How much have I earned and lost in 2020?

Objective for 2020: Maintaining the current level of passive income works -- Income was $16,200 ($1,350/month). I thought it was a simple objective but I didn't meet it. In fact, income was $0 because I had to write-off some of my capital.

After so many years of setting objectives, not one was remotely close too achieving target, which shows how unpredictable the markets are.

Average stock dividend yield in

2017 = 4.56%

2018 = 4.73%

2019 = 4.55%

2020 = 3.83%

This year, the verdict for Hyflux was out, and I wrote off my Hyflux CPS investments. I can imagine how painful it is for the rest of the creditors who have to write off >$3.3b investments. I was fortunate that I sized it small (3000 units during IPO), although I made the mistake to buy more CPS (added 10000 units) just 2 months before they were due to redeem the CPS. I learnt an expensive lesson.

I sold off my loss-making stock - Silverlake Axis, because they haven't been able to grow their profits, and they have a lot more competitors today as compared with 5 years ago.

I reduced position in Keppel Corp, mainly to not have more than 10% of my stocks in 1 company. I still like Keppel Corp because of their property.

I profited 20% from Dairy Farm and Comfort Delgro trades. They just happened to present good value, and they just happened to increase 20% after I bought, so I decided it was better to take profit because I couldn't convince myself that their business had fundamentally improved to warrant the higher prices.

I bought SPH REIT, AIMS REIT, STI ETF, Haw Par, Hongkong Land, mainly because I am bullish on property. Liquidity will definitely lead to inflated property prices in a matter of time.

I only managed to use a fraction of my warchest because the market corrected only for a few weeks. Sometimes when I read about people who criticise people (like me) who only buy on dips (actually I buy when prices are discounted and present good value), I wonder why they are so eager to preach their strategy. In any case, the more important thing is to stick with one strategy because switching between these two strategies is a certain wealth destruction strategy. Eventually, both sides will win, just that somehow one side makes a lot more noise than the other.

As the hurdle savings accounts all cut their interest rates this year, I decided to make housing refund to CPF. I bet many people did that too because it made the most sense. For those who say that CPF money cannot be touched if you were to do a refund, it's true, but you still can use it to buy stocks and funds and property with it. So I will treat it as my warchest too, just more restricted. I still hold cash, but not as much as before.

I am still holding my money in Autowealth. I like Vanguard funds, diversified and low-cost.

I bought into a few funds via Manulife ILP when prices were lower in Jun. It was a case of wanting to buy in Mar, but because of some admin issues, I didn't end up buying. Trying a new financial advisor for this case. Friends told me that I have too much money to experiment.

For all my effort, I barely broke even this year. Considering how many businesses had to close down this year, I think I am just lucky to be not affected (yet).

Objective for 2021 will be to buy more good stocks. I can't predict what the future will be, I can't control the dividend income, but I think that there will be more opportunities to buy good stocks at discounted prices because of market volatility. I will be targeting companies with property and/or high cash flow. Volatility is likely going to run through the whole year because 

1. industries are undergoing structural changes due to changes in demand, changes in consumer behaviour, caused by travel restrictions, this will translate to many jobs lost, and new jobs created. The new jobs will likely have talent shortage, which drives up manpower costs, and hinders the progress; 

2. markets have prices in hopes in the vaccine, and that economic recovery is certain in the next 1 year. However, if another pandemic hits, or if the vaccine faces an issue and need to be recalled or halted, or if the virus mutates and the vaccine is deemed useless, or if the vaccination takes longer than expected to be effective, or if travel restrictions need to remain longer, etc.; 

3. many governments will start to run out of pandemic budgets and have to tighten their spending on many keep-the-lights-on stuff, which will cause a government-induced demand contraction. The services required will likely remain the same, but the government will pay a lower price, consequently, down the food chain, margins are squashed because the government sets the prices. 

It's been a memorable year.

Book Review: American Default by Sebastian Edwards

 American Default: The Untold Story of FDR, the Supreme Court, and the Battle Over Gold.

This is a history book about the Great Depression, and it's controversial and it's a long read. What I like about this book is that it explains the opposite argument of quantitative easing, which is something we don't get to read in mainstream media, i.e. why printing money to bail out companies and markets lengthens the recession.

The rhetoric is always central banks acted quickly to release money to prevent a market crash. Hail central banks! However, where does all that money come from and where does it go?

The anti-QE argument is that the government will need to eventually cut back on spending or increase taxes to recoup the amount of money it printed. The businesses that would have otherwise failed, are artificially propped up, much like putting businesses on expensive and no-yield life-support machines. If the unprofitable businesses were not put on life-support, the impact would have been faster and greater, and the survivors would be able to grow their business because they are able to increase their market share (the share that was previously held by the unprofitable businesses). This will allow the market reset to happen faster, and end the recession faster too. 

The pro-QE argument is that when there is a demand or supply shock, or in the case of covid19, demand AND supply shock, we must save all businesses, regardless if they are profitable, because if the profitable businesses shut, the impact to the economy will be greater, i.e. profitable businesses take a very long time to develop. The idea is also that when the economy recovers, the government will be able to earn back the money, so the priority is to reduce shock and spread out the impact, by flooding the markets with money to support businesses, support jobs, etc, much like the damping graph in physics.

