The Straits Times Blogs - Goh Eng Yeow

Cautionary tale from a rogue S-chip

2009-11-17T02:59:00Z

Goh Eng Yeow comments on the unfolding boardroom scandal at Sino-Environment.

It was with some concerns that I wrote the latest commentary "A cautionary tale for S-chip investors" asking why Sino-Environment was allowed to trade for a further six months when it seemed likely that the firm might not survive the problems that beset it.

The problems faced by Sino-Environment were similar to those that had befallen Fibrechem Technologies and China Sun Bio-chem earlier – and it is difficult to believe that its boss will behave any differently.

For those who have not followed the Sino-Environment saga, a swift recap: Its founder and chairman Sun Jiangrong defaulted on a $120 million loan extended to him by a hedge fund in February. This resulted in his 56 per cent stake in Sino-Environment being seized by the hedge fund and sold on the open market.

His personal financial difficulties plunged the company into turmoil because it was faced with potential early redemption of a $149 million bond.

Under such circumstances, one would have expected someone – anyone in a position of influence in the company – to try to safeguard the company’s precious financial resources and keep it out of harm’s way.

The alarm bells should have been set ringing when the company failed to come out with its first quarter results – due out by mid-May – and had to hire auditors PwC to review "significant cash transactions" between January and March – the period which coincided with Mr Sun’s loan default.

This would have been the first indication of somebody’s suspicions that money might have been moved out of the company – and that an independent party was being hired to track down the transactions.

Instead, our attention was diverted by the charade staged by the management threatening to walk out on the beleaguered company that month, and the independent directors having to beg them to stay to ensure that operations run smoothly.

But buried in a May 25 announcement asking the executive directors to withdraw their resignations was also a "request that the key management co-operate on certain matters in the meantime".

On hindsight, I will not be surprised if these certain matters refer to the suspicious cash transactions that had been made between January and March.

But it will take more than a Sherlock Holmes to decipher all the cryptic meanings in the announcements made by the firm.

It certainly speaks volume about the manner in which Sino-Environment implements the disclosure-based practices. Surely, disclosures should be made in a coherent and transparent manner to let investors make an informed decision – to trade, or in this case, not to trade at all.

We would all be still in the dark about the subsequent report of the PwC findings to the CAD and the boardroom tussle to get rid of Mr Sun, if the management had not sacked the Singapore unit’s financial controller, Mr Raynauld Liang - and caused all these developments to spill into the open.

It makes me wonder once again what can be done if these offshore firms, which are listed here, refuse to play by our rules.

Sino-Environment’s independent directors are clearly out of their depth dealing with a boss who decides to turn roguish.

But I wish that they could have been more forthcoming right from the start about the problems that are festering in the company and not let them suddenly explode in the public eye last week.

Tightening the regulations further or ensuring that the chief financial officer is based here isn’t going to help – if the precious cash resources are out of reach – and in the hands of management far away from Singapore.

The biggest headache now is the sort of redress an investor who bought the stock after May could get from the whole sorry saga when trading should have been stopped after disclosures of the "significant cash transactions" were made by way of the PwC review.

The Bloomberg machine shows that about 15 million Sino-Environment shares were traded daily between March – when Mr Sun’s loan default came to light – and September when trading was suspended.

That is an awfully large number of shares each day during those fateful six months to answer for.

US dollar carry trade

2009-11-16T08:15:00Z

Goh Eng Yeow on the boost the weakening greenback gives regional equities.

ASIAN markets are rallying as the greenback falls to fresh lows against regional currencies, giving the giant US dollar carry trade a fresh lease of life.

As I write, the US dollar has fallen to a record low against the Singdollar.

It is difficult to fathom why the greenback is so weak today, but it is the biggest reason for propelling regional stock indexes on a fresh upward trajectory.

This has sent the Hang Seng hurtling towards the 23,000 resistance level, while STI is up nearly 50 points at 2,777.

Some will say that the renewed weakness over the greenback is a reflection of falling US economic might.

One newspaper has described US President Barack Obama's nine-day trip to Asia as a visit to his creditors.

"Mr Obama can only grin and ask his hosts to bear with the weakening greenback. He does not have the means to rescue the US dollar on his own," it noted.

And for traders the world over, the most telling sign of US humility was the picture of the deep bow which Mr Obama made before the Japanese emperor in Tokyo.

It is also a sign of China's growing confidence that its president, Mr Hu Jintao, left Singapore after Mr Obama took off to Shanghai.

A far less assured leader would have cut short his Apec summit visit to Singapore and return back to Beijing early to make sure that nothing goes wrong with Mr Obama's first state-visit to his country.

This is why faith is being renewed among traders that they can safely "short" dollars and "long" emerging market equities, without having to fear that a sudden rebound of greenback will wipe them out.

In the short-term, a weakening green-back will give strength of the US dollar carry trade – and like the precedessor yen carry trade a decade ago – trigger a sharp rise in the value of all types of assets – stocks and shares, precious metals like gold, as well as crude oil.

But in the long-term, the trend of the weakening dollar is unhealthy, as it may prompt other major trading nations to try to devalue their currencies as well to try to stay competitive.

