Some work on Sovereign risks

Shall touch on nations in troubled waters to let readers have some information.
I do not pride myself as a macro guy but this data is pretty insightful, it took me a while to get the table done but was well worth the effort. I will not be liable for any reliance on the information to make investment/s. decisions.

Click HERE if you are new to ratings, very good explanation by Blaha Finance.

• Greece 
• S&P downgrades from AA to BB-
• Total debt of Eur 305 bn vs 2009 GDP of Eur 237 bn
• If it takes Eur 45 bn (30 EU and 10 IMF) repayable on 2013, adding on to existing Eur 34 bn of interest and principal, thats approx Eur 74 bn or 31% of Greece's GDP
• Do not forget that each year, Greece ha to pay approx 10-15% of its GDP to pay off existing debts till at least 2017 where the debt payment slows to 5-10%
• Comes back to the point in my 1st post that a troubled country like Greece should not have sovereign yields for its debt. Previous news on traders scalping yield for 10 year Greek debt of 7+% to 6.5% was out of this world. True enough, now its over 10+%, 2 year at 15%. Well, you do not need a rating agency to tell you that Greek debt is junk status. It will and should stay at these yields or higher.
• Portugal 
• S&P cuts rating from A+ to A-
• Spain's largest trading partner 
• Face a slow growth issue with wages rising faster than productivity 
• Plans to have a 50% tax on "highly paid" finance executives
• Spain 
• Debt to GDP much lower than Greece
• Real estate bubble boom pulled in jobs and now the bust is killing it
• Country has product manufacturing quality issues and unable to adjust wages 
• Inefficient taxation system especially for property trades piles on the problem
• Debt wise not as leveraged as Ireland or Greece
• Slow growth and void from real estate will hamper recovery
• Look at charts below, July 2010 is a lumpy debt payup for Spain
• UK
• Commercial lending grows 5-10% yoy from 1999 to 2007 is actually declining in 2010
• Debt level remains high

 Looking at the table, I was very surprised to see Japan being the next largest reserve holder after China, mainly from strengthening of Euro against dollar. I guess we will see that reversing soon.

I highlighted in bold potential debt default candidates. Reading news and all do not give a clear view of the amount of risks lies therein the sovereign debt until you assemble the numbers.  The European countries in bold look awfully bad especially Ireland. Now US does not seem so bad relatively aint it?. Theres always a price to pay for something.

Click on the picture above to enlarge and see the otherwise invisible GDP growth yoy.

Source: Bloomberg 

Now the main bulk of the problem is Euro nations hold the debt of each and other. So if one falters, there is a strong incentive or rather disincentive to all rush and support that nation. So increasingly we can see the stress lines from Greece and now from Portugal and now likely Spain.

Foreign banks are holding alot of Greece and Portugal debt and less of Spain. However Euro banks are holding alot more Spain and Ireland debt. However, countries in immediate distress are those with high government debt to GDP and with poor GDP growth figures, not total debt to GDP. Spain is in trouble as it has over Eur 225 bn worth of debt due in 2010 (lumpy debt maturity), equivalent to Greece's economy. Adding to the problem, Spain has the highest budget and current account deficit in the world second to Iceland. However, noting its low debt relative to other troubled nations, its problem will be a slow one to come up and a likely economic recovery may save it from a fate like Greece.

On the other hand looking at reserves

I think it may be wise to

1. Long Singapore dollar and Russian Ruble
2. Short the US dollar, Euro and the Pound
3. If you are in the market
• Sell losers into strength, winners up to you 
• Stick with only the best names 
• OR if you are like me,stay >50% cash

Updates 5 May 2010: 
With the risk aversion and likelihood of cross default among Euro nations, we see a across the board decline in the stock indices. Please also note short US and/or Euro is a long term view. In the short term, both may rise in view of the falling markets due to unwinding from risk aversion trades. Do not ignore this development as US / Eur has one of the largest money supply around and unwinding may prove to be painful to those who short the USD or Eur early.

sovereign debt, default, reserves, Greece, Spain, Portugal, fiscal deficit, budget deficit, debt

On Roxy Pacific, E8Z.SI, ROXY.SP

Looking at the current down market, I thought it would be apt to move into this counter, a deeply undervalued counter.

A Brief - Roxy Pacific (RPH) is a small-mid scale Singapore property developer with some investments in commercial property, mainly in the East Coast, District 15 area.