In1930, they printed so much money that the government had to unpeg the dollar from the gold. It was also a difficult choice because there were bank runs one after another as there were thousands of banks and many were collapsing. The government had to print money to bail out the banks. The unprofitable ones were made to shut or consolidate. All the while, the government maintained a ratio, reduced the ratio when they needed to print more money, and eventually they printed so much money that all the gold in the world was insufficient to back the dollar, so they unpegged from gold. That was the road to stocks prosperity for those who like to analyse stock markets from 1929 when the great depression started. However, behind that rosy stock market growth, was the supposedly untold stories of government forcing farmers to destroy crops so that prices can rise, and help farmers earn more, and also ensure the president get re-elected because farmers form a big majority of voters. The government also confiscated all gold from every citizen, reduced all asset values by 40%, banned export of gold, banned import of commodities, so that prices of goods could be controlled and be increased by the government.

The similarities with what's happening in the US now is the trade tariffs imposed to help protect the US farmers. The intent is to fix prices to raise prices, so that farmers earn more, and also win the farmers vote. However, if we don't address the real problems, of perhaps quality, costs, and demand, the economy is never real. 

Eventually demand never really improved and the political struggles across the world led to World War II. Unfortunately, it was WWII that helped reset the markets. The post war rebuilding efforts was a big driver for the recovery of economies around the world. The arms race was the growth engine.

Moral of story: markets need to reset, wipe out the unprofitable companies, redistribute market share, to get out of a recession. Somehow, based on those arguments, I feel that we never really got out of the recession from 2008. The big question is how many cycles can such money printing cushion the impact of recessions? To a certain point, it's effect will not be felt. Inflation may be so high that causes the income gap to rise because of uneven asset distribution, and then people fight among themselves again because they feel that they have nothing else to lose. 

Book Review: Outliers by Malcolm Gladwell

It was one of those days where I was reflecting about what I have been doing with my life, and thinking about how some people just have the luck to be at the right place, right time, with the right person, when my friend recommended me this book Outliers. Basically, his message was that the world is unfair and we just have to accept it. It's not that we are not as capable, not as intelligent, we were just not as lucky.

There were three main things that really sunk into me. 

1. The society and institution set the rule books. Rule books can favour certain people over others.

2. The privileged simply have more opportunities, hence chances, to succeed, than others.

3.  The earlier you clock your 10,000 hours of practice to hone your skill, the earlier you can monetise the skill. If you get ahead of the pack, you can win big.

The first half of the book was about a research done on birthdays of junior hockey league players. It was a serendipitous moment where someone noticed that the birthdays of the players were mostly in Jan and Feb. The junior hockey leagues were designed to have many levels, and the grouping is by calendar year, starting from primary 1. The research found that at the 1st year, those born in Jan and Feb had more time practising hockey than those born in Nov and Dec, hence usually made it into the more superior levels in the following year. Year after year, the Jan and Feb players keep moving up the ranks, get better coaches, spend more time training, and eventually have higher chances of becoming national players.

Moral of story: Exams, just like junior hockey leagues, favour the Jan and Feb babies. Banded subject classes, streaming students based on grades, should be thrown out of the window, because it just makes the students who are ahead, much better, than those falling behind. Over time, because the pace of those falling behind will be slower and slower, it's just going to end up worse as the years go by.

The second half of the book was about a few prominent billionaires and their growing up years. Usually one reads that Bill Gates dropped out of Harvard to start Microsoft, or Zuckerberg dropped out of Harvard to start Facebook, but nobody says that prior to dropping out, they had already clocked their 10,000 hours of professional practice and was already working on a business. In fact, they had clocked their 10,000 hours before they finished secondary school. Their parents were also well-to-do, hence gave them the opportunity to clock those programming practice hours. They beat their peers to the programming practice because they had access to computers for longer periods of time, unlimited and free access that came from privilege.

Moral of story: I really should have started a software development business or writing business back when I was in school, instead of wasting my 10,000 hours of programming practice and 10,000 hours of writing practice. I made a sub-optimal decision to start clocking stock analysis practice hours while studying. Now I have all these skills that are not part of a supply chain, hence I can't do a 1+1+1=10 kind of magic. I really should beat myself up for not being a millionaire now.

Market Observations - Aug 2020

The US stock market had been a crazy V-shape roller coaster ride since I last wrote.

1. US Federal Reserve had been creating cash out of nothing to the tune of US$3T to buy junk bonds from financial institutions and stocks from the stock market.
2. US unemployment rate reached 14.7% in Apr, and reduced to 13.3% in May. More companies are expected to file for bankruptcies, which will lead to higher unemployment.
3. US population is still growing, i.e. births > deaths. While the number of covid-19 cases are still increasing, the death rates are fairly constant.

In Singapore,

1. Biggest budget in Singapore's history, S$93B, to primarily support jobs.
2. Increase in business closures, but there is very little information on it, and unemployment rate is not published monthly, unlike the US.
3. ~600k claimed Temporary Relief Fund, which may be a proxy to the extent of unemployment. Assuming 50% are legitimate job loss claims, 300k workers form 300k/3700k = 8% of the 3.7M workforce.

All these shout DEBT.

Warehouse storage needs will increase because businesses will buffer in contingencies, such as stockpiling essential goods, which will increase operating costs. Increase in warehouses may drive automation in warehousing to reduce manpower costs. Warehouse automation is currently a luxury item for businesses with the money, and it's largely purpose-built. A more mobile plug-and-play model will be required for smaller businesses to adopt. Warehouse-as-a-service may appear as the new way to manage the different stocking patterns throughout the year, however, unlikely software that has no physical footprint, warehouses have a physical footprint and for it to work, packaging of products may need to undergo some form of standardisation.

