tag:blogger.com,1999:blog-64012759225851168832024-03-14T02:25:32.525+08:00CashBenchAn Asia-focused blog from Singapore on investment tips & news. Start putting your cash to better use!Unknownnoreply@blogger.comBlogger42110tag:blogger.com,1999:blog-6401275922585116883.post-16711462005477525202009-11-27T21:12:00.001+08:002009-11-27T22:12:12.184+08:00Learning from Dubai’s debt problems<p style="margin-top: 0px"><strong>Yesterday, the huge <em>Dubai World</em> conglomerate shocked the world by announcing it needs a 6-month “standstill” on its debt repayments to June 2010. For most of us, what does this mean? CashBench filters through the hype and focuses on what we can learn from Dubai’s problems.</strong></p> <p><img title="Dubai Burj Al Arab Hotel" style="border-top-width: 0px; display: inline; border-left-width: 0px; border-bottom-width: 0px; border-right-width: 0px" height="327" alt="Dubai Burj Al Arab Hotel" src="http://lh6.ggpht.com/_G8T99lxDDBo/Sw_QLVMNMFI/AAAAAAAAAzc/gg4eyupNfS0/Dubai%20Burj%20Al%20Arab%20Hotel%5B4%5D.jpg?imgmax=800" width="434" border="0" /></p> <p><strong><font color="#000080">Extravagant Dubai</font></strong></p> <p><strong>Dubai</strong> is part of the seven emirates that make up the United Arab Emirates (UAE) in the Middle East. Despite its small size, it is arguably the most famous destination in the Middle East with many signature real estate developments. Some of these include the largest mall (<strong>Dubai Mall</strong>), tallest tower (<strong>Burj Dubai</strong>), and the most luxurious hotel (<strong>Burj Al Arab</strong>, pictured above).</p> <p> <br /><strong><font color="#000080">Dubai World</font></strong></p> <p><strong>Dubai World</strong> is a government-holding company of many well-known Dubai companies such as <em>Nakheel</em> and <em>DP World</em>. From this perspective, Dubai World is similar to <em>Temasek Holdings</em> in Singapore. </p> <p><strong>Nakheel</strong> develops the world-famous man-made island <em>Palm Jumeirah, </em>where we can find the huge Atlantis hotel & resort, a luxurious villa owned by David Beckham, and numerous other private homes owned by the rich & wealthy. <strong>DP World</strong> was the company that outbid Singapore’s PSA in 2006 to take over P&O from the UK, propelling it to the world’s 3rd largest port operator. </p> <p><strong><font color="#000080"> <br />Dubai World’s announcement</font></strong></p> <p>Dubai World announced yesterday that it needs a “standstill” on its debt repayments for 6 months. This means Dubai World wants to postpone any debt it is supposed to pay between Dec 2009 to end of May 2010. </p> <p><strong><font color="#000080"> <br />Why the big deal?</font></strong></p> <p>There are 3 key reasons why Dubai World’s announcement shocked the world:</p> <ul> <li>Just before the announcement, Dubai World has just raised $5 billion from two Middle Eastern banks in Abu Dhabi. This is more than sufficient to pay off the $4 billion debt from Nakheel due for payment on Dec 14. Strange, what other problems are Dubai World hiding? </li> <li>Dubai World has $59 billion of liabilities, or about 74% of all debt incurred by Dubai’s government-owned companies. If Dubai World cannot pay up, the majority of banks and other creditors that lent money to Dubai can be in big trouble. </li> <li>A credit rating agency has said that Dubai’s announcement may be considered a default on its payment obligations.  Many Dubai bonds are now downgraded to “junk” status. Will Dubai ever pay up? There is no guarantee that Dubai won’t announce another “standstill” if it still doesn’t have the money to pay off its debts in 6 months. Some analysts are beginning to compare Dubai with Iceland that went bankrupt in Oct 2008. </li> </ul> <p><strong><font color="#000080"> <br />What got Dubai into this mess?</font></strong></p> <p>Dubai created a miracle by building a modern city from almost nothing. It was also a trend setter in the Middle East. When other countries and emirates in the region saw the potential benefits of what Dubai is doing with its huge projects, they follow suit. </p> <p>Those of us far away from the Middle East will assume that Dubai made all this happen with its oil money, but that’s simply not true. In reality, Dubai has very little oil. It knows this but wants to build up a vibrant economy anyway. The solution? Borrow lots of money and build huge malls, hotels & homes that are bigger and better than everyone else. Do this, and people will come to visit and invest, brilliant isn’t it?</p> <p>The problem with this approach is also simple. Many of Dubai’s developments will take years to complete. Every mega real estate project needs lots of money and will require even more time to generate cash for its owners. This was not a problem as long as Dubai can keep borrowing money from banks or its richer UAE neighbour, Abu Dhabi. But when the world goes into a recession, there is hardly any money floating around, and less people and tourists to spend on big-ticket items. All of a sudden, Dubai becomes less appealing.</p> <p><strong><font color="#000080"> <br />What does this mean for investors?</font></strong></p> <p>Markets worldwide reacted negatively to Dubai World’s announcement. Banks are directly affected as they will not get a cent from Dubai World for the next 6 months. What’s more, there is a possibility that Dubai World may not pay up eventually, eventhough this is currently less likely. CashBench expects markets to be more volatile over the short-term and investors should continue to keep up with market news. In 6 months, we need to especially track if Dubai World can restart debt repayments.</p> <p>Dubai World made this announcement when the US markets were closed for the Thanksgiving holiday, with the Middle East and many other countries celebrating the <em>Eid</em> holiday today (<em>Hari Raya</em> <em>Haji </em>holiday in Singapore and Malaysia). European stock markets remained open yesterday and have dropped by about 3% generally. Expect US to open lower when it reopens after Thanksgiving. Stock markets in Asia have fallen yesterday too. As worldwide risk aversion has increased, there is now short-term downward pressure on Gold prices and a corresponding upward lift to the US dollar. </p> <p><strong><font color="#000080"> <br />What else can we learn from Dubai?</font></strong></p> <p>There are at least 2 lessons that we can learn from Dubai, no matter how near or far away we are from the Middle East:</p> <ul> <li><strong>Borrow within our means</strong>. Don’t over-borrow like Dubai. Whether we are borrowing for a new car, a new home or even for a loved one’s education, we must be pretty confident of paying off the monthly repayments. Using our credit cards is also a form of borrowing. Only buy what we can afford, the credit card bill will always catch up with us at the end of the month. <br /> <br /></li> <li><strong>Understand the impact of buying a new home.