It reminds many of the Asian financial crisis a decade ago, when several nations indulged in what is known as "competitive devaluation" to protect their exports markets to keep up with the falling value of their neighbours’ currencies.

The end-result was near bankruptcy for them.

The buy high, sell low syndrome

2009-11-11T03:53:00Z

Goh Eng Yeow on the increasing market weariness as indexes flirt with 2009 highs.

WATCHING the stock market the past few days and I am reminded of a man heaving a heavy sack, as he climbs up a hill. Each foot-fall becomes heavier as he climbs higher, as he turns wearier with every step.

Global stock markets have been flirting with 2009 highs, ever-since Wall Street's Dow Jones Industrial Average successfully breached the 10,000 level last Thursday.

But traders don't seem to be much cheered by the prospects of higher stock prices at all.

Instead, trading volumes around the world have been drying up, as buyers melt away as share prices climb higher.

What is supporting the global stock market rally is the increasingly shaky US dollar carry trade - with big-time punters borrowing heavily in US dollars to buy all sorts of assets from crude oil to emerging markets equities.

What they are betting is a further drop in the US dollar and a rise in the value of the assets they are buying. This will give them both forex gains and capital gains.

But as one economist points out, there is no chance of the US dollar falling to zero, even though the economic prospects of the US look awful. This explains why every drop in the greenback is viewed by traders with concern, as the prospect of a sudden rebound becomes more likely, wiping out those who are "shorting" the US dollar in a big way.

It seems strange to be placing a bet in the stock market when so much of the outcome hinges on the health of the ailing US dollar and almost nothing else matters – whether it is the underlying fundamentals of a blue-chip DBS Group Holdings share or the demand for crude oil going forward.

And just to give an example of the surreal situation which the market is finding itself trapped in, I got this note from a Hong Kong broker this morning.

It advised investors to buy HSBC Holdings up to a price of HK$91 on hopes that it would rise to HK$98. But if the stock should fall to HK$85, investors should take the loss in the chin and clear out of the stock altogether.

Strange, that such a trading recommendation should be made, considering that HSBC appears to be properly chastened by its US adventure and could not seem to be getting out of the troubled US mortgage market fast enough. On the flipside, it had even despatched its CEO to Hong Kong to show that it meant business in Asia.

Surely, if its share price falls sharply, isn't it more attractive to buy more of the stock?

But that is the ridiculous situation we are finding ourselves in the market today.

The buy high, sell low syndrome is back.

Buffett’s giant bet

2009-11-04T04:48:00Z

Goh Eng Yeow comments on the US$26 billion bet made by Warren Buffett as the stock market rally is losing steam.

ONE step forward and two steps back – this seems to be the direction that stock markets across the world are taking after hitting their highs for the year last month.

On Tuesday, market jitters were becoming audible, with the Wall Street’s Vix index – which measures the volatility of the S&P 500 Index – hitting its highest level since March.

While US stock index futures predicted another jaw-dropping fall on Wall Street, legendary investor Warren Buffett struck the biggest deal of his life – a US$26 billion (S$36.4 billion) purchase of Burlington Northern Santa Fe – in what he labelled as his "all-in wager" on America's economic future.

The question again being asked, like last October when he made huge bets on Goldman Sachs and General Electric, is whether Mr Buffett is losing his Midas touch.

He was even willing to issue new shares of his highly-prized investment firm Berkshire Hathaway as part of the purchase package to complete the deal.

But investors had their eyes firmly fixed on the communiqué to be issued by the US central bank at the end of a two-day interest rates fixing meeting tonight.

Despite splurging so much money on a single deal, Mr Buffett failed to move Wall Street at all. The Dow Jones Industrial Averages ended slightly down, spooked by renewed concerns over the business outlook of the US financial giants whose problems had sent the global financial system reeling last year.

What to make of all the mixed signals coming from Mr Buffett and the rest of the US markets so far?

As I write, the benchmark Straits Times Index is up a meagre 17 points to 2639.03. But it is still way below the high-water mark of 2,716 reached last month. Like investors elsewhere, the players here are keeping their powder dry, as they wait for the dust to settle on the latest bout of market uncertainties.

But as my small change column "On the trail of smart money" suggested, a retail investor should track the moves of shrewd market operators like Mr Buffett to time their own purchases for the long-term.

Mr Buffett has, as he had succinctly put it, put both his words and money where his mouth is.

I guess that even for an investor of Mr Buffett’s age – he is after all pressing on to 80 years old – taking a long-term view of companies and economic trends often wins out when they are temporarily depressed by short-term uncertainties - something which I hope to take up in a future small change column.

He may not be making money on his latest "elephant" purchase for years. But then Rome is not built in one day. He may yet be proven right on his latest bet on America’s future.

On another note, I have received several queries from readers to my the latest "small-change" column on how they can track insiders' trades.

The ST publishes a list of insiders’ trades every Friday which highlight some of the big trades of the week.

To get a better handle of the trades themselves, it is best for a reader to identify which corporate titans they wish to follow and the stocks they regularly trade. As these biggies are often the biggest shareholders of the companies, their trades will be reported on the Singapore Exchange website.

Just tracking a couple of trades will not give the reader a hang of the views which these insiders hold on their stocks. You will have to track them over time – months or even years to do so.