Why this counter is a buy

• Substantial discount to RNAV (the freehold hotel value is carried at cost).
• Astute management (cheap acquisitions in the areas, all below S$ 500 psf ppr)
• Long experience in the district 15 (Founder's father used to operate in that region
• Blockbuster year for 2010/2011 as S$280m worth of revenue unrecognized and with approx 15-17% net margins equate to S$42-47m worth of value
• Trading at steepest RNAV discount to peers - Sim Lian, Heeton, Sing Hldgs and Soilbuild
• Firm enjoys a 6 year long history of high growth, ROE 20% and net margins over 20%

Risks (Killing my own idea)

• Firm is very selective in acquisitions and may run out of land bank
• Currently 6 projects will last them approximately 2 years, streak ends there
• Hotel stocks typically trade at 40-50% discount to RNAV (But historically also plagued with other issues, for example Orchard Parade has money losing yeo Hiap Seng etc)
• Overall market dip (financial + property)

Expectations 

• Deep discount versus other small hotel owners cum property developers is illogical given the strong management, high quality freehold hotel as well as a record of 100% sales for their developments within a short period of time
• Did up a simple RNAV, took psf prices of Joo Chiat properties at S$850psf which is a very conservative estimates. Lately the area has been going for over S$1000 psf for 99 year leasehold small developments
• Even if assuming the developments are worth zilch, 0.8x price to NAV with only the revalued hotel will give a value of S$0.378 and 1x gives S$0.473.
• Downside is little since most of their developments sell out, hotels are seeing improving vacancies and even if that fails, the land under it is valuable since it stands opposite Parkway Parade, Marina area where even HDBs are going for S$800,000 for a 5 room flat
• Downside support price will be S$0.378 or higher, upside will take care of itself

Disclaimer: The writer is vested in this counter 

Roxy Pacific, hotel, Joo Chiat, East Coast, Property developer, Singapore

Disappointed? Not really..

This week, research was done but was not able to hit any trigger.
Many of the counters on my buy list keep going up, obviously a nitro- charged bull acting.
I find it hard to buy when everyone else is, somehow the price action seems to prove otherwise.


The sovereign risks, China's property rush, impending corporate debt problems and a high likelihood of rising interest rate lingers in the backdrop, risks that are too glaring to ignore. 


Perhaps I should buy in post dividends season or at least start preparing my shorts.
It seems like an overwhelming large majority of Asian companies have exceeded their fair value.

UPDATE: 27 April 2010
Jeremy Grantham from GMO fund who puts what I think in succinct words HERE 

fair value, corporate debt, overvalued, GMO, Jeremy Grantham, sovereign risks

Picking stocks without corporate governance issues

Recently wanted to write on this as I am close to done on my research on stocks to buy while the markets continue to range trade and hopefully fall. Most importantly, I have decided to buy some of the most scorned of companies on the exchange, namely S chips listed on SGX. Honestly, I think some of them are punished far too much versus other counters.

Reading an recent article from JP Morgan in 2008 on red flags, I felt it would be good to let readers know more about spotting dubious firms. Here are the factors that the report stated. I presume this report was from their Asset management arm.

1. Extremely low deposit rate for cash (Check what amount is on deposits)
2. High cash levels and also high debts (What for? Firms should pay it off to avoid interest expense)
3. Much higher capex for the same capacity (Check depreciation)
4. High gearing and working capital requirements but somehow still alive (Magic!)
5. Frequent fund raising (Leeches)
6. Hit and run (Major changes in major shareholders post IPO or capital exercise)
7. Resignation of key management, directors or auditors (Disagreements to opinions)
8. Acquisitions that do not make sense (Fair price? Affiliated parties and transactions?)
9. Lack of sufficient disclosure 
10. Low dividend payout despite high cash levels (Let me add share buyback too)

Good list here which I believe is sufficient to analysis on top of reading the footnotes carefully!

On the side notes, I have been recently reading alot on managers saying Singapore is a dead pool while considering dual listings which give rise to higher valuations. Therefore, overseas analysts and investors understand and appreciate their business unlike Singapore analysts  and investors who do not know anything.

From the statement, I deduce the following:

1. Investors who pay the most are the best investors in the world
2. A high stock price is the most immediate benefit and goal of the manager
3. Dual listing is a platform to access more (not necessarily cheaper imho) capital

Does this sound logical?
We shall see how the overseas markets will "better understand" with the performance in future.