Workers who have been out of a job will likely be in debt longer and pose more risks to the banks, in particular unsecured credit card debt and business loans. With businesses shutting leaving people out of jobs, it's going to be a very difficult process to "restart" economic activity, which is likely why the Singapore government went all out to support businesses during this government-initiated lockdown. It takes 20 years to grow from 1 to 1000 staff, but takes just 1 night to reset to 0. It's unthinkable how much effort it will take to really "resume" normal.

I expect asset inflation to happen. This is because the Fed has been buying US stocks. They commited to do everything they can to support the economy. They are spending US$120B/week. This will prevent the stock market from crashing and cause stock values to become inflated. The money that people earn from the stock market will trickle down to other aspects of the economy. Money will either go into alternative investments (e.g. crypto currencies, gold, art) or property, depending which gives a higher yield at that point in time.

I expect business activity to take a long time to recovery even if a vaccine is available this month (it's not, but I am just thinking this scenario through). Firstly, the vaccine needs time to produce, then we need time to inject it into billions of people. And if there is any allergic or any adverse reaction, it's bound to cause a pause to investigate and refine strategies. By the time we are done, the virus strain could have mutated, so there won't be total control so quickly. Then we will have psychological fear in people because of the try and repeat and try and repeat cycle which will make people feel that maybe it's just safer to stay at home until things get better. The younger ones itching to travel will likely still want to travel, but as long as the country imposes re-entry restrictions, such as having to self-pay $200 for the test, $2000 for a dedicated stay at a hotel and self-pay medical bills, people will think twice.

I expect Singapore property prices to be maintained, with only gradual decreases, as long as unemployment rates don't increase too drastically. This is because the landlords are generally not over-leveraged, thanks to prudent property cooling measures (total debt servicing ratios and loan-to-value ratios) that had been there since 2013. Those who will be selling are likely those who are older, only have 1 property and want to "downgrade to encash" their wealth that is parked in property, because rental yields will not be sufficient to cover living expenses for most people.

I estimate about 300,000 properties to be in the rental market. This is based on a few data points... This article from an MP query: 381,000 Singapore PRs and foreigners owned one private residential property, while 59,000 owned two. 20,000 Singaporeans own three to 10. Fewer than 200 own more than 10 of such properties. Of these private residential property owners, 15 per cent also own HDB flat.

HDB website has about 45,000 rental transactions yearly. If each lease is 2 years, that's 90,000 in the market. Assuming 10% are vacant, it's a total of 100,000 HDB flats available for rent.

Based on URA rental transactions, there are 172,000 condo rental transactions in 2018 and 2019. Assuming 10% are vacant, it's a total of 190,000 condo units.

If we go by some analyst estimates that we will lose 60,000 foreign workers this year, and we assume that on average 2 foreign workers rent 1 unit, it translate to 30,000 units freed up which is 10% of the rental property supply, and vacancy rate will go up to 20%. Rents will definitely fall in the next 2 years at least.

We will only start to see the impact of covid19 when the relief measures gradually expire. These include:
- Travel restrictions lifted (unknown, so that the foreigners who want or need to leave singapore will leave their rented properties and then we will know how many vacant units there will be. Of course, the government will already have all these data but retail investors won't know.)
- Jobs Support Scheme (until end Aug for most businesses except airlines and tourism that will last until end Jan)
- Bankruptcy limit raised by 4 times (until end Oct)
- Property principal and interest repayment waiver (until end Dec)

I will be holding some cash to wait for buying opportunities, for stocks and property (if prices fall).

Stock Review: If I were to pick a Hotel Trust

With the ongoing Covid19 pandemic, hotel revenues have been hit hard as travel restrictions have literally stopped all tourism, business travel and convention/exhibition events. Previously, those were the main revenue drivers for hotels and the occupancy rate had been increasing in the past 5 years, maintaining above 85%, which drove more investors to build more hotels over the next few years. When every hotel owner plans based on forward supply growth (based on then-room rates and then-occupany rates), and demand drops, we will be seeing some hotels closing or possible converting to more profitable residential properties like what happened in the past.

Extracted from Far East FY2019 Financial Report Slides - Hotel Supply

Extracted from Far East FY2019 Financial Report Slides - Visitor Arrivals

The main criteria that I will be assessing is the survivality. Basically if the REIT can survive the demand drop and hence price drop, they will have an advantage when the up-cycle restarts.

I browsed the financial reports of these 4 REITS:

1. Ascott Residence Trust (2Q2020, end 30/6)
2. CDL Hospitality Trust (2Q2020, end 30/6)
3. Far East Hospitality Trust (4Q2019, end 31/12)
4. Frasers Hospitality Trust (2Q2020, end 31/3)

1. Net Asset Value (NAV)

NAV is the valuation of all assets in the REIT. For hotels, it's primarily based on how much income the properties can earn. Prices will definitely fall, based on the financial reports from Ascott and CDL,  current prices, it has fallen by at least 50%, for those hotels that are operating. Those that are forced to closed are not part of the statistics. I did not manage to find a copy of Far East's financial report. Only Singapore and Australia are using some of their hotels and serviced apartments as facilities to house people who are entering the country, i.e. Stay-Home-Notice facility. This has provided Ascott and CDL with some reprieve.