</strong> For most of us, we have to borrow from the bank to buy a new apartment or house. This is a very long-term commitment and is similar to the long-term real estate projects in Dubai. We don’t own the home until we pay up the entire loan! <br /> <br />What’s more, home loans lasts even longer than many marriages. By buying a home, we are committing ourselves to regularly paying off a loan that may stretch for as long as 30 years. During this period of time, the bank expects us to pay up no matter what happens. There may be a recession going on, we may suddenly need to pay huge hospital bills for our spouse or children, or we may even be fired from our job. No matter what happens, we are expected to continue repaying our loans.  <br /> <br />If that’s the case, we also have to make sure that we can repay our home loan regularly, no matter what happens, unless we want to be another Dubai. </li> </ul> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6401275922585116883.post-8893832359369699992009-11-10T11:01:00.001+08:002009-11-10T11:11:55.015+08:00November 2009 Market Update<p style="margin-top: 0px"><strong>CashBench looks at some recent developments in Asia and around the world, and highlight trends that are important to investors. For November, this includes the new “Nasdaq” board in China, the Brazilian currency, and gold prices.</strong></p> <p><strong><font color="#000080">1. Irrational investors on China’s new “Nasdaq” board</font></strong></p> <p>China opened a new “Nasdaq” style stock exchange in Shenzhen on Oct 30 that allows smaller companies to be listed. This <strong>ChiNext</strong> <strong>exchange</strong> has been planned for a while, but the speculative investors rushing into this new stock exchange are already creating a stock bubble. Since it opened a week ago, the initial list of 28 stocks has gained as much as 210% and “circuit-breakers” meant to reduce speculation has been activated repeatedly. Some companies now have a PE (price to earnings) ratio of more than 100. As a comparison, even the bubbly Shanghai stock market averages a PE ratio of only 30. CashBench sees this as a good reminder of the higher risks in investing in the more volatile Chinese stock markets. More importantly, investors who directly or indirectly invest in China should take note that bubbles will eventually burst, sooner or later.</p> <p><strong><font color="#000080">2. Brazilian currency gained 30 percent over one year</font></strong></p> <p>The US dollar is expected to continue its depreciation over the short to medium term because of the massive amount of money spent to stimulate its economy. Despite that, unemployment has reached 10.2% in the latest quarter. This is higher than expected and simply means lots of people are still out of work.  Recover will continue and growth will occur, but a depreciating US dollar means some currencies must appreciate. Investors will have noted that Asian currencies are rising against the US dollar lately, but the Brazilian currency (Brazilian real) has gained even more. Over the past year, that gain was 30%. What’s even more significant to investors is this: the Brazilian government has just put in place measures to slow foreign investments, but an International Monetary Fund (IMF) official has said it’s unlikely to work. Time to buy some Brazilian real?</p> <p><strong><font color="#000080">3.  Gold hitting new highs above US$1,100 per ounce</font></strong></p> <p>Gold has been on an upward trend and has recently hit US$1,100 an ounce. The weakness in the US dollar and the underlying risk of inflation in the US and other developed countries is fuelling its rise. It wasn’t too long ago that Gold was at US$1,000 (September 2009), which means it has risen by 10% in just 2 months. Not exactly a good time to rush into gold investments for really short-term buyers, but there may be room for further growth as the US dollar is likely to weaken further, and there’s a reasonable chance of higher inflation occurring when global recovery is in full swing. Those who have some time to monitor gold prices may find it a worthwhile investment.</p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6401275922585116883.post-71053501329512028672009-10-21T01:05:00.001+08:002009-10-22T01:33:24.753+08:00Review of CPF LIFE<p style="margin-top: 0px"><strong>CPF LIFE (Lifelong Income Scheme For The Elderly) kicks in since September to ensure that seniors in Singapore have an assured source of income for life. Unlike the mass media, CashBench will not focus on the 4 CPF LIFE plans but reviews the scheme itself, including 3 key aspects that every Singapore resident must know.</strong></p> <p><img title="" style="border-top-width: 0px; display: inline; border-left-width: 0px; border-bottom-width: 0px; border-right-width: 0px" height="381" alt="" src="http://lh5.ggpht.com/_G8T99lxDDBo/St3txxfY7GI/AAAAAAAAAyc/pBYJ3rmRITc/CPF%20Life%5B4%5D.jpg?imgmax=800" width="434" border="0" /> </p> <p><strong><font color="#000080">CPF LIFE Overview:</font></strong></p> <p>The <strong>CPF LIFE scheme</strong> is essentially meant to be an improvement to the <strong>Minimum Sum Scheme (MSS</strong>). In the older <em>Minimum Sum Scheme</em>, a minimum amount of savings in our CPF accounts is set aside with the CPF Board to provide a regular source of income for retirement needs. This minimum amount is referred to as the <strong>minimum sum.</strong> However, this <em>minimum sum</em> is slowly reduced by each monthly payout during retirement. Therefore, income from the <em>MSS</em> will last for about 20 years only. Seniors who live beyond 20 years after retirement will lose this source of income, perhaps, when they need it most.</p> <blockquote> <p>CPF LIFE … promise of a monthly source of income that will last for life, without any age limits.</p> </blockquote> <p>The biggest change brought about by the <em>CPF LIFE </em>scheme is the promise of a monthly source of income that will last for life, without any age limits. Beyond this promise and key objective, the <em>CPF LIFE </em>scheme has 4 plans: <strong>Basic</strong>, <strong>Balanced</strong>, <strong>Plus</strong> and <strong>Income</strong>. They are different from one another in one important area: whether there is a bequest, and how much is the bequest amount.</p> <p>A <strong>bequest</strong> essentially allows a senior to leave some money to his/her children, spouse or other beneficiaries after death. The <em>Basic</em> plan promises the most bequest amount, while the <em>Income</em> plan leaves no bequest at all. On the other hand, the <em>Basic</em> plan offers the least monthly payout, while the <em>Income</em> plan offers the most payout per month. </p> <p>CPF members are free to choose which plan suits their needs best, but they cannot change from one plan to another after making a selection. Those approaching retirement can choose to remain in the <em>Minimum Sum Scheme</em> while younger folks must join the <em>CPF LIFE</em> scheme upon retirement in the future.