Saturday, February 28, 2009

Want to be rich? Try being rude to people

Business Times - 28 Feb 2009


THERE are fewer ways to make quick money without much effort these days than there are investors in Royal Bank of Scotland Group plc.

Investment banking? It will be broken for a generation. Hedge funds? You have more chance of getting the pope to organise your stag night than you have of rustling up fresh funds. Private equity? To put it politely, an industry based entirely on swapping solid-looking equity for funny-sounding debt is looking just a shade past its sell-by date.

Here's a tip that should come easily to the legions of former bankers and fund managers: If you want to make a lot of money, just try being rude to people.

Hold on, that doesn't make sense, you may say. Surely the way to get on in life is to be as polite as possible. A soft cloud of charm can carry even the lamest executive all the way to the boardroom. Tell everyone you meet they are fantastic, listen to their ridiculous suggestions, buy them a drink as they launch into a tedious anecdote, and they will think you are great. The way to the top is to be courteous, you say.

No less an authority than Dale Carnegie in his self-help classic book How to Win Friends and Influence People makes the point emphatically. Rule No 1 for making people like you: Become genuinely interested in them. Rule No 2: Smile.

New research has turned that wisdom upside down. The richer people are, the ruder they are, according to Dacher Keltner, a psychology professor at the University of California, Berkeley.

Prof Keltner and co-researcher Michael Kraus videotaped 100 undergraduate students who didn't know each other, and studied their body language during one-minute gaps in conversation.

The results were clear: Students from a higher socio-economic background were more likely to be rude during the silence. They would doodle, fidget or start grooming themselves. Less-privileged students made far more effort to engage with the other person, making 'I'm interested' signals such as laughing or raising eyebrows.

In short, the richer people were a lot ruder, while the poor were a lot more polite. The psychologists viewed the results as basic animal behaviour. The higher up the food chain you are, the fitter and stronger you are. The wealthier animals are signalling that they don't need anyone. The poorer animals are ingratiating themselves because they need help. 'It is the experience of wealth that leads individuals to become disengaged,' Prof Keltner says.

There is much truth to that. The richer you are, the less reliant you are on other people. It doesn't matter much what others think of you, since you are unlikely to be asking them for a favour any time soon.

And yet while the rich may be rude because they are wealthy, it is just as likely to be the other way around. Just as plausibly, they are wealthy because they are rude.

Mr Carnegie and other self-help writers have missed the point the last few decades. Getting ahead in life isn't about making people like you. It is about getting them to serve your interests.

Success depends, more than anything, on an inner ruthlessness. As anyone who has spent much time with chief executives will know, they are mostly an unpleasant bunch.

They bully, cajole, threaten and fume. There are very few examples of them flattering or charming their way to the top. They are more likely to be shouting and raging at people, demanding the impossible, and casting old friends and colleagues aside the moment they become an inconvenience. The accumulation of wealth requires an ability to crush rivals, stamp on employees, and sweep aside all opposition. Charm doesn't come into it.

As your bank or hedge fund slides toward insolvency, just carry on barking at your secretary, snubbing waitresses, and blanking old friends who nod at you in the elevator. Everyone will assume you are still loaded - and will hold off pulling the plug on you for a few more days at least.

Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.

Sembcorp Industries - Outperform

Business Times - 28 Feb 2009
CIMB-GK Securities, Feb 27, Close $2.11
IN line: Q4 2008 core net profit of $128 million (-30 per cent y-o-y) was in line with our estimate and consensus. FY2008 core net profit of $534 million (-4 per cent y-o-y) was 4 per cent above our estimate.

Marine was the key profit growth driver (+32 per cent y-o-y). SCI declared a lower FY2008 dividend per share of 11 cents for a payout of 36 per cent (FY2008: 48 per cent).

Projecting 5 per cent y-o-y earnings drop for Utilities in 2009. Q4 2008 Utilities profit of $30 million (-41 per cent) was below our expected $42 million due mainly to one-offs, including prior years' business development costs in Singapore ($10 million) and accounting standards differential adjustments for Phu My 3 (US $5 million). Stripping out the one-offs, profit would have been in line. Q4 2008 UK profit of $15 million (-20 per cent q-o-q) was largely affected by the pound's depreciation, which is ongoing. We are projecting a 5 per cent y-o-y earnings contraction for Utilities in FY2009 in view of our more cautious view on the pound, lower onsite service offtake and margin pressure from customers.