S chips, fraud, cash, corporate governance, JP morgan, SGX

Updates for April 2010

Hi to all,

March was a pretty flat week with little happenings and April looks set to beat March on that.
After the market rallying for a few weeks in a row, today it is taking a break.
I cannot and do not market time as my track record is embarrassing and I do not wish to catch a falling knife. I will still continue to buy things on a cheap, albeit at a slower pace.
However I do note the following,

• Markets is still flush with liquidity, no major tightening...yet, except for 
• China on tightening concerns (Andy Xie wrote a good piece HERE)
• Housing 
• China just up the minimum down payment for mortgage
• First house from 20 to 30% 
• Second house from 40 to 50% ,rates at 110% of PBOC's lending rate
• Govt clammed down on land hoarding real estate firms 
• Mortgage/GDP of 15% vs 80-110% for developed nations prior to the crash
• But China is GDP driven - using fixed investments)
• Property price to income is on average 20+x (I.e 20 years to payoff mortgage)
• Yields are rock bottom at 2-3% (I.e takes 33-50 years to recoup property costs)
• Banking 
• Bank reserve ratio was hiked 50bps to 16% previously 
• We can probably expect more in future as a way to control individual regions lending practices 
• Economy 
• China inflation now is at a 16 month high 
• Shut off loans to areas excess capacity since 2009, ex cement, steel, property
• China consume/invest to hit GDP# not vice versa
• Exports are still weak, especially with the recent trade deficit (See below)
• I do not think the property frenzy will end. Why? 
• Huge transfer of wealth from Govt to people in terms of resettlement cost
• Govt borrows and pays off residents (big time!)
• Residents have no roof over head + high inflation ...they buy houses, if not stock market 
• Do you think yields and down payment matters to residents?
• Govt needs to not only tighten fiscally and monetarily but also structurally, if not the middle class will suffer the most
• China recorded their first ever trade deficit of US 7.2 bil since 2004
• Compare this to US trade deficit of US 37 bil (Jan 2010)
• China spent 10% of their 2009 GDP to buy USD / sell RMB, 28% of goods services sold
• Revaluation of the RMB will cause thin margin exporters to suffer (Think textiles)
• This is xpected since exports were facing negative growth since 2008 and with Chinese being such large consumers, we cant expect them to be the worlds OEM plant forever without some form of improved or higher quality consumption
• Greece bailout 
• USD 41 bil by Euro counterparts, 3 year loan at 5%,wow!
• Induced buying for Greek 10 year bond, reducing yields 7.5% to 6.65% 
• Greece recorded 12.7% budget deficit on GDP
• Spain had 11.2% and Ireland 12% 
• They need to follow Germany to build a more efficient economy (Mindset shift needed)
• Blackrock bought 4% yield US notes while PIMCO shunned it 
• Classic case of inflation vs deflation bet 
• Personally theres a good reason why PIMCO may be right ....
• High fiscal deficit + high debt levels = likely rise in real interest rate and inflation 
• Higher rates lead to loss in bond value and inflation erodes the price of bonds
• Chasing the 4% is akin to short term bullish cyclical view wrapped in a secular depression
• Bill Gross (Pimco) said a country can issue more debt to escape a debt crisis only if: 
1. Country can issue own currency and is accepted in global commerce? 
2. Initial conditions moderate (Debt, deficits, demographics and growth)?
3. Can it issue future public debt as a substitute for private credit? 
4. Central bank can reflate via low/negative rates without creating a currency crisis?

• Performance checklist wise 
• Greece failed
• UK slightly better but
• Likely issuing more debt = inflationary pressures and bringing Pound down 
• US passes but 
• Doesn't mean US bonds are good investments
• est. US 46 tril (4x out.debt currently) of unfunded social medicare insurance.
• Position bond portfolios on 
1. Short end of curve- nations with successful reflation (Rates stay low)
2. Far end of curve - debt deflation resilient nations (Germany and Core Europe)
3. Each unit of quality credit spread will do better than a unit of duration
• SUMMARY 
• We are in for one big ride!
• Emerging / developing nations  are catching up fast
• China has an increasingly structural issue
• Seems like hubris taking effect with all the social problems kicking in 
• Starting to undersave and overspent - a cycle starting once again
• This gives rise to likely dips in the next few weeks
• By ensuring one buys good quality business with favorable pricing power, one is essentially hedging against inflation. That will be my guiding principle for 2010.
China, Greece, China property, Bill Gross, GDP, Andy Xie, inflation, deflation, debt

Postings and updates on portfolio

Hi to all dear friends and readers,

I received some well wishes and comments from some of you and will post my replies here.

