How much have I earned and lost in 2025?

Objective for 2025 was to more actively trim the underperforming stocks in a market rally to return money into my warchest to capitalise on the next market downturn.

Unfortunately, at the start of the year, there was market correction also known as the "tariff shock" where there was so much uncertainty.

I did not sell or buy anything for the whole year, which is the first time in my past 20 years or so. Paragon REIT privatised, and that marks the end of my best golden goose. Not only did my $30k capital have a $4k profit, since 2013 IPO, I bought more in 2016 and 2020, and had accumulated $15k of dividends.

On hindsight when I reflect about my decisions, I realised that there were a few reasons:

• stocks remain at historical high valuations with no apparent fundamental reasons, by fundamental I mean factors like substantial increase in profit margin, or reduction in debt interest costs. Instead, it's just narrower profit margins, stagnant unsecured borrowing costs.
• economic uncertainty unseen in history, where US was driving a de-globalisation agenda which was the exact opposite of what contributed to the past 100 years of economic growth?
• I wanted to keep my warchest for market downturns, so I decided to just adopt a wait and see attitude instead.

As a whole, dividends are up, which is a good thing, but it also means the probability of a market correction is even higher than before, and if it does happens, it's going to be really bad because the current highs are a lot higher than the past.

At the same time there is a race to see who implements Artificial General Intelligence first. Absurb levels of salary compensation makes Meta look as if the world is going to end if they don't implement AGI first and money isn't a problem -- a 24-year-old AI researcher, Matt Deitke, reportedly received an offer around US$250 million, where $100 million is payable in the first year.

Perhaps AGI will really be life changing, but before that day arrives, I only can analyse what category of tasks AGI would be able to excel in. 

If I broadly divide tasks into brainy, fine motor and gross motor, AGI will likely excel in some brainy work, with potential to possibly help improve efficiency in gross motor work, and perhaps some fine motor work in controlled environments. Examples of work which are considered as fine motor work in uncontrolled environments are surgery, dental tasks, machinery/devices/anything hardware repairs. 

If I further divide brainy tasks into fluid intelligence, crystalised intelligence, emotional intelligence, AGI will likely excel in fluid intelligence work, such as read and summarise contents, translate, basic to intemediate level trainer, follow an SOP to perform triage in various industries, etc. basically tasks that are performed by junior to mid level staff. 

While shifts in hiring are to be expected, I don't think it's as grim as some people are painting the future to be. Fresh graduates would most likely be taking up jobs that don't currently exist yet and we also can't tell what these jobs are because it really depends what new problems are created and subsequently need people to work on solving those problems. For example in the previous "Software as a Service" and "Ïnfrastructure as a Service" market consolidation that saw giants like Cisco, IBM, Oracle and SAP lose substantial market share as companies shifted to Microsoft and Amazon, new jobs were created that were centred around the new products, such as Amazon Web Services AWS administrator who needs to still have linux OS knowledge and also need to have python programming skills, as opposed to say a network administrator who needed to have primarily linux OS knowledge and did not need to know python at all.

Anyway, that's just my thoughts.

Overall passive income, excluding the SPH REIT profit was $22k for the whole year, which is motivating enough to keep me invested.

My objective for 2026 is to cut my expenses by 10%  so that I can channel that savings into my warchest. In the event of a market correction, I will not feel like I don't have enough cash to deploy.

Oh yes, and the boring chart.

How much have I earned and lost in 2024?

Objective for 2024 was to add more Reits for as long as valuations are attractive (i.e. > 95% occupancy and good location and >7% yields). However it did not happen in a good way and I only managed to add 1 Reit because valuations were not attractive.

The most tragic news for my portfolio was for Prime US Reit dividend to drop 90% y-o-y, and that's after already dropping a good half a year earlier. They had to sell properties and borrow more to raise money. They also changed their CEO who had been in a job for a year. His job was tough to begin with because interest rates remained high, valuations dipped for US commercial properties, so the business model for US Reit which was to borrow low and earn the difference did not work but it was at the same time hard to change when you are neck deep in debt. 