Extracted from respective financial reports

I compiled the highest and lowest prices in the last 52 weeks. Only Ascott did not fall below 50% of its NAV, and was trading at the highest P/B ratio, 55% of NAV (52 week low) and 73% of NAV (current) which shows more investor confidence in Ascott. Far East was the lowest at 41% of NAV (52 week low) and 57% of NAV (current).

2. Debt

The most risky part of a REIT is its debt. It is only profitable if they can maintain low interest rates, hence REITs have been merging increase their size so that they have better economies of scale to reduce management and financing costs. The main things I look for are average interest rates and off-balance sheet debt. The interest rates the REIT gets from the bank reflects the bank's risk appetite for their assets, i.e. the higher the rate, the less "faith" the bank has, and they have to source other financing (like corporate bonds). In this aspect, Ascott has the lowest interest rate of 1.8%.

Next is off-balance sheet debt in the form of Perpetual Securities (Perps). It's off-balance sheet because it's not shown on the balance sheet -- you have to scroll to the table that records it to see how much there is, and then manually calculate the debt/asset ratio because the debt/asset ratio that the REITs report excludes these debt.

Extract from Ascott - Statement of Movement in Stapled Securityholders Funds

Ascott has $396M of Perps and Fraser has $100M. CDL and Far East did not record any in their financial reports. I recalculated the debt % with the Perps added in. Ascott is no longer the lowest after that.

Extracted from respective financial reports - debt %

CDL is a little bit less indebted than Ascott. Ascott and CDL published their Fitch Ratings BBB and BBB- respectively.

Far East and Fraser are paying about 1% more in interests. They did not publish any ratings. Not getting themselves rated doesn't mean that they are bad too. However, Fraser Centerpoint Trust published their BBB rating.

3. Dividends

Normally, it will be a factor, however there is nothing to evaluate now because hotels are not in business.

Extracted from respective financial reports - dividends

Ascott and Fraser are positive mainly because they have serviced apartments that bring in income. CDL is negative.

Extracted from respective financial reports - profit

Based on the P/B and debt, I prefer CDL Hospitality Trust, but I also feel that I need more margin of safety because income is near 0 or even negative for the coming months. Hence I will only enter at 40% of NAV or $0.59. Tourism is unlikely to return to full scale immediately. SIA had also provided guidance that they are planning for recovery to be at max 50% of previous capacity, With half the visitors, room rates will likely fall by half, especially those at non-prime locations.

The writer does not own any of the stocks mentioned.

Stock Review: SIA

It has been a while since I last checked on SIA. This was my last review in Aug 2018 and I assessed that SIA's dividends were funded by debt, i.e. SIA borrows money from the bank to distribute to its shareholders. Another company whose dividends are debt funded is Starhub and their share price has only gone one way down. Side track: A quick way is to look at the metric dividend payout ratio. A ratio that is <100% means that dividends are paid out of profits. If it's >100%, then there are two possibilities, either they are paying the additional dividends from their cash balance, or they are paying from debt. Usually you need to read the financial report, compare the debt and cash balance to know which scenario is it.

SIA has grounded 96% of their flights to date. They need money to operate and I earlier estimated that they will run of cash in 2 months. There are two ways to raise money: borrow or you exchange paper for money aka print money. If you borrow, you have to return what you borrowed with interests. If you print, you don't have to return and you don't have to pay interest. So SIA obviously chose to print money. Who wouldn't right?

Link to the press release. Extracted key points below:

In a late announcement on Thursday, the airline said it is proposing a renounceable rights issue of up to 1.77 billion new shares at S$3 per share, on the basis of three rights shares for every two existing shares held by shareholders, to raise S$5.3 billion. The issue price represents a discount of about 53.8 per cent to the last transacted price of the S$6.50 on March 25. It added that the theoretical ex-rights price will be S$4.40.

SIA is also proposing to raise up to S$3.5 billion via a 10-year mandatory convertible bond (MCB) issue on the basis of 295 Rights MCBs for every 100 existing shares owned. The bonds, which come with zero coupon, will be priced at S$1 each. If not redeemed before the maturity date in 10 years, the MCBs will be converted to new shares based on a conversion price of S$4.84, which is a 10 per cent premium to the ex-rights theoretical price.

In addition, SIA will also be seeking approval to further issue up to S$6.2 billion of additional MCBs on similar terms and to be offered to shareholders via one or more rights issues down the line. This could take place within 15 months of being approved by shareholders.

SIA will be issuing rights (akin to printing money), 3 rights shares for every 2 shares you hold at $3/rights share. This means that the shares will be diluted, the existing shares will form 40% and the new shares from the rights issue will form 60%. Now maybe you receive $0.30 for every 1 share you own, but after the rights issue, because more people are sharing the pie, you will only get to eat $0.30 x 40% = $0.12/share.

What's peculiar about this rights issue is that they also have a convertible bond with no coupon (i.e. no interest). The catch is if SIA does not return the money, SIA will need to issue more shares. Based on SIA's past record, in a good year with $1B profit, they pay you $0.30/share of dividends. Assuming they continue to pay you $0.30/share, they will only have $650M left. They will need to save up $3.5B / 650M = 5.4 good years to return the money to shareholders. Temasek likely negotiated to give them 10 years to save it up. If a recession were to happen and SIA is unable to have a good year, assuming flights are 100% and profits are halved at $500M, SIA will need to presumably halve its dividend ($0.15/share), with $300M left. They will need to save up $3.5B / 300M = 11.7 years to return the money to shareholders. This means that over the next 10 years, SIA needs a few good years and no more flight grounding epidemics to be able to return $3.5B.