Marine the key growth driver. We expect marine to contribute 60 per cent to group earnings in FY2009, driven by the execution of its $9 billion order book.

Dividend back to old days. We were not surprised by the dividend cut, given that SembMarine earlier reduced its payout from 75 per cent to 53 per cent, citing the need to preserve cash. We have adjusted SCI's dividend payout from 50 per cent to 33 per cent, in line with its historical informal guidance (one-third of earnings).

Strong balance sheet, sustainable operating cash flow. The group had a $1.5 billion net cash position. Excluding SembMarine's net cash ($1.8 billion), Utilities' net debt stood at $244 million (net gearing of less than 0.1). Despite the volatile environment and a potential earnings dip in FY09, we still see value in its Utilities business and project operating cash flow of about $200 million per annum on a sustainable basis.

Earnings estimates trimmed by one per cent for FY2009 but raised by 6 per cent for FY10 to account for lower earnings for Utilities and Industrial Parks in FY2009. Our forecasts incorporate adjusted estimates for SembMarine. We also introduce FY2011 estimates.

Maintain outperform; target price reduced to $2.46 from $2.72, still based on sum-of-the-parts valuation. Our target price takes into account the recent cut in our target price for SembMarine and the marked-to-market value of Gallant Venture.

For a change, read the good news

Business Times - 28 Feb 2009

Recent events signal that the credit market is on the mend and the worst is behind us
By Sani Hamid Director, wealth management (economy & strategy) Financial Alliance

I GET weird looks from people these days when they ask me what my call is on the market and I say 'buy'. Apparently, 'buy' has become a dirty word in investors' minds as much as other three-letter words such as CDO and CDS. In fact, calling for a 'buy' today is seen as equally insane as it was to call for a 'sell' in the latter half of 2007 - just as the market was about to peak.

Nevertheless, it's not hard to see why this is the case as investors are inundated with (largely negative) noise emanating from both the economic and stock market fronts, which grab most of the headlines daily. Spreading good news doesn't seem to be in vogue these days but I'll do it anyway.

There has been some good news from the credit market in recent weeks. The TED Spread - which in very basic terms measures the level of risk adversity between banks which lend to one another and is a widely used gauge of the credit market's health - is now back down to 100 basis points, levels last seen in the months before Lehman's collapse, and a big improvement to the spike up to 460 bps in October 2008. Anecdotal evidence also suggests that trade financing has resumed again, thus allowing for global trade to flow after being virtually frozen late last year. And to top it up, large, well capitalised companies such as Cisco (US$4 billion), Caterpillar (US$3 billion), Novartis (US$5 billion) and News Corp (US$1 billion) have successfully tapped the market in recent weeks for amounts unthinkable just a couple of weeks ago.

I believe these events signal that the credit market is on the mend and although it will take time for it to function as per normal, the worst is behind us. However, investors have generally ignored such good news, as they remain fixated on the multi-year or record lows that many economic data have slumped to and on the continued decline in the stock market as some, like the Dow, take out their November lows.

So how do we reconcile all the negative news around us with the good news from the credit market? In order to do this, we first have to understand two things.

Firstly, the news flow we are hearing daily emanates from three cycles: the credit market cycle, the stock market cycle and the economy cycle. I will call the aggregate news flow from all three cycles, 'The Tri-Cycle Noises'. While fairly simple to understand, it is critical to differentiate the news which belongs to each cycle because as you will see they carry different degree of importance.

