opposition can make the process difficult. To placate critics and cut costs, officials say that they would seek to run some postal operations out of stores like Wal-Mart or to share space with other government offices.

Cutting the work force is more difficult. The agency's labour contracts have long guaranteed no layoffs to the vast majority of its workers. But now, the agency is asking Congress to enact legislation that would overturn the job protections.

Fredric V Rolando, president of the National Association of Letter Carriers, warned of disaster if partisanship keeps Congress from acting.

'This is about one of America's oldest institutions,' he said. 'It survived the telegraph, it survived the telephone, and we have to do everything we can to preserve it and adapt.' - NYT

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

[Book] Learn to earn : a beginner's guide to the basics of investing and business

2011-08-30T23:37:00.000-07:00

Title Learn to earn : a beginner's guide to the basics of investing and business / Peter Lynch & John Rothchild.
Author Lynch, Peter (Peter S.)
Publisher New York : Wiley, c1996.
Physical Description 272 p. : ill. ; 24 cm.
Subjects Investments United States. Corporations United States Finance. Capitalism.
Rating: 3/5
Highlights:

When stock prices fall 10 percent from their most recent peak, it's called
a "correction". We've had fifty-three corrections in this century (20th
century), or one every two years, on average. When stock prices fall 25 percent
or more, it's called a "bear market". Of the fifty-three corrections, fifteen
have turned into bear markets. That's one every six years, on average.

[Book] Investing from the top down : a macro approach to capital markets

2011-08-30T23:22:00.000-07:00

Title Investing from the top down : a macro approach to capital markets / Anthony Crescenzi. Author Crescenzi, Anthony.
Publisher New York : McGraw-Hill, c2009. Physical Description x, 291 p. : ill. ; 24 cm.
Series Title McGraw-Hill finance & investing
Search by Subjects Capital market.
Highlights:

Business cycle (expansion): transportation, technology, capital goods

Business cycle (peak): hard commodities, energy, consumer noncyclicals (e.g., food, drugs, cosmetics), health care

Business cycle (contraction): utilities (i.e. tend to fair well during contraction phase)

Business cycle (expansion): consumer cyclicals (e.g., autos, housing), financials

Top-down indicators e.g. Commodity Futures Trading Commission's Commitments of Traders Report (cftc.gov), Fed (www.frbsf.org), Baltic Dry Index (www.balticexchange.com), www.cdc.gov/nchs/agingact.htm, trade and industry groups, things around us.

[Picture] US recessions invariably bad for shares

2011-08-21T08:27:00.000-07:00

Link :

http://www.businesstimes.com.sg/sub/premiumstory/0,4574,452953,00.html?

[Books] Trade like Warren Buffett

2011-07-04T07:45:00.000-07:00

Title Trade like Warren Buffett / James Altucher.
Author Altucher, James.
Publisher Hoboken, N.J. : Wiley, c2005.
Rating: 3/5 (i.e. average)
Highlights
--- Question: What tools can be used in helping to predict future cash flows?
--- Answer: "Growth of the U.S. economy. If the U.S. economy grwos at a certain percent a year, then the cash flows of the market are most likely growing at the same rate, give or take one to five percent." ==> if stock index grows much faster GDP, bad things can eventually happen.

Title The 100 best stocks you can buy, 2011 / Peter J. Sander and John Slatter.
Author Sander, Peter J.
Publisher Avon, Mass. : Adams Media, c2010.
Search by Subjects Stocks, Stocks Evaluation.
Rating: 4/5 (reason: good overview - company profile; reasons to buy / for caution)
Notes
Growth and income - consumer staples, healthcare (medical devices)

[Books] About scenario planning

2011-06-23T07:19:00.000-07:00

Title Inevitable surprises : thinking ahead in a time of turbulence / Peter Schwartz.
Author Schwartz, Peter, 1946-
Publisher New York : Gotham Books, 2004, c2003.
Physical Description xvii, 247 p. : ill. ; 21 cm.
Search by Subjects: Strategic planning, Business forecsting, Technological innovations, Organizational change, Crisis management.
Ratings: 3/5
Highlights:
Question: How to prepare for the future?
Answer:
1. Build and maintain your sensory and intelligence systems.
2. Cultivate a sense of timing. When you see an event approaching, make a point of asking: how rapidly is it approaching? When could it occur? How far in the future?
3. Identify in advance the kinds of "early-warning indicators" that would signal that a change is rapidly upon you. For instance, if you are concerned about climate change, what represents the next big warning sign?

Title Get there early : sensing the future to compete in the present / Bob Johansen.
Author Johansen, Robert.
Publisher San Francisco, Calif. : Berrett-Koehler Publishers, c2007.
Physical Description xix, 258 p. : ill. ; 25 cm.
Search by Subjects: Strategic planning, Leadership, Business forecasting, Decision making.
Ratings: 4/5
Highlights
1. Foresight to Insight to Action cycle: the foresight was that biotech would have major impacts on P&G products; the insight was that the leaders did not have enough background to make good business decisions in this important emerging area of science; and the action was a reverse mentoring program that paired young scientists with the top managers in the company.
2. Core methodologies to develop forecast: expert opinion aggregation; historical analogy; scenarios; survey research; ethnography; visualization; and artifacts from the future.
3. The story of a healthy dilemma. Foresight: Health will be an important filter for food-purchase decisions, but taste will still be important. Insight: Campbell''s should focus on nourishing lives. Action: Implement the Campbell's strategy

[Books] The future for investors : why the tried and true triumph over the bold and new

2011-05-17T01:42:00.000-07:00

Title The future for investors : why the tried and true triumph over the bold and new
Author Siegel, Jeremy J.
Publisher New York : Crown Business, c2005.
Search by Subjects Stocks, Stocks History, Rate of return, Stocks Rate of return.
Comments: 4* (strengths: data, tips, strategies).

"The long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual earnings growth and the growth that investors expected." -- The Tried and True / Finding Corporate El Dorados: The Basic Principle of Investor Returns (pp. 41)

Average of top 20: (a) annual return = 15.26%; (b) earnings per share growth = 9.70%; (c) average P/E ration = 19.17; (d) dividend yield = 3.40%
Average of S&P 500: (a) annual return = 10.85%; (b) earnings per share growth = 6.08%; (c) average P/E ration = 17.45; (d) dividend yield = 3.27%
(Table 3.2 / pp. 45)

DIV directives: (a) dividends (sustainable); (b) international (emerging); (c) valuation (resonable valuations relative to growth)
-- Strategies for the Future (pp. 242)

Sector Strategies:
Oil and natural resources
Pharmaceuticals
Brand-name consumer staples
-- Strategies for the Future (pp. 254)

[Article] Brazil defends its way of cooling the economy

2011-04-03T08:24:00.000-07:00

Business Times - 29 Mar 2011

Brazil defends its way of cooling the economy

(CALGARY, Alberta) Brazil on Sunday defended its unorthodox strategies to cool its economy as the International Monetary Fund cautioned Latin America not to forget its basic tool for fighting inflation: the cost of money.

Central bankers mainly use interest rates to guide an economy.

But policymakers in Brazil, which has some of the highest interest rates in the world, have suggested that they will increasingly use measures including curbs on bank lending to complement rates, reducing bets on the pace of hikes.

The deputy governor of Brazil's central bank said huge inflows of hot money attracted to the country's high interest rates were fuelling a lending boom and inflation.

'We are facing now a great flood of international liquidity,' Deputy Central Bank Governor Luiz Pereira da Silva told a bankers' forum in Canada.

'Too much of a good thing can be a problem.'

Brazil's inflation rate topped 6 per cent in February for the first time since November 2008. As well as alternative monetary policy measures, Brazil has erected several barriers to inflows of speculative capital.

The policies have been criticised by some economists and the International Monetary Fund has been lukewarm to them.

'The more unconventional measures can never be a substitute for the fundamental measures,' IMF Western Hemisphere director Nicolas Eyzaguirre told a news conference in Calgary, where financial officials from North and South America gathered for Inter-American Development Bank meetings.

Mr Eyzaguirre said interest rates were below historical averages in much of Latin America where central banks slashed interest rates in 2009 to counter the global economic crisis.

Faced with rising inflation pressures, countries should start by reining in fiscal policy and monetary policy, the IMF official said. The head of the IMF on Saturday said that many Latin American economies were overheating.

'You want to deleverage or exit from that stimulus stance,' Mr Eyzaguirre said. He said if money inflows are a problem, other measures could also be used.

Brazil has raised borrowing costs sharply since 2009 but policymakers worry that higher rates are attracting too much investment, pumping up credit markets and hurting exporters as the local currency strengthens. It has also asked banks to hold more money in reserve, but inflation continues to rise.

New President Dilma Rousseff has announced plans to cut US$30 billion from the government's budget although investors are still waiting for proof the cuts will take place.

But super-low US interest rates are encouraging a huge and potentially destabilising flow of cash into developing economies, and countries across Asia and Latin America have put up barriers to it.

Brazil, for one, has raised taxes on foreign purchases of local bonds and asked banks to hold money in reserve when they bet the local currency will strengthen. -- Reuters

[Books] Make your money work for you : how to grow your investment dollars

2011-03-21T09:20:00.000-07:00

Title Make your money work for you : how to grow your investment dollars
Author Chee, Keon.
Publisher Singapore : Marshall Cavendish Business, c2011.
Search by Subjects Finance, Personal, Finance, Personal Singapore, Investments, Investments Singapore.

Reader's comments: Suitable for beginner readers who are starting on the path to financial freedom.

Notes

[Books] Fisher Investments on technology

2011-03-21T08:56:00.000-07:00

Title Fisher Investments on technology
Corporate Author Fisher Investments.
Publisher Hoboken, N.J. : John Wiley & Sons, c2010.
Series Title Fisher Investments on series
Search by Subjects High technology industries, Investments.

Reader's comment: An excellent book that provides a comprehensive overview of the Technology sector written in a simplistic way (suitable for readers at moderate technical levels).

Notes
1. Like every other sector, Technology has a set of economic, political, and sentiment drivers.
2. Economic growth is the single largest driver of the Technology sector.
3. Economic drivers: fixed investment,component shipments, inflation, share supply, and currency.
4. Political drivers: taxes, property rights, trade and fiscal policy.
5. Sentiment drivers: perception of Technology as a "high beta" sector, widespread feelings of euphoria, and the mental overhang and risk aversion following the bursting of the Technology bubble.
6. Other drivers: innovations and upgrade cycles.

Top-down investment methodology

The top-down investment methodology first identifies and analyzes high-level portfolio drivers affecting broad categories of stocks. These drivers help determine portfolio country, sector, and style weights. The same methodology can be applied to a specific sector to determine industry and sub-industry weights.
Quantitative factor screening helps narrow the list of potential portfolio holdings based on characteristics such as valuations, liquidity, and solvency.
Stock selection is the last step in the top-down process. Stock selection attempts to find companies possessing strategic attributes consistent with higher-level portfolio drivers. Stock selection also attempts to find companies with the greatest probability of outperforming their peers.
It's helpful to use a Technology benchmark as a guide when constructing a portfolio to determine your industry and/or sub-industry overweights and underweights.

