100% guarantee on deposits?

Many financial advisors and investors have advocated MAS providing a guarantee on Singaporeans’ bank deposits. Currently only the first $20,000 is recoverable in the event of a bank failure.

Actually, I do not think it is a prudent move for banks to insure 100% of deposits.

Firstly, it will bring about a huge influx of cash into Singapore from other countries. Singapore banks will be seen as safe heavens for cash. This would ultimately increase demand for Singapore dollar and Singapore exports will suffer. GDP will go down even more as we lose our competitiveness. Do not forget Singapore is an export oriented economy.

Secondly, it will discourage people to invest. Many would believe money in the bank is even safer than keeping it under the pillow since it is 100% guaranteed. This does not bode well for the local equities market and for risk adverse investors. Remember, your deposits will definitely be eroded by inflation, slowly but surely.

Thirdly, it is not cost effective. The depositors will ultimately pay for the insurance. It may be in the form of service charges, lesser interest or just an insurance fee.

Fourth, it might encourage irresponsible lending since the risk of defaulting on its bank deposits is borne by third party. Imagine that I borrow money from A and if I do not pay A, B (insurer) will have to pay. Would I exercise necessary prudence to return money to A? Am 1 less likely or more likely to take on more risk? Answer is clear.

Lastly, we are already compensated to deposit money in the bank through the interest payable to us. The risk of default is small, which explains the low interest rate on our deposits in the first place!

I feel that bank should offer an optional insurance scheme to those who wants to seek a 100% guarantee on his/her deposits. The premium can be 0.1% (per annum) of amount insured. This would save all the debate going on. Of course the insurer can be anyone but the bank itself!

SPH FY 08 Results

SPH has declared a final year tax exempt dividend of 19 cents per share, a notable feat in current financial turmoil.

It has reported a set of decent results:

Revenue had exceeded $1.3 billion, a record high.

Operating profit grew 17.5 per cent to $502 million.

Due to a 67.3% dip in investment income together with an impairment charge for SPH’s investments in associates, net profit decreased 12.4% to S$437 million.

It is worth noting that the dividends paid out will be tax exempt, compared to the usual 18% company tax the previous year. As such, dividend payout actually increased by more than 1 cent this year.

I have adjusted my expectations of dividend cut for FY 09. However, it is likely SPH will at least retain its 27 cents dividend payout for FY 09.

At last traded price of $3.5, the yield is 7.71%.

Take note that SPH has increased its dividend payout for 5 consecutive years. If the economy worsens, government might even cut corporate taxes to support the economy. However, I am not betting on our government to help, but newspapers being a near staple necessity will continue to earn a decent recurring income for FY 09.

Sky@eleven will continue to recognise income till 2010 and there should be larger amount of profit recognition in FY 2009.

SPH has a quick ratio of 3, a rather healthy debt ratio especially when credit is tight now.

Going forward, I will continue to hold on my 49 lots of SPH dearly and reinvest the dividends received.

For those who have sold down the stock due to fear and panic, I think it is rather overdone.

For those who have bought more SPH today, congrats! The dividend payout is likely to give you a great Christmas! I am unable to join you as my cash at hand is too tight!

SPH will XD on 09/12/2008, the dividend will be paid on 23/12/2008 (eve of Christmas Eve).

Where to put our money?

One Singapore dollar to 1.02 Aussie dollars. This rate has never been seen for years!

Today I quickly sms my friends and asked them if they would like to go Australia in Dec, in time for their summer farm stay. Of course, the rates were the highlights. After I sold my Aussie dollars at $1.29 last year, Aussie has been coming down especially after the recent 100bps rate cut.

The fall in commodities prices and unwinding of YEN carry trade has brought down major currencies and indices to their multiyear lows.

Indeed, nothing is safe other than gold these days. Putting our money in Singapore dollars deposit will yield nothing more than 1.8% even if you are depositing a million dollars in UOB million dollar deposit promotion.

Of course, the personal banker might sell you something that yields more, but at current market and prevalent fear, no one would dare take it.

Most would rather suffer a real loss of 5% after adjusting for inflation.

Mr. Oei Hong Leong estimated that market would go down even more, as it is the end of the beginning. He recently made headlines buying AIG at rock bottom and selling for a $7 million dollars profit, before donating it.

Fear is clearly prevalent in the market, everybody is anticipating the market to go down further. However, today, I bought 5 lots of STI ETF (CPF) when STI nearly reach 2000 points. Although 90% of the investors are probably selling, I do know that like all crises, this one will eventually be resolved and the bull run will resume.

Human greed is never ending, there will be more market run up and crashes to come.