One last note: I have made the effort to write the market blog regularly with a view to give online readers a handle on market directions and highlight possible trading trends. Over time, I hope to attract readers to give their views and turn the blog into a vibrant discussion on the market.

The blog has recently attracted comments on topics opposition politics which is inappropriate to the topics being discussed here.

I am glad that some readers have endeavoured to point this out to those polluting this blog with their irrelevant comments.

Those people who are unhappy about non-stock market issues should really air their grievances elsewhere and leave this space for those who are keen to learn more about the equities market and grow their nest-eggs.

‘This is it’ for the markets?

2009-10-29T07:29:00Z

Goh Eng Yeow wonders if the recent stock indexes heights mark their high points.

I WAS among the one hundred-odd people who got to watch the Singapore premiere of the documentary which featured late singer Michael Jackson’s London comeback shows last night.

The film left viewers musing over what they had missed had Mr Jackson been alive to perform the show — the 3D imagery, pyrotechnics and elaborate stage sets — not to mention the incredible precision of his performance.

His various rehearsals were inter-weaved in the film and they flowed smoothly into the one performance reflecting what he proudly labelled as his "This is it" performance — the gold-plated standard which other performers will have to live up to.

But the strenuous rehearsals — the precisions in the choreography demanded by Mr Jackson of himself and his dancers – not to mention the marathon singing practices — would have exhausted a man half Mr Jackson’s age.

The effort in putting on the show was probably the major cause behind the death of the 50-year old singer, come to think of it.

Still, reflecting on the theme of his London come-back shows reminds me of the uncertain state of the stock market.

Is it "This is it" time for the Dow Jones after it breached the 10,000 level, the benchmark Straits Times Index crossed the 2,700 mark and the Hang Seng swung above the 22,000 level — all at about the same time?

At their respective current levels, the major stock indexes are half-way between their March lows and all-time highs — reached incidentally in late October 2007.

It is not surprising that after the recent losses on the Dow Jones, stock pundits believe that a 7 to 10 per cent correction in share prices is at hand. "This is it", they say. The indexes have reached their targets and bulls are looking tired. Time for the market to take a break and fall lower.

The jury is still out whether this is a correction before markets test fresh high levels next year, or a gentle descent back to lower levels to reflect the awful state of the "real" economy in developed countries such as United States and Europe where unemployment is still growing and consumption remains tepid.

The only parallel with current trading patterns is October 2007, when a massive dose of liquidity injected by the US central bank with an interest rate cut — plus a plan by China, now shelved, to allow its investors to buy shares directly from overseas — caused share prices to surge to record high levels.

Of course, this time around, the swing up has been much higher, since the Fed not only cut interest rates to almost zero in March, but also printed around US$3 trillion to provide a cushion of support for the global financial markets.

China has been helpful too, giving out a US$500 billion economic stimulus package and getting its banks to lend generously.

But getting the Fed to print even more money may be tough — with the Europeans and Japanese complaining loudly about the systematic devaluation of the US dollar and the implicit threat by China to swap out of its large US dollar hoard.

As for China, both the stock market and the real economy look like over-heating from the economic stimulus measures and the fear is that it might have to tighten up, just as the Fed is forced to stop its printing presses.

Regional bourses like Hong Kong and Singapore are caught in a pincer between Wall Street and Shanghai. So it is no wonder that they have tumbled on the sudden barrage of bad news that suddenly seem to become the norm once again.

No wonder, there are cynics who believe that investment bankers on Wall Street and in London are stubbornly clinging on to the eye-popping bonuses due to them, despite the big storm of protests this has generated in the Western media.

Given all the fresh uncertainties, there might not be any huge bonuses to collect any more next year. After all, a bird in the hand is worth two in the bush; and paraphrasing Mr Jackson, they might say "This is it."

The angst afflicting investors

2009-10-26T03:30:00Z

Goh Eng Yeow on the lacklustre market sentiment.

IT'S been a while since I have written a blog on the stock market.

At first glance, nothing much seems to have changed. Except for stock market indexes pressing past key resistance levels in the past two weeks, lots of investors are contented to sit back and let the rally pass them by.

As I write, the benchmark Straits Times Index is languishing around Friday's close of 2,715, unable to shake off the lethargy which has afflicted stock markets around the world since August.

The bulls have been arguing for a while now that stock prices should continue to move upwards. Investors are earning nothing, keeping their money in the bank, with interest rates at close to zero levels.

And with the greenback showing no signs of revival against regional currencies, it is attractive for investment banks and hedge funds to borrow more heavily in US dollar to make even bigger bets in the region’s stock markets.

But a report by Citigroup this morning shows that foreign fund managers' attention seems to be fixated elsewhere.

"About US$781 million (S$1.09 billion) of new money flowed to offshore Asian funds last week. But this was less than one-third of the global emerging market funds, 37 per cent below global funds and even 10 per cent smaller than the amount taken in by Latin American funds whose assets under management are just one-fourth of Asian funds," it observes.

So what is holding back foreign funds from making bigger bets here?

Citigroup believes that the problem stems from the large number of cash-calls made by companies as they strengthen, or repair, their balance sheets after the recent massive financial fire-storm.