</p> <p>With this overview, let’s look at some key aspects that every Singapore resident must know about the <em>CPF LIFE</em> scheme.</p> <p><strong><font color="#000080">1. Monthly payout is guaranteed but not fixed</font></strong></p> <p>While <em>CPF LIFE</em> guarantees a regular source of monthly income, the amount received is not fixed, and will be reviewed every year. Every senior under the <em>CPF LIFE</em> scheme will receive an initial monthly payout based on a number of factors.</p> <blockquote> <p>… lower interest rates and a higher average age of death among seniors may lead to lower monthly payouts in the future.</p> </blockquote> <p>After the initial monthly payout is determined, two key factors are used to determine if the payout amount should be revised. These are (a) <em>interest rates</em>, and (b) <em>average age that seniors pass away</em>. In general, lower interest rates and a higher average age of death among seniors may lead to lower monthly payouts in the future. Unfortunately, these are not factors within our control. </p> <p>In addition, the numbers that are shown in newspapers or CPF guides for typical monthly payouts are meant for those approaching retirement soon. These figures do not apply to those far away from retirement now. Given the uncertainty in the monthly payout amounts, it is therefore wise for working professionals not to depend on <em>CPF LIFE</em> as the only source of income when retirement comes along.</p> <p><strong><font color="#000080">2. Monthly payout is not adjusted for inflation</font></strong></p> <p>While chatting with a friend recently, CashBench was told that a bowl of fishball noodles costs only 50 cents in the early 1970s. Fast forward to 2009, this bowl of fishball noodles costs at least $2.00 now. Inflation sounds like a big word, but it simply refers to the gradual increase in prices of things we buy. Using fishball noodles as a measure, inflation over the past 4 decades is about 3.6% a year. </p> <p>Looking at <em>CPF LIFE</em> again, it is important to realize that the monthly payouts are not adjusted for inflation. This means the monthly payout remains the same even if prices of things we buy get more and more expensive. For example, if we receive $600 monthly today, we can happily buy 300 bowls of fishball noodles. That’s quite a lot of noodles! However, a bowl of fishball noodles will cost $2.80 after 10 years if inflation stays at 3.6% per year. By then, we can only buy 214 bowls of noodles with the same $600 payout. That’s a reduction of almost 30%!</p> <blockquote> <p>… the monthly payout we receive will buy less and less stuffs as we grow older.</p> </blockquote> <p>Essentially, the monthly payout we receive under <em>CPF LIFE</em> will buy less and less stuffs as we grow older. For this reason, it is again important not to rely on <em>CPF LIFE</em> as the only means of income during retirement. Instead, we should also invest in assets that can give returns that either match or is higher than inflation.</p> <p><strong><font color="#000080">3. Bequest amount is not guaranteed, and not fixed</font></strong></p> <p>One reason why CashBench is not overly concerned on an in-depth discussion among the 4 <em>CPF LIFE</em> plans is the fact that bequest amounts are not guaranteed. While the <em>Basic</em>, <em>Balanced</em> and <em>Plus</em> plans provide for bequest, it is impossible to determine beforehand how much will be given. In fact, there may not be any bequest eventually. Why?</p> <blockquote> <p>If a senior received payouts more than the premium he/she initially paid, there will be no bequest.</p> </blockquote> <p>To join the <em>CPF LIFE</em> scheme, the initial money set aside is now called a <em>premium,</em> instead of the <em>minimum sum</em> in the <em>Minimum Sum Scheme (MSS)</em>. The bequest amount left to the beneficiaries is calculated as this <em>premium</em> minus all monthly payouts given out before death. If a senior received payouts more than the premium he/she initially paid, there will be no bequest. This is true no matter what <em>CPF LIFE</em> plan he/she is in.</p> <p>The maximum premium payable to join <em>CPF LIFE</em> right now (exclude any bonus top-ups) is S$117,000. Any bequest received by the beneficiaries will not be significant unless a retiree passes away very early during retirement. Even if the retiree dies before any payouts is given, the maximum that a beneficiary can receive is $117,000. Even by today’s standards, this is not enough to buy most HDB flats. </p> <p>What’s more, the exact bequest amount is uncertain as we won’t know exactly when we’ll pass away. From another perspective, beneficiaries will also not know how much to expect from the bequest. What does all these mean? A senior who is really keen to leave a gift for beneficiaries should probably not depend on <em>CPF LIFE</em> as the primary means of bequest.</p> Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-6401275922585116883.post-4657395477079479752009-09-23T02:34:00.001+08:002009-09-23T08:05:42.073+08:00How much fees to pay for shares? Find out!<p style="margin-top: 0px"><strong>Have you always wondered how much fees and taxes you need to pay for those shares you bought or sold? Instead of waiting for the contract statement to be posted to you, find out immediately using CashBench’s Excel Tool!</strong></p> <p><img title="CashBench Excel Tool" style="margin-top: 5px; display: inline; margin-right: 5px" height="74" src="http://lh5.ggpht.com/_G8T99lxDDBo/SrkYrtohu3I/AAAAAAAAAyM/OgpGHmqOuOw/CashBench%20Excel%20Tool%5B4%5D.jpg?imgmax=800" width="242" align="left" border="0" /></p> <p>Buying 1000 shares with a share price of $5.00 should cost $5,000. But, this does not include all the different fees and taxes we need to pay.</p> <p>How much do we really need for these fees, commissions, charges & taxes? Try calculating it yourself and you’ll soon find that even a calculator doesn’t help you very much. Why? Because there are 4 types of fees and taxes, with 3 different tier rates to take care of! </p> <p>Now, CashBench can get rid of that problem for you. Take charge of your investments today and use the <strong>CashBench Excel Tool</strong> to determine exactly how much you’ll need to pay for these fees and taxes. Just key in 2 pieces of information: the number of shares you are buying or selling, and the current share price. For example, 1000 shares at $5.00 per share will actually cost $5,029.30. That’s almost $30 of fees and taxes. If we are selling these shares, we’ll only get back $4,970.70.