Financial Teasers 28 Feb 2008

Top Stories

Bernanke focuses on recession fear over inflation
Federal Reserve Chairman Ben Bernanke indicated the central bank will continue cutting interest rates in a bid to prevent a dangerous downward spiral in the U.S. economy. Bernanke's testimony to Congress was the clearest indication yet that inflation fears have not swayed the Fed from the most aggressive campaign of interest rate cuts in decades. Bloomberg/ClipSyndicate (28 Feb.) , The Washington Post (28 Feb.)

Private equity firms approach SWFs for loans
With investment banks caught in the credit crunch, private equity firms are turning to sovereign wealth funds to help finance large leveraged acquisitions. The move indicates buyout firms believe the credit squeeze will continue longer than originally expected. Financial Times (subscription required) (28 Feb.)

RBS: Fitch's plans may force investors to unwind CDOs
Fitch Ratings is considering changing its rating criteria for collateralised debt obligations backed by corporate debt to reflect lower recovery rates and higher default risks. If other ratings agencies follow those changes, the Royal Bank of Scotland Group says investors may be forced to unwind up to $150 billion of CDOs. Bloomberg (27 Feb.)

Poll finds few Americans to spend stimulus checks
Fewer than 20% of Americans say they plan to spend the rebate checks Washington is sending them to stimulate the economy, a Bloomberg/Los Angeles Times survey shows. About six in 10 respondents said the U.S. is already suffering from a recession. Half say the economy will be in about the same condition in six months, while almost three in 10 said it will be worse. Bloomberg (28 Feb.)

Local governments hit by swaps along with failed auctions
Municipalities across the U.S. followed their bankers' advice and issued auction-rate bonds in combination with interest-rate swaps. Now both markets have gone sour. "Right now, the auction rates aren't matching up very well with swaps," said James Moncur, Houston's deputy comptroller. "We are still better off than if we had done fixed-rate bonds, but the advantage is shrinking." Bloomberg (28 Feb.)

BP feels heat to deliver profits from renewable energy unit
Analysts say BP is feeling intense pressure to demonstrate that its forays into renewable energy can generate a profit for shareholders. BP has invested billions of dollars in solar energy over the past decade but the business still does not deliver a profit. The Times (London) (28 Feb.)

JPMorgan third foreign underwriter of China's bonds
China has made JPMorgan the third foreign bank authorized as a primary dealer of government bonds. HSBC and Standard Chartered also underwrite government bonds issued within the country. "We are very active in the secondary market, but for the first time now we have access to participate in the primary market," said Carl Walter, chief of JPMorgan Chase Bank China. FinanceAsia.com (28 Feb.)

Japan's Aozora willing to part with GMAC stake
Japan's Aozora Bank Ltd. would sell its stake in U.S. consumer finance firm GMAC if the price was right, the bank's new CEO said. Aozora spent $500 million on its GMAC shares in 2006 as part of a buyout group led by Cerberus Capital Management. The subprime mortgage crisis caused GMAC to lose $2.3 billion in 2007. Reuters (28 Feb.)

European trading companies prepare for dark liquidity pools
It is not yet known whether Europe will embrace the use of dark liquidity pools as the US has, but regional equity trading companies are getting ready to launch their systems. ITG, Nyfix, NYSE Euronext and Turquoise are among those preparing to enter the market within the next several months. Financial News Online (26 Feb.)

Investors wait to parse Buffett's annual shareholders letter
Observers of Berkshire Hathaway Inc. will be combing Warren Buffett's annual, plain-language letter to shareholders Friday, looking for hints about Buffett's involvement in the bond insurance business and specifics on his successor. "This is exactly Buffett's kind of market, with dislocations in the financial space," said Mohnish Pabrai, who models his portfolios after Buffett's. Reuters (27 Feb.)

Market Activity
Asian shares dip on U.S. economic outlook
Asian shares fell Thursday amid worries that the slipping U.S. economy and falling dollar could hurt the region's exporters. The gloom in equities helped fixed income assets like Japanese bonds. Gold, oil and other commodities remained near record highs on supply concerns. International Herald Tribune/Reuters (28 Feb.)

Brazil now tops index of emerging markets
Brazil is the new home to the world's largest emerging market as measured by a leading index. Shares in Brazilian companies now make up 14.95% of the MSCI Global Emerging Market index, which is weighted by market capitalization. That surpasses China's weight of 14.15% and South Korea's contribution of 13.69%. MarketWatch (27 Feb.)