"Over the past three months, total cash-calls (both IPOs and secondaries) reached US$54 billion in Asia ex-Japan, which was 3.6 times the funds raised in Latin America, emerging Europe, Middle East and South Africa added together."

By coincidence, both ST and BT highlight today the large number of share placements made by Singapore firms this year.

I suppose that it is prudent house-keeping for management to make hay while the sun shines by raising money in whatever way they can – and share placements seem to be the easiest route currently – as there is no guarantee that the going may get tougher going forward.

But the discount is so big in some cases – loss-making bio-technology play Transcu gave new investors a eye-popping 38 per cent discount to last traded price – that it arouses unhappiness among existing shareholders.

With such share placements, these shareholders not only fail to get a bite of the cherry, but find that their existing shareholdings are diluted in percentage terms as well.

With the end of the year approaching in just over two months, I expect the "watchful peace" in the stock market to continue for a while yet.

At the start of the year, I wrote that the stock market mood was so bleak that dealers were wishing that the clock could, at that instant, strike at midnight on Dec 31, 2009 just to get the year over with. Today, many must be wishing that the current year never comes to a clsoe, as this could mean the end of the stock market party.

Investing in STI index fund

2009-10-14T03:48:00Z

Goh Eng Yeow clears the air on trading the STI ETF.

I GOT several inquiries from readers on exchange traded funds, following my small change column last Sunday. This is my reply.

Exchange traded funds (ETF) – the vanilla type at least – are made up of baskets of stocks which closely mirror widely-watched stock indexes such as Singapore's Straits Times Index and Hong Kong's Hang Seng benchmark.

Many readers want to know where they can buy the STI ETF which tracks the STI.

Well, it is listed on the Singapore Exchange. As I write, it is up two cents at $2.75 with 472,000 shares traded. STI is up 5.74 points at 2,674.3. This means that the STI ETF is traded at a small premium to the index.

I've mentioned the volume traded so far to dispel any misconception that the STI ETF is thinly traded. For retail investors, there should be a sufficient number of shares traded each day to ensure that they can easily get in and out of the counter.

One thing good about the STI ETF is the low management fee involved - about 0.2 per cent of the value of the assets in the funds. In contrast, a conventional unit trust will charge you anywhere between 1 per cent and 5 per cent of the value of the assets for the pleasure of managing them on your behalf.

Some readers confuse the STI ETF with the multitude of STI warrants displayed on the screen.

With the STI ETF, you actually get to “own” a basket of blue-chips such as SIA, DBS and UOB. You will also get an annual dividend payout. The latest dividend yield works out to 4.4 per cent – far higher than what banks are paying. You can also use CPF or SRS monies to buy into the STI ETF.

However, with STI warrants, what you get is an option contract. An option does not confer ownership on the underlying assets. Instead, what it offers is a bet on whether the price of the asset goes up or down. If it goes up, you walk away with a prize, but if it goes down, you may end up losing everything.

I hope this article helps to clear the air on STI ETF.

Enclosed below is a page from Shareinvestor.com which gives salient features on STI ETF:

STI ETF STI ETF
Last 2.750	Change +0.020	High 2.850	Open 2.730	Cumulative Volume 472,000
Percent Change +0.7%	Low 2.730	Yesterday's Close 2.730	Cumulative Value 1,306,010
Remarks	Buy Volume 17,000	Buy Price 2.740	Sell Price 2.760	Sell Volume 252,000

Fundamentals
EPS ($) ^a -	Rolling EPS ($) ^e -	NAV ($) ^b 1.6060
PE -	Rolling PE ^f -	Price / NAV ^b 1.712
Dividend ($) ^d 0.120000	52 Weeks High 2.750	Cash Value ($) ^g -
Dividend Yield (%) ^d 4.364	52 Weeks Low 1.490	Price / Cash Value ^g -
Issued & Paid-up Shares ^c 260,000,000	Par Value ($) n.a.	Market Cap (M) 715.000
Stock Categories ETF

Animal spirits are talking

2009-10-12T08:41:00Z

Goh Eng Yeow says human emotion is affecting the money markets

THE great British economist John Maynard Keynes coined the term "animal spirits" to describe the impact which human emotion had on decision-making in the financial markets.

When there is literally nothing to explain the wild price swings in the stock market since the onset of the global financial crisis two years ago, animal spirits have been used time and again by market strategists to describe the seemingly bizarre behaviour of investors.

Looking over the e-mails sent to me by investment banks over the weekend, I believe that animal spirits will be at work again soon in the stock market — to propel prices higher.

If sufficient investors believe these glowing reports, we will probably round up the remaining months of the year with another bout of exuberance.

This is despite the weaker-than-expected September job data in the United States released two weeks ago (how many investors actually recall that figure now?) which implied that people in the world's biggest economy were still losing jobs at a horrendous rate and that the recovery, if anything, would be patchy and difficult.

The brokerage reports that I have seen are unanimous in believing that the worst is over.

Below is just a sample of what I have read so far:

"We think the regional upturn is sustainable and the key issue is not the risk of a double-dip recession but the need for Asian central banks to normalise macro policy through interest rates hikes and currency appreciation." – Merrill Lynch.