I continued to recycle a few issues of SSB until the rates fell and I thought that it was more of a deliberate process than luck. I can look back and thank my younger self for the 3.21 - 3.47% p.a. for the next 9 years.

For the whole year I only bought 

Mapletree Pan Asia Commercial Reit (Apr)

Stocks I sold:

Singtel (Mar)

SIA Engineering (Feb) - fully exited all my positions

Stock valuations remain expensive. The risk premium of stocks over treasury bonds is still in the same 1-2% range like last year. The only reason I can think of is that there is just too much liquidity in the market and the money has no where to go. However, stock valuations may remain expensive if we accept that asset inflation had already set in all over the world. 

The big question is when should I swap my lenses so that I don't lose out on investment time in market, and still safeguard the downsides? And my answer to that is that it depends on how much warchest I have to hedge my downsides. In the current market, if my warchest is 30% of portfolio (total stocks, funds, SSB, FD), I will probably still sit out. This is what people term judgement, where there is no right or wrong answer.

Unfortunately my "managed funds" are all still losing a lot of money. Neither did I add nor cut loss because these were supposed to be long-term investment funds, so I will just have some faith in these investment specialists. 

Although my portfolio has been positive, I also do not feel like I can call myself an "investment specialist". There is always this thought at the back of my head that says I have a track record to have better returns than the investment specialists I am paying now, but another thought sitting further behind my head that says that the runway is still long and it is still too early to conclude if I am really getting better returns in the long term.

My objective for 2025 will be to more actively trim the underperforming stocks in a market rally to return money into my warchest to capitalise on the next market downturn.

The income chart is becoming boring. This year's passive income was $20k/year or $1.7k/month, which was lower than last year because of the absence of one-off dividend payouts in Singtel and a drop in Reit dividend and a drop in interest income because I repaid a part of my mortgage in cash. Yield is 5.5%. Not fancy, not fantastic, but could have been as bad as my investment specialists' returns.

My daughter asked me how I earn "so much" from passive income. I was trying to nudge her to put in more effort in her studies so that she does not end up working as a cashier or waitress earning just $2-2.5k/month. To motivate her, I shared with her that my passive income is already what the cashier or waitress earns, and I put in fewer hours to achieve the same income. Being lazy, she was interested in this lazy approach to earn money without much work, and after a long explanation, she gave up because behind every $1 earned is hard work, hard work from my younger self to earn, save, invest, hard work by my present self to earn, save, invest, and hard work by my future self to continue to earn, save, invest, and maintain all these accumulated wealth so that everybody can live a life we can associate with quality and meaning.

Behind the chart of wealth accumulation, what is not seen is earned income, and I only realised how directly related it was when I was explaining to my daughter. If I plot my earned income onto the same chart. I saved my first $100,000 after working for 7 years, which is the same year when crossed $5,000/month income and since then there has been no looking back. In that first 9 years of investing journey I wasn't making any money. One theory is that compounding effects take 17 years at 4% p.a. to have an effect. However, I believe that the compounding effect can't start unless the base is substantial, which I was at $100,000 at year 9. There is no magic, the only way is to earn more when you are younger, save more when you are younger, and do not make wealth destructing decisions as you age wiser. However with all the inflated cost of living and property prices, the $5,000/month in today's dollars is probably closer to $8,000/month, and $100,000 base is closer to $200,000. 

Long story short:

If student: study hard, get a higher paying job. Whatever your passion is, try to align it with a high pay job and work towards learning the skills to enter that job.

If already working: look around and see which job pays more, and has a higher salary cap, and work towards getting that sort of job.

If can't get that better job: meet more old friends to get more ideas how they navigate life, and leverage on your network of friends, or friends of friends.

If have kids: ensure they set their goals for higher paying jobs, then they can give you more pocket money next time!

Life's very tough chart - x axis maps to boring chart investigating journey year

Boring chart

How much have I earned and lost in 2023?