InBev doubles profit on property sales, triples dividend
Belgian brewer InBev NV tripled its dividend after fourth-quarter profits more than doubled on gains from real estate sales. The world's largest brewer reported earnings rose to €900 million from €371 million a year earlier. InBev last year sold most of its Belgian and Dutch pubs to real estate fund Cofinimmo for €419 million. Bloomberg (28 Feb.)

Economics
ECB data shows biggest jump in Eurozone business borrowing
Businesses in the 15-country Eurozone borrowed at a record rate last month -- a sign the region has avoided a credit crunch that could stall growth. The European Central Bank said borrowing increased at an annual rate of 14.6% in January, indicating companies remained upbeat about the economic outlook. Financial Times (subscription required) (28 Feb.)

Chinese institutions put more into Hong Kong markets
The Chinese government is increasingly turning to Hong Kong's financial markets as it expands its pension investments and currency trading. The central bank is considering making Hong Kong an offshore center for the yuan, the Shanghai Securities News reported. The National Social Security Fund had invested $4.5 billion in the Hong Kong-listed shares of domestic companies as of a year ago, the report said. China Daily (Beijing) (28 Feb.)

Geopolitical/Regulatory

G7 ready to act together against turmoil, Japan official says
Member countries of the Group of Seven industrialized nations are ready to act both individually and collectively if financial turmoil threatens to unhinge the global economy, Japan's top financial diplomat said. Naoyuki Shinohara, vice finance minister for international affairs, also cast doubt on calls to establish a Japanese sovereign wealth fund with the country's foreign reserves. Reuters (28 Feb.)

Financial Products
European mutual fund markets face prolonged dry spell
Sharp drops in global stock markets and growing signs of tough economic times led European and U.S. investors to rush money out of mutual funds. U.S. equity funds saw $33 billion leave in January, though some returned in February. Recovery in European fund flows is expected to take longer. Financial News Online (28 Feb.)

A new challenge to mutual funds: actively managed ETFs
The rise of exchange-traded funds has worried the mutual fund industry for years. Now there's a new worry. The SEC approved a group of actively managed ETFs. They'll be the first ETFs to expand beyond a passive investment style similar to mutual fund index funds. Boston.com (28 Feb.)

Financial Teasers 27 Feb 2008

TOP STORIES

Future looks brighter for bond insurers, markets

The uncertainty surrounding bond insurers MBIA and Ambac may be dissipating, bringing hope to the stock markets and credit markets. Both Standard and Poor's and Moody's Investors Service reconfirmed MBIA's triple-A rating this week. S&P also confirmed Ambac's top rating. Financial Times (subscription required) (26 Feb.)

CEO Brown says MBIA done raising dilutive capital: MBIA Chief Executive Jay Brown said the largest bond insurer in the world has completed its "significant dilutive capital" raising. The company has also eliminated its quarterly dividend, will no longer insure new derivative credit contracts, and has temporarily halted the writing of new structured finance business. CNBC/Reuters/The Associated Press (26 Feb.)

Stock of European insurers hit along with banks
European insurance companies have been hurt along with the banking sector. Though banks worldwide are writing down billions in assets, not so the insurers. "Insurers are not banks, despite the appallingly simplistic references to financial stocks," said insurance analysts at U.K. brokerage Collins Stewart. But some investors believe that lack of clarity on writedowns warrants a defensive stance on all financials. MarketWatch (26 Feb.)

Investors begin to question fair value accounting
Fair value accounting, touted as a way to increase transparency, is now questioned by investors who have seen their markets evaporate in the credit squeeze. Critics say the accounting practice is not worth the volatility it causes, as exemplified by Merrill Lynch, Citigroup and other firms that have posted massive write-downs on hard-to-value assets. Reuters (26 Feb.)

Private equity conference sounds gloomy tone
A somber mood dominated the private equity industry's key conference in Munich. The industry has been slammed by the credit crunch and the resulting loss of cheap debt. Alchemy Partners founder Jon Moulton said it could be years before favorable conditions return. "The banks aren't offering anything but threats. They are in trouble themselves, and we won't see an aggressive banking market for a number of years," he said. Bloomberg/ClipSyndicate (27 Feb.) , The Independent (London) (27 Feb.)