Secondly, one needs to understand that a lag exist between these cycles. A sustained shock to the credit cycle will take time to impact the stock market and thereafter, the real economy. The Tri-Cycle Concept looks to make sense of the noise we experience and is best explained as we look back to 2007, when the seeds of the crisis actually began to sprout. It began in February 2007 as HSBC warned that its provision for losses on US sub-prime mortgages could hit US$11 billion. This was followed by write-downs from other major banks but in July 2007, two Bear Stearns hedge funds collapsed under the weight of related sub-prime mortgages. And in September 2007, UK mortgage lender Northern Rock became the first British bank to suffer a run in 140 years. During this period, the TED Spread increased from 20 bps in February 2007 to a high of 190 bps in August 2007.

But did the average investor pay heed to this back then? No. The STI, for example, continued its fairy tale run only to peak in early-October 2007 at 3906. Similarly, Singapore's economy continued chugging along and it was not until mid-2008 did it began its sharp descent. This explains clearly the lag between all the three cycles.

The Tri-Cycle can be represented on a chart showing the sequence of these three cycles and lags between them. From a news flow perspective, one can pick any period from the accompanying chart and deduce the type of news (positive or negative) emanating from that particular period. For example, in the box representing 4Q 2008, all three cycles are on a decline, thus suggesting news from all three are negative. As we all know, 4Q 2008 was indeed one of the worst quarter in living memory and we were bombarded with negative news from each of these cycles.

Separately, in the box representing Now (1Q 2009), the credit cycle has begun to turn up although the stock market and economic cycles remain on the downtrend. This explains the mixture of news flow that we see presently: improving news from the credit market but continued bad news on both the stock and economic front. While investors unfortunately prefer to focus on news flow from the latter two, news from the former is actually of greater importance as it actually leads the other two cycles.

In essence, just as many had been caught up in the euphoria of a rising stock market in early 2007 and thus, totally ignored the fact that the credit market was tightening, investors are once again totally ignoring the fact credit markets are showing signs of thawing. All said, investors risk repeating the same mistake of focusing on the wrong noise. Only this time the risk is not that they will miss the top but instead the bottom in the equity market.

GIC cuts loss in one fell swop

Business Times - 28 Feb 2009

Conversion of its Citigroup preferred shares into common stock will pare paper loss from US$5.5 billion to US$1.67 billion

THE Government of Singapore Investment Corp (GIC) will convert all its preferred shares in Citigroup into common stock to cut its losses. The swop will give it an 11.1 per cent stake in the troubled US bank, which yesterday announced a sweeping plan to boost its common equity base. The conversion will pare GIC's paper loss on its original US$6.88 billion investment in Citi from 80 per cent or US$5.5 billion to 24 per cent, or US$1.67 billion, based on Thursday's closing price of US$2.46 for Citi shares.

Separately, Citi said yesterday that it plans to swop up to US$52.5 billion of its preferred stock, including US$25 billion of the US$45 billion held by the US government, for ordinary shares.

Citi also recorded a massive US$10 billion charge for impairment of goodwill and other intangible assets in the fourth quarter, resulting in an additional net loss of US$9 billion for the final three months of last year.

For GIC, the decision to convert its shares appears to have been the lesser of two unpalatable choices. Citi yesterday suspended dividend payments on its preferred shares as well as common stock, which means that GIC would lose the 7 per cent annual dividend that it has been receiving if it chose not to convert its holdings.

The conversion will make GIC the second-biggest shareholder in Citi with a stake of about 11 per cent, compared to about 4 per cent at the time of its original investment. The US government will be Citi's largest shareholder, owning 36-38 per cent of Citi's common equity. The final stakes will depend on how many investors in the publicly held tranche of Citi's preferred stock decide to participate in the share conversion.

One thing is certain: Existing ordinary shareholders will suffer massive dilution of more than 70 per cent. Citi shares plunged 37 per cent to US$1.55 at the start of US trading yesterday after the bank's announcement. At that price, GIC's unrealised loss on its Citi investment would be US$3.6 billion. The profitability of US banks 'is likely to be impaired in the next two years', said Ng Kok Song, GIC's group chief investment officer in a statement.

'GIC's view is that with this latest move, Citigroup's capacity to weather the severe economic downturn will be strengthened.'

Before yesterday's announcement, the market value of the preferred shares held by GIC had already slumped 80 per cent to just US$1.376 billion since its initial investment in Citi, as mounting losses made it less likely that the bank would be able to keep up its dividend payments.