 Objective for 2023 was "To continue to load up on FD if rates stay at 4% and above, and buy stocks when yields are attractive. By attractive, I will look at prevailing 1 yr FD rate +3%."

I was extremely lucky to have deposited FD when FD rates peaked at Dec 2022 and Jan 2023. Every month after that had seen FD rates going lower and lower until 3%. When the FD matures, the prevailing rate now is around 3.5% which is still decent.

I was extremely lucky to have applied and allocated the Dec SSB issue where 10-year interest rate was 3.40%. The maximum allocation was $20,000, and I applied for $20,000, so I am grateful. Every month I had to evaluate whether to redeem an earlier issue, while balancing the odds for partial allocation, and to maximise SSB returns. For example, do I redeem 3.0% to apply for 3.2%, and what if I redeem $20k, but I only get allocated $10k in the new issue due to over subscription? or do I redeem my 2015 issue that is currently paying me 3.3% for another 2 years until Oct 2025 to apply for 3.4% for 10 years, but what if I get partial allocation?

In Jun, I wiped out a large sum of savings to make partial repayment for my mortgage loan so that my monthly repayment remains the same. After my 1% fixed rate was up and the float rate was like 4.5%! As I don't know where rates were heading, I signed a 3-year fixed rate of 3.38%. In the freak event that rates drop to 1.8% and below next year, I will pay the 1.5% penalty for early loan redemption.

Stocks was so-so for me. I decided to buy into the dip for REITs, which I thought is right for my portfolio, but I must also set a disclaimer that the risk premium for stocks is not justiable. Risk free rate is 3.5% but Reit stock dividends are just 5-6%. So it does seem that there are cash rich investors who are loading up on Reits too anticipating a rebound.

Stocks I bought for the year:

Prime US Reit (Jan, Jun)

Seatrium (Feb - because of Keppel Corp sold away their oil and gas business to Semb Corp, so shareholders were given shares in the new entity Seatrium)

AIMS AMP Reit (Jun)

Keppel Reit (Jun, Nov)

Mapletree Pan Asia Commercial Reit (Jun, Aug, Oct)

Stocks I sold:

Singtel (Jun)

SIA Engineering (Jun, Jul)

Unfortunately my "managed funds" are all losing a lot of money. Those double whammy kind where I have to pay the investment specialist 1% and still make a loss of 50%. Total amount of money in this managed fund portfolio is 50k (in China unit trusts and US ETFs). I won't add anymore to it and also won't be cutting losses because I can't guarantee that I can recover the losses in another investment because there is definitely economic slowdown in the various China industries from the government's clamp down efforts to prevent escalating debt, banning monopoly, banning tuition, banning gaming, and we don't know what else.

What caught me by surprise was the CPF SA and MA rates were  revised upwards slightly to 4.08%. Who would have thought that the the 4% floor rate could change? 

Finally the silver lining to the less than ideal investments made in managed funds, my passive income is slowly rolling and reached $2k/month this year. Yield was 6.1% largely due to increasing Reit holdings and record profits from banks. It's amazing to think that I persisted for 20 years, reading financial reports and reading even more financial reports and not getting sick of it. Many of my colleagues and friends say that I am one-of-a-kind now because my investment philosophy is seen in everything I say and do everyday and for every kind of situation, be it family, personal, work, or any other random situations.

I thought a technical recession will hit this year but it didn't. I thought it was mathematically impossible for interest rates to remain high because many companies will go bankrupt, and it's still high and hasn't come down.

My objective for 2024 will be to add more Reits for as long as valuations are attractive (i.e. > 95% occupancy and good location and >7% yields). Reits are becoming like investment funds where some funds can just go bust if they don't manage their cash flow and maintain their assets and customers well. 

Market Observations - Jun 2023 - Bargains appearing

As we approach the mid year, I am jotting down some of my thoughts. I also re-read the pieces written the past few years to reflect and assess if I need to calibrate my decision-making process.