Analying a stock in five steps

Understand business and earnings drivers - industry overview, company description, corporate history, business segments, recent news/pressreleases, markets and customers, competition
Identify strategic attributes e.g. low-cost production, strong brand name, pure play
Analyze fundamental and stock price performance e.g. sustainability, margins, revenue trends, earnings
Identify risks - systematic risk (e.g. strained supply chain) versus stock-specific risk e.g. sole suppliers
Analyze valuations and consensus expectations e.g. P/E, P/B, dividend yield, P/S

[Books] Fisher Investments on consumer staples

2011-03-19T10:12:00.000-07:00

Title Fisher Investments on consumer staples
Publisher Hoboken, N.J. : Wiley & Sons, c2009.
Series Title Fisher Investments Press, Fisher Investments on series.
Contents Consumer staples basics -- History of consumerism in America -- Consumer staples sector drivers -- Consumer staples sector breakdown -- Challenges in the consumer staples sector -- Consumer staples in emerging markets -- The top-down method -- Security analysis -- Consumerize your portfolio : investing strategies.
Search by Subjects Consumer goods United States History, Consumption (Economics) United States History.
Notes
1. Demand in the secto is characterized as price and income inelastic, which makes the sector non-economically sensitive and differentiates Consumer Staples products from Consumer Discretionary products.
2. Consumer Staples stocks usually will not provide tremendous upside over a short time horizon, but firms with strong economic moats can be lucrative over long-term investments.
3. Drivers can be grouped into three categories: economic (GDP, consumer spending, interest rates, currency movements), political (taxes, trade policy), and sentiment.

[Books] Fisher investments on energy

2011-03-19T10:06:00.001-07:00

Title Fisher investments on energy
Corporate Author Fisher Investments.
Publisher Hoboken, N.J. : John Wiley & Sons, c2009.
Search by Subjects Energy industries, Investments
Notes
1. The Energy sector's largest drivers, by far, are oil and natural gas prices.
2. Oil prices are driven primarily by world supply and demand conditions, but other factors like geopolitics, speculation, and government action can also affect prices.
3. Natural gas prices are mostly determined by regional supply and demand issues. Drivers of supply and demand for natural gas differ grealty depending on the region.

[Books] Fisher Investments on consumer discretionary

2011-03-19T09:37:00.000-07:00

Title Fisher Investments on consumer discretionary
Corporate Author Fisher Investments.
Publisher Hoboken, N.J. : Wiley, c2010.
Series Title Fisher Investments on series
Search by Subjects Consumer goods, Consumption (Economics), Investments.
Notes
1. The sector can be volatile owing to its leverage to economic growth and consumer spending (in turn, is driven by trends in employment, wages, and disposable income).
2. There are five basic categories of Consumer Discretionary stocks: Media, Retail, Automobiles, Consumer Durables, and Consumer Services.
3. Drivers can be grouped into three categories: economic, political, and sentiment.
4. Analying a stock in five steps:

Understand business and earnings drivers - industry overview, company description, corporate history, business segments, recent news/pressreleases, markets and customers, competition
Identify strategic attributes e.g. low-cost production, strong brand name, pure play
Analyze fundamental and stock price performance e.g. sustainability, margins, revenue trends, earnings
Identify risks - systematic risk (e.g. strained supply chain) versus stock-specific risk e.g. sole suppliers
Analyze valuations and consensus expectations e.g. P/E, P/B, dividend yield, P/S

Note (Luxury Goods): Demand for luxury goods is typically more resilient than that of mass-market brands due to the wealthier target demographic. Global economic growth benefits these companies because the base of affluent customers grow.

[Notes] Global Industry Classification Standard (GICS)

2011-03-19T05:25:00.000-07:00

http://www.mscibarra.com/products/indices/gics/gics_structure.html

http://www.mscibarra.com/resources/pdfs/GICSSectorDefinitions.pdf

2030
Revenue: capacity/loads/volume; pricing;
Factors: energy (37% of costs);

[Article] Sharp yuan rise unacceptable: China central bank

2011-03-19T04:55:00.000-07:00

Business Times - 18 Mar 2011

Sharp yuan rise unacceptable: China central bank

(BEIJING) China will not tolerate any sharp yuan rises to shield local exporters, limiting annual appreciation to 3 per cent in the next five years, a senior central bank official was quoted by local media as saying.

China's central bank has to keep buying foreign exchange to limit yuan gains, a report on the website of Caijing magazine quoted Li Bo, head of the second monetary policy department at the People's Bank of China (PBOC), as saying.

'If the central bank stops buying foreign exchange, the yuan will appreciate sharply, which is unacceptable,' Mr Li was quoted by the report on the website: www.caijing.com.cn.

'Sharp yuan appreciation will seriously affect the export sector, jobs and economic growth,' Mr Li added.

To keep the yuan stable, the central bank has to buy foreign currency entering the country in the form of trade surplus, foreign direct investment and hot money inflows, pumping out huge amounts of local currency as a result.

The yuan could rise gradually to between 5 and 6 per cent against the US dollar in the next five years, approaching its 'equilibrium' rate, Mr Li said. 'Expectations on the yuan to rise has weakened somewhat, and we are able to withstand an annual yuan rise of about 3 per cent,' the official noted.

The yuan has gained about 3.9 per cent since it was depegged from the US dollar in June 2010. China has shrugged off foreign criticism that the yuan is still undervalued, which gives Chinese exporters an unfair advantage in international trade.

Top Chinese officials, including Premier Wen Jiabao and central bank governor Zhou Xiaochuan, repeatedly said that China would keep the yuan basically stable while reforming the currency regime to make it more responsive to market forces.

But many analysts believe China will allow the yuan to rise 5-6 per cent this year to help curb imported inflation.

Mr Li said China should gear up to make the yuan fully convertible in the next five years. 'We have to make a big step forward in opening the capital account in the coming two or three years so that we can basically realise the goal of full yuan convertibility in the 12th five-year plan,' the official explained. -- Reuters

[Article] Don't count the stock market out, there's value yet

2011-03-19T04:51:00.000-07:00

Business Times - 19 Mar 2011

SHOW ME THE MONEY
Don't count the stock market out, there's value yet

There are blue chips with expected dividend yield of over 6%; that beats keeping money in the bank

By TEH HOOI LING
SENIOR CORRESPONDENT

WE ARE in very uncertain times now and the catalogue of issues is endless: the seemingly intractable sovereign debt problems and persistent high unemployment in the developed world; the financial aftermath of the devastation in Japan following the earthquake last week; rising food and commodities prices which are exacting a big toll on the lowest strata of the economy; widening income disparity, the gradual shift of economic centre of gravity from the West to the East; rapid urbanisation of hundreds of millions of people; climate change; the fast depletion of resources from this earth. The list goes on.

No one can tell for sure how things will pan out. There could be a lot of unknown unknowns just lurking around the corner. History may not provide much of a reference if we are moving into totally uncharted waters. Still, we shouldn't be paralysed into inaction just because there are many uncertainties out there. For one thing, inaction which involves the clinging on to dear cash may turn out to be a losing proposition given that the worth of cash gets eroded by inflation over time.

Yes, what has happened in the past may be totally irrelevant going forward. But there will always be certain things that continue to make sense. For example, if a company is able to create value and make profit, and there is a chance to participate in its business at a reasonably low cost, a rational person would and should consider doing it.

The next question then is, what is a reasonably low cost? For me, it would be one that would give me a significantly higher return than other available alternatives at the moment.

The price would also have to be low enough to give me some assurance that it does not have much room to go down further, and cause permanent loss to my capital. In this respect, history, for better or worse, provides us with some benchmarks to look at. Robert Shiller, professor of economics at Yale University, popularised a market valuation metric where the current market price is measured against the average earnings per share (EPS) of the last 10 years. This will even out the cyclicality of earnings.

I tested that out on the Straits Times Index, the one calculated by Datastream, which goes way back to 1973. In Chart 1, you can see that from 1983 till now, the STI trades between 10 times and about 35 times of its average past 10 years' EPS. We are now at 17.7 times earnings, or about one standard deviation below the average multiple that the index traded at in the past 40 years or so. Hence, at current levels, stocks can't be said to be expensive, but neither are they a screaming buy. We are now at levels last seen in mid-2003, early 1999, late 1997, and early 1991.

How about the equity risk premium (ERP)? This is a measure of the expected return of an equity investor over and above the risk free rate. I use the earnings yield (the inverse of price-earnings ratio) minus the one-year interbank rate as a proxy for ERP. The higher the ERP, the higher the supposed return for holding equities.

In Chart 2, you can see that the ERP shot through the roof - it went as high as 19 per cent - in March 2009, just before the capitulation of the market following the global financial crisis. That's the highest the measure has been in its 24-year history, and that also proved to be one of the biggest buying opportunities of all time.

Today, the ERP is at 7 per cent. Again, that's a reasonably good level from which the market had tended to chalk up decent gains, going by patterns in the past. We were at similar levels back in July 2009, February 2008, December 2005 and January 2003.

And finally, the dividend yields of a number of Singapore stocks are still expected to be juicy based on analysts' expectations. I downloaded the data from Bloomberg and categorised the stocks based on their market capitalisations.

Among big cap bluechip stocks, we can find more than 10 which are expected to deliver more than 6 per cent in dividend yield. That beats keeping money in the bank, and it outpaced the expected inflation rate for this year as well. Among the stocks are StarHub, Mapletree Logistics and Ascott Residence. There are also many smaller companies which are paying much more generous dividends. The caveat is of course the sustainability of their payouts.

Finally, just a reminder that the list we provided is based on the screening from Bloomberg. Investors are advised to do their own analysis on the individual companies before deciding to pick up any of the stocks.

[Article] Local stocks with Japan exposure shaken

2011-03-17T09:10:00.000-07:00

Business Times - 12 Mar 2011

Local stocks with Japan exposure shaken

Among the worst hit are Saizen Reit, which plunges 6% in price, and GLP, which slips 3%

By JOYCE HOOI

LOCAL stocks with exposure to Japan spiralled downward on the Singapore Exchange yesterday, following the earthquake and tsunami that hit the country in quick succession.

Among the worst-hit were Saizen Real Estate Investment Trust (Reit) and Global Logistic Properties (GLP), which have properties located in the earthquake- and tsunami-hit Sendai city.

Saizen Reit's counter closed 6 per cent - or a cent - lower at 15.5 cents, far outpacing the Straits Times Index's loss of 1.04 per cent. Of Saizen's 146 properties, 22 are in Sendai. The trust has another three properties in Morioka, a prefecture north of Sendai.

GLP shed 3 per cent on the news, closing 6 cents lower at $1.90. The trust derives 82 per cent of its portfolio value from Japan. It has four properties either in Sendai or nearby Fukushima.

Currently, it is not known if any of its properties in Japan have been damaged, but its prospectus includes a line that says that its insurance policies in Japan cover damage to facilities and business interruption, including those caused by earthquakes. It has a caveat, however, that such coverage might not be sufficient.

'There's been some knee-jerk reaction on GLP but I expect this to taper off within the next one week, as soon as GLP can give investors a more detailed assessment of the impact on them. For companies with exposure, that is what I would want to see,' said Liu Jinshu, an investment analyst at SIAS Research.

Parkway Life Real Estate Investment Trust lost 2.2 per cent, closing at $1.70, 4 cents lower. It has 28 low-rise nursing homes and one distributing and manufacturing facility in Japan. Revenue from those properties accounted for 34 per cent of gross revenue in 2010.

While none of its properties are in the worst-hit Miyagi Prefecture, one of them is in Chiba, where Cosmo Oil Co's oil refinery caught fire yesterday, following the earthquake.

While some analysts believe that office assets - which tend to be tall buildings - are likelier to sustain more damage from the earthquake, an analyst who covers the Reits sector in Singapore said that the squat buildings will be worst hit by a tsunami.

Mapletree Logistics Trust has 14 properties in Japan, one of which is Sendai Centre in the Miyagi Prefecture. Another four are in Chiba. Its counter closed 2.7 per cent lower to 91 cents yesterday.

Other counters with an ostensibly smaller exposure to Japan saw correspondingly smaller selldowns. Frasers Commercial Trust, with its four properties in Japan, closed at 81 cents, 1.22per cent lower.

Starhill Global Reit - which owns seven retail properties that are all in Tokyo - saw its share price dip 1.6 per cent, while CapitaMalls Asia with properties in Tokyo, Kobe, Osaka and Hokkaido closed the day 1.1 per cent lower.