The US government, GIC and other investors that bought Citi preferred stock alongside GIC in January last year will receive common stock at a price of US$3.25 a share. Those investors, including Saudi Arabia's Prince Al-Waleed bin Talal, have agreed to the exchange, said Citi.

At the conversion price of US$3.25, GIC will get some 2.12 billion common shares in exchange for its US$6.88 billion in preferred stock. Based on Thursday's closing price of US$2.46 a share, GIC's stake after conversion is worth US$5.21 billion.

That puts GIC's unrealised loss on its original US$6.88 billion investment in Citi at US$1.67 billion after the conversion, compared to US$5.5 billion before.

Under the original terms of GIC's investment in Citi, it would have had to pay a much higher conversion price of US$26.35 for each common share, GIC said. That would have translated into a stake of just 261.1 million shares, worth a mere US$642 million at Thursday's closing price for Citi shares.

But the conversion also means that GIC will now bear greater risk than before, as an ordinary shareholder. It also gives up for good the 7 per cent annual dividend that it previously earned on its preferred shares.

Citi chief executive Vikram Pandit said that the conversion plan had just 'one goal' - to increase the bank's tangible common equity or TCE. Converting its preferred shares into ordinary equity will boost its TCE ratio - the focus of stress tests by US regulators starting this week as a key measure of the bank's ability to withstand further losses if the recession is worse than expected.

Ordinary shareholders are the first to suffer any losses, so common equity is seen as the highest quality of capital that a bank holds, and the size of a bank's common equity base relative to its assets is considered the purest measure of its buffer against losses.

The hope is that by raising its TCE ratio, Citi will be able to weather the worst recession that the US has seen in decades. The plan is expected to increase its TCE as a proportion of its risk-weighted assets from less than 3 per cent now to 7.9 per cent.

Crucially, it does so without the need to inject more money from the public purse. That makes it unnecessary for the US government to seek the approval of lawmakers for more funds amid growing public fury over the use of taxpayers' money to bail out large banks.

But the US government could still inject more capital into Citi - in the form of mandatory convertible preferred shares - if the stress tests show that the bank's capital cushion still needs bolstering. That would mean further dilution for ordinary shareholders, including GIC, when the shares are eventually converted to common stock.

'As a shareholder, GIC supports the initiative by Citigroup and the US government to strengthen the quality of the bank's capital base in view of the challenging economic environment,' GIC said in a statement.

Link to SAP support

Learn more about SAP.

Monday, February 23, 2009

George Soros' Testimony

Tuesday, June 3, 2008
George Soros Testimony before the U.S. Senate Commerce Committee Oversight Hearing on FTC Advanced Rulemaking on Oil Market Manipulation

Madame Chairperson, distinguished members, I am honored to be invited to testify before your committee. As I understand it, you are seeking an explanation for the recent sharp rise in the oil futures market and in gasoline prices. In particular, you want to know whether this rise constitutes a bubble and, if it is a bubble, whether better regulation could mitigate the harmful consequences.

In trying to answer these questions, I must stress that I am not an expert in oil markets. I have, however, made a life-long study of bubbles. So I will briefly outline my theory of bubbles—which is at odds with the conventional wisdom—and then discuss the current situation in the oil market. I shall focus on financial institutions investing in commodity indexes as an asset class because this is a relatively recent phenomenon and it has become the "elephant in the room" in the futures market.

According to my theory, every bubble has two components: a trend based on reality and a misconception or misinterpretation of that trend. Financial markets are usually very good at correcting misconceptions. But occasionally misconceptions can lead to bubbles because they can reinforce the prevailing trend and by doing so they also reinforce the misconception until the gap between reality and the market’s interpretation of reality becomes unsustainable. The misconception is recognized as a misconception, disillusionment sets in, and the trend is reversed. A decline in the value of collaterals provokes margin calls and distress selling causes an overshoot in the opposite direction. The bust tends to be shorter and sharper than the boom that preceded it.