Compared with the first six months of last year where crypto went through a boom and bust, and Russian sanctions disrupted raw material supply big time, the first six months of this year was peacefully quiet. The contrast is so stark that it feels like we are in the eye of the storm -- no sound, no wind, you can hear a needle fall on the floor, market frenzy indicators (bond yield curve, inflation rate, debt-to-GDP ratio) are all shouting abnormality, yet economic indicators (unemployment rate, non-performing-loans, salary growth) looks like a normal market expansion.

With that backdrop, I will be sharing a bit of what I did in the past six 6 months in a few areas.

Singapore Savings Bonds (SSB)

I had been applying for SSB every month since Jun last year, redeeming lower yield issues, and replacing them with newer higher yield issues, and the last issue I bought was the May issue (apply in Apr, issued on 1 May). As a result, I now have SSB from 9 different issue dates, and the lowest 10-yr rates is 2.9%. Why I couldn't bump out my 2.9% issue was because I balanced returns and risk not being allocated the issue due to multiple over-subscribed issues, such as SBDec22 GX22120S 3.47% where the maximum allocated was $14,500. Had the Jun issue been >3%, that 2.9% issue would have been recycled. As you can buy and redeem in the same cycle, you need to have enough cash "float" -- which means if I want to redeem $30,000 from a previous issue, I need to deduct $30,000 from my bank account to apply for the next issue first, then wait for 4-5 days for the $30,000 from the redemption to be returned to my bank account. 

My objective was to create a "bond ladder" -- stagger $200,000 (which is the SSB max threshold) over 6 months so that there is interest payout every month, hence each issue I recycled was also about $30,000, except for some months where SSB was over-subscribed and there was a cap. I am happy with this part of portfolio which I don't need to worry about for the next 10 years if savings interest rates were to fall. If rates rise, then I will continue to recycle the cash. Just for my future musing, these were the issues with allocation cap:

• SBAug22 GX22080V 3.0% - $9,000
• SBNov22 GX22110A 3.21% - $10,000
• SBDec22 GX22120S 3.47% - $14,500
• SBJAN23 GX23010Z 3.26% - $172,500

So if you had been lucky enough to apply $172,500 in Dec for Jan issue, you will be guaranteed 3.26% interest over 10 years. 

From the SSB rates, we can see that rates peaked in Dec 2022. 

Fixed Deposit

Dec was also the month I rushed to place 1-year fixed deposits at CIMB at 4.15% p.a. I deployed all my cash into FD. The cash I got from my stock sale were all put in FD and SSB. You will only understand the cash strapped feeling when you actually have to calculate your daily expenses needs to ensure you don't run out of cash, yet at the same time maximise the returns of redeeming older issues and applying new issues. There were a few days where I felt like I had miscalculated and out of money, and I had that few moments of understanding of what people living in poverty feel everyday. I borrowed some money to cover some big expenses, and also deferred certain payments until I get some money back in early Jan, and my T-bills maturing in Mar.

FD rates also peaked in Dec. 

REITs

REITs in Singapore was relatively overvalued where blue chip dividend rates were 4.5% vs 4.15% FD, so I bought Prime US REIT which was one of the better distressed pure-US REIT (the other SGX listed REITs were Manulife, KBS, Digital Core). There was a momentary rebound in Jan-Feb where you felt like you struck lottery buying them -- rising 20% in a week at one point, and then the next moment, it will crash down lower. To give you a sense of the descend, I will list my transactions:

• 21 Oct 2022 - buy 8,000 @ 0.45
• 9 Jan 2023 - buy 10,000 @ 0.385
• 1 Jun 2023 - buy 15,000 @ 0.20

My average price is USD 0.32. The "usual" dividend is 6.8 cents (which is 31% yield based on the last done price of 0.22). How I worked out my margin of safety is to assume a 50% reduction in dividend, and I decided to add more to reduce my average price, to translate to 10% yield if dividends drop by 50%. Of course if dividends drop by 75%, then my yield will be 5% instead, and if dividends drop to 0, then my yield is 0, but this is just risk-return trade-offs. Overall, sizing matters and this is about 3% of my SG-stock portfolio. Prime US REIT is the only stock I bought since my last purchase of UOB stock in Aug 2022 where banks look super attractive because their yields were higher than blue chip REITs.