In the region, markets were similarly downbeat. The Hang Seng Index was down 1.55 per cent while the FTSE Bursa Malaysia KLCI lost 1.4 per cent.

The glumness spread to Europe, hitting insurers' stocks such as Munich Re which lost 4 per cent by mid-day and Swiss Insurance Co, which lost almost 6 per cent.

The disruption caused by the natural disaster would only serve to underscore the shaky fundamentals of Japan's recovery, said Vishnu Varathan, Asia economist for Capital Economics.

'There was quite a bit of hope for a Q1 rebound in the Japanese economy. So far, our view has been that some of these hopes have been overplayed due to underlying confidence data and some industrial data that do not look all that robust,' he said.

'So this earthquake is probably going to dampen the economic momentum further in Q1. This increases the chances that the recovery in Japan will be a lot more anaemic. It's very unfortunate.'

The impact outside Japan, however might be limited. Mr Varathan pointed out that Japan is not a major consumption power. While there might be some disruption to regional supply chains, there will be marginal impact.

The yen, which fell to a two-week low against the greenback in the wake of the quake, would be beneficial to trade and growth, according to Leong Wai Ho, an economist at Barclays Capital. 'That offers the economy some reprieve in the near-term. I think the broader question is whether the Bank of Japan will do anything extraordinary in the aftermath of this event to keep growth conditions more conducive,' said Mr Leong.

Beyond the short-term, Japan is expected to recover. 'The impact will be short-lived, and the reconstruction will help to add gross domestic product points down the road,' he said.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

[Article] Singapore Market Strategy

2011-03-17T09:05:00.000-07:00

Business Times - 15 Mar 2011

Brokers' Take

Singapore Market Strategy
DMG & Partners Research, March 14

FOLLOWING Japan's 8.9-magnitude earthquake and the subsequent tsunami, widespread damage has been reported and a nuclear power plant in Fukushima has also suffered radiation leaks. Japan's Economic and Fiscal Policy Minister Kaoru Yosano said that the economic impact will exceed the 20 trillion yen (S$310 billion) in damage sustained in the 1995 Kobe earthquake.

Among the Straits Times Index constituent stocks that we cover, the impact on Singapore Airlines or SIA ('buy', TP: $17.20) is probably larger than on the rest. SIA has a high flight capacity exposure (Nagoya, Osaka, Fukuoka and Narita), which could face a risk of poor load factor. While management has yet to disclose the exact capacity exposed in its Japanese routes, we estimate that SIA risks recording low load factor for 15-18 per cent of its total capacity.

However, we have yet to factor this into our earnings estimates as we feel that it would be premature to do so, pending further assessment on the overall impact of the earthquake and tsunami in Japan.

For budget airline Tiger Airways ('buy', TP: $1.65), we do not expect any negative impact from the Japan quake as it currently does not operate any flights to Japan. In fact with the catastrophe in Japan, tourists will be deferring their holiday plans there; hence, there may be an increase in travel to other destinations which Tiger services.

The impact is minimal for most of the other sectors.

The Singapore banks are primarily exposed to the Asean and Hong Kong markets and have minimal exposure to Japan.

In the oil and gas segment, Keppel Corp ('buy', TP: $13.94) has a stake in a Japan unit involved in the fabrication and supply of specialised steel parts, but this unit's earnings contribution share to Keppel is insignificant.

The real estate investment trusts (Reits) under our coverage have no significant assets in Japan, except for ParkwayLife Reit, which has some exposure in Japan (33 per cent of its portfolio value), but most of their properties are located in regions which are relatively less affected by the earthquake, and none is within the evacuation zones of the nuclear plants.

The impact on commodity counters is small. Noble Group ('buy', TP: $2.58) and Olam International ('buy', TP: $3.70) have little exposure to Japan. Straits Asia Resources ('neutral', TP: $2.49) sells coal to Japan and coal power as an alternative to nuclear could lead to higher coal prices, a positive for the company.

The impact on telcos is negligible. SingTel ('neutral', TP: $3.00) has the largest proportion of mobile revenue coming from roaming at 20-25 per cent but Japan is not a key contributor in terms of outbound roaming revenue. Telcos are safe-haven investments in these volatile times, owing to their strong free cash flows and generous dividend yields. Our top pick remains M1 ('buy', TP: $2.85) followed by StarHub ('neutral', TP: $2.85), both without overseas footprints.

[Article] Builders' stocks soar on a dark day in Tokyo

2011-03-17T09:03:00.000-07:00

Business Times - 15 Mar 2011

Builders' stocks soar on a dark day in Tokyo

Carmakers, insurers and utility firms see share prices plunge

By CONRAD TAN

(SINGAPORE) Japan's stock market reeled yesterday as trading resumed after the country's worst earthquake on record, but shares of construction firms and other companies expected to benefit from the rebuilding effort soared.

The benchmark Nikkei 225 index slumped 633.94 points, or 6.2 per cent, to close at 9,620.49, its lowest level since Nov 4 last year. It was the biggest one-day fall since Dec 2, 2008.

But shares of firms such as Kajima Corp, Japan's biggest construction company, and Taiheiyo Cement Corp, the country's largest cement maker, jumped by more than 20 per cent on the Tokyo Stock Exchange, as investors bet that the companies would profit from the massive rebuilding effort after the disaster from the earthquake and the tsunami that followed.

Kajima's share price finished 22.2 per cent higher, while Taiheiyo Cement's share price rose 21.2 per cent. Both are members of the Nikkei 225 index.

Other index stocks that saw big gains were Taisei Corp, another construction firm, which rose 19.9 per cent, and Daiwa House Industry Co, Japan's biggest home-builder, which ended 12.1 per cent higher.

Outside the main index, the share price movements were even greater.

Kumagai Gumi Co, another construction firm, saw its shares jump a whopping 47.6 per cent in Tokyo, while shares of Nippon Road Co, which makes road-paving materials, soared 37.2 per cent.

Shares of utility and transport companies, which are likely to suffer lost revenues and incur substantial repair and rebuilding costs, were among the worst hit.

Tokyo Electric Power Co, which operates the Fukushima Daiichi nuclear complex that was severely damaged by the earthquake, plummeted 23.6 per cent, after another explosion there yesterday morning injured six people and worsened fears of a catastrophic meltdown at the plant.

Other stocks that suffered sharp declines included Japan Steel Works, a steelmaker, whose shares plunged 18.9 per cent, and East Japan Railway Co, the country's biggest rail company, which was forced to cancel most of its train services in the wake of the tsunami last Friday. Its shares slid 18.3 per cent.

Exporters such as electronics giant Sony Corp and carmaker Toyota Motor Corp also saw their share prices drop, as the companies shut most of their factories in Japan due to power disruptions and damage, and to ensure the safety of their staff. Sony shares slid 9.1 per cent, while Toyota shares ended 7.9 per cent lower.

Shares of insurers also plunged, as investors expected the firms to face enormous insurance claims. Dai-ichi Life Insurance Co, Japan's second biggest life insurer, saw its share price fall 18.9 per cent, while shares of Tokio Marine Holdings, which offers property as well as life insurance, slumped 12.4 per cent.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

[Books] Hot commodities : how anyone can invest profitably in the world's best market

2011-02-14T08:17:00.000-08:00

Title Hot commodities : how anyone can invest profitably in the world's best market
Author Rogers, Jim, 1942-
Publisher New York : Random House, c2004.
Search by Subjects Commodity exchanges; Futures market.

Q: What is the difference between a consolidation and the end of a bull market? - pp. 28
A: A consolidation is simply a temporary decrease in prices e.g. when the Chinese government forced large banks to tighten loans to manufacturers in an effort to slow the economy. In 1978, oil production had exceeded demand for the first time in years - a major fundamental shift (which changed the way we live), which should have signaled the end of the bull market.

Review Box: The Brief For Commodities - pp. 30
* Demand is increasing and supply is extremely low and declining, and it will takes years for this imbalance to improve.
* As economies in Asia continue to grow, there will be a strong worldwide demand for all commodities. China, in particular, has quickly moved from a major exporter to an importer of commodities.
* When stocks are down, commodities are up, and vice versa.
* Commodities are tangible assets.
* Commodity prices can rise even when the economy is stuck in reverse.
* Commodity returns outpace inflation.
* Stock prices can go to zero. Commodities cannot. Unlikes shares in a company, commodities are real things that are always likely to be worth something to somebody.
* The U.S. Federal Reserve's policy of monetary stimulus and rapid credit expansion will continue to push up the prices of commodities as more and more money chases a diminishing supply of assets.
* History shows that war and political chaos only push commodity prices higher.

Supply & Demand - pp. 45
A) Supply
1. How much production in there worldwide?
* How many tons of reserves are there?
* Is the production in areas that might experience turmoil?
* Are the reserves rich with copper or only marginally productive?
* What are the existing inventories?
* How many mines exist worldwide?
* How productive are these mines?
* What is the potential supply over the next 10 years?
2. Are there new sources of supply?
* Old mines expanding?
* When?
* How much will this cost?
* How much copper will this expansion produce?
* How long will it take before additional supplies get to market?
3. Are there new potential supplies?
* How much?
* How expensive to develop and then produce?
* How long before these new sources will be available?
* When will the new supplies get to market?
Note: This kind of research will give you a good sense of how much copper (or any other commodity) there is likely to be over the next 10 years - barring unpredictable events, such as strikes, fires or other natural disasters, political problems in that country.

B) Demand
* What is the commodity used for?
* Which of the current uses will continue?
* What alternatives are available to replace it if the prices go too high?
* What new technological advances might require this commodity that did not exist before?

Others
* Every single commodity traded takes time to be found, grown, produced, and shipped. Exploration and production for energy products and minerals take decades. One coffee tree takes three to five years to grow to fruition. That is why bull markets in commodities last so long: When supplies of things are allowed to become depleted without increasing new capacity, it takes time even to recognise the change, much less to get production up to the point where it can meet demand.
* Oil capacity is, once again, not keeping pace with consumption. The reasons are: Underinvestment in the capacity to pump, refine, and transport oil AND a supply-demand imbalance.

[Note] Commodity

2011-02-10T07:27:00.000-08:00

Summary
1. Supply versus Demand

Trends
1. Output is unlikely to see a significant jump in the next several years ... The supply side has been lagging behind demand growth for a very long time. - MyPaper, 10 Feb 2011

Copper
(A) Supply
(B) Demand
1. World's largest consumer: China - MyPaper, 10 Feb 2011

Iron Ore
(A) Supply
1. Largest exporter: Western Australia (also one of the world's largest producers) - MyPaper, 10 Feb 2011
2. Rio Tinto chief executive Tom Albanese yesterday said that ... demand set to outstrip supply of the precious steelmaking metal until at least 2013. 'Realistically, if we look over the next year or two it's hard to find big new areas of supply globally, particularly in 2011. But as 2013, 2014, 2015 start winding in, you're going to see a lot of new iron ore coming in the market.' - Business Times, 14 Feb 2011
(B) Demand
1. Infrastructure projects such as road, rail, utilities and housing are steel-heavy. Iron ore is a principal component in the manufacturing of steel.

Rice / Wheat
(A) Supply
1. Largest wheat grower: China (largely sufficient) - MyPaper, 10 Feb 2011
2. Largest rice exporters: Thailand, Vietnam (note: prices in Vietnam are often determined by the Philippines) - MyPaper, 16 Feb 2011

(B) Demand
1. Largest rice importer: Philippines - MyPaper, 16 Feb 2011

[Article] How Interest Rates Affect The Stock Market

2011-02-05T00:03:00.000-08:00

http://www.investopedia.com/articles/06/interestaffectsmarket.asp#12968924274452&close

The Interest Rate

Essentially, interest is nothing more than the cost someone pays for the use of someone else's money. Homeowners know this scenario quite intimately. They have to use a bank's money (through a mortgage) to purchase a home, and they have to pay the bank for the privilege. Credit card users also know this scenario quite well - they borrow money for the short term in order to buy something right away. But when it comes to the stock market and the impact of interest rates, the term usually refers to something other than the above examples - although we will see that they are affected as well.