This sequence contradicts the prevailing theory of financial markets, which is based on the belief that markets are always right and deviations from equilibrium occur in a random manner. The various synthetic financial instruments like CDOs and CLOs which have played such an important role in turning the subprime crisis into a much larger.

financial crisis have been built on that belief. But the prevailing theory is wrong. Deviations can be self-reinforcing. We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities which has some of the earmarks of a bubble. I believe the two phenomena are connected in what I call a super-bubble that has evolved over the last quarter of a century. The misconception in that super-bubble is that markets tend toward equilibrium and deviations are random.

So much for bubbles in general. With respect to the oil market in particular, I believe there are four major factors at play which mutually reinforce each other.

First, the increasing cost of discovering and developing new reserves and the accelerating depletion of existing oil fields as they age. This goes under the rather misleading name of "peak oil".

Second, there is what may be described as a backward-sloping supply curve. As the price of oil rises, oil-producing countries have less incentive to convert their oil reserves underground, which are expected to appreciate in value, into dollar reserves above ground, which are losing their value. In addition, the high price of oil has allowed political regimes, which are inefficient and hostile to the West, to maintain themselves in power, notably Iran, Venezuela and Russia. Oil production in these countries is declining.

Third, the countries with the fastest growing demand, notably the major oil producers, and China and other Asian exporters, keep domestic energy prices artificially low by providing subsidies. Therefore rising prices do not reduce demand as they would under normal conditions.

Fourth, both trend-following speculation and institutional commodity index buying reinforce the upward pressure on prices. Commodities have become an asset class for institutional investors and they are increasing allocations to that asset class by following an index buying strategy. Recently, spot prices have risen far above the marginal cost of production and far-out, forward contracts have risen much faster than spot prices. Price charts have taken on a parabolic shape which is characteristic of bubbles in the making.

So, is this a bubble? The answer is that the bubble is super-imposed on an upward trend in oil prices that has a strong foundation in reality. The first three factors I mentioned are real and would persist even if speculation and commodity index buying were eliminated. In discussing the bubble element I shall focus on institutional buying of commodity indexes as an asset class because it fits so perfectly my theory about bubbles.

Index buying is based on a misconception. Commodity indexes are not a productive use of capital. When the idea was first promoted, there was a rationale for it. Commodity futures were selling at discounts from cash and institutions could pick up additional returns from this so-called "backwardation." Financial institutions were indirectly providing capital to producers who sold their products forward in order to finance production. That was a legitimate investment opportunity. But the field got crowded and that profit opportunity disappeared. Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.

I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987. In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.

To be sure a crash in the oil market is not imminent. The danger currently comes from the other direction. The rise in oil prices aggravates the prospects for a recession. Only when a recession is well and truly in place is a decline in consumption in the developed world likely to outweigh the other factors I have listed. That makes it desirable to discourage commodity index trading while it is still inflating the bubble.

There is a strong prima facie case against institutional investors pursuing a commodity index buying strategy. It is intellectually unsound, potentially destabilizing and distinctly harmful in its economic consequences.

When it comes to taking any regulatory measures, however, the case is less clear cut. Regulations may have unintended, adverse consequences. For instance, they may push investors further into unregulated markets which are less transparent and offer less protection. It may be possible to persuade institutional investors that they are violating the "prudent man’s rule" by acting as a herd just as they did in 1987. If not, buying commodities--as distinct from investing in commodity producing enterprises-- should be disqualified as an asset class for ERISA institutions. The various techniques for circumventive speculative position limits should be banned, provided the ban can be made to apply to unregulated as well as regulated markets.

Raising margin requirements would have no effect on the commodity index buying strategy of financial institutions because they use cash. Nevertheless, it would be justified because it would discourage speculation, and speculation can distort prices. Varying margin requirements and minimum reserve requirements are tools that ought to be used more actively to prevent asset bubbles from inflating. This is one of the main lessons to be learned from the recent financial crisis.

Finally, dealing with the bubble element should not divert our attention from the inter-related problems of global warming, energy security and so-called "peak oil". Although they are beyond the scope of these hearings, these are pressing issues that require urgent action.

I hope my remarks are helpful to your deliberations. Thank you.