Warchest

If not for the fact that I did partial capital repayment to reduce my mortgage loan (to reduce interest payments), I would have nibbled a little on SG REITs (the Keppel and Mapletrees are really very attractive now). :P This is the classic investor's dilemma, when bargains appear, you are likely equally to be cash deprived, and my strategy is to maintain a warchest to capitalise on windows of opportunity. If tomorrow the REITs I am eyeing on become 7% yield players, I will deploy my warchest. Until that happens, risk premium isn't attractive enough to slaughter a 3% paying 10-yr risk-free bond - SSB.

Housing Loan

I was very lucky to secure 1% p.a. fixed 1-year loan early last year for my mortgage loan. I recently did loan repricing and secured a 3.38% p.a. fixed 3-year loan. I had to sign a new contract because without a new contract, I will need to pay 4.5% p.a. I will only know if I am lucky 1 year later. There was an article about 38% of residential mortgage loans are now on floating rates loan package, 7 months ago the figure was 37%, so if there is anything to read into the 1% increase, it's that consumers generally expect rates to fall. Fixed rates in banks across the board have fallen from the Jan peaks of more than 4%.

Why I chose a 3-year loan as opposed to a fixed 3.65% 1-year loan was because I don't know where rates are heading in the future. If I had known that rates can rise 500% in 1 year, I would have opted for the 3-year 1.85% p.a. loan back when I chose the 1-year loan. If rates fall back to 1.85% within 1 year, I will just pay the 1.5% penalty to break the contract and switch bank.

Conclusion

We are not in blood-on-the-streets yet. We averted a crash thanks to the US central bank committing to guarantee all Silicon Valley Bank deposits above the deposit insurance limit of USD 250,000. That bank run would have crashed the markets. Today's market feels very similar to 2011 where there are signs of fragility in pockets of the economy and when Syria war started, every little jiggle triggers some panic and risk evaluation. This is the start of the bargain market. Back then I described the market as having the various large central banks applying a "damping function" to slow the impact of a crash over the course of a few years. Since 2011, I had the same "feels like 2011" feeling in the 2015 china flash crash where bank stocks crashed from trading firm bankruptcy, bribery scandals and oil price crash, and then the 2016 REITs crashed, and when everyone thought there was more to come, the REITs crash were the last. Post Mar 2020 covid crash, there was the same "feels like 2011" after that.

If there is going to be any recession in the second half of the year, my guess is that it's going to be a technical recession. Based on the track record of how various central banks respond to these mini crisis, it's hard to foresee a full blown market crash like that one we saw in Lehman brothers where the "Big Short" movie portrayed the Fed as the last potential saviour who did not bail out the first casualty fast enough.

How much have I earned and lost in 2022?

 Objective for 2022 was "Stay the course and trim down the non-performers."

2022 was really volatile and most of the times, I was in self-doubt, which also explains the lack of blog posts. I wasn't even sure if my analysis was 51% correct or 51% wrong. Fed's tightening started many corrections. Each time after a correction happens, there is a rally, and no one knows if it's a bear rally (which means just up a bit but head down even more) or bull rally (up up and away).

Stocks I bought for the year:

Astrea 7 4.125% (Mar)

Daiwa House Logistics Trust (Jun)

UOB (Aug)

Prime US Reit (Oct)

Stocks I sold:

Isoteam (Mar)

Japan Food Holdings (Sep)

ST Engineering (Nov)

STI ETF (Nov)

Full year dividend income for my SG portfolio was higher at $13.8k (4.9% yield), mainly because of dividend recovery post- pandemic. I also sold some shares to cover losses for some of the non-performers. The shares I sold were at prices where their dividend yields were below the 4% SG gov treasury bills yields.