The interest rate that applies to investors is the U.S. Federal Reserve's federal funds rate. This is the cost that banks are charged for borrowing money from Federal Reserve banks. Why is this number so important? It is the way the Federal Reserve (the "Fed") attempts to control inflation. Inflation is caused by too much money chasing too few goods (or too much demand for too little supply), which causes prices to increase. By influencing the amount of money available for purchasing goods, the Fed can control inflation. Other countries' central banks do the same thing for the same reason.

Basically, by increasing the federal funds rate, the Fed attempts to lower the supply of money by making it more expensive to obtain.

Effects of an Increase

When the Fed increases the federal funds rate, it does not have an immediate impact on the stock market. Instead, the increased federal funds rate has a single direct effect - it becomes more expensive for banks to borrow money from the Fed. However, increases in the discount rate also cause a ripple effect, and factors that influence both individuals and businesses are affected.

The first indirect effect of an increased federal funds rate is that banks increase the rates that they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means that people will spend less discretionary money, which will affect businesses' top and bottom lines (that is, revenues and profits).

Therefore, businesses are also indirectly affected by an increase in the federal funds rate as a result of the actions of individual consumers. But businesses are affected in a more direct way as well. They, too, borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as much and will pay a higher rate of interest on their loans. Less business spending can slow down the growth of a company, resulting in decreases in profit.

Stock Price Effects

Clearly, changes in the federal funds rate affect the behavior of consumers and business, but the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock's price, take the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices.

If a company is seen as cutting back on its growth spending or is making less profit - either through higher debt expenses or less revenue from consumers - then the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company's stock. If enough companies experience a decline in their stock prices, the whole market, or the indexes (like the Dow Jones Industrial Average or the S&P 500) that many people equate with the market, will go down.

Investment Effects

For many investors, a declining market or stock price is not a desirable outcome. Investors wish to see their invested money increase in value. Such gains come from stock price appreciation, the payment of dividends - or both. With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable.

Furthermore, investing in stocks can be viewed as too risky compared to other investments. When the Fed raises the federal funds rate, newly offered government securities, such Treasury bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the "risk-free" rate of return goes up, making these investments more desirable. When people invest in stocks, they need to be compensated for taking on the additional risk involved in such an investment, or a premium above the risk-free rate. The desired return for investing in stocks is the sum of the risk-free rate and the risk premium. Of course, different people have different risk premiums, depending on their own tolerance for risk and the company they are buying. However, in general, as the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential return remains the same or becomes lower, investors might feel that stocks have become too risky, and will put their money elsewhere.

Interest Rates Affect but Don't Determine the Stock Market

The interest rate, commonly bandied about by the media, has a wide and varied impact upon the economy. When it is raised, the general effect is to lessen the amount of money in circulation, which works to keep inflation low. It also makes borrowing money more expensive, which affects how consumers and businesses spend their money; this increases expenses for companies, lowering earnings somewhat for those with debt to pay. Finally, it tends to make the stock market a slightly less attractive place to investment.

Keep in mind, however, that these factors and results are all interrelated. What we described above are very broad interactions, which can play out in innumerable ways. Interest rates are not the only determinant of stock prices and there are many considerations that go into stock prices and the general trend of the market - an increased interest rate is only one of them. Therefore, one can never say with confidence that an interest rate hike by the Fed will have an overall negative effect on stock prices.

by Jim Mueller

[Books] "Fund spy" & "The little book that builds wealth"

2011-01-28T01:26:00.000-08:00

Title Fund spy : Morningstar's inside secrets to selecting mutual funds that outperform
Author Kinnel, Russel.
Publisher Hoboken, N.J. : John Wiley & Sons, c2009.
Search by Subjects Mutual funds Ratings and rankings, Investment analysis.
Summary
1. website: www.morningstar.com/goto/fundspy
2. "You want to begin with funds that have low expense ratios, low trading costs, and high levels of manager investment. Then you should look for evidence of manager skill by examining the long-term record from the manager's start date." (pp. 43)

Title The little book that builds wealth : the knockout formula for finding great investments
Author Dorsey, Pat.
Publisher Hoboken, N.J. : John Wiley & Sons, 2008.
Series Title Little book big profits series
Contents The game plan -- Economic moats -- Mistaken moats -- Intangible assets -- Switching costs -- The network effect -- Cost advantages -- The size advantage -- Eroding moats -- Finding moats -- The big boss -- Where the rubber meets the road -- What's a moat worth? -- Tools for valuation -- When to sell -- More than numbers.
Search by Subjects Investments, Stocks, Investment analysis.
Summary
1. "... great products, high market share, efficient operations, and smart executives are all unreliable signs of an economic moat"
2. pp. 24
3. pp. 145
4. pp. 169

[Article] US small-cap rally shows economy is getting healthier

2011-01-13T09:01:00.000-08:00

Source: The Business Times, Tuesday, January 4, 2011

.....

Earnings at smaller firms are a better indicator of economic strength than larger businesses because they get a greater proportion of their sales at home (US)

....

Large companies tend to lag behind smalller ones in the first two years of bull markets and beat them during the following 12 months

...

[INVESTING] Identifying a business with an economic moat

2010-12-12T07:04:00.000-08:00

Summary

1. Characteristics: (a) customer lock-in; (b) patents, brands, licenses; (c) cost advantages (business models); (d) networks

References

Leong, D. (2010). "Of castles and moats". PULSES (Dec 2010).
Features: (a) customer lock-in (high switching cost); (b) patents, brands, licenses; (c) cost advantages (business models); (d) networks

[REITS] Summary

2010-12-12T06:55:00.000-08:00

Summary
1. Fundamental factors that drive valuations: Potential for capital value growth; sustainability and growth of rental income from the properties; and capital structure of the Reit and the calibre of its managers.
2. Common measures of valuing a Reit: Discounted cash flow; Book value; and Cap rate or yield.

References

Jararaman, B. (2010). "How much is the reit worth". Pulses (Dec 2010).
(a) Common measures of valuing a Reit: Discounted cash flow; Book value; and Cap rate or yield.
(b) Fundamental factors that drive valuations: Potential for capital value growth; sustainability and growth of rental income from the properties; and capital structure of the Reit and the calibre of its managers.

[Article] Interest rates likely to go up in next 5 years: McKinsey study

2010-12-12T01:49:00.000-08:00

http://www.businesstimes.com.sg/sub/news/story/0,4574,417023,00.html?

Published December 10, 2010

This is due to higher investment demand and lower savings

By TEH SHI NING

(SINGAPORE) A surge in global investment demand fuelled by rapid emerging markets growth could drive interest rates upwards within the next five years, says a study by McKinsey Global Institute (MGI) released yesterday.

The infrastructure investment boom in Asia, Latin America and Africa is unlikely to be matched by an increase in global savings, as ageing populations run down savings and China rebalances and trims its savings rate.

Greater demand for capital to invest, set against a limited supply of capital from savings, will push real long-term interest rates up, possibly within the next five years as investors start to price in this longer-term shift, the report says.

But significant change will kick in by 2020, which is when MGI's researchers expect global investment demand to hit levels not seen since the post-war rebuilding of Europe and Japan.

And by 2030, they expect investment demand to surge past 25 per cent of global GDP, compared to the recent 2008 high of 23.7 per cent. Based on consensus forecasts of global growth, this means a more-than-doubled global investment of US$24 trillion in two decades' time, from just US$11 trillion today.

While the report sets no forecast on how high the cost of capital could rise in coming years, a return to the 40-year average would mean a 1.5 percentage point hike in real long-term interest rates (such as the real yield on a 10-year bond).

MGI thinks that real interest rates could 'easily surpass' this long-term average as the world adjusts to soaring investment needs. Real interest rates reflect not just the borrowing costs but also the risk premium on inflation, a premium on the rise today as loose monetary policy breeds uncertainty over future inflation, it says.

Central to the report is its observation that the 'global saving glut', said to have sent interest rates falling over the past three decades, was not caused by a hike in the world's savings rate, which in fact tumbled from 1970 through to 2002.

Instead, it resulted more from falling capital demand as global investment rates sank after post-war rebuilding and in line with slower global GDP growth.

It explains why upward pressure on interest rates is expected soon, with the global savings rate set to fall and investment demand now on a sharp upswing.

The mix of this surge in global investment demand will shift as the emerging markets grow.

MGI projects investment in infrastructure and residential real estate to come to about US$4 trillion and US$5 trillion respectively and US$15 trillion in other productive assets in 2030, should global growth stick to consensus forecasts.

Businesses, financial institutions, consumers, investors and government policymakers will all have to 'adapt to a world in which capital is more costly and less plentiful, and in which more than half the world's savings and investment occurs in emerging markets', says MGI, the business and economics research arm of consulting firm McKinsey.

Costlier capital will mean that companies need to recognise that higher output per dollar invested and having access to direct financing give them a competitive advantage over rivals. Large companies may increasingly raise funds in debt markets, as they are less costly than bank loans, while more mid-sized ones may too seek access to capital markets.

Higher real interest rates could make commercial and retail banking, overshadowed in recent years, more attractive to financial institutions, while investors could in the longer run shift from equities and alternative investments back to fixed-income instruments and deposits.

Rising interest rates mean short-run losses for bondholders, but in the long term still generate better returns from fixed income investments than during the years of cheap capital, the report says.

MGI's researchers also suggest that governments of mature economies rebalance and find ways to promote savings and domestic investment while reducing reliance on consumption. Governments of emerging markets, meanwhile, ought to deepen and stabilise financial markets to channel funds into productive investments, they say.

[Bonds]

2010-12-01T18:53:00.000-08:00

More about bonds
1. HSBC (Bonds): (a) Singapore dollar bonds; (b) International bonds http://www.hsbc.com.sg/1/PA_1_4_S5/content/singapore/personal/investments/series/archive/nov.html

Taking a new look at innovation

2010-11-27T20:51:00.000-08:00

It is more about redefining business than being inventive

Fri, Nov 19, 2010
The Business Times

By Chen Huifen

Link: http://www.asiaone.com/print/Business/News/SME%2BCentral/Story/A1Story20101118-247893.html

PANELLISTS at a business discussion debunked the notion that innovation is about invention and instead, portrayed innovation as a way to redefine a business and differentiate a company.

'The common notion of innovation is that you invent your way to greatness - come up with this breakthrough product or technology,' said Olam International CEO Sunny Verghese.

'That's a very useful source of innovation but the chances of success, of all of us trying to find the next breakthrough product and inventing our way to greatness is very small. So really, in every business, we have to find the capacity to innovate. And in some of the businesses, it might be (about) how you innovate your business model.'

Mr Verghese described an example of a wax candle manufacturer in the US that makes white candles for religious use. In the 1980s, the business that was sold to a new entrepreneur, who expanded the business into every thinkable use of candles, such as aromatherapy and many others. While the business continued to stay focused on making wax candles, it had built the capability to make candles for every occasion. In 20 years, the business grew from a few millions in revenue to one that is worth a billion dollars.

This is similar to Olam's case as well. Started as a cashew nut business, it has since transformed into a global integrated supply chain manager of 20 agricultural commodities. Key to that transformation has been its ability to leverage on adjacent opportunities, such as by sourcing for more products, or moving upstream to deal with farmers directly. These and other strategic moves helped Olam to differentiate itself from other competitors.