SIA is also seeking approval to have another $6.2B MCB on the same terms via one or more rights issues to shareholders within 15 months of approval, which means near term. This is scary. Returning $3.5B sounds like a mean feat. If they were to need $6.2B in the coming 15 months, redeeming $3.5B + $6.2B = $9.7B 10 years from now will be impossible because it means SIA needs 10 good years ($1B/year) and not pay out any dividend and no more similar epidemic (which is practically beyond control).

So the best case scenario is SIA returns all the $3.5B or $9.7B if they were to need the additional $6.2B within the next 15 months.

Current total shares = 1.19B
Total shares after 3-for-2 rights issue = 1.19B x 2.5 = 2.975B
Dilution effect = 1.19B/2.975B = 0.4

If SIA is unable to repay the $3.5B or $9.7B, all share holders who subscribed to the MCB will get more shares in SIA "295 Rights MCBs ($1 each) for every 100 existing shares owned, where rights are converted at $4.84/share".

Then the better case scenario, is where there is only $3.5B MCB.

Conversion of MCB to shares for $3.5B MCB = 3.5B / $4.84 = 0.723B shares
Total shares after $3.5B MCB conversion = 2.975B + 0.723B =  3.698B shares
Dilution effect = 1.19B/3.698B = 0.322

Worse case scenario, $9.7B MCB
Conversion of MCB to shares for $9.7B MCB = 9.7B / $4.84 = 2.004B shares
Total shares after $9.7B MCB conversion = 2.975B + 2.004B = 4.979B shares
Dilution effect = 1.19B/4.979B = 0.239

Worst case scenario: SIA becomes bankrupt.

How much do you have to pay as a shareholder to subscribe to all the rights and MCB?
If you own 1000 units of SIA now, you will be entitled to
- 1500 rights @$3 each
- 295/100 x 1000 = 2950 MCB rights @$1 each (converted to 610 shares)
Total cost to you = 1500x3+2950 = $7450 for 2110 shares, to prevent your 1000 units share dilution

If SIA draws from the additional $6.2B MCB, you will be entitled to another
- 295/100 x 2500 = 7375 MCB rights @$1 (converted to 1523 shares)
Total additional cost to you = $7450 + $7375 = $14825 for (2110+1523=3633 shares)

I don't know how many shareholders will subscribe to this. It sounds like an expensive investment to ensure SIA's survival.

Assuming SIA maintains its dividends of $0.30/share, here's how your investment will pan out if you spend or don't spend that $7450 (with the upper limit being $14825).

If you don't spend $7450 (or $14825),
Best case - MCB is fully redeemed, dividend will be $0.30 x 0.4 = $0.12/share
Worst case - $9.7B MCB is not redeemed, dividend will be $0.30 x 0.239 = $0.0717/share
If you bought SIA shares at a peak of $16 back in the good old days, your dividend yield will become 0.0717/16 = 0.4%
Or if you bought it at $11, your yield will be 0.0717/11 = 0.65%
of at $6, yield = 0.0717/6 = 1.2%
And this is assuming dividends are maintained. If dividends are slashed by half, then your yield will also be halved, which means... I think you know how to halve it.

If you spend $14825 (why I say this is because you either cut losses and don't spend anything or you spend to maintain your share)...
Best case = Worst case = you still get $0.30/share if dividends are maintained.
If you bought at $16, yield = 0.30/16 = 1.9%
If you bought at $11, yield = 0.30/11 = 2.7%
If you bought at $6, yield = 0.30/6 = 5%

If the yield is 2%, it means you have to hold 50 years to break even... 1% yield breaks even in 100 years!

Is there a way to still invest in SIA? Probably... Buy if prices fall to $3?
If I spend $3000 to buy 1000 units, subscribe to rights and MCB at $14825, and then pray hard that dividends are maintained at $0.30, for a yield of 10%. If dividends are halved, yields drop to 5%.

Or maybe sell and cut losses now and buy again at lower prices? Assuming after all the dilution, SIA is still a darling demanding a 2% yield, dividends maintained,
if 2% - $0.0717/share / 2% = $3.60/share
if 4% - $1.79/share
if 6% - $1.20/share

if dividends are halved,
2% - $1.80/share
4% - $0.90/share
6% - $0.60/share

So will I buy SIA? Not anytime in the near future.

If I happen to have SIA shares, which I don't, I will put my $14825 in a good REIT which will easily pay me more than what SIA can possibly pay me in the next 10 years. If I am lucky with a 10% yield, like the days AIMS REIT fell to $0.90/share (yield 11%), I may even get my capital back in 9 years, without having to hope that SIA redeems the MCBs.

Trend of Un-linked Covid-19 Cases

All the while, we have been able to trace the Covid-19 cases to patient 0. On 21 Mar, we had the first 6 un-linked cases so I started monitoring the numbers and reading up on how the numbers will grow for uncontrolled situations.

I tabulated the number of un-linked new Covid-19 local transmission cases, i.e. they didn't travel overseas (not import case), and they don't know anyone who was infected (known cases).

21/3 = 6

22/3 = 2

23/3 = 6

24/3 = 13

Total = 27 new unlinked cases

On 22/3, the government announced social distancing measures, such as leaving 1 metre spacing when queuing to order/pay/enter restaurant for food, cannot sit opposite a stranger at the hawker centre, etc. Singaporeans or Permanent Residents who travel despite advisories will have to pay the full unsubsidised cost of hospitalisation due to Covid-19. 80% of the new cases were imported cases, and there were still 1000 local travellers daily.