</p> <p><img title="" style="border-top-width: 0px; display: inline; border-left-width: 0px; border-bottom-width: 0px; border-right-width: 0px" height="218" alt="" src="http://lh6.ggpht.com/_G8T99lxDDBo/Srkc6NC0oMI/AAAAAAAAAyY/STCVF9BYej8/Sample%5B1%5D.gif?imgmax=800" width="436" border="0" /> </p> <p align="center"><strong>Sample Calculation: $29.30 Fees & Taxes</strong></p> <p align="left">You can <strong>get this</strong> <strong>CashBench Excel Tool immediately</strong> by joining the CashBench group on Yahoo now. It’s free and members will also receive a 7-page PDF report on how to invest in warrants. In addition, you will receive email updates on new analysis, forecasts and news on CashBench. These updates are sent once a week or less often so that your mailbox does not get cluttered. To top it off, you can also get your hands on other CashBench reports and tools from time to time as they are released.</p> <p><strong>To receive this CashBench Excel Tool immediately and sign up for email updates, send a blank email to </strong><a href="mailto:cashbench-subscribe@yahoogroups.com?Subject=subscribe">cashbench-subscribe@yahoogroups.com</a><strong> or enter your email address below.</strong></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6401275922585116883.post-42739181419311841502009-09-18T17:32:00.001+08:002009-09-18T18:32:19.279+08:00The Mirror Image of the Straits Times Index?<p style="margin-top: 0px"><strong>Recently, we keep hearing of the Chinese stock markets leading the movements in worldwide stocks. How true is this for the Straits Times index (STI) in Singapore? CashBench investigates…</strong></p> <p style="margin-top: 0px"> </p> <p style="margin-top: 0px"><strong></strong></p> <p style="margin-top: 0px"><strong></strong></p> <p style="margin-top: 0px"><img height="288" src="http://farm3.static.flickr.com/2533/3680636529_92887a67db.jpg" width="430" /> <br /><a href="http://www.flickr.com/photos/koalazymonkey/3680636529/" target="_blank"><font size="1">[Photo: Koalazymonkey]</font></a></p> <p>Before the current worldwide downturn, investors in Singapore typically look at the performance of the overnight markets in the United States for clues on how Singapore stocks will perform the following day. Does this work anymore?</p> <p>Based on a 3-month and 12-month analysis carried out by CashBench, investors should start looking elsewhere for ideas. Over the past 3 months, there is a low correlation between the returns of the STI and the Dow Jones, Nasdaq or S&P 500 indices. This is true whether a comparison is made for same-day performance (E.g. Friday vs. Friday) or overnight performance (E.g. Friday in Asia, Thursday in US). Mathematically, the correlation between Singapore and the US indices over a 3-month or 12-month period range from 0.28 to 0.37.  These numbers are really far away from a “perfect” correlation score of 1.</p> <blockquote> <p>… the Hang Seng index in Hong Kong is almost a mirror image of the Straits Times index.</font></p> </blockquote> <p>If that’s the case, which markets now moves in step with the Singapore stock market? This may or may not surprise you, but the Hang Seng index in Hong Kong is almost a mirror image of the Straits Times Index. Over a 3-month or 12-month period, the correlation between the Singapore and Hong Kong stock market returns is about 0.78. This basically means that when the Hang Seng drops, the Straits Times is likely to follow, and vice versa.</p> <p>However, depending on who you talk to, the Hong Kong stock market may or may not be representative of the entire “Chinese stock markets”. If we were to use the Shanghai Composite index for comparison instead, the correlation to Singapore’s Straits Times index drops quite a lot, down to 0.43 to 0.5. </p> <p>CashBench ends with a surprising find. Despite being culturally and geographically close to Malaysia, the 12-month correlation between the Singapore STI index and Kuala Lumpur’s KL Composite index is just 0.37. However, over the past 3 months, this was much higher at 0.63. Will this short-term trend persists? </p> <br /><font size="1">Note: The correlation analysis used by CashBench is based on the correlation co-efficient and can range from –1 to 1. A score of 1 indicates there is a perfect relationship between the two indices compared, where an upward movement in one index is followed exactly by an upward movement in the other index. A score of 0 means there is no relationship, and performance of both indices are completely random and does not follow any pattern or trend. Data analysed is based on adjusted closing index levels up to 17 Sep 2009 (Thursday). </font> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6401275922585116883.post-40283023506853759192009-09-01T14:53:00.001+08:002009-09-01T15:14:50.442+08:00Shanghai Composite Fell 21% in August<p style="margin-top: 0px"><strong>THE SECOND LARGEST MONTHLY DROP IN 15 YEARS</strong></p> <p style="margin-top: 0px"> </p> <p style="margin-top: 0px"><strong></strong></p> <p style="margin-top: 0px"><strong></strong></p> <p style="margin-top: 0px"><strong>Translated from <a href="http://www.zaobao.com/" target="_blank">Lianhe Zaobao</a> (Chinese), published 1 Sep 2009</strong></p> <p>Recent heavyweight stocks in the Chinese markets collectively fell, resulting in panicky sentiments among investors. According to a report by the <em>China Economic Weekly</em>, an unnamed source close to the Chinese regulators said policies to stabilize the markets may be launched. This source also emphasized that market stabilizing measures does not specifically target the Chinese national day on 1 Oct. Such measures may include the reduction of short-term notes issued by the Chinese central bank, and the speeding up of IPO and fund launches. However, with the continued volatility in the A-share market, stabilizing the Chinese markets will be a challenge for the stock market regulators.</p> <p>On 5 Aug, the Shanghai Composite Index peaked at a high of 3478.01 and started dropping thereafter. By 17 Aug, the index fell to 2870.63 or 5.79%, the largest single-day drop this year. Yesterday, the index went a step further, dropping by 6.74% to a new low of 2667.75. Before this, the largest single-day drop in the Shanghai Composite was back in 10 Jun last year at 7.73%. Over at the Shenzhen market yesterday, there was a corresponding big drop of 7.55% to 10585.08.</p> <p><em>Note: Based on first 6 paragraphs of article.</em></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6401275922585116883.post-60649218870018582342009-08-25T20:04:00.001+08:002009-08-25T20:29:45.522+08:00SGX Structured Warrants (Part 3)<p style="margin-top: 0px"><strong>This is the final part of a three-part series on structured warrants on the Singapore Exchange (SGX). The first two articles can be found <a href="http://cashbench.blogspot.com/2009/07/structured-warrants-on-sgx.html">here</a> and <a href="http://cashbench.blogspot.com/2009/08/sgx-structured-warrants-part-2.html" target="_blank">here</a>. This week, we focus on key warrants terms that investors must know, the specific methods of warrant investing and key investment risks for warrants.