I was buying every single issue of Singapore Savings Bonds to the max of $200k/person, and then redeeming earlier issues that had lower yields to recycle them into the higher yield issues. I also put some money in FD when it was 4%, and 6 month treasury bills when it was 3.3%. I don't know, but somehow stock yields are just 5% and it's like a no-brainer to put money in FD that is risk-free and pays 4%.

My objective for 2023 will be to continue to load up on FD if rates stay at 4% and above, and buy stocks when yields are attractive. By attractive, I will look at prevailing 1 yr FD rate +3%.

Overall, my gut feel is that we are already in a recession, but it's a balance sheet recession kind of recession. Maybe a technical recession will be logged in 6 month's time, but we are deep in one now. Inflation will likely remain until the next black swan event which we won't know what it will be.

Interest rates increased a lot in the last 6 months. My view is that it's mathematically impossible for loan interest rates to remain high because many countries and companies will go bankrupt. The question without an answer is how much non performing loans can the market absorb. We had been fortunate live through 2 decades of growth fueled by loans and no one can imagine the impact with loans are reduced.

And finally... a glimpse of my boring chart. Passive income went up a teeny bit, but still in the same range of 1.3k/month.

Market Observations - Jul 2022 - Turning Tide

 The past 6 months could have been a fiction book if we didn't live through it: 

• Crypto currency Luna levitated to godlike levels and crashed to almost 0 (less than 1 cent). At its peak on 5 Apr, it was $119, and newfound wealth led to newly crowned "crypto investors".

• Russia's invasion into Ukraine led to trade sanctions, which led to a supply crunch of almost everything you can name on earth, resulting in prices spiking and then crashing down. It didn't help that it happened at the same time when Luna went to the moon.

• Interest rates doubled in a matter of months. In Jan, Singapore floating mortgage interest rates were still below 1%, and in Jun, it's just under 2%. It's similar in other countries too, as the Federal reserve increased interest rates.

The construction sector resumed work last year, and it caused a worldwide shortage of building materials such as steel, sand, and even small items such as screws, and it was just supply crunch in 1 industry. What we saw with Russia was disruption at a wide scale, not as serious as when China went into lockdown mode, because everyone had started to diversify their supply chains and stockpile critical materials, but it comes in at a close second -- fuel, food, shipping, labour, all increased one after another in a chain reaction. Even nickel prices went to the moon. The only thing that probably won't reach the moon is my income *cold joke*. 

Nickel prices in the past 1 year

Why I believe that the tides have turned?

• I don't hear man-on-the-street talking about buying crypto. Earlier this year, I get to hear such conversations in MRTs, buses, restaurants, hawker centres. I haven't heard anything in the last 1 month.
• I don't see as many advertisements about investing in REITs for retirement. I believe that marketing money is smart, when the baits work, there will be a lot of them laid. So the hype is over.
• I don't see as many advertisements about buying property for investment. I believe this is a sign of increasing market activity -- agents don't have to try so hard to attract buyers.
• It does not feel like we had reached a "blood on the streets" phase after a market wipeout, and we may not even see one because job support has been the #1 priority in the pandemic support budget.

What data points do I look at?

• Pandemic support budget -- All the schemes have tapered off.
• Non Performing Loans -- Local banks financial reports report steady NPL rate of about 1.5%. As new loans are also growing the loan portfolio, proportionally, the increases in NPL (which are past loans) are not obvious. Banks also can be selective with their customers and don't need to fight to increase market share (and get lower credit quality loans as trade off).
• Retail rental and occupancy rates -- Although the pandemic caused many businesses to close, it didn't lead to widespread vacancy. Shopping malls that hit the right notes with location, footfall, amenities, are still commanding high rental and occupancy rates (see Mapletree Commercial, SPH REIT). As long as people are still spending money, the economy is good.
• Debt -- Debt is ever increasing in China and personally I don't have a good feeling about it. The good thing is USA has even bigger debt and they are still alive. The bad thing is no one knows the impact of unwinding debt at a China scale, but when that happens, I definitely want to be holding on to tangible cash flow producing assets.