ISDA offers suggestions on CDS settlements
Holders of credit default swaps have new guidance on settling trades if one of the troubled U.S. bond insurers were to fail. The International Swaps and Derivatives Association published a list of deliverables bonds. "The purpose of the list is to provide information as to the range of obligations that market participants believe may be delivered in the occurrence of a credit event," the association said. FinancialWeek (26 Feb.)

Trichet notes Asia's global economic role increasing
The governance of global macroeconomic and financial affairs is changing as Asia-Pacific countries gain economic power and assume more global responsibilities, European Central Bank President Jean-Claude Trichet said. "The world economy might be better able to rely on the dynamism of the Asia-Pacific region should growth in other regions lose some momentum," he said. Agence France-Presse (26 Feb.)

Energy shares climb as oil price hits new high
With oil services companies in the lead, energy-related shares rose in New York trading as oil pushed through to a record close above $100 a barrel. El Paso Corp. was left out of the surge because the company's earnings failed to meet estimates. MarketWatch (26 Feb.)

ABN AMRO to close investment accounts held by U.S. citizens
ABN AMRO said that for "strategic reasons" it will close the investment accounts of customers with U.S. passports, although they will be allowed to keep their checking and savings accounts. "It has nothing to do with individual clients, but is part of a strategic assessment and affects only a very small part of the client base," said Hans van Zon, an ABN AMRO representative in Amsterdam. International Herald Tribune (26 Feb.)

JPMorgan gauge shows global liquidity returning
A JPMorgan indicator is showing signs that global liquidity is improving. David Shairp, global strategist at JPMorgan Asset Management, says the gauge, which takes in the U.S. monetary base and the Federal Reserve's custody holdings on behalf of other central banks, has picked up significantly in recent weeks. The global liquidity surge comes as central banks hold more bonds, perhaps because they want to stop their currencies appreciating. Financial Times (subscription required) (26 Feb.)

Banco do Brasil profit drops 2.5%
Government-controlled Banco do Brasil SA said fourth-quarter profit fell 2.5% as it spent more on expansion insurance and increased provisions to cover lawsuits. Latin America's largest bank by assets said its recurring profit fell 0.4%. Banco do Brasil is awaiting regulatory approval to offer services to Brazilians living in the U.S. The bank is also studying expansion into Argentina, Chile and Uruguay. Bloomberg (26 Feb.)

Canadian banks may report first profit slide in six years
Canada's biggest banks are likely to post quarterly profit declines for the first time in almost six years when they begin publishing results later today. Canadian banks have been hurt by debt write-downs, but also by falling investment banking revenue driven by fewer mergers and weaker capital markets. Bloomberg (27 Feb.)

MARKET ACTIVITY

Banco do Brasil profit drops 2.5%
Government-controlled Banco do Brasil SA said fourth-quarter profit fell 2.5% as it spent more on expansion insurance and increased provisions to cover lawsuits. Latin America's largest bank by assets said its recurring profit fell 0.4%. Banco do Brasil is awaiting regulatory approval to offer services to Brazilians living in the U.S. The bank is also studying expansion into Argentina, Chile and Uruguay. Bloomberg (26 Feb.)

Canadian banks may report first profit slide in six years
Canada's biggest banks are likely to post quarterly profit declines for the first time in almost six years when they begin publishing results later today. Canadian banks have been hurt by debt write-downs, but also by falling investment banking revenue driven by fewer mergers and weaker capital markets. Bloomberg (27 Feb.)

ECONOMICS

Dollar falls to new low against euro
The U.S. dollar sank to a record low against the euro Wednesday following weak economic data and news that U.S. consumer sentiment hit a five-year low. The euro's value went past the psychologically important $1.50 level in Asian trading.
Bloomberg/ClipSyndicate (27 Feb.) , Forbes/Reuters (27 Feb.)

Indicators show Americans squeezed by inflation, home values

New economic reports confirme that Americans are squeezed between falling home values and rising costs of goods. A gauge of consumer confidence fell to its lowest level in nearly five years. "Look at the things that are accelerating: food and energy. What is decelerating? It's electronics and light trucks. These are not things that people buy every day," said Seth B. Plunkett, a bond portfolio manager at American Century Investments. The New York Times (27 Feb.)

Survey: Institutional investors see high recession risk
More than half of institutional investors believe there is a high risk of a U.S. recession, while virtually all expect the risk is at least moderate. A survey by Fitch Ratings revealed a dramatic souring in the outlook of institutional investors in the past six months. Respondents expect credit markets to be unstable through the third quarter, with housing market stability taking longer. FinancialWeek (26 Feb.)