Do not despair. Rather, find the courage to be greedy now.

SPH updates

SPH will be reporting its FY 08 results on 10 Oct Friday. I do hope they will declare a decent amount of dividends to i) support its declining share price for the next 2 months; ii) earn myself a nice bonus when it is paid out in December. Currently, I have 49 lots of SPH in my portfolio.

It will not be true to say that there will be lesser dividend this year (FY 08) as SPH would need to conserve more cash for building the Next Generation Network (NGN). This is because SPH was only awarded the project yesterday and it is unlikely to hold back dividends to anticipate the award of this project.

SPH’s SGX announcement was as follows:

The project will be funded by a combination of shareholders’ equity, government grant, operating cashflow and external funding. OpenNet forecasts its shareholder investment requirements to be in the range of S$120 million to S$160 million, which will be required during the construction and commissioning phase. SPH’s share will range from S$30 million to S$40 million.

According to the press release, it will cost at least $2B to build the network.

Assuming government grant’s of $700M, SPH’s 25% stake will require it to come out with at least $325M over 4 years.

A last check on SPH’s 3Q 08 financial statements, there is about $216M of free cash sitting in the bank accounts. The current liabilities are only $333M VS the current assets of $1B.

The quick ratio stands at a healthy 3.07.

I do not foresee SPH issuing rights to fund the NGN. There might be a lower dividend payout from 2010 onwards as SKY ELEVEN will stop contributing profits when it is completed in end-2009 and management conserve cash to fund NGN. The prospects of bumper dividends in 2009 will also be dimmer upon the final completion of SKY ELEVEN.

However, I do see that SPH’s share in broadband business is a good strategy to tap on the expertise of Singtel networks and earn itself a perpetual cash cow. Do not forget, the profit margins of broadband business hovers between 25%-35%. With SPH’s stake of 13.97% in M1, it can be assured a steady income from the communications sector, almost a recession proof business.

Starhub’s position as the highest speed provider in broadband will be challenged. It might have to end up leasing the networks from Open Net.

The NGN will also aid SPH aggressive marketing efforts into virtual advertising and information network to compliment its newspapers and magazines.

Back to its dividend payout this year, I do hope to receive at least 16 cents per share or $7840 tax exempt dividend from SPH in Dec. Anything lesser than that will likely to cause its share price to plummet below $3.60 when it goes XD in Dec.

Good luck to all vested!

Have you bought Lehman Mini Bonds and DBS High Notes?

Today’s Sunday Times ran a feature on the credit crisis, summarizing the events that had unfolded over the year, particularly the market crash and spectacular recovery this week.

I was particularly interested on a small column that reported the loss by many investors who were market DBS High Notes as an alternative fixed deposit (FD) by personal bankers and relationship managers.

Many, enticed by the high coupon payout structure of the investment have invested between $50,000 to $125,000.

It was the same case for Lehman Mini Bonds, marketed by foreign banks.

These structured deposits are likely to pay nothing to investors even if they were to be held till maturity.

Many blamed the bankers for marketing such “high risk” products to low risk threshold investors when many wanted just plain vanilla FDs in the first place!

Yesterday, I met up with a few bankers and enquired the status of the structured deposits. I confidently told them that Lehman mini bonds investors should get back some money as bondholders have priority claim on assets as compared to ordinary and preference shareholders when a company goes belly up.

Below are their replies:

Banker A: Huh, is it? Bondsholders have higher priority to claim debts?

Me: Yup, if not a bond is not a bond when it carries a higher risk exposure to ordinary shareholders and receiving lesser dividend (coupon) payout.

Banker A: Oh I see.

Banker B: Actually I do not think those who invested in mini bonds will get anything back afterall.

Me: How come? Lehman has sold its assets and surely it can receive something back to pay back bondholders right?

Banker B: Mini bonds are not bonds lah. It is just a marketing name for the structured product. We can call it super bonds, high yield saver, or golden bonds. But the underlying product is very complex one. I also don’t know what it is. We just market it when conservative people who want to put FDs walk in and don’t want to invest in unit trusts or equity link notes.

Me: What?! You mean the banks sell bonds that are not bonds and fooling people it is as safe as bonds?

Banker C: Their bank not that bad, sell until mini bond series 2 only. Mine sell till series 8!

Me: So are your sales affected?

Banker A, B, C: Actually it is business as usual. We just concentrate on insurance now. Long term investment mah. But we do not sell UTs or structured products anymore. Currencies market are more welcome by investors also. We have got many products to market.

From the above conversation, I feel that the local bankers have really poor knowledge of simple finance. They do not even know the difference between bonds and shares to begin with. How do you expect them to sell complex products in the first place? And mind you, these banker friends have been in the industry for 2-3 years!