Valuations

• As the risk free Singapore Saving Bond (SSB) rate is 3% p.a. for 10 years, I am using that as a benchmark to compare the risk premium. Mapletree Commercial REIT's (MCT) current price of $1.80 has a 5.2% dividend yield. for 2.2% more, will you take the risk? Historically, MCT's yields are around 4.5% when risk free rates are 1.5%, so if we apply the same risk premium of 3%, MCT's dividend needs to be 6% to make sense. If we look at DBS/UOB dividend yield, it's 4.6%, and it makes you wonder if buying a bank stock makes more sense than say MCT?
• Price Earning ratios of Singapore companies are not too expensive, and not at bargain ranges either. The STI ETF is at $3.15, which is about 10% below its Apr highs. Historically, there is a higher chance of maintaining at this level, than either moving up or down. Usually bank stocks trade at < 3% yields.

What I will buy

• At current prices, I see the most value in bank stocks, for reasons stated above.
• If I have to make a second choice, I will choose food manufacturing businesses because they have more control over supply side costs.
• All other sectors have their fair share of risks. Air travel hasn't gone back to even 25% of pre-pandemic levels. Tourism and hotel REITs will also have to expect bumpy restarts. Transport companies have have to cope with erratic oil prices with the ongoing "fight" between US and Russia. Energy companies have to cope with high cost of operations and they don't have much pricing power to begin with (personally I feel that another energy crisis will result in energy companies being nationalised again). Telcos still are handicapped without their data roaming and business travel income stream which traditionally forms 20% of their telco revenue. F&B and basically any service industry that is highly dependent on human capital will have to struggle with high rental and manpower costs.

Opportunities that I will look for

• Maximise SSB deposits if rates really continue to increase beyond this month's 3% p.a. to the mystical 4%. 
• If that happens, we almost certainly will have a stock market correction of another -20%.
• Personally, I believe if everybody expects a 4% p.a. FD rates in dec, will it ever happen? If only market timing is this easy... 

Disclaimer: The writer owns shares in DBS, UOB, STI ETF, SPH REIT. 

How much have I earned and lost in 2021?

"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."

I will say I met the objective as I bought property counters. More of that below.

I tried really hard to find good stocks and it was really really tough because asset inflation has set in unfortunately. Monetary policies remain loose, hence cheap money is still reigning. I didn't write any detailed financial analysis of any stocks, mostly because prices just didn't meet my screening criteria. There are signs of bubbles everywhere, but we will never know when it will pop, so if you see advertisements touting to be able to "help you" be prepared for a market crash or continuous inflation or even hyper-inflation (hyper-inflation is very far-fetched but marketing is all about playing on fear), do yourself a favour and apply some common sense.

Here's how to prepare yourself:

1. Check your cash flow. MAS has a really good ratio which everyone should follow 55%, which means your monthly debt repayment amount should not exceed 55% of your gross income.
2. Check your debt level. Ensure that your assets > debt. Assets = property, investments, bonds, cash.
3. Check your emergency cash level. Many people tell you to have 3 or 6 or 12 months of your monthly income. Personally I suggest you calculate your monthly cash flow surplus (i.e. the amount after debt repayment and monthly expenses) as well. If your surplus is > 75%, probably 3 months income will tend you through. If your surplus is <25%, you may want to have 12 months income because it means you are living on a rather tight budget.
4. Plug any leaks. Terminate any non-income producing business ventures or assets. Review any recurring monthly expenditure, and switch to more cost effective alternatives where possible.
5. Don't quit your job. Continue to work for as long as you can.

