Tuesday, September 30, 2008

Death of equities?

This is the shock I got when I opened up yahoo! finance this morning, like all morning.



I've not seen such a precipitous drop in DJ or SP500 before! STI's fall yesterday seems like child's play when compared to the big brothers over at US. I think STI might fall 6% too, so it will be around 2200. Too bad I've got work, otherwise watch the historic moment unfold.

When I came back home, I was rather shocked to learn that STI did not break 2200. In fact, it's slightly neutral at -0.1%.


What a world of difference a few hours make! Market is hard to predict indeed. STI is surprisingly strong. After going down to 2240, STI rebounded and never looked back. HSI also went from -1k to +135 intraday. Invisible hands at work here?

A little market trivia: The title of this article, "Death of equities", was published by Business Week. Then, DJ was around 800. But by the early 90s, DJ had risen over to over 3k. The rise was started around 3 months after the article was published :)

7 comments :

H said...

Hi LP,

Allow me to put God's view on $ here. We all know it actually.
_____________________________
1 Timothy 6:6-11

6But godliness with contentment is great gain.

7For we brought nothing into the world, and we can take nothing out of it. 8But if we have food and clothing, we will be content with that.

9People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction.

10For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.

17Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment.
_________________________

Having said that, read "Stocks for the long run", lastest version.


HH

PC said...

Share with you an interesting article, which I read from a forum last night...

Why the "bailout" won't work

The problem is not one of liquidity; it’s one of solvency. Put it another way, the problem isn't that there isn't money to make loans (there is), the problem is, the entities that need to borrow (such as banks) aren't solvent -- they don't have the ability to generate the income to pay the debt and interest.

Remember there are 'assets' and a liability associated with this asset (when using borrowed money). The assets have dropped in value, say to 10% of the original value, but the debt has remained. How to service it?

The next stage is probably some of suspension of mark-to-market rules. Why? Because even with the government willing to buy toxic assets, banks would be forced to mark what those assets sold for, not what they have on their books (if they marked what they were worth on their books, they would have to raise capital which they can't do). In essence, for the plan to work the banks needs to dump the toxic "assets" while maintaining their value on their balance sheet. Essentially, this is shifting the liability since someone at some point needs to make up this difference.

There is no credit crunch. There was a credit ORGY. However, it ended. This is the aftermath; the whole system is built on lies and deceit. That banks won't lend to each other is a very rational response when everyone thinks the other is cooking its books and posting fake numbers. If you don't think the counter party can pay you back, why would you lend?

Imagine a guy with a credit card in over his head...to the point he can't even pay the interest forget the principle. At some point in normal society the debt get liquidated (seizing of assets, bankruptcy, whatever). And life goes on.

Likewise, that is what has happened here. The exception is that, instead of the guy going bankrupt, the debt has been shifted/become the liability of the whole neighborhood!

It’s not clear what we would buy these assets for. At one point, Bernanke said more than fair value but not how much. So perhaps the government is saying we'll buy $1 bills for $10, but we'll be ok because the $1s are really $5s. Or perhaps it’s buying $10 bills for $1, because they are really worth $5. Who knows?

Ultimately, for debt to be serviced, it is claimed on future earnings, which are generated by labor.

In a rational/fair society, we would destroy the debt since its unserviceable (a business deal that went wrong), similar to a VC investing in a business that went bankrupt.

Instead, we are going to maintain the debt and make a claim against the future labor of someone to service it. I wonder who that will be?

Ultimately, we find ourselves on the road to indentured servitude -- a promise of freedom yet unable to ever pay off the debt + interest accumulated by our government. How much interest and debt is an average American, rather government mule willing to service?

As noted, part of the bailout is suspension of mark-to-market. In addition, reserves are set to 0.

The suspension of the mark-to-market will actually make lending tougher in my opinion because now you are institutionalizing lying about what your assets are worth. I.e. ok, govt inhales $700 billion in toxic assets at whatever the price banks have on their sheets. This still leaves banks in the precarious situation of not being able to lend to each other since they still don't know who's solvent.

Alternatively, the US inhales all the bad debt and leaves it to be worked off by the middle class.

This policy makes no sense and is the worst of all worlds. Better would have been as suggested by economists to write down the value and have government recapitalize the banks; its basically what we're doing anyway except getting a worse deal for taxpayers.

We need everyone to start functioning honestly so that banks can start lending to each other again (I believe each other to be solvent) and capable of repaying loans.

Instead, we're doing everything possible to keep either monetizing the debt (through "temporary fed loans" that will last forever) and keep the game of musical chairs going.

la papillion said...

Hi HH,

Thks for sharing ur views :) Will try to look for that book.

la papillion said...

Hi pc,

You're pretty well informed I must say :) Keep on with the sharing, lots of things to learn from you :)

PC said...

Flats in great demand

Pinnacle draws 3 times more applications than the number of flats

By Jessica Cheam
Sep 30, 2008

THEY are among the priciest flats ever launched by the Housing Board, but there has been no shortage of potential buyers.

The 50-storey Pinnacle@Duxton in Tanjong Pagar has attracted 1,467 applications for the 428 four- and five-roomers on offer - that is about 3.5 hopefuls for each unit.

Cheaper homes in less central areas were in even more demand, with applications streaming in at a rate of 20 per new flat in some districts.

HDB's balloting exercise on Friday attracted a total of 4,463 applications for 992 flats on sale in Ang Mo Kio, Queenstown, Jurong West, Kallang/ Whampoa and Tanjong Pagar as of 5pm yesterday.

The 111 five-roomers at the Pinnacle start at $545,000 and hit $645,800 for a 49th storey unit - the most expensive new HDB flats - yet there were still 372 applicants.

