Market Updates For Feb 2012 and Portfolio Adjustments

1) Local market STI increased approximately 11% year to date, 17% from Oct 2011 lows. There were similar returns across regional markets. US markets increase at a lower rate, roughly about 7% YTD.

2) The reasons contributing to the buoyant stock markets have little to do with market fundamentals. It is the consequent of central banks printing money as European Central Bank pledged to lend out 489B EUROS to ease potential credit crunch in Dec 2011. This is as good as providing cheap credit to banks which enable them to lend out more cheaply for investments. This money are flowing to Asia and emerging market regions. Just last week, funds investing in regional equities drew a net inflow of US$430M. This is the 4th straight month of inflows to Asian regions, which explains the 5th straight week of regional equities market appreciation.

3) Aussie dollars appreciated as stock markets rallied. Over the span of 2 months, it has increase more than 4% against SGD and 5.5% against USD.

4) Average turnover of equities are still below last year’s average. There is a noticeable increase in volume, not value. This translates to speculative trading of penny and mid cap companies stocks. An indicator that market may be looking toppish for the short term (3 months-6 months)

5) Borrowing costs continue to appreciate for corporate loans. This is a peculiar phenomenon. Notice that although banks are able to borrow cheaply from their central banks, they are charging high premiums on the interest lent out to companies, driving up returns on bond yields and returns. One local unlisted company have even issued out 8% PA (non investment grade), 3 year corporate bond.

6) The rationale is simple. World central banks provide cheap liquidity to their local banks. Instead of lending out to companies, they lent it out to governments instead. This way, they do not need to set aside the regulated reserve requirements as government bonds are considered their capital. What happens if government defaults then? The scenario though unlikely may result in foreign banks run.

7) The Baltic Dry Index as of last week has fallen to its lowest in 25 years. This index is a leading indicator of world trading activities, which means lower anticipated demand for raw materials.

8) Conclusion: There could be possible downside risk, given that markets have rallied so strongly over the past 1.5 months. Greece coalition government is under pressure from its own people and Euro zone leaders on their debts. There is small break through lately but with debt refinancing due in March, all eyes are on their ability to repay their current debt obligations. Nobody is able to forecast market’s reaction to Greece default as no EURO Zone member has defaulted.

9) What am I looking at to invest? I have taken profit on a number of equity positions and embarking on exciting leverage financing. I will pledge my shares for a cheap OD line (1.3% P.A.), purchase a 3 year SGD corporate bond and leverage on the same bond to purchase another one. This would increase my yield of $250,000 to 6.5% P.A, assuming interest rates remain low. This investment is at the final stage as my OD line is up, I just need to select the safe bond to leverage upon. My outlay will be approximately $150,000 in cash and $350,000 in borrowings. This would enhance my entire portfolio to $500,000 in fixed income, $230,000 in equities and $50,000 in cash. I will write more about this when the bonds are purchased. Margin call concerns will also be addressed.