Geopolitical/Regulatory

EC proposes voluntary code for SWFs
The European Commission plans to announce today proposed ground rules for sovereign wealth funds. The measures, aimed at creating a global voluntary code of conduct for the funds, are designed to thwart a more a protectionist initiative led by French President Nicolas Sarkozy.
The Times (London) (27 Feb.)

Bernanke reshapes Fed in his image
Federal Reserve Chairman Ben Bernanke has introduced some of the discipline of inflation-targeting central banks in Britain and Sweden. He has demonstrated a focus on medium-term goals while flooding the banking system with short-term cash in a pinch. Bernanke has also persuaded fellow members of the Federal Open Market Committee to publish their projections four times a year instead of two, and stretch out to a third year. Bloomberg (27 Feb.)

Financial Products

ETF offers Egypt's large-cap stocks
Egypt's first exchange traded fund for large-cap stocks is expected to draw local customers as well as foreign institutional investors, Morgan Stanley said. Cairo's benchmark CASE 30 has risen more than 500% since Egypt launched an economic reform drive in 2004. The CASE 30 rose 51.3% last year. Reuters (26 Feb.)

More offerings allow small investors access to commodities
Investors are more willing to consider commodities now that major stock indexes are down and Treasury bonds are battered from multiple Federal Reserve rate cuts. But the potential for the U.S. to fall into recession leaves some wondering if the commodity price boom will bust. A recession would likely cut U.S. demand for energy, metals, and farm products, though growth in the rest of the world could keep prices high.
BusinessWeek (27 Feb.)

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How to identify areas of investment with return of 15%?

Valerie said...
Hi, am just an employee earning a small income in Malaysia. However, setting aside RM500 sounds okay. And after reading your article, I decided to start to plan ahead.However, you keep on saying to invest with an average return of 15%. My question is - how do we identify areas of investment which can generates such return? If you can name them, and are sure on the numbers, I would say everyone would set aside more than they could afford to shorten the time to reach the desired return. Your advise please, thanks.
February 17, 2008 5:28 AM

Seane Lynch said...
Valerie, great to hear that you realise the benefits of investment and decide to plan ahead. Starting early is equally important. To take a stab in answering your question on how to identify areas of investment with return of 15%, I would say that you have the following available options:

(a) Invest in mutual funds that are aggresive in nature. Aggresive in nature means that the bulk of the monies will be invested in stock market, be in local or overseas. Bulk could be as much as 80%. Be prepared to stomach volatility in the value of your investment though.

(b) Invest in stock market directly. If you would like to avoid fees and other charges that may be incurred when you invest in a mutual funds (which could be as high as 5-6% upfront), you may want to research on how to invest in the stock market directly. There are many school of thoughts on how to predict and time the market movement with the objective of buying low and selling high (chartist and technical analyst for example), those that calculate how much the stocks are worth and buy/sell when stocks are undervalued/overvalued (the fundamental based investors), and of course not forgetting the punters. Uncles and Aunties in both Singapore and Malaysia made up for a high proportion of punters in the stock market.

As you can probably gauge from the above options, stock market remains the best possible long term investment that can provide you a return of 15% or more, hopefully. Quoting lessons from Peter Lynch, don't try to time the market movement as market is extremely difficult to predict even for smart fund managers or analysts. Instead, view yourself as a business investor and focus on identifying companies that you understand well and have good business model. You are in actual fact owning a small piece of the company when you buy their shares. As long as the story line of the companies is good in terms of having the ability to derive good profits (from the business model), the stock price will rise in the long run.

It may sound difficult but it is interesting and satisfying if you are willing to invest some of your time in understanding the companies that you want to invest in. Again, have a long term horizon set in your mind and be patient as watched stock never boils.

You may have heard Uncle and Aunties buy stocks like nobody businesses but may deliberate for days or weeks or even months if they want to buy a TV or a refrigerator. They keep researching for better brands, look for warranty period and other features before placing their money. Invest at least as much time and effort in choosing companies to invest as you would in choosing a TV or a refrigerator.

p/s: Sorry Uncle and Aunties for using you guys as examples of punters. I can't think any better ones.

Too Long.......?