Thursday, February 19, 2009

Sibor dives

Feb 19, 2009 (Straits Times)

Most banks have raised their spreads to make up for increased risk and higher capital costs

A KEY interest rate that sets the cost of interbank lending has plunged in recent weeks, but those taking out new mortgages will be no better off.

The three-month Singapore Interbank Offered Rate, or Sibor, dived to 0.68 per cent this month, bringing it near the all-time low of 0.63 per cent reached in June 2003.

The rate at which banks lend to one another has been dropping since September last year, and is expected to stay low.

But new home buyers expecting interest rates for Sibor-linked housing loans to fall in tandem will be disappointed.

To compensate for increased risk and the higher cost of capital, most banks have upped the spreads that they charge above Sibor, making Sibor-pegged home loans more expensive.

At DBS Bank, a home buyer taking a loan of 80 per cent of his property's value in July last year would have paid a rate of Sibor plus 1.25 percentage points. Now, a new buyer has to pay Sibor plus 1.75 percentage points.

Even though Sibor fell from 1 per cent to 0.68 per cent between last July and now, the rate charged has actually risen from 2.25 per cent to 2.43 per cent.

The margin on HSBC's standard Sibor-pegged package now stands at 1.25 points, up from 0.7 point last July. The rate has effectively risen to 1.93 per cent, from 1.7 per cent.

Monday, February 9, 2009

New positive spin on S'pore's real estate sector

Business Times - 09 Feb 2009

Economist calls bottom in 2010, based on an 18-year cycle seen in US

(SINGAPORE) With observers seemingly falling over one another to come up with the most bearish forecasts, Phil Anderson - who calls himself a renegade economist - stands out from the crowd and confidently calls a property market bottom next year.

'There will be substantial real estate buying opportunities for people with cash next year, which will set them up comfortably for the next 18 years,' the founder of Economic Indicator Services told The Business Times recently.

Investors, however, will need cash to buy because, by then, banks will have no money and will be very reluctant to lend, he said. So individuals, companies and even countries with no debt, such as Singapore, will be well-placed to take advantage of the next boom.

Mr Anderson bases his prediction on an 18-year cycle which he says has manifested itself in the United States since 1800. 'The cycle is as regular as clockwork. It is quite bizarre,' he said.

The US began selling real estate, officially and under a set legal structure, on May 10, 1800, he said. 'Since then there were speculative peaks every 18 years.'

There were peaks in land sales or real estate speculation in 1818, 1836, 1854, 1888, 1908, 1926 and 1944. The peaks were followed by downturns or depressions, typically lasting four years. World War II disrupted the pattern. But the cycle resumed in 1955.

The real estate market in the US again peaked in 1989 and bottomed in 1991. And 18 years later, in 2006-07, it hit another high. We are now into the third year of downturn, so by next year the market should bottom, which will mark the beginning of the new 18-year cycle, according to Mr Anderson.

The next boom, peaking around 2024, will be huge because hundreds of millions of Chinese will enter the market for the first time, he said. 'Singapore is well-positioned to take advantage of the next boom because of its proximity to China. I am very bullish on Singapore. It is uniquely placed. Although real estate is already expensive in Singapore, it is going to be more expensive.'

Mr Anderson is confident the cycle will repeat itself as long as land is tradeable and in private hands. 'It will continue to happen because people will chase the capitalised rent of land,' he said. 'It will be gone only if the rent is collected by the government.'

China's privatisation of its real estate market guarantees a real estate cycle, according to him.
Also, everything that has been done to tackle the current financial crisis is to preserve the system. 'So the system will start again.'

There are smaller cycles within the big 18-year cycles. The first seven years are characterised by a gradual improvement in activity and confidence following the previous crash. The next seven years see steeper increases in activity and prices, with the sharpest gains taking place in the final two of the seven years.

'That's when most people take on more debt. That's also the easiest time to buy real estate because loans are easy to get as banks have a lot of money. But that's absolutely the wrong time to do so,' said Mr Anderson.

The next four years, of course, are the downturn, during which the banks will clear their problem loans, the market will absorb the excess stock and the governments will get organised.