"The firming economic recovery in China and improved employment outlook have boosted consumer confidence and brought along consumption growth." – Merrill Lynch again.

"We believe we are now at the tail-end of the earnings recession." – Morgan Stanley.

"China discretionary performed well this week as China reported solid sales growth during its Golden week holidays." – Citigroup.

Principle of flotation

2009-09-29T07:07:00Z

Goh Eng Yeow on how a weaker greenback impacts regional equities markets.

THE buoyancy in Asian stock markets today reminds me of a law in physics — the Principle of Flotation — which every student would have studied during his secondary school education.

Essentially, it says that an object can float on water because there is an equivalent mass of fluid beneath it which is giving it support.

With equities levitating to levels last seen in 12 months ago, I wonder if there is a similar principle at work in the financial markets.

I spent yesterday writing an analysis on an esoteric subject — US dollar carry trade. No many people understand what it is all about or how to track the size of the trade, but it is probably the biggest factor influencing the direction of the financial markets currently.

With US interest rates at almost zero per cent and the greenback sinking to almost all-time low against the Japanese yen and the euro, it is a no-brainer for any bright trader to borrow heavily in greenback to make big bets on other asset classes.

In doing so, he is betting that when he has to repay the greenback loan, the US dollar would have fallen sharply, and so the asset he has brought would be worth a lot more in greenback terms.

This has propelled the stock market here, as well as those elsewhere in Asia sharply higher, as cheap money floods the market and the resulting rising tide lifts all equities – quite literally.

The carry trade is also providing the fuel for the renewed spate of mergers and acquisitions.

Just watch Wall Street last night when the Dow shot up 123 points on a wave of M&A fever. When money becomes so cheap, chief executives start becoming empire builders again.

But apart from the equity investors who stand to make a killing from the galloping stock markets, why should anyone else bother about it?

A weakening greenback has consequences far beyond the equities markets.

As the Japanese have discovered to their horror, the switching out of yen into US dollar borrowings has caused their currency to surge to near record high levels, raising fears that their companies may be priced out of business altogether.

This is despite all the warning signals flagging red that it is in danger of falling into a deflation trap again because of falling demand, as people anticipate tougher times ahead and cut back on their spending.

For the rest of us, another fear looms – the spectre of run-away inflation if the prices of oil and other raw materials surge and cause an untenable rise in consumer prices.

So far, this has not happened. Because the US and Europe have been mired in recession, demand has been weak and there is more than ample supply of oil available, and this has dampened the pricing power of the producers.

But this sweet spot may not last forever.

Eventually, the supplies would have been used up, and there would be pressure to raise oil prices to compensate for the weakening dollar.

For investors, the best strategy going forward is to track the US dollar.

I expect regional markets to enjoy the sea of support provided by the US dollar carry trade, until the greenback strengthens and forces a un-winding of the carry trade.

Then it is time to get hell out of the market and stay in cash. It is worth recalling the violence which had accompanied earlier unwinding of the yen carry trades during the Asian financial crisis in 1997-98 and again during the recent global financial crisis,

How long will this rally last?

It is hard to tell, but bearings on the equities markets in the near future, in all likelihood, will come from the currency market.

Tale of a HK IPO

2009-09-23T07:56:00Z

Goh Eng Yeow on the lacklustre debut of the Sinopharm IPO in Hong Kong.

PERHAPS the best example of the speculative frenzy now affecting all Asian markets can be found in Hong Kong where investors simply could not get enough of the mainland firms beating a path to list there.

But while the reception for China IPOs is white hot in Hong Kong, the first-day trading fervour has noticeably cooled.

The Sinopharm IPO in Hong Kong is a good example. The company only needed to raise US$1.1 billion but attracted a cool US$63 billion in subscription money.

Shouldn't an overwhelming response have translated into a rousing response when the shares made its trading debut?

But this morning when Sinopharm finally made the grand entrance, its share price started to fall, after opening at a high of HK$19.80 – a 23 per cent premium over its issue price.

Currently, it is trading at HK$18.74 – a mere 18 per cent premium over its issue price. This premium is rather small, by recent standards, when it is usual for a mainland IPO to open 30 to 40 per cent above issue price in neighbouring Shanghai.

This is surprising, given the rousing reception it had received during its IPO launch when it had attracted blue-chip investors such as Hong Kong banker David Li , China Life Insurance and Bank of China Group Investments.

As such, one would have expected the premium it would have commanded over its IPO issue price would have been much higher than what it has been given by the market today.

Some will say that Sinopharm's valuations had been rather rich, as it was priced at about 25 times 2010 projected earnings. In contrast, a recent IPO in Singapore - Gaoxian Fibre Fabric - was only priced at four times earnings.

But Sinopharm’s lacklustre debut is probably a symptom of a wider problem – the glut of liquidity sloshing around regional markets looking for a safe harbour.

After sitting on their cashpile for months, some investors have decided to come in from the cold and put their money to use again.

Since regional share prices have almost doubled in the past six months, they are simply putting their bets on the China IPOs which still offer some value, in their view.

Besides the incredible amount of money they put up in chasing these IPOs, they also had no problems in getting margin financing.