If I am not wrong, DBS High Notes and mini bonds have invested in different underlying assets through options. Derivatives are highly volatile investment instruments and always leveraged to create higher returns (and risk).

Such sophisticated instruments are definitely not suitable for a retiree or a housewife who might not even know how to open a securities account. Derivatives are zero sum games, where one gain’s is due to another’s loss.

Sometimes, these structured deposits are marketed with shopping vouchers and labeled as capital protection products.

However, capital protection does not share the same status as capital guaranteed products. Only the latter has an insurance bought by the bank from a third party to insure the investors’ invested amount.

Should the bankers be blamed?

In a way the bankers are doing their jobs to market aggressively the banks’ products, bringing revenue for their company. Regardless whether they are paid a handsome commission, they are obligated to market the products by the bank. If they are not paid a single cent of commission, but just a salaried worker, should they still be blamed?

There are accusations that the bankers are not doing their jobs and are guilty of mis-selling.

Actually, I feel the banks are the one that should be fully responsible. They should have a system to educate the bankers. Sales should not be commission based as it would lead to unethical selling. Bankers have heavy responsibility. Pay them well so that they can have a high level of integrity. There should be other KPIs to assess them instead of sales figures. They should really be well versed in finance and not just salesmen trying to exceed sales quota.

However, the investors should also share the blame, in my opinion. How can they invest in something that they do not understand?

A coupon rate of 5% is rather high and there should be a fair amount of risk that comes along.

Investors should seek to understand the kind of risks involved before buying any investment products. There are always risks involved. Even FDs have risk. If the banks in Singapore collapse, only the first $20,000 is insured. You can lose the rest.

We can summarise several lessons for the low risk investor:

Do not believe what the banker says at face value. Question him thoroughly. Ask him questions like: What is the risk involved? If he says there is no risk, only gain, leave. All financial products and investment comes with risk.

Ask the banker to explain how the products work exactly. Ask him if there are derivatives or options involved in the product. If there is, leave. Derivatives are only for sophisticated investors.

Do not be enticed by high coupon payout products. The higher the payout, the higher the risk involved. The high coupon payout is commonly known as the risk premium. As the term suggest, you will have to take a lot of risk to earn higher (risk) premium (interest).

Do not buy a structured product because it is the bank’s flavour/theme of the month.

Do not buy a product because there are free gifts. You are actually the one paying for the free gifts from the sales charge.

Do not buy anything you do not understand! Will you buy a washing machine that is so complex that neither you nor the salesman knows how to operate?

Financial literacy is everyone’s responsibility. Pointing fingers at people when things turn sour will not change things. After a few years, you will still make the same mistake. Take charge of your own finances and be accountable for your own investments. If there is anyone to blame, we can only blame ourselves to be too gullible!

Preparing the worst outcome for my portfolio

I have invested almost all my available cash into the Singapore stock market. As regular readers know, my investment strategy is mainly income investing, with preference to low volatility stocks as main components of my portfolio.

When I purchase stocks, I try to ensure that the dividend yield is at least 6%.

How much risk threshold am I looking at? Is my current portfolio aligned to my risk tolerance?

If I were to say that I feel absolutely nothing to the current market and whistling everywhere I go, I am lying!

The market is indeed worrying!

However, I am prepared to reduce my expectations of dividend yield from my entire portfolio to 3% PA.

This means that from my $300,000 portfolio, I expect my total yearly cashflow to go as low as $9,000 or $750 monthly.

The initial target was $18,000 or $1,500 monthly.

After reducing my expectations, I heave a sigh of relief. I am sure $9,000 a year is still decent dividend payout, compared to leaving money in the bank.

If the market does recover, I will be looking at 10% gains or more.

Meanwhile, I will continue to invest my dividends and free cash back into the market whenever possible.

It is time to avoid timing the market!

I will only subscribe to one belief now: 手中有股心中无股！ (Stocks at hand but stockless at heart!)

Quick updates

I have bought Keppel Corp @ $9.28 a fortnight ago (cash) and 4 lots of STI ETF (CPF) @ $2.58 today.

Will the market go further breaching the 2400 mark and go all the way down to 1800 points?

Possibly so.

But I will continue to invest whenever I have cash to dollar cost average and will hold my stocks dearly till the next Bull Run comes.

I do hope SPH will fall below $3.96 for me to pick up more! I intend to sell all my holdings for a modest profit in Dec and cherry pick battered blue chips then! If not I will be happy to receive a decent dividend payout which would enable me to have an added year end bonus too.