On 24/3, the government announced additional measures such as closure of tuition and enrichment centres, cinemas, night clubs, suspension of church/mosque services, limiting no more than 10 people seated together, etc. Penalties for people who did not comply with their Stay Home Notice (SHN) after returning from overseas became stiffer. There was also specific instruction for those returning from the UK and USA to serve SHN in hotels. There was even a recruitment advertisement for $10/hour temp workers to check on people who are required to serve SHN.  This is a sign of desperation. 

The Deputy Prime Minister Heng Swee Kiat scheduled a public address on 26/3 to announce budget measures to help businesses cope with these measures. Businesses really need the help.

Today, 25/3, the stock market rallied unexpectedly, so I decided to sell the Dairy Farm International Holdings (@$4.05) that I bought on 13/3 (@US$3.80) to lock in profit. There was also a US$0.145 dividend ex-dated 19/3, so a ~9% profit for 12 days sounded good.

As a whole, I expect more un-linked cases to be announced because these new cases -- students/young adults studying or working overseas (likely UK and USA) who are returning to Singapore because of advisories -- are not complying with SHN.

The virus levels are the highest in the first 7 days, and the most infectious. Symptoms are also milder in the first few days, such as a runny nose. To me, these jokers have been roaming about too much and because the spread doubles everyday and only becomes noticeable after 1 week, i.e. the jokers likely have been roaming since 14/3 (around the time UK was in a crisis), and then the cases was only confirmed on 21/3, in the meantime, the jokers continue to spread, and even if we try to trace and isolate, because of the exponential multiplication effect between 14/3 until today, I think we won't be able to catch up unless our contact tracers are also exponentially increasing, and I can reasonably expect 100 unlinked cases by this Sunday. Sad, but I think a lockdown is in the horizon.

I am still hugging on to my stocks and bracing for more volatility in the days ahead.

Market Observations - Mar 2020

I had been reading news, financial reports, and crunching numbers and I am jotting down some of my observations for my future analysis and reflections.

1. Institutional selling of bank stocks started in the week of 10 Feb. It's especially pronounced because of the consistent weekly selling. Institutional selling volume increased 4 times in the week of 9 Mar and the Straits Times Index (STI) constituents dominated the Top 10 list that week.

My hypothesis: Funds expected Singapore banks to have higher non-performing loans from airline and tourism sector because of the flight and tourist restrictions, so the selling started after the announcements on restrictions. Funds received (either start to receive or receive a lot more) withdrawal requests from 9 Mar and started cashing out stocks to meet clients' withdrawal requests.

2. 13 Mar Friday was the day the markets experienced their first -10% drop. I observed that the selling continued everyday, and prices continue to fall for the stocks in the STI. A few Real Estate Investment Trusts (REITs) fell a lot more than others, and these were those with lower volume, poorer asset quality or assets outside of Singapore.

My hypothesis: Singapore funds that copy the STI and Singapore REIT-20 index (S-REIT-20) were in high demand in the past few years, and a lot of money flowed in because of the touted higher returns with lower risk (because they are "blue-chip companies") compared with cash or fixed deposits. As a result, the funds buy these index constituents, driving up their prices (and valuations). As these plans were sold as flexible investment plans where customers can contribute a fixed sum monthly and withdraw/cash out anytime, it is very likely that many customers treated it as a high yield savings account, and decided to withdraw their money at one go when they saw the prices falling. These customers were unlikely to be retail investors who analyse and choose stocks from the stock market. I believe that all the REITs will minimally be sold to their book values. Beyond which, how low prices will go depends on the number of buyers.

3. There is a confluence of factors triggering the sell down. There is the oil price crash that impacts the oil companies, the commodities trading companies and subsequently the bank. There is the restriction on air travel that impacts airlines, cruise lines, airline-supporting industries such as tourism, hotels, airline food and logistics, and subsequently the bank. The banks bear the risks of companies being unable to repay their loans or becoming bankrupt. And there is what I call the index fund unwinding phenomenon because "investors" who supposedly were long-term investors decided that they prefer to hold cash.

My hypothesis: Airlines have been operating with thin margins. Singapore Airlines (SIA) margin is just 4.3% based on their 3rd quarter (ended 31 dec) financial report. Their cash balance will only last them about 2 months, and they will definitely end their year with a loss, although china flights were only grounded from Feb and europe flights in mid mar. Their 9 month profit is ~$500M, but their operating cost per quarter is $4B. Assuming grounded flights don't earn revenue and also don't incur expenses, there are other fixed costs such as non-flight crew staff cost, loan repayments, rental and a bunch of payments which I estimate to be ~$1B/quarter. SIA cannot afford to not collect revenue, and they don't have alternative revenue streams. Their alternate revenue streams are all airline-related and will all be impacted. I will avoid airlines and airline-related stocks until these companies announce their financial reports for the quarter ending on 31 mar.

I will also avoid oil-related companies for the time being because the oil price war is destructive.

I will buy REITs and companies that are not in the STI, if their valuations are attractive.

4. Risks factors. Banks will get hit really bad if they get a triple blow from bankruptcies from oil sector and airline sector and withdrawal of client investments from funds. Wealth management fees have been seeing double digit growths mostly because fees are charged as a percentage of the Assets Under Management (AUM). As the fund values are high, the fees will correspondingly be higher. At this point, I will avoid banks too until there is more certainty that there won't be an oil or airline company going bankrupt.