This serves to highlight another problem – banks are also flushed with cash. Since the IPO market in Hong Kong is so hot, they have also hopped onto the bandwagon, financing these high networth customers in chasing the IPO shares.

The risks to the banks are also marginal, since they only have to extend loans for a period of up to two weeks only.

Therein lies another dilemma. Like other Asian economies, the Hong Kong economy is slowly picking up the pieces, after the global financial crisis in the past two years.

For many businesses still suffering from the stresses of coping with the aftermath of the financial crisis, the white hot Hong Kong IPO market must seem like it is located in a different planet altogether.

Pre-empting a property bubble

2009-09-14T09:30:00Z

Goh Eng Yeow on traders’ reactions to the move to dampen some speculation

PROPERTY counters are reeling from the much anticipated move by the Government to deflate the bubble now brewing in the residential property market.

As I write, City Developments has fallen 74 cents to $10.34, while rival CapitaLand is down 17 cents at $3.70.

What surprises me is the strong reaction by traders to the Government’s move to disallow the interest absorption scheme by developers to lure buyers to purchase new properties.

Essentially, the interest absorption scheme is a variation of the deferred payment scheme which was scrapped in October 2007. It allows a buyer to defer making the bulk of the payment on the property he buys until TOP, once he has come up with the agreed down-payment.

Given the scare at the end of last year when there were fears that large number of buyers on the deferred payment scheme might default on their uncompleted property purchases, it is surprising that traders should have reacted so strongly to the scrapping of the interest absorption scheme.

The problem with such a scheme has always been that buyers might be tempted to over-stretch themselves by buying more than one uncompleted property, or buying something which they could not afford to service, after footing the initial payment.

So, going by the talk around the market, few are surprised by the Government’s move.

But having said that, the sharp fall in property counters could have been due to traders factoring in other possible measures which the Government may be contemplating to cool the heated property market.

Property counters have had a good run since July when they last succumbed to jitters it was because the Government proposed a rule change in income tax to clarify how gains on property sales could be taxed. The proposal was scrapped the following month.

Note that the latest measures announced by the Government to dampen the real estate fever is aimed at uncompleted properties.

But HDB resale prices have also been accelerating as well – and it is this sector which is being watched closely by housing agents, banks, and practically everyone who owns a HDB flat, since it houses 80 per cent of our population.

By sheer coincidence, Tuesday marks the first anniversary of Lehman Brothers’ demise.

Since Lehman's collapse, we have had six months of gloom when there were widespread fears that the global financial system might collapse and end the way of life as we know it, followed by six months of near miraculous recovery.

The next six months may find the markets trying to reconnect with reality, after the past few months of exuberance.

Heading into the fall

2009-09-02T04:45:00Z

Goh Eng Yeow examines the bumps preventing indices from going higher.

SEPTEMBER has, so far, turned out to be a nervous month for traders, as autumn trading officially commences in the United States and Europe.

The approaching first anniversary of the collapse of Lehman Brothers had cast an unwelcome spotlight on a host of unsavoury practices on Wall Street yet to be resolved.

Last night was particularly worrisome, as US financials plunged. Big gainers from last month like Citigroup plunged 9.2 per cent and Bank of America lost 6.4 per cent.

But just as I had observed in a February posting about certain blue-chips enjoying a natural floor price as the market plunged, there also appears to be hurdles which stock indices will have to surmount before the markets can conquer their Lehman anniversary jitters.

Take the S&P 500 index. It had been dancing around the 1,000 support/resistance level for the past two weeks. This was also around the level which it had initially sunk to, a fortnight after Lehman’s collapse last September.

As for the Hang Seng, it has been oscillating around the 20,000 support level for more than a month now. It is surprising but true that the index was also at this level in the week before Lehman’s collapse.

For the STI, it is obvious that it must breach the 2,600 level in order to regain its upswing momentum, after regaining this level on July 28. Like the Hang Seng, STI’s current level of 2,566 brought it back to levels 12 months ago before Lehman failed.

The 2,600 psychological barrier for the STI is important in another sense. On Jan 3, 2000, the STI hit a then all-time high of 2,608 - a record which was to remain standing for six years until it was finally smashed in October 2006.

Unless the STI could break out of its current gridlock, the 2007 bull-run, which caused it to surge to a record high of 3,831, might turn out to be an anomaly unlikely to be repeated any time soon.

Defusing a potential housing bubble

2009-08-31T06:54:00Z

Goh Eng Yeow asks if banks should tighten lending guidelines now.

IT MAKES sense to ask ourselves if the current terms extended by our banks for home loans are too generous.

If I recall correctly, these guidelines were relaxed, along with the scrapping of other anti-speculation measures like the capital gains tax on property sales profits, to fight the then scary free-fall in home prices after the bursting of the dotcom bubble bust in 2000.

But the loose monetary policy now practised by the US Federal Reserve to fight falling prices in the United States has the effect of depressing interest rates elsewhere in the world, where economic conditions are not similar to the US.

Given the risk of bursting a rather big bubble in our housing market, one has to ask if it is still sensible to stick to the same guidelines which were used to combat our own deflationary downward spiral in home prices. Will we be sowing our own seeds of destruction by doing so?