For instance, with direct access to its supply sources, the company is able to provide certification guarantees to customers making special requests, such as organic labelling and zero use of forced child labour.

In another instance, Mr Verghese also told of a hair salon chain that grew by increasing the frequency of haircuts among its customers. In each of those examples, the business was able to identify a need in the market, articulate it and then exploit it.

'Every business can be commoditised,' added Mr Verghese. 'The semiconductor business may be very high technology content but it's a commodity business. And every commodity business can be differentiated. And if you don't achieve the differentiation, you don't have the right to grow. Because you'll be unprofitable.'

Mr Verghese was speaking at the panel discussion on 'Redefining business models' at the BlueSky Conference organised by the Action Community for Entrepreneurship (ACE) in partnership with Spring Singapore. The panel also consisted of Taiwan's Bionet Corp founder and chairman Chris Tsai, Etonhouse International Holdings founder Ng Gim Choo and UPS Singapore managing director Greg Carstens.

During the 45-minute discussion, the panel cautioned against viewing innovation as a smooth sailing journey and suggested that entrepreneurs study the market and analyse the trends in order to help them identify a need that has yet to be articulated.

Bionet's Dr Tsai shared that in the case of his company, employees are encouraged to innovate but have to abide by a set of risk management system that allows for the plug to be pulled when an innovative development does not perform by the time a pre-defined budget has been reached.

Held at the Grand Copthorne Waterfront yesterday, the BlueSky Conference is part of the BlueSky Festival, which is an annual platform for entrepreneurs to exchange ideas and share experiences.

[Note] Currency / Inflation / Interest rates

2010-10-16T08:01:00.000-07:00

Summary
1. A stronger currency makes imports such as food stuffs cheaper, helping to curb inflation
2. A stronger currency makes exports relatively more expensive in foreign markets, while shrinking the value of firms' overseas earnings when repatriated.
3. When interest rate is raised, the general effect is to lessen the amount of money in circulation, which works to keep inflation low. It also makes borrowing money more expensive, which affects how consumers and businesses spend their money; this increases expenses for companies, lowering earnings somewhat for those with debt to pay. Finally, it tends to make the stock market a slightly less attractive place to investment.
4. Rising rates may help banks by boosting lenders' net interest margins if they aren't accompanied by a higher demand deposit rate.

References

1. A stronger currency makes imports such as food stuffs cheaper, helping to curb inflation ... Near-zero interest rates and poor growth prospects in the United States and Europe are already driving large flows of money into Asia, pushing up the prices of property and other assets. - The Business Times, 15 Oct 2010

2. The lower rates will make it even harder for banks here (in Singapore) to boost their net interest income from lending - their biggest source of revenue. - The Business Times, 16-17 Oct 2010

3. Japanese exporters, led by carmakers and electronics producers, have come under pressure from the rising yen in recent months. A strong yen makes Japanese exports relatively more expensive in foreign markets, while shrinking the value of Japanese firms' overseas earnings when repatriated. - MyPaper, 17 Jan 2011

4. Countries across Asia are attempting to grapple with accelerating inflation pressures as food and commodity costs climb, and liquidity rises with an influx of foreign capital ... almost all the regional countries will be “raising interest rates to tackle inflation”, which, along with currency gains, may slow economic growth. China’s Shanghai Composite Index of stocks dropped 1.3 per cent last Friday on concerns that monetary tightening would hurt corporate earnings. Steel Authority of India sank after it said higher costs contributed to a 34 per cent drop in quarterly profit ... Officials have, instead, relied on reserve ratios to try and mop up liquidity resulting in part from trade surpluses and inflows of foreign capital. South Korea also said it aims to freeze the cost of utilities, cut food tariffs and ask steelmakers to refrain from boosting prices to help stabilise commodity costs. - MyPaper, 17 Jan 2011

5. How Interest Rates Affect The Stock Market (by Jim Mueller)
Link: http://investinglibrarian.blogspot.com/2011/02/article-how-interest-rates-affect-stock.html

6. Rising rates may help banks by boosting lenders' net interest margins if they aren't accompanied by a higher demand deposit rate. - Business Times, 13 Jan 2011

7. The main driver for emerging world inflation is higher food prices and to a lesser extent, higher energy prices. Food has a CPI weight of 31 per cent in Asia and 26 per cent in Latin America compared to 15 per cent in Europe, 8 per cent in the US and 16 per cent in Australia. - Business Times, 12-13 Feb 2011

8. Tools for combating inflation includes: raising banks' reserve requirements; gains in currency; and increase in interest rates (thereby damping growth while also attracting speculative capital, or "hot money").

[Wedding]

2010-09-18T10:03:00.000-07:00

Hotels
1. Marriott Hotel at Orchard: good (food quality & pace, accessibility, setup, stage with 2 screens at side, 50 tables)
2. Marina Mandarin: poor (accessibility, food pace); good (food quality, setup, stage with 2 screens)

Birthday gifts
1. Default: a beautiful bouquet of flowers e.g. roses, lilies, sunflowers esp. baby's breath

[Article] And the difference is: Reits ...

2010-09-05T08:58:00.000-07:00

Source: PULSES (September 2010) by Bobby Jayaram

Reits are priced differently by the market according to the type of properties owned.

Note: Mainly applicable to Singapore real estate.

RETAIL

Supply is carefully controlled by the government. Prime retail space along Orchard Road has also been well-controlled ... Apart from good supply and demand dynamics, retails assets lend themselves well to asset enhancement ... rentals grow in line with increasing sales for their tenants ... rentals also showed minimal volatility.

Long-term fundamental drivers such as population growth, increased tourism and rising wages for Singaporeans also bode well for malls in the future.

OFFICE

The economics of office real estate (from an investor's perspective) are somewhat inferior to that of retail malls. The commodity-like nature of office space makes over-supply a bigger problem than for retail real estate.

Another long-term trend to note is the popularity of suburban business centres. Multinationals are moving more and more of their non-customer functions to suburban centres ... Asset enhancement is also much less effective for office properties than for malls.

INDUSTRIAL

They can be divided into business parks, light industrial and warehouses/distribution centres. Industrial land is mainly supplied by the government on short-term leases of 30-60 years.

Industrial Reits usually trade at higher yields than retail and office Reits because of several risks specific to this segment. Some of the key risks are:
- Limited capital gains given the minimal scope for asset enhancement and the relative ease of building new industrial property. The exceptions are large ramp-up logistics facilities which require high capital and land usage.
- High volatility - Occupancy rates of industrial property have historically seen high volatility depending on the economic environment. In 2003 and 2004, the occupancy was only in the high 70s.
- Long-term fundamentals not clear - Business parks and warehouses have good fundamentals in Singapore. The same, however, cannot be said for factory space ... relocated to cheaper locations.

HOSPITALITY

Hotel Reits, however, dampen the volatility in theri business by negotiating long-term master lease agreements with a hotel operator. CDL Hospitality, for instance, has 20-year leases for its hotels. This provides a minimum fixed revenue plus a variable part linked to the hotel operator's revenues and gross profits.

Hospitality Reits are economically sensitive and exhibit high volatility in room rates and occupancy. Many investors pile into these Reits when the economy starts to pick up and tourism is on an uptrend.

The bane of hotel Reits is over-building. The hotel sector is notorious for overbuilding during good times which depresses returns for the sector.

The service residence Retis such as Ascott Residence Trust suffer less volatility than the hotel Reits as quite a number of their stays are for more than 12 months, whihc provides some stability. They are, however, still more risky than other types of Reits with long leases.

HEALTH CARE

These Reits are considered the most stable in the Reit sector, given their long-term master lease agreements and lower probability of capital appreciation of assets. Considered as less exciting, they usually also trade at the highest yields in the sector.

Unlike the US where the healthcare industry especially nursing homes is dependent on government reimbursement, private health care in Asia is patronised by the well-off and funded through private insurance or through personal funds. This eliminates a key source of uncertainty regarding government policies.

The long-term fundamentals for health care are attractive as life expectancy is increasing across Asia and lifestyle-related diseases are also on the rise.

In terms of supply, while barriers to entry are fairly high for full-service hospitals, they are quite low for nursing homes. As such, over-supply can depress occupancy rates. Thus, the quality of healthcare assets owned by the Reit is very important.

Another key area ... is the strength of the master lessee and the actual revenues the hospital is generating which ultimately determines the sustainability of the Reit payouts.

[Article] Noble Group's Q2 profit tumbles 65%

2010-08-13T08:01:00.000-07:00

Business Times - 13 Aug 2010

Plunge comes even as group's sales surge 80 per cent to US$12.9 billion
By FELDA CHAY

COMMODITIES supply chain manager Noble Group's earnings for the second quarter tumbled 65 per cent from a year ago - which saw a US$154 million one-time gain from the acquisition of Australia's Gloucester Coal Ltd.

Net profit for the period ended June 30 plummeted to US$85.9 million, or 1.44 US cents per share, as compared with US$248.8 million, or 4.91 US cents. Excluding the one-off gain, net income was still lower than the corresponding period last year, though the drop was less drastic - to US$47 million from US$95 million, a 50 per cent fall.

The fall comes even as the Hong Kong-based group saw sales surge 80 per cent to US$12.9 billion for the quarter.

Gross profit rose 17 per cent to US$314.6 million as cost of sales climbed 82 per cent to US$12.6 billion. Its selling, administrative and operating expenses ran up to US$200.2 million from US$118.4 million.

Noble's executive chairman Richard Samuel Elman said in a letter to shareholders: 'I wish we could have done better but I haven't yet figured out how to invest in the future and not spend money doing it.

'The good news is the money wasn't wasted and we have laid some great foundations. We are working on some additional exciting opportunities which we hope to be able to announce in the not-too-distant future.'

Part of its investments include building up its energy business, said Mr Elman. It is also working to 'fine tune' its coal operations.

For the first half, Noble saw net profit drop 41 per cent to US$200.9 million from US$339 million a year earlier. Excluding the oneoff gain, net income was 12.4 per cent lower at US$162 million from US$185 million. Sales increased 83 per cent to US$24.3 billion from US$13.3 billion in Q2 last year.

Its energy business made up the bulk of first-half gross profit, bringing in US$271 million, while its agriculture segment added US$172 million. Metals, minerals and ores contributed US$119 million - a significant increase from the US$22 million it brought in for H1 last year.

Said Noble's chief executive Ricardo Leiman: 'We believe we are increasingly well positioned in our investments and acquisitions, in our management and operating team, and in our systems and risk management to be able to achieve our target of doubling profitability over the next few years.'

Yesterday, Noble's shares closed down 2.5 per cent to S$1.59.

[Book] Rich Dad Poor Dad

2010-08-10T09:36:00.000-07:00

Summary
1. Rule No. 1 (also the only rule): know the difference between an asset and a liability, and buy assets
- an asset is something that puts money in my pocket (i.e. Asset adds to Income)
- a liability is something takes money from my pocket (i.e. Liability adds to Expense)

2. Types of assets
- businesses that do not require presence (note: if you have to work there, it means that its a job, not a business)
- stocks, bonds, mutual funds
- income-generating real estates, royalties

3. Types of income
- earned income
- passive income e.g. real estate
- portfolio income e.g. stocks, bonds, mutual funds

References
1. pp 77: from lesson two "Why teacher financial literacy"

[Company] Frasers Centrepoint Trust

2010-08-07T06:17:00.000-07:00

Summary (Frasers Centrepoint Trust, FCT)

Business: Reit (sururban malls, Singapore + 31 per cent in Hektar Reit listed on Malaysian stock exchange)
Management: Dr Chew Tuan Chong, CEO of FCT, ex-CEO of Singapore Science Centre
Finance:
Price:

References

1. [Article] Time For A Change - Pulses July 2010
- FCT (Reit) has four suburban malls in its portfolio: Causeway Point, Northpoint, Anchorpoint and Yew Tee Point.
- CEO's vision: To double the Reit's asset size in the next five to seven years, from its current $1.5 billion
- Main focus: to be the solid foundation of Singapore suburban malls
- To tap Frasers Centrepoint's strong pipeline of assets (note: Frasers Centrepoint is the property arm of Fraser & Neave)
- Suburban malls are highly resilient, very stable assets. During a downturn, people still need to go to suburban malls for their necessities.
- Foreseeable future: new properties e.g. Bedok Point, asset enhancement on Causeway Point

[Article] SMRT first-quarter net profit falls 20.7%

2010-08-07T03:09:00.000-07:00

Business Times - 31 Jul 2010

Group says it may not be able to maintain previous financial year's profitability for FY2011
By NISHA RAMCHANDANI

SMRT Corp, which yesterday announced a 20.7 per cent fall in net profit to $38.24 million for its fiscal first quarter ended June 30, has cautioned that it may not be able to maintain FY2010's profitability for the current financial year ending March 31, 2011 (FY2011).