</strong></p> <p><img height="322" src="http://farm1.static.flickr.com/23/33700530_dc20fecd99.jpg?v=0" width="430" /> <br /><a href="http://www.flickr.com/photos/edcotton/33700530/" target="_blank"><font size="1">[Photo: Ed100]</font></a></p> <p></p> <table style="border-right: black 1px solid; border-top: black 1px solid; margin-top: 10px; background: #fedab2; margin-left: 8px; border-left: black 1px solid; border-bottom: black 1px solid" cellspacing="0" cellpadding="2" width="350" align="center"><tbody> <tr> <td valign="top"> <p style="margin-top: 0px"><strong><font style="font-size: 16px" color="#bf4e27">Only for CashBench Group Members</font></strong></p> <br />Those who join CashBench on <em>Yahoo! Groups</em> will immediately receive this <strong>entire three-part series on warrants in a single PDF report</strong> for easy reference, wherever you are. What's more, membership is <strong>free</strong> and you’ll also receive updates once a week or less often on new analysis, forecasts and news from CashBench! To join CashBench now, just provide your email address below. <div style="width: 220px; margin-left: auto; margin-right: auto;"><form action="http://groups.yahoo.com/subscribe/cashbench" method="get" style="border: 1px solid black; margin-top: 15px; padding: 3px; margin-bottom: 5px;" target="_blank"><input name='user' onblur='postrecall(this,"Your Email Address");' onclick='postclear(this, "Your Email Address");' size='20' style='vertical-align: top' type='text' value='Your Email Address'/> <input name='submit' type='submit' value='Send'/></form></div> </td> </tr> </tbody></table> <p><strong><font color="#000080">Key Warrant Terms:</font></strong></p> <p>If you have found a good reason to invest in warrants by now, it’s time to go through the key warrant terms that you will encounter when investing. Among these terms, the more important ones are the <em>warrant name format</em>, and <em>conversion ratio</em>. These have been placed right at the top of this section. The remaining terms are more technical in nature and are also included for your reference.</p> <p><font size="2"><u>Warrant Name Format</u></font></p> <p>First, let’s start with the name of a warrant on the SGX. Every listed warrant uses a name that contains some useful information to the investor. It follows this format: <br /><br/></p> <table style="background: white" height="35" cellspacing="0" cellpadding="1" width="460" border="0"><tbody> <tr> <td valign="middle" align="left"><font size="2"> <strong>[Underlying]</strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong>[Ex. Price]</strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong>[Issuer]</strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong>[Ex. Style]</strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong>[Call or Put]</strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong>[Expiry Date]</strong></font> </td> </tr> <tr> <td valign="middle" align="left"><font size="2"> <strong><em><font color="#000080">STI</em></strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong><em><font color="#000080">3000</em></strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong><em><font color="#000080">SGA</em></strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong><em><font color="#000080">e</em></strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong><em><font color="#000080">CW</em></strong></font> </td> <td valign="middle" align="left"><font size="2"> <strong><em><font color="#000080">091029</em></strong></font> </td> </tr> </tbody> </table> <p>An example of a <strong>warrant name </strong>is <strong>STI 3000SGAeCW091029.</strong> The name tells us that the underlying asset of this warrant is the <strong>STI</strong> index with an exercise price of <strong>3000</strong>. Since the STI is an index, 3000 refers to the index level and not a dollar amount. For warrants on a single underlying stock, the warrant name <em>does not</em> include the exercise price. Next, the third-party issuer is <strong>SGA</strong>, or Societe Generale. Other common issuers are <strong>DB</strong> for Deutsche Bank and <strong>MBL</strong> for Macquarie Bank. The “<strong>e</strong>” tells us the exercise style is <em>European</em>. <strong>CW</strong> represents a <em>Call Warrant</em>, whereas <strong>PW</strong> means a <em>Put</em> <em>Warrant</em>. The last 6 digits is the expiry date. For this example, <strong>091029</strong> refers to an expiry date of 29 Oct 2009. The 6 digits therefore uses the <strong>YYMMDD</strong> date format. </p> <p>Despite the useful information contained within the warrant name, these are <em>not</em> sufficient to a potential investor. There are other terms you may encounter and they are covered in the rest of this section. </p> <p><u>Conversion Ratio</u></p> <p>The <strong>conversion ratio </strong>for a warrant is another term that every warrant investor must know. When a warrant investor exercises the right to <em>buy</em> or <em>sell</em> the underlying asset of a warrant, the conversion ratio determines the number of warrants needed to buy or sell each underlying asset. For example, a 1-to-1 conversion ratio for a DBS call warrant means 1 warrant can be used to buy 1 underlying DBS share. If the ratio is 10-to-1, 10 warrants is needed to buy 1 underlying DBS share, and so on.</p> <p><u>3 States of Every Warrant</u></p> <p>Next, we look at the 3 possible states of a warrant. Every warrant is always in one of 3 states, In-The-Money (ITM), Out-of-The-Money (OTM), or At-The-Money (ATM). These are just short forms to describe if the warrant has any <strong>exercise value</strong>.</p> <ul> <li><strong>In-The-Money (ITM)</strong> occurs when the warrant has exercise value. For a call warrant, the current underlying asset price must be higher than its exercise price (Example: Call warrant with exercise price of $15 and the current underlying is $20). For a put warrant, the current underlying price must be lower than its exercise price. </li> <li><strong>Out-of-The-Money (OTM)</strong> is the reverse of ITM where a warrant does not currently has any exercise value. We do not have any right to exercise a warrant in an OTM state, and if it remains such as, the warrant expires worthless. </li> <li><strong>At-The-Money (ATM)</strong> occurs when the current underlying asset price of a call or put warrant is exactly equal to its exercise price (Example: Call warrant with an exercise price of $15, and the current underlying price is $15 too). </li> </ul> <p><u>Intrinsic Value & Time Value</u></p> <blockquote> <p>Intrinsic Value is just another name for Exercise Value … equal to the gain we get if we can exercise the warrant immediately…</p> </blockquote> <p>Next, the price of every warrant can always be broken down into 2 components, intrinsic value or time value:</p> <ul> <li>A warrant has <strong>intrinsic