Stocks I bought for the year:

VICOM (Jun)

Daiwa House Log Trust (Nov)

Capitaland Integrated Commercial Trust (Dec)

Stocks I sold:

Wilmar (Feb)

Singapore O&G (Sep)

Hongkong Land (Nov)

Full year dividend income for my SG portfolio was lower at $13k (3.5% yield), mainly because of dividend cuts. I also sold some shares and received $4k profit.

This year I also calculated how much interest I get from my CPF accounts, and it's 3.2% across all the fancy account names and bonuses. Although it's a can-see-cannot-touch-until-55 account, I think it's a good mental exercise to condition yourself with a risk-reward threshold. If you can't beat 3.2%, you really should max out your CPF accounts first or hire someone to do the job, while you buy time to improve your competency.

I also diversified to managed investment services with Autowealth (30k) and a Manulife Financial Advisor (12k/year commitment) mainly to buy into US and China markets. While I could buy the unit trusts myself, I decided to pay for services while I learn the ropes. The financial analysis aspect is really too much work, or rather, the level of detail I expect of myself cannot materialise with the amount of spare time I have now.

Objective for 2022: Stay the course and trim down the non-performers. I really need to analyse whether I should hold or cut loss on the lagtards.

This year I decided to also plot cumulative passive income to give myself a moral boost. It's almost 100k after all these years!

What did I buy and sell between Jan to Jun 2021?

The stock market rallied for a good 7 months from Oct 2020 until Apr 2021. Usually when the market rallies, I will look at selling stocks which I feel have reached prices that exceed their market value.

I sold Wilmar in Feb 2021, which was a stock I bought in Feb 2018 when the market was sluggish. The thing about Wilmar that I liked back then was that it had very very good cash flow and it wasn't pricey, near historical mean. The thing I dislike about Wilmar now is that it's debt laden and pricey, way above the historical mean. Although fundamentally they are a lot bigger, they IPO-ed some parts of the company, but as a whole, they took on a lot more debt and I wasn't convinced that they were yield accretive acquisitions. It was a good run with 80% capital gain and 11% total dividends, so overall it was up 91%.

I bought Vicom in Jun 2021, few days ago. I didn't have to buy anything, but I thought I should buy something since I haven't bought anything for a long time (since Sep 2020). REITs are fairly/overvalued, so I decided to look at other stocks and settled with Vicom, which is a stock that I had been looking at but had never initiated a position. What I like about Vicom is that it is a boring and transparent business with high cash flow. It's also like a monopoly business because vehicle inspection and certification services are highly regulated and you won't have new players enter the market so easily. It also has low float, low volume, so it's unlikely to be in the radar of big fund houses -- I like such stocks, because prices are relatively stable.

Autowealth bought some ETFs for me in Feb 2021, mainly US ETFs, under their portfolio that charges performance-based fees instead of the standard yearly management fees. I generally don't know how to choose funds, although some people tell me that funds are not meant to be individually analysed like stocks. So for now, I am paying others to choose funds and manage them for me, while I continue to pay myself to choose and manage stocks. Only time will tell if this is a good arrangement.

My friends had asked me if it's a good time to buy stocks. I would say that if you are just starting out, you probably can just get into any stock at any time, but don't go all out, because historically, prices take a breather in Aug and Sep and sometimes through Nov. If you already have stocks on hand, then you probably can afford to wait a bit because usually stocks go on sale 1 or 2 times a year (about 10% correction from peak for the year, which could mean STI at about 2920) and this year, it had not happened yet, so if you think you will be lucky, then wait for it. It may not happen too, like in 2009, where prices only went up, up and away.

Personally, I am expecting the "pandemic effects" to set in this year, i.e. government hand-outs will be less generous, savings dry up, lenient loan policies will be tightened, interests will slowly rise, income will be squeezed. I also feel that some sort of "balance sheet recession" effects will hit the mass market non-essential retail businesses, where people opt for cheaper alternatives or totally cut back on spending. Although the economic forecast is positive growth, I believe that the growth will be rather invisible, in the form of bio medical or electronics production and property asset inflation, and will not translate to salary growth.

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.