'The outlook in the next 12 months for train operations is expected to be challenging with continuing losses from Circle Line operations, increasing cost pressures and the impact of distance fares on fare revenue,' SMRT said.

The drop in Q1 earnings was a result of lower operating profits, partially offset by its share of better results of associates and lower income tax expenses.

Revenue rose 9 per cent to $235.34 million on the back of higher MRT ridership, contribution from Circle Line Stages 1 & 2, higher bus ridership as well as higher rental revenue. But partially offsetting this was a 66.8 per cent, or $8.8 million, drop in 'other' operating income to S$4.36 million. SMRT said it was 'due mainly to lower other maintenance and related income'.

Earnings per share were 2.5 cents in Q1FY2011, slipping from 3.2 cents in the previous corresponding quarter.

Revenue from its train operations rose 12.2 per cent to $129.6 million as a result of higher MRT ridership and contribution from Circle Line Stages 1 and 2, but operating profit fell 24.5 per cent to $27.7 million, due mainly to losses from the Circle Line as a result of low ridership and lower other operating income.

While ridership for the Circle Line has risen from an average daily ridership of 124,000 to nearly 145,000, this has yet to meet the expected ridership of 200,000. Profitability was also affected by high electricity costs.

'The group is currently monitoring the impact of distance fares implementation on group fare revenue,' SMRT also said.

The group has recently switched from a transfer rebate system to a distance-based charging one, which may have a negative impact on fare revenue in the next 12 months.

Higher ridership raised revenue from its bus operations by 7.2 per cent to $52.5 million in 1Q11 but SMRT still incurred an operating loss of $770,000 in the quarter - versus an operating profit of $1.24 million in Q1FY2010 - due mainly to higher staff and related expenses as well as higher diesel cost.

Operating profit for its taxi business slumped 41.3 per cent to $655,000 as a result of higher repair and maintenance costs and hirers' benefits, though taxi rental revenue was slightly higher at $18.25 million.

On the other hand, rental revenue grew 12 per cent to $17.3 million on the back of increased space thanks to the redevelopment of commercial spaces at various MRT stations, boosting operating profit for the segment by 7.9 per cent to $13.5 million.

'In the 12 months ahead, the profitability of the group will be impacted by higher staff costs, volatility in energy prices and continuing losses for Circle Line,' said SMRT president and CEO, Saw Phaik Hwa. 'However, we will continue to grow our businesses both locally and overseas while managing our cost levels.'

SMRT also announced yesterday the promotion of Teo Chew Hoon to senior vice-president of SMRT Investments and SMRT Taxis.

Shares in SMRT closed at $2.22 yesterday, up one cent.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

[Notes] Financial statements

2010-07-18T04:48:00.000-07:00

Summary

Notes
1. Low PER does not necessarily mean that the company is undervalued if the earnings increase is not from a genuine increase in profits due to SUSTAINABLE sources, such as higher revenue or lower operating cost. Note that one-time gains include disposal of assets.
2. Cash earnings per share measures the quality earnings of a company by dividing its operating cash flow over its outstanding shares.
3. Extra cash from operations can be used for purposes as follows: to purchase new fixed assets (eg plant, equipment and land), or to reward shareholders in the form of dividends, or to reduce bank borrowings.
4. Financing from company's shareholders or banks.

[Article] Don't Just Follow The Leader

2010-07-18T03:55:00.000-07:00

Source: Pulses (June 2010)

What challengers can do to win more customers

Challengers can embark on campaigns comparing themselves to the leader. This includes comparative advertising where the advertised brand compares itself to the market leader by putting its competitor down; "taste testing" as in the cola wars where consumers indicate their preference between two or more brands in a blind trial; and buying the leader's names in search engines.

The idea is to break the consumers' perception that the dominant brand is all there is. By encouraging consumers to move out of their comfort zone and seek alternative brands, challengers can showcase their offering and disrupt the top-of-mind advantage that leaders enjoy.

Consumers will realise that other brands are almost on par with the leader. Even if the challenger is not purchased immediately, it may be considered in the future. Hence, product demonstrations and exhibitions, freebies in trial-sized packages, and coupons are ways to get consumers to try something that they normally would not buy, and learn more about the challengers.

The bottom line is that for challengers, the goal is to get consumers to think of alternatives that can serve them better .... to break the habit of relying on the tried and tested, and consider other brands.

Lippo-Mapletree Indonesia Retail Trust

2010-07-18T02:17:00.000-07:00

Summary
1. Focus: the middle-class consumer in Indonesia (4th largest population, 50% under 25)
2. Income stability: staggered leases; LMIR's sponsor (including Lippo-related tenants)

(+) Immense growth potential
(-) Country's stability (economy, politics); interest rate, currency movements; lease terminations;

Sources
1. 2010 Jun (Pulses): occupancy rate of 96.9 per cent, yield (10%), 4th largest population in the world (50% under the age of 25); fast-growing middle class; country's economic growth; LMIR's sponsor (PT Lippo Karawaci, Indonesia's largest listed property company by market capitalisation); low gearing of 10.5 per cent; strong interest cover ratio of 11.3 times; low gearing and potential pipeline of malls from a strong sponsor point to strong growth prospects; key tenant (PT Matahari Putra Prima, Indonesia's larget retailer, also linked to the Lippo group, in turn helped LMIR maintain high occupancy rate of 96.9 per cent, far above the market average of 82.2 per cent); Lippo-related tenants leasing space from LMIR include Timezone amusement centres, Hypermart; focus on middle-class consumer; RENTAL cycles; staggered leases; interest rate, currency movements; lease terminations;

[Article] A name synonymous with UOB

2010-06-03T02:42:00.001-07:00

Source: The Business Times, Tuesday, June 1, 2010

Below is parts of the essay about liquidity.

Now there's the European problem ... People don't invest in Europe, they all come to Asia. Asia's full of liquidity, therefore we're very volatile. The property market, share market, go up and down. This is hot money, it can go in and out fast.

The problem is that Asia, including Singapore, is full of liquidity. Certainly investors - high net worth people - don't want to put their money in the bank for 0.2, 0.5 per cent interest. So if there is opportunity, they speculate in property, in equities. That's why the property and share markets are volatile. All Asian markets, Singapore, China, Hong Kong, I (Wee Cho Yaw) think, go up too fast. That's worrying also. China is introducing a lot of controls on property speculation.

[Article] Hedge Inflation With Commodities

2010-05-16T07:39:00.000-07:00

Source: Fundsupermart (Apr - Jun 2010)

There are over 25 different commodities. They can be categorised into four categories: Energy, Industrial metals, Precious metals and Agriculture.

Although each category tends to be governed by the same global rules, individual commodities have their own particular fundamentals. The increasing environmental pressure on the use of traditional energy forms is accompanied by a search for alternate sources.

Industrial metals are sensitive to the pace and extent of the global recovery.

Precious metals have industrial uses in automobiles and jewellery, and are also perceived as a good hedge against inflati0on.

Demand for agricultural products is rapidly increasing, dirven by the growing worldwide pressure to supply (human) food, (livestock) feed and (bio) fuels.

Huge influx of money leads to inflation which is beneficial for commodities prices.

[Article] Technology: A Different (And Better) Breed 10 Years On

2010-05-16T07:11:00.001-07:00

Source: Fundsupermart (Apr - Jun 2010)

Tech sub-sectors: e-Commerce; Online Advertising; and Enterprise Infrastructure Cycle.

1. e-Commerce
- e.g. Amazon.com, Priceline.com, Vistaprint, Ctrip and Mercado Libre.

2. Online Advertising
- 29% of our total media time is spent online)
- e.g. Google, Baidu

3. Enterprise Infrastructure Cycle
- corporate PCs (e.g. Dell), Enterprise Storage (e.g. Network Appliances), Servers (e.g. IBM and Hewlett Packard), Networking Equipment (e.g. Cisco Systems) as well as some major component providers (e.g. Intel).

[Article] 3 Investment Ideas That Will Outperform Emerging Markets

2010-05-16T06:09:00.000-07:00

Source: Fundsupermart (Apr - Jun 2010)

MSCI Emerging Markets Index (as at 31 Dec 2009): 22 markets that can be classified into four main regions (Asia ex-Japan - 55.5%; Latin America - 23.8%; Middle East & Africa - 10.4%; and Eastern Europe- 10%).

[1] Undervalued Markets (Valuation Metrics)
1. Price-to-book (PB) ratios vs Return on Equity (ROE)
- The PB ratio indicates the price an investor pays for the book value of a company. ROE measures how efficient a company generates profits from the company's equities.
- A high PB ratio usually occurs with a high ROE.

2. Price-earnings (PE) ratio
- Cyclical sectors have lower PE ratios due to their unstable profit outlook.

3. Earnings growth

[2] Beneficiaries of the Mid-stage Recovery: exports and technology

[3] The Inflation Cycle Winner
- Inflation is driven by two forces. The first is increased demand that drives up prices of goods. This is known as demand-pull inflation. The second is when the production costs of goods increase and producers pass on the costs to consumers, resulting in higher prices of finished goods. This is known as cost-push inflation.
- The sector that outperforms (other cyclical sectors e.g. materials, industrial, financials) during inflation - energy.
- In an inflationary environment, the profit margins of some downstream industries could narrow. For example, rising raw materials costs impact earnings of fabricators and bulk producers. They may decide to bear the costs to keep their pricing competitive and this will affect profit margins. If they choose not to, either they pass the cost down to the next level or risk losing out on price.
- Consequently, the only beneficiaries of inflation are the owners of the raw materials - upstream firms (e.g. Gas / Oil E&P) with the ability to quote higher prices to cover costs.

[Article] Buying The Unloved

2010-05-02T06:21:00.000-07:00

Source: Teh Hooi Ling (PULSES, Apr 2010)

Price-to-book is the best predictor of future share price performance as downtrodden value stocks typically outdo high-PTB growth companies

No other measure had nearly as much predictive power - not earnings growth, price/earnings (PE), or volatility. Downtrodden "value" companies have outpaced high-PTB "growth" companies annually by an average of 11-15.5 per cent over the past 34 years.

The lowest PTB portfolio chalked up an average one-year return of 33.2 per cent between January 1997 and June 2002. The lowest PE portfolio managed 27 per cent a year, while the top losers portfolio raked in 12.5 per cent a year.

What is PTB ratio?

PTB ratio is the ratio of company's market capitalisation to the book value (BV) of its equity. The BV of equity is derived by taking total assets as recorded in a company's balance sheet and deducting its liabilities. It is quite similar to net tangible assets (NTA), except that BV equity may include intangibles like goodwill of an acquired subsidiary, whereas NTA does not.

Stockmarket recovery years are especially good for the lowest PTB portfolios. The major recovery years would be 1993, 1999, 2003, 2007 and 2009. Last year, in particular, the 10 per cent of Singapore stocks with lowest PTB ratios racked up a return of 130 per cent, compared with the STI's rebound of 64 per cent.