The phenomenon of investors cashing out should not be overlooked as well because the rate of cashing out in this market correction is a lot a lot a lot faster than previous corrections. At this point, we are only at about -30% from peak, and the cashing out phenomenon started from before -20%. Some reasons I can think of are the investors are not working (retirees who need cash for daily expenses), they have an upcoming condo down payment, they have a margin call on their shares financing account.

I see the need for cash for condo down payment as a risk that should be monitored. There is a huge pipeline of new launch condominiums due for completion in the next few years. These condos have also been sold at higher than market prices. There are a few scenarios that can play out:

- Buyers forfeit 25% of their 5% deposit (which is 1.25% of the purchase price) if they have just exercised the option but haven't completed the sale.

- Buyers want to proceed with the purchase, but they haven't sold their existing HDB flat or condo because the developers gave them more time to sell and will reissue the option at a later date. These buyers will have to sell if they want to avoid paying Additional Buyer Stamp Duty (ABSD) or 12% of purchase price. If they can't pay the ABSD or they can't sell, then they will have to forfeit their 1.25%.

- Buyers will sell their existing HDB flat or condo at lower prices because they are unable to sell at their asking price but they need the money for 20% down payment of the new condo. This can cause resale prices to fall.

- Developers may end up with more unsold units if buyers decided not to complete the sale despite paying the 5% to exercise the option earlier. Developers will have up to 2 years after completion to sell these units or have to pay 25% stamp duty on these unsold units. Developers may end up having to lower their prices.

Start of the Great Stock Sale

When I look back at how the events unfold, I can't help but wonder how coherent everything is.

In end Jan, after Singapore banned China visitors from entering after the Chinese New Year weekend, everybody was saying that our government over-reacted. The novel coronovirus COVID-19 was no where nearly as fatal as SARS, the number of cases were so few, and precaution measures seemed grossly exaggerated.

In Feb, a Permanent Resident (PR) who refused to comply with his Stay Home Notice (SHN) was stripped of his PR status. Companies that hired staff on Employment Pass (EP) had their EPs revoked when their staff failed to comply with SHN. Citizens who didn't comply with the SHN were also charged in court. All these were also deemed excessive by some observers. Some say that the virus is just like the flu and it will be mainstream.

In early Mar, new cases start to decrease and it seemed like the storm had blown over, but in a twist of fate, there were cases of COVID-19 in all major cities in the world. All of a sudden, every government was not responding like it was just like the flu; they were responding to it like it was an ultra contagious virus that needs to be contained. That made the whole world panic and chaos ensued. Saudi Arabia's suddenly declaration to Russia that they will increase oil production to bring down oil prices also added to the frenzy. This was manifested in a consecutive stock market fall over the week of 9 - 13 Mar. Oil prices also fell to the lows seen in the last oil crisis in 2015.

And suddenly, it seemed like the country that will stand to benefit the most is China? During their crisis, their government exercised their supreme powers to convert automobile factories into production plants for Personal Protect Equipment (PPE) due to supply shortages. Exports of PPEs by factories owned by foreigners were banned. This created a sudden shortage of supply for other countries outside of China. If that didn't make the other countries think of starting to produce PPEs themselves, and hoping that China will lift the ban for their PPEs to be shipped out, they would be in deep trouble now because they just became even more dependent on their factories in China. Now that there is a worldwide outbreak, China factories will be singing and their logistics sectors will be dancing with higher exports of PPEs. I stab guess that the automobile factories may even turn in a profit from PPE sales in place of their vehicles.

If I have to put a date to the start of the Great Stock Sale (GSS), it will be 11 Mar, because I consider -20% the first trigger. There was a slight rebound on 12 Mar, but 13 Mar had extremely thin volume, probably a fraction of a normal day and prices ended up being discounted 20-40% (from 1 month ago) across the board. As I usually buy when there is a GSS, I don't have a "plan" ready on hand, so when I had to decide how much to budget, I came up with a rough plan:

10 bullets, ~$5000 each, hit targets which are on my shopping list, are at historic lows and dividend yields are at least 5% based on lowest of past 10 years figures.

The companies in my watch list that hasn't fully meet the criteria are

- banks DBS, UOB, OCBC

- REITS CapitaCommercial Trust, CapitaMall Trust, Keppel REIT

- moats Singtel, ST Engineering, QAF, Wilmar, HongKong Land

- airline-related SATS, SIA, SIA Engineering 

- conglomerates Keppel Corp, JMH

As there were so many stocks that I am interested in, I had to be very selective with how many bullets to use so this was how I used them:
- 6/3 (STI 3000 pts)

- 11/3 (STI 2800 pts) Bought Haw Par $11.10

- 13/3 (STI 2600 pts) Bought AIMS REIT $1.20

- 13/3 (STI 2600 pts) Bought SPH REIT $0.88

- 13/3 (STI 2600 pts) Bought Dairy Farm US$3.80

- 16/3 (STI 2500 pts) Bought AIMS REIT $1.15
- 19/3 (STI 2300 pts) Bought SPH REIT $0.70
-25/3 (STI 2500 pts) Sold Dairy Farm US$4.05

Haw Par and Dairy Farm didn't meet the dividend yield criteria, but they were my first positions, so I decided to take a gamble. Haw Par has good cash flow. Dairy Farm has good assets. And because I used 2 bullets, I gave Singtel a miss because I already have quite a lot of it, although it met the criteria.