First step to be taken is to determine the monthly allocation for building the first million worth of assets. I think generally RM500 per month is quite a comfortable amount that can be set aside by most who are employed. Hence I would choose to illustrate below how RM500 saved every month will grow under different rates of return within 30 years:

(a) Without any return on investment at all - Merely RM180k (or the principal amount)
(b) At 5% annual compounded rate of return - RM410k (2.3 times the principal amount)
(c) At 8% annual compounded rate of return - RM709k (3.9 times the principal amount)
(d) At 15% annual compounded rate of return - RM2.8 million (15.7 times principal amount)
(e) At 25% annual compounded rate of return - RM21.9 million (121.7 times principal amount)

The above numbers tell me that if I can grow my assets at 15% per annum on compounded basis, I will be able to reach RM1 million before 30 years. To be frank, I was totally demotivated when the numbers say that I can only probably achieve my aim of having RM1 million worth of assets between 20 to 30 years from now on if I start to save RM500. That is also provided that I can continue to achieve 15% annual compounded rate of return. It's too long a time horizon to look at.

Most of the people I talked to have the same thinking that saving RM500 per month (in which is quite a huge amount for those who are employed and not earning huge salaries) and only able to reach RM1 million dream in 20 - 30 years is a long time horizon. However, the funny thing is they know how difficult it is to achieve but they decide not to even do it!

Bottom line is let's not procrastinate and think how much we can allocate every month for long term investment purpose. Generally, financial consultants/planners advise to allocate from 15% up to 20% of gross income for investment purpose. I leave that to you on how much you want to allocate. I am gonna start off with RM500.

If you are not too well versed with calculation of returns based on amount of allocation other than RM500, let me know as I can assist in providing you the numbers.

(p/s: I have excluded other form of forced savings such as contributions to Central Provident Funds in Singapore or Employees Provident Funds in Malaysia in the above discussion. Of course these contributions will also help to achieve RM1 million sooner than the above timeline. Reason for exclusion is that you can't really do much with the rate of return of the funds. I prefer to concentrate on the monthly allocation and how you can maximise it's growth rate by investing in accordance to fundamental investment principles.)

Kicking Off

"Kick off" is the buzzword that investment bankers, lawyers, accountants, other relevant advisers and not forgetting the companies themselves, use to signify the beginning of most corporate exercises. During a "Kick off" meeting, investment bankers essentially tell their clients "Hey look. We are darn serious about billing you the fat fees that we are supposed to earn from this simple transaction in which you will see how we complicate it through our advices. So, let's get started with this boring meeting and our legal adviser will bring you through this stack of legal document where you will see how scary the penalties are, if you try to be funny by hiding information or doze off during subsequent meetings. We call it the due diligence planning memorandum."

Abit of a side track of how advisers and their clients kick start corporate exercises, at least formally. What I would like to say to "Kick off" my blog is simply that I will be sharing investment decisions that I will take on a long term basis to achieve my first million worth of assets. I believe there are many out there who aspire to build their first million too. No intention of being an expert or make investment recommendations here. Being a keen follower of Warren Buffett and Peter Lynch, I believe in fundamental investing. My objective is to apply these principles in making my first million. Various other principles and strategies will also be adopted and they are by no means ideas of mine but more of applying and testing them.

I do not have rich family background and earn my income through employment. Without going into debate on how to maximise income through other sources, I would like to concentrate on achieving the first million through constant allocation of monthly income for investment purposes. Although I may not be residing in Malaysia, I am particularly interested in the asset classes in Malaysia. Many friends warn that fundamental investing in Bursa Malaysia holds no water as it is a market full of speculators. Being a contrarian at heart, I choose to believe otherwise. Not for the sake of going against common beliefs but I do believe that Malaysia has alot of potential and the presence of speculators is seen as a good element in stock market as they will overvalue and undervalue stocks through greed and fear. That is when fundamental investor takes opportunity by buying undervalued stocks and of course, selling overvalued stocks. Another class of asset that I am particularly interested in is the property sector. Coupled with other available asset classes like gold, mutual funds and structured products alike, I will try to take a hit in achieving the first million, the D-I-Y style.

Lastly, before any naive readers make losses by using the information in this blog, I would like to ring fence my a**hole by quoting a disclaimer which read "The information and views expressed herin are the author's personal interpretations and thoughts and in no event should be taken as investment recommendations. The author will not be responsible for any losses incurred by adopting and/or using the information disclosed herein. Supportive comments are widely encouraged though if profits are made by adopting and/or using the information disclosed herein.