Banks will, of course, say that they have a sophisticated risk management system to screen borrowers to ensure that such a similar disaster like the US sub-prime crisis does not take place here.

Examples extended by bigger and more well-established global lenders offer no consolation.

In Britain, HBOS had recklessly lent on the UK mortgage market and this forced it into a shot-gun marriage with Lloyds Bank late last year, as the global credit crunch took a turn for the worst. The merger succeeded in dragging Lloyds into the morass as well, and it had to be rescued by the UK government.

It is also interesting to delve into some of the strings attached by the banks here to ensure they get their money back.

Last week, I had a good laugh as my lawyer friend regaled me with the tales of the measures taken by the banks to lend themselves comfort on the creditworthiness of their borrowers.

She had a couple of cases where the bank had insisted on a third person giving an “open guarantee” to the home loan offered to the young couple buying the flat. This string was attached because the bank was fearful that, given the size of the loan, the monthly mortgage payment might stall if either or both of the couple should lose his/her job.

“In the past, it was usually the father, the mother or the in-law. But now, I see an unmarried sister or brother standing in as guarantor for the loan as well,” she said.

I wonder if the guarantor knows what he is getting into. He probably signs on the bottomline, as a gesture of goodwill towards his sibling who is getting married – and he is not anticipating that he will make any payment at all.

But he has made an open guarantee and he is liable for any further future borrowings if his married sibling takes up a further loan on the flat. It certainly sets the stage for future family discord.

On a more serious note, there was this observation made by a friend who used to work in Dubai whose building boom has come to a screeching halt because of the global credit crunch.

Each day, he said that there were 4000 to 5000 people leaving Dubai as the jobs market dried up. What some foreigners did was simply throw their car/house keys at the airport, as they caught the next plane out of the city.

With his observation comes this question: Are foreigners getting the same generous access to home loans as Singaporeans? There is hardly any hold over them if Singapore hits an economic bump and they simply flee back to their home country. Will the banks then end up becoming unwilling owners of their condos and HDB flats?

This morning, I had a Cai Jin column published on the same subject asking if we will end up suffering a subprime style crisis because of the way that the cheap credit is fuelling our housing boom.

One reader took issue with me for saying that in some countries such as China, home-owners have to make full cash-payment of their houses, claiming that many first time buyers there could get loans from the Chinese banks.

China is a huge country, and his observation may only hold true for a few big Chinese cities, and a very small segment of the population. Suppose that just 1 per cent of the Chinese population successfully get a housing loan, this will work out to 12 million people.

But this detracts from my argument that banks in Singapore are about the most generous in the world in requiring borrowers to fork out only 10 per cent down payment in order to qualify for a home loan.

I have another example to offer: Last year, a friend of mine went across the crossway to Johor Bahru to open a current account at the branch where he already maintained a savings account for many years. To his surprise, he was asked to get a guarantor – and that was just for opening a checking account. He was not even applying for a loan.

Protecting investors’ rights

2009-08-25T07:46:00Z

Goh Eng Yeow thinks SGX should protect small investors' interests too.

FOR those who keep complaining non-stop about the Government’s failure to listen to their gripes, it must come as a surprise to find that a proposed change in the Income Tax Act on property sales gains has been scrapped, following public feedback.

As the ST editorial points out this morning, the odd feature about the whole exercise was asking the public feedback in the first place. No living person on earth would say "Tax me some more".

What Finance Ministry was actually planning to with the proposed tax change was to make it clearer to individuals on the type of circumstances that they would not be taxed if they sell a property.

But it conceded that there was merit in the feedback given by respondents who pointed out that it might create 'inadvertent uncertainty for individuals who sell more than one property within any four years', even though it had stressed that there would be no change to the current income tax treatment for such cases.

Public consultation on subjects relating to listed firms and the stock market has become a regular feature for those of us in the investment community as well.

Take the latest move to provide additional safeguards in the proposal to require overseas controlling shareholders of listed firms to custodise their shares in Singapore, and to disclose any financial arrangements which might trigger a change of share ownership in the firm.

These proposals do not come by chance.

In March, there was a series of accounting scandals involving S-chips. Even though I have been following the markets for a quarter of century, I was surprised to find myself getting worked up over them. They could easily have been prevented.

As I pointed out in two columns headlined "Bank players from pawning shares" and "SGX to beef up its gatekeeper role", the SGX should have devised ways to make errant bosses of overseas firms accountable, rather than tiptoe around the problem.

As an investor myself, I applaud SGX’s efforts to make itself the "Asian Gateway", offering us a wide variety of investment choices by attracting overseas firms to list here.

But most of us are used to the way local firms and their bosses conduct themselves, and it is natural for us to assume that overseas-based ones will play by the same ground rules.

Few of us even know that there are few leverages over these overseas bosses if irregularities occur. They spend the bulk of their time outside Singapore and own few assets here. Some don’t even bother to turn up for their company’s AGMs here.

To make matters worse, investors don’t even get the protection of the Singapore Companies Act. Even though their listed firms are traded here, they are incorporated in Bermudas or Cayman Islands.

They also have a host of professionals to defend their interests.

Some of them are quite patronising, dismissing me as being naïve for asking for such measures.