I thought that if I used 1 bullet every 100 point drop of the STI index as a rough gauge of how low the tide can go, the index would be about 2000 points by the time I am done with 10 bullets, and then I will load another 10 bullets to buy the 3 banks at prices closer to the previous 2015 lows.

From past observations, it takes at least 3 years for prices to climb up, so I am swaying to be a little bit heavier on REITS to boost my base portfolio yield which had stagnated over the past few years.

[Edited to capture the transactions from 19/3]

Book Review: The Greatest Trade Ever

The Greatest Trade Ever - The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History by Gregory Zuckerman

John Paulson was one of the traders who researched the US subprime mortgage loans and believed that those loans will default one day. He bet on fall of the ABX subprime mortgage loan index. The symptoms that pointed to a bubble were
- low interest rates
- shady practices where income documents were neither required nor verified; even your dog can buy a house
- property prices rising much faster than income
- optimism that the government will never make millions of citizens become homeless
- risky (high risk of default) derivative securities bundled with safe securities, and passed off as safe securities rated AA when they shouldn't be
- subprime mortgage lenders issuing more loans than mainstream banks

The bankruptcy of New Century Financial Corporation, a subprime mortgage lender in Apr 2007 was the start of the financial crisis. After making his money from the ABX index fall, he shifted his bets to buying securities that bet against bank collapses because the the cost was a lot lower that shorting bank stocks directly, and banks were insufficiently insured with capital to withstand any sudden drop in valuation of their riskier asset loans. The symptoms were:
- banks holding lower rated mortgage bonds
- banks selling insurance that they had no means to payout
- banks not having sufficient cash to withstand a bank run

In Sep 2008, a mass exodus of clients led Lehman Brothers into bankruptcy. That was the drop of water that broke the vase. They had been suffering losses from their subprime mortgage loans but apparently there were cover-ups to shield these numbers.

This book is a good reminder to watch where complacency is the greatest.

Book Review: Unshakeable

Unshakeable - Your Financial Freedom Playbook by Tony Robbins

I had seen advertisements selling seminars by Tony Robbins with raving testimonials about how their lives had been transformed. I decided to tune in to this audiobook which had 2 chapters read by Tony Robbins himself.

He speaks with high energy and that is a big ingredient to being a successful trainer. Fortunately for him, he joked that a tumour he found in his brain, which he decided not to touch, may be his secret source of unlimited energy.

All we need is just 10% of his readers to be charged up by him, to start investing in the stock market monthly, and we are set to drive the markets higher and higher (into a bubble). And like self-fulfilling prophecy, these 10% will feel more charged up as their stocks rise in value, because they felt that they took charge of their financial lives, and continue to promote the "wisdom" of monthly investments, adding to the bubble.

If there is anything that I learnt, it's that the stock market is filled with money that is brainlessly injected (in faith) monthly because of all the literature about how the Dollar-Cost-Averaging (DCA) strategy works. My only hope is that people acknowledge survivorship bias, and that while DCA may work, what DCA is applied to matters a lot more.

We need speakers like him to dispel covid-19 panic and ensure that the DCA believers support the economy at large.

Book Review: The Man Who Solved the Market

The Man Who Solved the Market - How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

Jim Simons was a mathematician who became a quantitative investor. The book described how he wanted to derive patterns from the stock market, like a mathematical model. Unfortunately, there was no mathematical model to reproduce the stock market movements, but he managed to find some patterns in trades that have a short duration.

There were a few things mentioned which I think contributed to his success:
- He was lucky. He had many failed trades before he got lucky. \
- He had access to a lot more resources (i.e. money) which gave him an edge over other traders. He earned above average salary before he became a trader. He had access to computers, software engineers, long before computers became mainstream. This allowed him to analyse data faster and more accurately than others.
- He also bought data from other financial institutions, to add more dimensions to his data analysis. - The pattern he followed was to follow where the action is, i.e. when a stock has a lot more buying/selling action than normal, it means that there is something to follow.
- As his fund became bigger, his trades have substantial volume to move the markets, which in turn creates signals that other traders pick up and follow, and just nice, that allows him to offload his trades and take profit.

After reading this book, I am more convinced that having money, and a lot of it, gives you an edge in knowledge, resources, wealth and in turn, more wealth. Trend following only works when you are setting the trend, not following it.

How much have I earned and lost in 2019?

How much have I earned and lost in 2018?

Objective for 2019: Increase REITs by 10% (Trying this again, hope to have good bargains), increase portfolio yield by 0.5%, increase income to $16,800 (or $1,400/month).
Verdict: Didn't meet all.

Average dividend yield in
2017 = 4.56%
2018 = 4.73%
2019 = 4.55%

Income was $16,200 ($1,350/month), 2018 was $16,200 ($1,350/month).

I did not buy much stocks because there were no good bargains, hence income didn't manage to grow too. I earned lesser and also spent more (baby expenses), so my overall savings rate halved -- used to save 60% of income but only managed 30% this year. Interest rates remained about the same as previous year.

I sold Cache Log, OUE Hospitality Trust. Boardroom was privatised and delisted, so it was also sold in a way.

I bought Hongkong Land. That's all.

I only buy stocks when there are good bargains. I also sell those that I think are not worth keeping. Maintaining the current level of passive income works too. That shall be the objective for 2020.

As the market hasn't corrected since 2015, the chances of a correction is higher and higher every year so I am also hugging my warchest tight.