But even in down-years, the lowest PTB stocks often fell less than the STI. In 1994 and 2002, they actually registerd positive returns amid declines in the STI. In 2000 and 2001, they fell by a smaller margin.

Book values

Below 1.00 times book value, cheap
Between 1.0 and 2.0, normal.
Above 2.0, expensive.

Buying a stock when it is trading way below its normal PTB range almost always guarantees a good return. And cashing out at the top of the range is almost always wise.

[Article] 5Cs of overseas market intelligence

2010-04-21T06:18:00.000-07:00

A systematic approach can help businesses sustain their ventures to achieve their long-term business objectives

Contender: know yourself
Customer: know your market
Competitor: know your rivals
Collaborator: know your allies
Communication: let your market know you

[Article] Tremendous Opportunities in a crisis

2010-04-17T01:52:00.000-07:00

Source: BT (2010 Apr 17 - 18)

Even in the darkest hours, step up your research and you are most likely to be rewarded

Market valuation then and now

2007 Oct 11: (a) median price-to-book ration (x) = 1.76x; (b) median dividend yield = 1.24%
2009 Mar 09: (a) median price-to-book ration (x) = 0.49x; (b) median dividend yield = 2.87%
2010 Apr 15: (a) median price-to-book ration (x) = 0.98x; (b) median dividend yield = 0.72%

Best performing stocks relative to peak on 2007 Oct 11

Etika: 2007 Oct 11 ($0.12); 2009 Mar 09 ($0.13); 2010 Apr 15 ($0.665); Increase = 454.2%
RH Petrogas: 2007 Oct 11 ($0.115); 2009 Mar 09 ($0.6); 2010 Apr 15 ($0.6); Increase = 421.7%
Think Environmental: 2007 Oct 11 ($0.142); 2009 Mar 09 ($0.08); 2010 Apr 15 ($0.4); Increase = 181.7%

Best performing stocks relative to trough on 2009 Mar 09

OSIM: 2007 Oct 11 ($0.586); 2009 Mar 09 ($0.05); 2010 Apr 15 ($0.97); Increase = 1,840%
Etika: 2007 Oct 11 (- -); 2009 Mar 09 ($0.03); 2010 Apr 15 ($0.575); Increase = 1,817%
HTL International: 2007 Oct 11 ($0.845); 2009 Mar 09 ($0.075); 2010 Apr 15 ($0.87); Increase = 1,060%

Companies

2010-04-10T10:08:00.001-07:00

FOR

1. Olam : 2,000 x 2.500 = 5,000 (TP: 3.32 @ 10% growth)
2. 2nd Chance : 10,000 x 0.330 = 3,300 (DIV - 10% @ 2010) (+) Yield = 10% (stable)
3. K-Green Trust : 5,000 x 1.11 = 5,550 (DIV - 7.0%) (+) Yield = 7%
4. Macq Int Infra : 2,000 x 0.980 = 1,960 (DIV - ) (+) Yet to reach 100% NAV

WATCHLIST (main)
(A) Banking & Finance
- DBS (16.3), OCBC (15), UOB, SGX (27.5), ARA Asset Management [09 Apr 2010]

(B) Transport / Communication
- SMRT (20), ComfortDelGro Corp, Goodpack (22.1), SPH (15.3), SingTel (14.6)

(C) Property / Reits
* Factors: debt, occupancy, strategy (tennant mix, staggered lease, AEI etc.
- Second Chance Properties (10.2) , CapitaMalls Asia, CapitaLand, GLP
- Retail: FCT (5.7%), CapitaMall Trust (5.26%), CapitaRetail China Trust (6.4%)
- Infrastructure: K-Green Trust
- Mixed: Starhill Global Reit (6.6%)

(D) Commodity
- Olam, Sembcorp Marine (12.5), Keppel Corp (9.2)

AGAINST

Ascendas Industrial : (-) large fluctuations in share price
CapmallAsia: (-) large fluctuations in share price during 2010;
CitySpring: (-) huge debt
Etika: (-) product (commodity); website containing wrong spellings (indicates lack of attention to company's image)
Food Empire: (-) emerging markets (Russian, Ukraine)
Golden Agri: (-) large fluctuations in share price
Ho Bee: (-) large fluctuations in share price
HTL: (-) cyclical; revenue/margins largely affected
KS Energy: (-) large fluctuations in share price between 2007 - 2010
Labroy Marine: (-) large fluctuations in share price
LippoMapleRetailTrust (LMRT): (-) fall in dividends (over time)
Midas: (-) large fluctuations in share price
OSIM: (-) revenue/margins largely affected
Rickmers Maritime: (-) industry: shipping; debt
Russia: (-) large fluctuations in share price during May - Aug 2010
Samudera Shipping: (-) large fluctuations in share price
Semb Corp: (-) large fluctuations in share price
SMRT: (-) slow fluctuations; margins/revenue can be affected by changes in infrastructure
Suntec Reit: (-) large fluctuations in share price
Tai Sin Electric: (-) large fluctuations in share price
UIC: (-) purchases by WCY didn't lead to increases (note: increases did occur in early stages)
Unisteel: (-) large fluctuations in share price
UOB Kay Hian: (-) large fluctuations in share price
UOL: (-) large fluctuations in share price
ZhongGuo Powerplus: (-) large fluctuations in share price

WATCHLIST (others)

(A) Banking & Finance
- DBS (16.3), OCBC (15), UOB, Hong Leong Finance, SGX (27.5) [09 Apr 2010]

(B) Consumer Staples
- Thai Beverage Public Co (16.2)
- F&N: ppty development (to be transferred to FCT etc.)
- Super Coffeemix Manufacturing

(C) Utilities
- SP AusNet (16.4)

(D) Transport / Communication
- SMRT (20), ComfortDelGro Corp, SingPost (13.8), SPH (15.3)
- M1 (12.4), SingTel (14.6), Starhub (12.6)
- SingPost: very good cash flow (90% EPS paid out as dividends), very low growth (1-5%), Mail (80%); Logistics (8%); Retail (8%); Property (4%)

(E) Reits: debt, occupancy, strategy (tennant mix, staggered lease, AEI etc.)
- Retail: LMRT (10.5%), Frasers Centrepoint Trust (5.7%), CapitaMall Trust (5.26%), CapitaRetail China Trust (6.4%)
- Logistics: MapleTree Logistics Trust (7.05%), Ascendas Reit (6.7%)
- Infrastructure: CitySpring (6.9%)
- Industrial park: Ascendas Indian Trust (7.4%)
- Mixed: Starhill Global Reit (6.6%)

(F) Others
- Boustead (7.4): stable
- Goodpack (22.1), Second Chance Properties (10.2) , CapitaMalls Asia
- Olam: stable growth in EPS; good business model
- SPH
- Qian Hu Corp
- Raffles Medical Group
- Etika International
- Hsu Fu Chi International
- SIA Engineering Co
- Thomson Medical Centre

(G) Highlights
- Sembcorp Marine (12.5), Keppel Corp (9.2)
- Yanlord Land Group

(H) Cyclicals
- UOB Kay-Hian
- UOB Kay Hian (11.1), Kim Eng (13.2)

Notes

1. Olam : 2,000 x 2.500 = 5,000 (TP: 3.32 @ 10% growth)

1. 2nd Chance : 10,000 x 0.330 = 3,300 (DIV - 10%)
2. K-Green Trust : 5,000 x 1.11 = 5,550 (DIV - 7.0%)
3. Macq Int Infra : 2,000 x 0.980 = 1,960 (DIV - )

Insurance (Life – TM Asia Life) @ 12 Jan - 2,099
Insurance (Accident - TENET) @ Apr - 165.90
Insurance (Health – NTUC Income) @ Dec - 398 (304+94)
Insurance (Health – NTUC Income) @ Dec - 72 (41+31)
Car (insurance + road tax) - 2,000.41 + 711 (15 Oct 2010)
Total / year 2,700

Food Empire

2010-04-10T04:05:00.000-07:00

Source: Full Year Financial Statement And Dividend Announcement for the Period Ended 31 December 2009

For FY 2009, revenue for Russia declined due to lower consumer demand as a result of the contraction in the country’s GDP and a depreciating currency. The lower revenue in Russia also reflected the Group’s deliberate strategy of introducing tighter credit controls which resulted in a lower volume of sales as less credit was extended to distributors.

Eastern Europe and Central Asia revenue was down by 36.8% in 2009 compared to the previous year. The Group’s second largest country market, Ukraine, continued to show signs of economic weakness throughout 2009 compounded by the uncertainty resulting from the run up to the national elections during the final months of the year. The result of the global slowdown together with internal factors caused Ukraine’s economy to slow, resulting in lower consumer demand. The spending power of Ukrainian consumers was also affected by a significant depreciation of the Hryvnia against the US dollar. In the Group’s third largest country market, Kazakhstan, the Group’s sales held up well, with noticeable signs of improvement in demand during the final quarter.

A commentary at the date of the announcement of the significant trends and competitive conditions of the industry in which the group operates and any known factors or events that may
affect the group in the next reporting period and the next 12 months.

Revenue from two of the Group’s key markets - Russia and Kazakhstan - had shown a significant rebound during Q4 2009 and the Group expects this trend to continue in the first half of 2010. In the Group’s other key market of Ukraine, conditions continue to improve but less rapidly than the other two markets. The economy in Ukraine remains weak necessitating assistance from the IMF, and uncertainty over the political situation remains.

Raw material prices are steadily rising as global demand begins to improve, in particular the price of sugar. The Group continues to monitor price movements of its raw materials.

The Group is actively looking for opportunities to further grow the business including possible
upstream acquisitions to secure greater control over raw materials as well as downstream to expand the Group’s distribution network into new markets.

The Group’s performance may also be affected by the following factors:
• fluctuations in the cost of raw materials and oil;
• a tight credit and lending environment;
• foreign exchange fluctuations;
• competitive market conditions; and
• the possibility of changes in regulatory policies in developing markets.

Allowing for the risks articulated above, and barring another major global economic shock, the Group expects revenue and profitability to improve in 2010.

Intrinsic Value

2010-04-10T03:40:00.000-07:00

Source: 2009 AR (for Berkshire Hathaway Inc.)

INTRINSIC VALUE

Now let’s focus on a term that I mentioned earlier and that you will encounter in future annual reports.

Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover – and this would apply even to Charlie and me – will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value.What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.

Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far different from their intrinsic values.

The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire’s per-share book value was $19.46. However, that figure considerably overstated the company’s intrinsic value, since all of the company’s resources were tied up in a sub-profitable textile business. Our textile assets had neither going-concern nor liquidation values equal to their carrying values. Today, however, Berkshire’s situation is reversed: Now, our book value far understates Berkshire’s intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.

Inadequate though they are in telling the story, we give you Berkshire’s book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire’s intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.

You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education’s cost as its “book value.” If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.

For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.

Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn’t get his money’s worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.

.....

The ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic value. Alas, that value cannot be calculated with anything close to precision, so we instead use a crude proxy for it: per-share book value. Relying on this yardstick has its shortcomings, which we discuss on pages 92 and 93. Additionally, book value at most companies understates intrinsic value, and that is certainly the case at Berkshire.

In aggregate, our businesses are worth considerably more than the values at which they are carried on our books. In our all-important insurance business, moreover, the difference is huge. Even so, Charlie and I believe that our book value – understated though it is – supplies the most useful tracking device for changes in intrinsic value. By this measurement, as the opening paragraph of this letter states, our book value since the start of fiscal 1965 has grown at a rate of 20.3% compounded annually.