1. I will have half yearly updates on my portfolio
2. There will be discussions on the positions as and when I'm analyzing it
3. My updates will be written on a best effort basis, including market updates and analysis
4. Please note that I do not use analytic tools like Bloomberg  and Reuters etc so everyone is free to discuss ideas and/or worldly matters
5. Last but not least, I am not exactly doing this full time but I do hope that will happen one day

Thank you and happy investing!

Sing Tao News Corp 星島新聞集團 - 1105 HK

I was looking at this counter at the release of its 4Q09 financials yesterday (12 April 2010).

• Turnaround story, 
• HK's leading free newspaper publisher for Headline Daily (circulation 760k / day), The standard (circulation 200k / day) and Sing Tao Daily. This versus competitors for free newspapers AM 370 and Metro circulation of approx 200k+/day each.
• Also publishes several popular HK magazines including East week, PC Market, East Touch, JET, Spiral, CAZ buyer and Job market.

Financials 

• Mkt cap of HK 900m, has approx HK 413m in cash and short term securities 
• Firm historically loses money in publishing and makes it up with gains in investments although operating losses are common in firms operating in free newspaper publishing (ex AM370 and Metroline Daily)
• In 2007, investments were HK 366m which declined to a mere 41m in 2008 
• Financials very messy but if one digs further, one will realize operating profit is never positive except for 2007 and 2009 (notes - years with high ADEX, very bullish years in other words) 
• Equity book growth is at 8% CAGR with no operating free cash flow to speak of

Thoughts 

• The position is interesting but not at price of HK1.09, neither safe or cheap 
• A spin off as catalyst in this case is not attractive reason being do you think Sing Tao will spin off 100% of its core business? I think even a 70% issue of stake will be unlikely 
• Further, the firm as a whole churns out HK 63m of operating earnings per year, I think 
• Too big a risk to bet on management's ability to be great investors 
• Subsequently price is now at HK 1.37, up 18% today and 6% the day before 

The market actions seem to suggest that the market knew something I did not know.

 Anyone has comments please feel free to write it here. 

Sing Tao, 1105 HK, 星島新聞集團, free newspaper

10 signs your stock will double

Alright, I know the title sounds cheesy but hey, it provides some simple and good things to watch out for.
Your stock should display the following according to the website HERE.

1. Out of favor or even hated (Strong investor bias against the firm)
2. Hidden progress (Performance time lag) 
3. New Technology (Maybe something simple yet effective, ex integrated cab billing systems)
4. Investment in R&D (Takes years to fruition)
5. Industry tailwinds to support the firm (Goes against #1 and 9) - I do not really agree with this
6. Changes to industry structure or number of competitors 
7. Owner managers (Eat what they make)
8. Insider buying (Note the amount, volume as well as is it for executive compensation or simply increasing shareholder value?)
9. Unrecognized by the market (Analysts do not cover it, no one sees it, often the small ones)
10. Financial Strength 

On investment categories and allocaions

As investors, we need to understand what is our aim in managing investments. A clear and meaningful categorization of possible situations allows for better cash allocation as well as active risk management.
I know many have read articles from the 2 investors, please bear with me, it is for the benefit of everyone.

Heres Peter Lynch's categories which in my opinion covers quite pretty much everything

1. Slow growers - Tracks GDP, high dividend yields, PE is not crucial here (in fact most are high)
2. Stalwarts - Large firms,10-12% growth (returns <= 50% in 2 years), rotational and 
3. Fast growers - 20-25% growth, growth / PE >1 (High returns)
4. Cyclicals - Some mistaken for Stalwarts, follow economic cycles, timing important but hard. Sometimes think buy high PE, sell low PE
5. Turnarounds - Depressed firms, stages fast comeback when successful 
6. Asset opportunities - Hidden asset values, requires industry working knowledge

Here' Warren Buffett's categories as stated in his early partnership letters

1. Control (1956) - situations requiring majority ownership of the firm 
2. Workouts (1956) - situations involving restructuring, turnaround and others not correlated to market
3. Generals - very undervalued (1956)
4. Generals- relatively undervalued (1965)

Overall #4 would have generated some good and some disasters, overall I believe for a small capital, staying 100% vested is important and still result in positive returns versus a benchmark.In times of high valuations, it is hard to find #3, while #1 and #2 historically is hard to find and onerous to manage.

Updates (6 April 2010)
Some of my close friends not in the investment field asked me how to survive with a small capital.
My answer was precisely when you have a small capital base, it is far easier to produce out-sized returns which I will explain in a later post.