Pledging of shares is a common business practice and asking for these disclosures is an intrusion of privacy. How many people would like others to know their financial arrangements, like the loans they took from banks?

But let’s not kid ourselves. Why do these businessmen come to list their firms in Singapore in the first place?

One of the merchant bank’s best selling points to these businessmen is that this enables them to "monetise", or give a value to the business they own, if the company is listed.

Bankers are practical people. If a businessman in a privately-owned company wants to borrow money from them, they want to know the tangible assets which can be pledged as collaterals – buildings, machineries and etc.

However, if the businessman owns a listed firm, they are happy to take the listed shares as a collateral for the loan, since they can sell these shares if anything goes wrong.

For these businessmen, it could not have been a more wonderful arrangement. They can get rid of any personal guarantees that they extend over company’s borrowings. At the same time, they also get a fresh line of credit, pawning their shares.

And since they are running the firm, only they are in total possession of all the information – their own personal loans, and the company’s borrowings.

It is well and good when the economy is humming along fine, and everyone is making money.

But bankers are not stupid. Sure, they are lending to the listed firm, but they are doing so, only because these businessmen are running the business. As a precaution, they always slip in a clause to reserve the right to be repaid in full, if there is a ownership change.

If the economy hits a rough patch like it did this year, suddenly, the businessmen found themselves tripped over by a mountain of debts – personally and on the company side.

It is very sad that each time such a disaster happens and the share price nose-dives, thousands of small-time investors find part of their life-savings wiped out too.

I will not be fobbed off by legalities thrown up by the professionals that these businessmen had no choice because their lenders insist on a confidentiality clause in the loan agreements.

This seems like a flimsy argument. Which lender will not want to know whether his borrower has other financial arrangements, if only to make sure that he is not over-stretched?

When their firms become listed, it becomes public property and any actions taken by these businessmen have to be scrutinised carefully, because public money is involved.

I am sorry if some of these businessmen meet with financial mishaps, but steps should be taken to ensure that they do not bring down innocent small-time shareholders with them.

It has taken five months for the SGX to come around to the proposals first mooted in my two Cai Jin columns in March. In its efforts to build an "Asian Gateway", SGX should at least make sure that our small investors' interests are well-served too.

The hands of history

2009-08-20T03:03:00Z

Goh Eng Yeow on the dilemma facing investors as they confront investment choices

The hand of history rests very heavily on the shoulders of market watchers like myself as we watch the amazing developments in the past two years – the near-collapse of the global financial system and the subsequent V-shaped stock market recovery.

As I observed in my ST news analysis this morning, there is a seismic shift in the centre of financial gravity from the United States to China. The only sure thing when such a cataclysmic event takes place is more turbulence, as the financial markets adjust to the new realities.

I am sure the fallout from the financial turmoil has kept those of us in our 40s and 50s wide awake at night, wondering what to do with our nesteggs. Will the money we have painstakingly accumulated for our retirement suddenly turn into a piece of toilet paper, if inflation gallops out of hand ?

Parking the money in the bank gives us almost zero returns, but the run-up in equities has been so sharp and scary – and without support from any positive earnings surprises – that putting money in stocks seems equally dicey as well.

One writer in the Financial Times complains bitterly that it is generational theft. The trillions of dollars printed by central banks to nurse huge economies such as the US back to health is punishing those, nearing retirement, who have kept the bulk of their assets in cash for their living expenses.

Instead, it is rewarding the young who are saddled with large debts and some equity investments – as inflation erodes the value of their borrowings.

In an opinion piece in the New York Times yesterday, legendary investor Warren Buffett described the monetary medicine administered by the Fed as greenback emissions. The threat it poses might turn out to be as ominous as the financial crisis itself.

Like other market watchers, I have tried to search for a precedent in history to get clues on how things may unfold.

Rather than the gloomy 1929-1930 scenario, we may have to grapple going forward, we may find ourselves reliving the lost decade in the 1970s when stagflation – a toxic mixture of high inflation and rising unemployment – reigned supreme.

The only memories I had of the 1970s was the relentless rise in the prices of necessities. But those were also the days when Singapore was emerging as one of the four dragon economies in Asia – with dazzling growth rates and rapidly rising standards of living.

But as a developed economy now, the trajectory of our stock prices is more likely to be in tune with those on Wall Street and London and that is what made the 1975 comparison discomforting. In the 1970s, stock markets languished for years, as companies struggled with the uncertainties of rising prices and tepid consumer demand.

How about properties, you may ask ? If I recall correctly, the residential market was bubbly till 1981, with home-owners willing to pay as much as 10 per cent interest on their housing loans.

Then the housing bubble burst and home prices languished for over a decade, before picking up in 1993 when the stock market enjoyed its biggest bull-run until it was overtaken by 2007’s rally. Those who bought homes in the late 1970s had to wait a good 12 years to get any return on their investments!

The 1973 to 1982 period had been described as one huge bear market era which only came to an end when the US Fed squeezed out inflation with sky-high interest rates to take excess money out of the system.

Things may not be so simple now. The US does not call all the shots, with the emergence of China as an economic superpower to be reckoned with.

It is a trying time for investors making decisions on what to do with their nesteggs alright. If history is any guide at all, it is that uncertainties will prevail.