Source: Business Times, May 14-15, 2011
http://www.businesstimes.com.sg/sub/premiumstory/0,4574,439061-1305403140,00.html

He asked: 'So PE is price times what? You can't take a spike in profit margin and look at the PE without taking into account that that's a spike, a peak. Because profit margins are more mean reverting, they have a stronger tendency to go back to normal than PEs do.

'So what you have to say is, fair price is a normal PE of normal profit margin. And today's market, there's more damage from profit margin going back than the risk from PE. So you have a moderately higher than it should be PE, and a much higher profit margin. Both of them working in the same direction means a badly overpriced stock market,' he said.

'You could have had a higher PE on lower profit margin and it would actually be cheaper. And that's the way to do it. That is truly the way to do it.

...

From the S&P 500 charts, you can see that profit margins in 1999 at 15.6 per cent was at its highest point in the last 13 years. PE, at 30 times, was at its peak too. That, as it turned out, was one of the biggest stock market bubbles in recent memory.

In late 2001 and early 2002, profit margins sank to just under 9 per cent. PE at that time was relatively high, at 25-26 times. In the following 12 months or so, as the margins recovered, the PE got compressed. The margins recovered even further, and the market ran away after that.

That is until 2007, when again margins were peakish, having risen to above 14 per cent. PE at that time was moderate, at 16-17 times. This was soon followed by the global financial crisis.

Profit margins hit a low again at just over 8 per cent in September 2009. Since then, the S&P 500 has gained 29 per cent.

Today, the net profit margin for S&P is about 13 per cent - rather near the peak. PE, however, is not exorbitant, at about 15 times.

Return on equity and return on assets, which are also mean reverting, are at 24 per cent and 8.7 per cent respectively. That's again near the peak of 27 per cent and 10 per cent in the last 13 years. But to be fair, the market's profit margins and return on equity and assets are just slightly above the median of the last 13 years.

Only in price-to-book (PTB) is the S&P 500 now slightly below its 13 year median of 2.8 times. It is now trading at 2.3 times book. So on the whole, I think we are still not in an excessively overvalued territory.

Regulated Utility Business

2010-04-10T03:29:00.000-07:00

Source: 2009 AR (for Berkshire Hathaway Inc.)

Our regulated electric utilities, offering monopoly service in most cases, operate in a symbiotic manner with the customers in their service areas, with those users depending on us to provide first-class service and invest for their future needs. Permitting and construction periods for generation and major transmission facilities stretch way out, so it is incumbent on us to be far-sighted. We, in turn, look to our utilities’ regulators (acting on behalf of our customers) to allow us an appropriate return on the huge amounts of capital we must deploy to meet future needs. We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.

Dave and Greg make sure we do just that. National research companies consistently rank our Iowa and Western utilities at or near the top of their industry. Similarly, among the 43 U.S. pipelines ranked by a firm named Mastio, our Kern River and Northern Natural properties tied for second place.

Moreover, we continue to pour huge sums of money into our operations so as to not only prepare for the future but also make these operations more environmentally friendly. Since we purchased MidAmerican ten years ago, it has never paid a dividend. We have instead used earnings to improve and expand our properties in each of the territories we serve. As one dramatic example, in the last three years our Iowa and Western utilities have earned $2.5 billion, while in this same period spending $3 billion on wind generation facilities.

MidAmerican has consistently kept its end of the bargain with society and, to society’s credit, it has reciprocated: With few exceptions, our regulators have promptly allowed us to earn a fair return on the ever-increasing sums of capital we must invest. Going forward, we will do whatever it takes to serve our territories in the manner they expect. We believe that, in turn, we will be allowed the return we deserve on the funds we invest.

In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations are met – and we believe that they will be – Berkshire’s ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead.

Our BNSF operation, it should be noted, has certain important economic characteristics that resemble those of our electric utilities. In both cases we provide fundamental services that are, and will remain, essential to the economic well-being of our customers, the communities we serve, and indeed the nation. Both will require heavy investment that greatly exceeds depreciation allowances for decades to come. Both must also plan far ahead to satisfy demand that is expected to outstrip the needs of the past. Finally, both require wise regulators who will provide certainty about allowable returns so that we can confidently make the huge investments required to maintain, replace and expand the plant.

'Dividend Player' (from The Edge Singapore, 28 Feb 2011)
* "Because of all the inflation protection that is built into their business models, their tariffs go up, their revenues are higher, their cash flow is bigger and their nominal dividend is higher."
* "We like businesses such as utilities, telecoms, toll roads, independent power plants, waste management and pipelines because they are not cyclical or less cyclical than your average business and don't face much competition. Regulated utilities and infrastructure firms are the most defensive model you can find. When inflation goes up, the cost base goes up and the regulator allows you to raise your tariff."
* "Ports are a cyclical business. During a recession, port traffic can fall off a cliff."

Sector: Insurance

2010-04-10T03:25:00.000-07:00

Insurance

Our property-casualty (P/C) insurance business has been the engine behind Berkshire’s growth and will continue to be. It has worked wonders for us. We carry our P/C companies on our books at $15.5 billion more than their net tangible assets, an amount lodged in our “Goodwill” account. These companies, however, are worth far more than their carrying value – and the following look at the economic model of the P/C industry will tell you why.

Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does our float.

If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money – and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float.

Let me emphasize again that cost-free float is not a result to be expected for the P/C industry as a whole: In most years, premiums have been inadequate to cover claims plus expenses. Consequently, the industry’s overall return on tangible equity has for many decades fallen far short of that achieved by the S&P 500. Outstanding economics exist at Berkshire only because we have some outstanding managers running some unusual businesses. Our insurance CEOs deserve your thanks, having added many billions of dollars to Berkshire’s value. It’s a pleasure for me to tell you about these all-stars.

Acquisition Criteria (for Berkshire Hathaway Inc.)

2010-04-10T03:15:00.000-07:00

Source: 2009 AR BERKSHIRE HATHAWAY INC.

ACQUISITION CRITERIA

We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

What to buy

1. Business
"Is the business simple and understandable?”
“Does the business have a consistent operating history?”
“Does the business have favorable long-term prospects?”
Examples
(i) Businesses that make products that wear out fast or are used up quickly, that have brand-name appeal and that merchants have to carry; where the price competition is shifted to the merchants. (Gillette, Coca-Cola)
(ii) Communications businesses that provide a repetitive service that manufacturers use to sell their products. (Interpublic)
(iii) Businesses that provide repetitive consumer services that people are consistently in need of; where non-union workers with little or no skills can perform the services.
(ServiceMaster, H&R Block, MBNA)

Identifying Non-Commodity (Consumer Monopoly/Toll Bridge) Businesses:

Large barriers to entry
Consumer awareness/name brand loyalty
Don’t rely heavily on investments in land, plant and equipment
Large cash flows
Nearly always debt free
Low-tech products which don’t require sophisticated plants or on-going improvements

2. Management
“Is management rational?”
“Is management candid with the shareholders?”
“Does management resist the institutional imperative?”

3. Financial statements
"Focus on return of equity, not earnings per share.”
“Calculate ‘owner earnings’ to get a true reflection of value.”
“Look for companies with high profit margins.”
“For every dollar retained, has the company created at least a dollar of market value?”

4. Intrinsic value
“Determine the value of the business”
“Buy only when the price is right – when the business is selling at a significant discount to its value.”

What not to buy

Commodity Businesses are a no-no.

They sell a product where the price is the single most important motivating factor in the consumer’s buy decision. There is considerable competition. Profits are kept low because of price competition. Capital is usually spent upgrading plant and equipment to keep abreast of the competition.

They include:

Textile manufacturers
Producers of raw foodstuffs, i.e. corn and rice
Steel producers
Gas and Oil companies
Lumber industries
Paper manufacturers

Identifying Commodity Businesses:

Low profit margins
Low return on equity (American corporation average is 12%; they are much lower)
Absence of any brand-name loyalty, patents or copyrights
Presence of multiple producers
Existence of substantial excess production capacity in the industry
Erratic profits

Strategy

2010-03-23T08:30:00.001-07:00

Summary

Sectors: Brand-name consumer staples; Pharmaceuticals; Oil and natural resources (i.e. physical assets) [sources: 1, 2 - except energy]
Sectors (others): REITS (retail, healthcare, industrial), finance (banks, assets management), transport, services (e.g. SIA Engineering - maintenance), utilities, telecomms.
Sectors (to avoid): REITS (resident, hospitality, infrastructure, commerical, shipping), construction, commodity-like industries (e.g. manufacturing)

Figures (average of top 20 within S&P 500): (a) annual return = 15.26%; (b) earnings per share growth = 9.70%; (c) average P/E ration = 19.17; (d) dividend yield = 3.40%

Sources

Title The future for investors : why the tried and true triumph over the bold and new

Title The 100 best stocks you can buy, 2011 / Peter J. Sander and John Slatter.

Bubble Trouble?

2010-03-21T09:16:00.000-07:00

Source: Feb 2010 Pulses

Easy money policies adopted by central banks to tackle the financial crisis have raised the spectre of ugly asset price inflation

Bubbles occur when asset prices deviate from their fundamental values. Fueling the current trend of rising prices are the easy money policies pursued by central banks following the global financial crisis in October 2008. By leaving interest rates at or near zero, liquidity has flooded into several Asian markets in search of yields and returns.

Prices have consequently surged in many asset classes despite the tepid economic conditions. Equities, real estate and commodities such as gold and copper have all had a banner year in 2009 ... investors have started to borrow in US dollars to purchase higher-yielding assets.

Property has staged such a sharp turnaround, given how sensitive it is to interest rate movements.

Tips for spotting future manias (i.e. identifying bubbles)

Behind most bubbles is a story.
Virtually all bubbles have excess leverage and/or the use of derivatives.
Bubbles in one asset class infect other classes as exuberance and wealth increase.
Non-traditional investors (that is, the man in the street) get attracted and participate in it.
Conspicuous consumption and the envy of others getting rich.

Quotes

2010-03-20T21:04:00.000-07:00

Summary

1. Pay yourself first
2. Buy asset - anything that adds money into your pocket
3. Buy low, sell high

Business

"The biggest lesson that I've learned in the last 20 years is you must first differentiate your business before you try and scale it. If you don't, you will always struggle for profitability." (Sunny Verghese, CEO Olam, 27-28 Feb 2010)

Management

Financials

"Low current valuations x high projected growth = potentially great returns" (All else being equal, the lower the PEG, the better.)
"Returns are often temporary, but expenses go on forever" by John C Bogle

Price

"A cynic is a man who knows the price of everything but the value of nothing." - Oscar Wilde. (Value can be ascertained, though imperfectly, by focusing on simple and well-established standards. A reliance on common multiples such as price-to-earnings and price-to-book value, and earnigns and dividend yields should serve the commonsense investor well enough over time.)
"Be fearful when others are greedy and greedy when others are fearful." - Warren Buffett (the power of reversion to the mean)

[Article] How they compare

2010-03-20T20:15:00.000-07:00

Comment:When crisis (or "big wave") happened, all funds (equity, bonds) sank.

"I'm like a Chinese businessman who treasures hard cash"

2010-03-04T07:51:00.000-08:00

PULSES (Feb 2010)

What are the key metrics to look at?
- (minimal) borrowings; (good, stable ) cash flow; sustainable revenue; ROE (return on equity); ROCE (return on capital equity); margin of safety

When to sell?
- One should look at the rate of change in price, not the absolute price.
- Price may still go up, we don't know. But the more it goes up, the greater the chance that we are going to have a hard landing.

Which sectors to look at?
- "Why do you want to look at this sector - it's so depressed." And I say: "That's precisely wjere the opportunities are. Wny would you look at a sector that's booming?"

Others
- "You cross the river by feeling each stone." i.e. always take a little step first. Experimented first, watched, monitored and realised, it works. Fine-tuned it. So the same style is repeated again and again.