value</strong> only when it is in the ITM state. Therefore, intrinsic value is just another name for <i>exercise value</i>. Intrinsic value is equal to the gain we get if we can exercise the warrant immediately. (Example: Call warrant with exercise price of $15 and underlying share price is now $20. The intrinsic value is then calculated as $20 - $15 = $5). </li> <li>All warrants also have a <strong>time value</strong>. This value is not as simple to calculate. Investors just need to know that the time value of a warrant quickly decreases to zero as its expiry date approaches. This is also the reason why investors do not usually invest in warrants that will expire soon because the price of an expiring warrant is more likely to drop due to a rapidly decreasing time value. </li> </ul> <p>Together, the intrinsic value and time value will equal the <strong>price of a warrant</strong>. This is the price that an investor will need to pay to buy a warrant. As a warrant will always has some time value left before its expiry date, the price of a warrant is always positive. </p> <p><u>Premium</u></p> <p>We have just a few more terms to cover. <strong>Premium </strong>for warrants refer to the percentage price change in the underlying asset needed to break even. The calculation of <em>premium</em> assumes we will hold the warrant until expiry. For example, a premium of 10% for a DBS call warrant means the share price of DBS must increase by 10% for an investor to cover the cost of buying the warrant. Any further increase means the investor has made a profit.</p> <p>Some investors choose warrants based on its premium, but this is not usually a good idea because premiums do not determine warrant prices. Instead, investors should use the major factors described in the <a href="http://cashbench.blogspot.com/2009/08/sgx-structured-warrants-part-2.html" target="_blank">second article</a> of this series (E.g. <em>Underlying</em> <em>Asset Price</em>, <em>Implied Volatility</em>, etc) to choose which warrants to invest in.</p> <p><u>Gearing, Effective Gearing, & Delta</u></p> <blockquote> <p>... a 5x Effective Gearing means a 10% increase in DBS Shares will result in a 50% increase in the DBS warrant price.</p> </blockquote> <p><strong>Gearing</strong> and <strong>Effective Gearing</strong> are measures used to determine the leverage effect of buying a warrant compared to buying the underlying asset. <em>Effective Gearing</em> is the more accurate measure, calculated using the <strong>Delta</strong> and <em>Gearing</em> of the warrant. There is however no need to know the specific calculation.</p> <p>What’s important here is to interpret <em>Effective Gearing</em>. For example, if a warrant has an <em>Effective Gearing</em> of 5 times, the warrant price will theoretically change 5 times more than the underlying asset. Using the DBS shares example again, a 5x <em>Effective Gearing</em> means a 10% increase in DBS shares will result in a 50% increase in the DBS warrant price. </p> <p>However, please note that the <em>Effective Gearing</em> of a warrant is not constant and changes as the warrant moves among the 3 states (OTM, ATM & ITM). For this reason, Effective Gearing is best used as an approximate reference and investors may want to monitor this regularly for changes.</p> <p><strong><font color="#000080">How to invest in Warrants:</font></strong></p> <blockquote> <p>There are 2 basic approaches to investing in warrants, buy and hold, or sell-before-expiry.</p> </blockquote> <p>If you have read this far, you must be eager to start investing in warrants. We are almost ready for real action! There are 2 basic approaches to investing in warrants: buy and hold, or sell-before-expiry.</p> <p><u>Buy & Hold Approach</u></p> <p>This approach is not usually recommended, and the reasoning is simple. It is already a tough job to forecast whether the underlying asset price of a warrant will increase or decrease. What’s more, there are other factors that influence warrant prices as CashBench has already explained. If we adopt a <strong>Buy & Hold approach</strong>, how can we be sure that all these factors are working in our favour on a single day – the day that the warrant expires?</p> <p>However, if you do feel extremely confident of your forecast, do take note of the following points:</p> <ul> <li><strong>Auto-Exercise / Exercise Notice</strong>: Don’t assume that a warrant that has <em>exercise value</em> will be automatically exercised on your behalf. It often is, but if it isn’t, you must submit an exercise notice. Details will be available with the issuer of the warrant. </li> <li><strong>Cash / Physical Settlement</strong>: You may have an option to either receive cash upon exercising your warrant, or to get the underlying asset transferred to your <em>Central Depository</em> (<strong>CDP</strong>) account. Again, check with the warrant issuer. Do note that all warrants on stock indices will be cash-settled because it’ll be too messy to distribute the component stocks of the index to you. </li> <li><strong>Settlement Price</strong>: The price that is used to calculate any gains for you is usually not based on the closing price of the underlying asset on the expiry date of the warrant. This will be specified by the warrant issuer in advance, and is typically based on an average of the last 5 closing prices of the underlying before expiry. This helps to avoid deliberate price manipulations by speculators. However, warrants issued for a stock index (e.g. STI) will usually be based on the closing index level on expiry date as stock indices are less subject to manipulations. </li> <li><strong>Settlement Calculation</strong>: To determine how much gain you are entitled to when exercising a warrant, use this formula: <strong>(Settlement Price – Exercise Price) ÷ Conversion Ratio</strong>. Let’s look at a quick example. We have a call warrant on DBS with a settlement price of $20, an exercise price of $15 and a conversion ratio of 10. The gain per warrant = ($20 - $15) ÷ 10 = $0.50. </li> </ul> <p><u>Sell-Before-Expiry Approach</u></p> <blockquote> <p>All warrant investors … must know that they cannot buy or sell a warrant right up to its expiry date.</p> </blockquote> <p>The second approach to warrant investing is <strong>Sell-Before-Expiry</strong>. Compared to the <em>Buy & Hold</em> approach, this approach is more flexible and similar to stock investing. Instead of waiting for the warrant to expire, we buy a warrant and regularly monitor all the major factors that affect its price. Recall that these factors include the <em>price of the underlying asset</em>, <em>implied volatility</em>, and <em>time-to-expiry</em>. The last major factor is the <em>exercise price</em>, but this does not need to be monitored because it remains constant. Instead, we select a warrant with an appropriate exercise price right at the start of investment.