I have a small capital base and below are some of the criteria I employ:

1. Abnormally large margin of safety 
2. Foreseeable catalyst to unlock the value realization 
3. Positions that are little correlated to the market
4. Preferably no institutions cover it 

Happy investing, best regards.

allocation, Peter Lynch, Warren Buffett, portfolio, workouts, stalwarts, cyclicals, turnaround

A debt financed economy (US)

Heres some takeaways from firms who suffered pain, good to learn from mistakes from them. Alot of them underestimated the impact of the structural issues and either went in too early or did not hedge. The developed economy was running on benign monetary policies, budget deficits and bullish views on assets. This has manifested itself into stratospheric levels of debt in 3 forms:

• Corporate - Firms doing LBOs - $430 b in 2007 with ev/ebitda of 6-9x being common. Such firms will need to recap in 2010 and years to come. Maturities will come in 2012 and mostly 2013-14.

• Real estate - The bubbly view on assets also hit properties. It did not help that residential mortgages increased dramatically from US2.3 to 3..3 tr in 2004-07 (13% cagr). Securitization market grew US400 to 800b (25% cagr) in the same period. This led many to believe the large institutional cash to invest, low rates environment and the insufficient supply outlook was real. Cap rates were compressed from 9 to 4+%. 
• In 2009, only 40% of commercial CMBS issued post 2002 have matured and US900b will come due in the nest 3 years. Most of this will come from savings banks and institutions. On maturity, banks and CMBS trusts will then choose to either foreclose, restructure or roll over.

• Sovereign - US, UK, Japan and Eurozone have collectively US 25.9 tr in sovereign debt including T bills and directly issued central government debt. Most countries with exception of UK over relied on short to medium term funding and 62% of the debt (US 16 tr)will come due in 2014. 
• This will compete with the LBO and CRE refinancing. Governments can do 3 things, improve GDP, cut outflows or simply inflate their way out. First 2 will mean long recovery, higher taxes, less incentives. Printing money does not apply to weaker Eurozone nations. Inflation will solve the issue and yet raises rates for future debt issuances, however it will not completely eliminate the debt issue, especially to comply with the Maastricht treaty of 60% debt to GDP levels by 2032.

Japan seems to be in quite some situation, I'll see what I can contribute here in the next posts.

The early part of the coming decade, we will do fine with low rates and improving confidence and operations across industries. So we can definitely see rising utilization, improving inventory cycles and perhaps even opening debt capital markets. However, in the long run, rates will make a even stronger comeback in a bid to curb inflationary pressures and to avoid a irrational transfer of benefit from the prudent saver to the leveraged consumer.

CMBS, delinquency, loan, GDP, corporate debt, sovereign debt

CMBS delinquency, commercial loan defaults and real estate, corporate debt, maturity

Read a blog on CMBS delinquencies with very convincing numbers. Read it here.
A short summary: 

• CMBS delinquency is still rising (in the US 700 billion market) 
• Realpoint estimates delinquencies at over 6%, TREPP estimates it at over 10% (highest ever)
• With extended "Stay hotel" loans and $ 3 billion Peter Cooper village / Stuyvesant Town (which is still current on payments at the moment), total unpaid loans to hit US 60-70 billion by mid 2010
• delinquencies estimated to hit 8-9%  by then and 10-11% by end 2010
• This is on top of record vacancies 

And for the corporate debt sector 

• Standard and Poors has a report online on corporate debt maturity
• As discussed with many of you, a bulk of the maturity will kick in at 2011/12 till 2015
• Alot of firms especially non financials in US will have issues in that period 
• Get the report here 

I will follow up with some thoughts on out credit driven economy in the next post tomorrow.

Unemployment, S&P index (US markets) and GDP growth

Something interesting that one of my friend pointed out. The last crisis was one where GDP was hit badly and unemployment rate soared. This chart is from 1970 till now.


Unemployment rate was not low to start with. We enjoyed declining unemployment from 1980s till 2000s with booming housing market, low rates and financial innovation until 2006 when it started creeping up silently. (Leading indidcator for once?)


The 2009 unemployment rose as much as 1.5x - 2x more than past averages. Notice that market has a big move up within 2-3 years after each peak unemployment number? Hmmm


Do look at the other chart below, market runs inverse to unemployment but 2009 was a anomaly. Either we have too many stock pickers getting better or more people should wake up and get back to work.