Demand for those flats paled in comparison with the 762 applications for just 39 four-room flats in Kallang/Whampoa, priced at between $364,000 and $435,000.

Property analysts said the response was not surprising, considering the underlying demand for new flats from first-time buyers and the preference for cheaper units.

Still, the fact that the Pinnacle racked up more than three times more applications than flats available proves there is strong demand, said PropNex chief executive Mohamed Ismail.

'Buyers have to expect to pay a premium for the prime location of city flats,' said Mr Ismail.

The HDB said the prices of Pinnacle flats were still lower than those of resale flats in the area. HDB figures show five-room flats in Tiong Bahru's Jalan Membina recently selling for $670,000 above the 20th floor. The average price of a five-room flat sold in Jalan Membina and Cantonment Close over the last three months was $624,000.

The response to the ballot also highlighted another emerging hot spot - Jurong, an area once spurned by buyers for being too far from the city.

Five-room flats here were about 11 times oversubscribed - 335 applications for the 30 flats.

ERA Asia-Pacific's assistant vice-president Eugene Lim said new flats here are now more attractive after a masterplan to rejuvenate the area was announced recently.

'It's also currently one of the cheapest housing spots in Singapore. It's not surprising it's moving now,' said Mr Lim.

He also feels those priced at $650,000 are at the top end of what buyers can afford.

'With two incomes, it's still manageable,' he said. In many cases, these flats are cheaper than buying from the resale market, where buyers usually need to pay a cash component upfront to sellers. This is not required for new flats, he added.

Still, HDB 'should be conscious that such pricing of flats are affordable only to a small cross-section of HDB home buyers,' said Mr Ismail.

But the true popularity of the flats has yet to be seen as the number of applications might not reflect the actual take-up rate. Applications for the new flats close on Oct 9.

PC said...

September 30, 2008

Shouldn’t new HDB flats be priced less than market rate?

I REFER to last Saturday’s article, ‘$645K: HDB’s priciest flats go on sale’.

I was shocked that HDB has priced its new stock of flats in Tanjong Pagar at $545,000 to $645,000. I am not surprised the higher-end flats have relatively few takers due to steep pricing. As it is, HDB has priced its new flats according to surrounding resale market prices and built in a discount before launching them to the public.

I wonder if this is a fair comparison as the property market rides through the up-and-down cycle and if a new buyer buys now, he runs a high risk of buying at the high end of the market trend and may lose on his investment when the market goes down. This often happens to HDB resale or private property buyers who buy high in an uptrend market but lose heavily when the market goes south. It will be tragic if a buyer of a new HDB flat also goes through this financial heartache with his first ever housing unit.

There is generally not much premium earned on buying brand-new HDB flats now. One wonders if it is more prudent to buy a resale unit with the $30,000 rebate given as a sweetener, rather than buy a brand-new unit at such a high price.

Gone are the days when new HDB flats were much cheaper than in the current market. I bought my first new executive flat about 15 years ago at $143,000. I paid less than $500 a month for a mortgage loan. I later sold it a few times over when the property market was booming five years after I bought it. That was my first new HDB flat experience as I could buy only private or resale flats after that.

As the property market matures, I wonder if HDB has lost its mission to allow Singaporeans to own affordable housing with cheap loans. With new flats priced so high, home owners not only have to pay exorbitant loans but also worry that their flat valuation may drop if the market turns sour. Buying a new flat becomes more of a risky investment than providing a roof over one’s family.

HDB also needs to price its new flats better by considering factors other than surrounding resale valuation. To prevent home buyers immediately selling their flats after the five year lock-in period to make a profit, HDB can tie home owners to a longer lock-in period of eight to 10 years, enabling it to price flats cheaper. Many Singaporeans stay in their flats after more than 10 years, some for sentimental reasons, while others do not want to lock themselves into another big mortgage loan when they buy another property.

Gilbert Goh

PC said...

A study on Singapore's property market done by NUS's economists 12 months ago, dated 19 October 2007...

No bubble in property market: NUS study

By Erica Tay
Oct 19, 2007

DESPITE Singapore's red-hot property prices, no bubble is forming in the property market here, according to a study by National University of Singapore (NUS) economists.

In fact, the rise in home prices is below the market's long-run 'equilibrium' level, based on factors such as income and property supply, preliminary findings of the ongoing study show.

In other words, the pace of housing price rises is still below the level that would be expected based on market fundamentals, according to the study conducted by a team led by Associate Professor Tilak Abeysinghe.

This is unlike the case in the early 1980s and mid-1990s, when property price inflation shot up above its long-term equilibrium levels, the study noted.

Early findings from the study, still a work-in-progress, was presented to a small audience at the Singapore Economic Policy conference yesterday.

House-price inflation is expected to hit 18 per cent this year, before easing to 13.7 per cent next year, and then to 3.2 per cent in 2009 and 3.4 per cent in 2010, the NUS team's model predicted.

Factors used to determine the equilibrium price level include disposable income per person, housing stock and the new supply of property.

The study also found that it takes a long time for property price inflation to adjust to its long-run equilibrium.

And a rise in property price inflation would lead to a spike in construction investment a year or so down the road, but its effect fades after that.

The study concluded that price bubbles should be avoided, as they affect private consumption as well as income redistribution, among other things.

Prof Abeysinghe is the deputy director of the Singapore Centre for Applied and Policy Economics at the NUS, which organised yesterday's meet.

The one-day conference also saw speakers examine issues ranging from fertility, migration and labour market trends, to CPF savings and the elderly.

The paper, entitled Singapore's Property Market And The Macroeconomy, can be viewed at http://nt2.fas.nus.edu.sg/ecs/cent/ESU/conference.htm