</p> <p>Once the first 2 factors move in our favour considerably, we will sell the warrant immediately and not wait for it to expire. Our gain will simply be the price we sold the warrant minus the price we paid for it initially. Of course, we may also make a loss. Since this approach is so similar to stock investments, many warrant investors use this approach by default. </p> <p>However, all warrant investors that use this approach must know that they cannot buy or sell a warrant right up to its expiry date. For most warrants, the last trading day is the 5th business day before expiry. If in doubt, check with the warrant issuer!</p> <p><strong><font color="#000080">What are the investment risks:</font></strong></p> <blockquote> <p>The maximum loss for warrants is much more likely to occur than stocks because of the limited life of all warrants.</p> </blockquote> <p>This series on investing in SGX structured warrants is almost complete. You now have almost all the key knowledge required to invest in warrants. We end with the most important section of all: what are the risks of warrants investing?</p> <p>We already know by now that warrants depend on quite a lot of factors to work properly and there are therefore many risks to warrants investing. Some of the major risks include the following:</p> <ul> <li><strong>Liquidity</strong>: You may not always be able to buy or sell a warrant whenever you want to. This is because each warrant has a specified maximum issue size. When there is very strong demand for a particular warrant, the warrant issuer may not have enough remaining warrants to sell to you. This may result in unpredictable and volatile warrant prices. </li> <li><strong>Currency</strong>: Similar to stocks, any warrants that are quoted in a foreign currency is subject to currency fluctuations. These fluctuations may be in your favour or against you. </li> <li><strong>Issuer</strong>: Structured warrants are usually issued by large and stable banks. However, we know that banks can get into trouble too. If the issuing bank fails or goes bankrupt, our warrants may become worthless even if the underlying asset price moved in our favour. </li> <li><strong>Underlying Asset</strong>: Just like any bank, the underlying asset of a warrant can get into trouble too. If the underlying asset is a company and it goes bankrupt, or its shares is suspended or delisted, our warrants may become worthless. Check the warrant terms & conditions for the specific actions that the warrant issuer will do in these scenarios. </li> <li><strong>Maximum Loss</strong>: The maximum loss when investing in warrants is the initial price we paid for the warrants. This is also true for stocks. However, the maximum loss for warrants is much more likely to occur than stocks because of the limited life of all warrants. In just a few months, all money invested in a warrant can go down the drain, never to come back. </li> </ul> <p><strong>You now know all the key features of warrants and every other important aspect needed to start investing. The warrant websites maintained by the major warrant issuers are important references from here onwards. These include </strong><a href="http://sg.warrants.com" target="_blank">Societe Generale</a><strong>, </strong><a href="http://www.dbwarrants.com.sg" target="_blank">Deutsche Bank</a><strong> and </strong><a href="http://www.warrants.com.sg/" target="_blank">Macquarie Bank</a><strong>. These websites provide information on warrants currently available and related data such as <em>underlying asset price, implied volatility </em>and <em>exercise price.</em> </strong></p> <p><strong>If you have found this series useful, share your comments and do keep up with the latest analysis, forecasts and news on CashBench. To receive updates or get this series in a single PDF report now, join <em>CashBench </em>on <em>Yahoo! Groups </em>by providing your email address below.</strong></p> Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-6401275922585116883.post-8317094960610642452009-08-19T22:26:00.001+08:002009-08-19T22:26:47.712+08:00Lowest CFA Level 3 Exam Pass Rate<p style="margin-top: 0px">This is one of those very rare occasions where CashBench focus more on my personal experience rather than analyse news or give out investment tips. Today, <a href="http://www.channelnewsasia.com" target="_blank">Channel NewsAsia</a> has an article under <em>Singapore News</em>  on the 45% pass rate for all <a href="http://www.cfainstitute.org/" target="_blank">CFA</a> candidates. This is across all three CFA levels around the globe, based on results of the recent Jun 2009 examinations. In the Asia Pacific region, the passing rate was even lower at 42%. Right here in Singapore, 7,800 signed up for one of the strength-draining 6-hour exams this year. In fact, the results for levels 2 and 3 were only released yesterday, and represents an important milestone for CashBench.</p> <p>First, the release of the results meant that CashBench has passed the third and final level of the CFA examinations. Each of the 3 levels were so rigorous that only a very well-prepared participant can ever dream of passing. Of all the investment related programmes or certifications out there, the CFA charter holder examinations is often regarded as the most difficult and rigorous. Currently, Singapore only has 2,343 CFA chart holders who have passed all exams and accumulated the required professional experience. Hence, it is often a pre-requisite and/or preferred qualification for many senior investment related positions.</p> <p>Second, this year’s CFA level 3 examination was also significant in another way.  Usually, most participants at CFA level 3 will already be very well prepared since they have gone through 2 rigorous levels beforehand. However, since the CFA examinations started in 1963, the global passing rate for level 3 participants this year is the lowest ever! To be part of the 49% who have passed the level 3 examination for 2009 is therefore even more special personally.</p> <p>CashBench is glad to have gone through this journey nevertheless as participating in both a top-ranked MBA programme as well as the CFA program simultaneously meant that CashBench is much more well-versed across business and finance, particularly in investment-related sub-fields. For those who would like some extra ad-hoc help for their own CFA examinations, CashBench has the <a href="http://cfa-ace.blogspot.com/" target="_blank">CFA Ace and CFA Ace Premium</a> service to answer CFA related questions that you may have while preparing for the examinations.</p> <p>Finally, and most importantly, CashBench wants to especially thank two friends who helped to kick-start my CFA journey. For the first friend, the act was simple but crucial. This friend owned a CFA-approved calculator and very generously gave away the calculator to CashBench 2 years ago. There are in fact only 2 calculator models approved for use in CFA examinations and this simple act meant that CashBench need not buy a new one. The calculator is still working :) The help from a second friend was more indirect but also crucial. When CashBench has just started MBA classes, one of his classmates started sharing on the CFA program and the classmate’s own experience in pursuing the program. Without this generous and unreserved sharing, CashBench may not have started and passed the CFA examinations so soon. To both friends, CashBench says a very big <strong>thank you</strong>!</p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6401275922585116883.post-44731308886792851052009-08-18T17:37:00.001+08:002009-08-20T01:35:45.597+08:00Practise Investing Without Risk<strong>CashBench once asked a friend, “<em>how much are you willing to lose for an initial investment of $5000?”</em> This friend replied “<em>I'm not a risk taker. $50?”</em>. If you are like this friend, but wants to enjoy the thrill of forecasting the future, what can you do? CashBench suggests a safe option.</strong>  <p><img height="286" src="http://farm3.static.flickr.com/2381/2385193167_b654c17189.jpg" width="430" /> <br /><a href="http://www.flickr.com/photos/sreejithk2000/2385193167/" target="_blank"><font size="1">[Photo: Sreejith K]</font></a></p> <p>There are many of us who very much prefer to take little or no risk with our own money. Keeping spare cash in the bank is the preferred option, as the thought of an investment falling in value is simply unacceptable. There is nothing wrong with feeling this way. Yesterday, the <em>Shanghai Composite</em> index fell more than 5%. My friend, who can only lose S$50,  will probably get a shock if he has invested in China-linked unit trusts or exchange-traded funds (ETFs). </p> <p>Some of us may simply not be ready for taking risks. Others do not have sufficient spare cash to put into risky  investments for a wide variety of reasons. However, it would often be beneficial to practise the forecasting of future events or the direction of markets. As the saying goes, “<em>practice makes perfect”</em>. If you can forecast well, you may be more willing to invest, knowing you’ll be more likely to have a profitable investment.</p> <blockquote> <p>Make use of “wisdom of the crowds” principle to predict future events … what the majority believes to be true, will usually come true.</p> </blockquote> <p>So what can we do to practise in a safe and riskless way? CashBench came across the <a href="http://www.cfo.com/cfopredictionmarket/" target="_blank">CFO Prediction Market</a> recently and suggests this as one possible avenue to practise your forecasting & investing skills without risking any money. The real purpose of the CFO Prediction Market is to make use of "<em>wisdom of the crowds”</em> principle to predict future events. This is based on the belief that what the majority believes to be true, will usually come true.</p> <p>The CFO Prediction Market allows us to place our own forecast of the future and also see what’s the current aggregate forecasts of everyone else. For the Asian or Singapore investor, some relevant forecasts we can place include the closing price of the S&P 500 stock index, the quarter that the US economy stop falling, or even the date where Boeing carries out its first test flight of the 787 Dreamliner aeroplane. Participants of the CFO Prediction Market can forecast a range for any of these events and more, with an initial “cash balance” of $20,000. For example, a participation may use $1000 to forecast that the first test flight of the Dreamliner will occur between Dec 2009 to Jun 2010. A smaller date range will allow you to “gain” more cash if your prediction is correct.</p> <p>As you can see, forecasting and investing goes hand in hand. The best way to make use of the CFO Prediction Market is to research on each event, and formulate your forecast based on that. If you are confident of your forecast, you can of course use a larger portion of your cash balance for that forecast. However, without adequate research backing up our forecasts, we are just placing bets without any basis. </p> <p>To practise your forecasting and investing skills, visit the <a href="http://www.cfo.com/cfopredictionmarket/" target="_blank">CFO Prediction Market</a> and create an anonymous profile. </p> <p><em>Note: CashBench is not affiliated or commissioned by the CFO Prediction Market to publish this article and did not receive incentives or compensation of any kind from CFO Prediction Market.</em></p> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6401275922585116883.post-71317703763124898322009-08-13T17:18:00.004+08:002009-09-23T10:48:09.231+08:00Get CashBench Updates via Email<span style="margin-top: 0px; font-size: 78%"><a href="http://www.flickr.com/photos/pandemia/441815045/" target="_blank">[Photo: Pandemia]</a></span> <p style="margin-top: 0px"><img title="Yahoo" style="border-top-width: 0px; display: inline; border-left-width: 0px; border-bottom-width: 0px; margin-left: 0px; margin-right: 0px; border-right-width: 0px" height="198" alt="Yahoo" src="http://lh6.ggpht.com/_G8T99lxDDBo/SoPaY1XfTFI/AAAAAAAAAws/oKDb65J31_E/Yahoo%5B7%5D.jpg?imgmax=800" width="244" align="left" border="0" />For those who wants to be updated via email on new analysis, forecasts and news from CashBench, simply join the <strong>CashBench group on Yahoo </strong>today. It’s <strong>free</strong> and group members will receive email updates once a week or less often. This will ensure every update from CashBench will be useful, and you are not overloaded with emails too.</p> <p style="margin-top: 0px"> </p> <p style="margin-top: 0px"></p> <p style="margin-top: 0px"></p> <p style="margin-top: 0px"></p> <p style="margin-top: 0px">In addition, CashBench respects your privacy and will not share your particulars with group members or anybody else. You can also easily subscribe or unsubscribe at any time. Upon joining, new members will <strong>receive a sample update immediately</strong> to get a good idea how CashBench email updates look like. </p> <p style="margin-top: 0px"> </p> <p style="margin-top: 0px"></p> <p style="margin-top: 0px"></p> <p style="margin-top: 0px"></p> <p style="margin-top: 0px">Besides receiving updates, CashBench group members on Yahoo will also be able to access new tools and PDF reports from time to time. Right now, new group members will <strong>immediately receive two gifts: the <a href="http://cashbench.blogspot.com/2009/09/how-much-fees-to-pay-for-shares-find.html">CashBench Excel Tool</a> to calculate fees & taxes payable for investments, and a PDF report on how to invest in warrants</strong>. To sign up for email updates, just send a blank email to <a href="mailto:cashbench-subscribe@yahoogroups.com?subject=subscribe">cashbench-subscribe@yahoogroups.com</a> or provide your email address below.</p> Unknownnoreply@blogger.com0