Mr Anderson has detailed his research in a book The Secret Life of Real Estate - How it moves and why, published last year. Based in London and Melbourne, his firm has 'several hundred' online subscribers who pay £200 (S$442) a year each for his 'big picture analysis and ways to take advantage of turning points in market cycles'.

Sunday, February 8, 2009

Chinese PM's Visit to London

Feb 3, 2009

Chinese Premier Wen Jiabao spoke about his country's approach to dealing with the global financial crisis in an interview with the London-based Financial Times.

Below are some of his remarks, which were published late on Sunday.


'Running our own affairs well is our biggest contribution to mankind.'

Mr Wen, on China's role in combating the global economic crisis


'Many people have not come to see this point...If we have a drastic fluctuation in the exchange rate of the yuan, it would be a big disaster.'

Mr Wen, on the need to keep the Chinese yuan stable


'It is a ridiculous view...It is completely confusing right and wrong when some countries that have been overspending then blame those that lend them money for their spending.'

Mr Wen, on whether China's huge pool of domestic savings is to be partly blamed for the financial crisis

US$10 laptop

Feb 3, 2009
NEW DELHI - INDIA has unveiled plans to produce a laptop computer costing just US$10 (S$15) in a bid to improve the skills of millions of students across the country.

The laptops will be mass-produced as part of a government-sponsored education scheme launched on Tuesday in the southern city of Tirupati.

Details about the computer remain scarce, but Higher Education Secretary R.P. Agrawal said last week that it would be available within six months.

"Once the testing is over, the computers will be made available on commercial basis," he told the Press Trust of India news agency.

"Its cost will be 10 US dollars. If the parents want to gift something to their kids, they can easily purchase this item."

The laptop will reportedly have a two gigabyte memory and wireless Internet capability, but officials have not publicly demonstrated a prototype - or yet explained how it can be produced at such a low cost.

The government has earmarked more than 46 billion rupees (S$1.4 billion) to develop the low-power gadget to work in rural areas with unreliable power supply and poor Internet connectivity.

The planned laptop is part of a push to increase the number of students in higher education and give them the technological skills needed to further boost India's economic growth.

New Delhi rebuffed a previous attempt to bring cheap laptops to India, led by MIT computer scientist Nicholas Negroponte's One Laptop Per Child programme.

The government cited hidden costs for its rejection of that computer, which was dubbed the US$100 laptop.

-- AFP

Gold forecast to hit US$1,000

Feb 5, 2009

SINGAPORE - INVESTMENT bank Goldman Sachs has raised its forecast for the price of gold to US$1,000 (S$1,500) an ounce in the next three months from its previous forecast of $700 due to rising investor demand for safe haven assets.

Gold was trading at US$902.70 an ounce by 0106 GMT (9.06am Singapore time) on Thursday, down US$2.15 from New York's notional close, but was within sight of a near four-month high of US$930.40 an ounce hit last Friday. Gold struck record at US$1,030.80 last March.

'The gold price rally has been driven by surging demand for gold in all forms: physical gold, exchange-traded funds (ETFs), and futures contracts as investors seek 'a safe store of value' amid the financial distress and inflation risks,' Goldman Sachs said in a report.

'It is also important to emphasise that the recent strong demand for gold has not been irrational but rather pretty much in line with the probabilities of financial and sovereign default.' It also noted a strong relationship between the price of gold in US dollars and the exchange rate of the dollar against other currencies has begun to break down, adding that strong investment buying would offset a decline in jewellery demand.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust , said it held a record of 859.49 tonnes of gold as of Feb 4, up 6.12 tonnes from Feb 2.

'Such strong demand for investment reasons is likely more than offsetting the declines in gold demand for jewellery use,' said Goldman Sachs.

'In fact, this recent surge in gold ETF demand would more than offset a 20 per cent decline in the fourth quarter global jewellery demand for gold,' it said.

The investment bank also raised its forecast for the price of gold to US$950 an ounce in the next six months from an initial estimate of US$785. Its 12-month gold forecast was pegged at US$825 an ounce, up from US$795 previously. -- REUTERS

GE to pay quarterly dividend

Feb 7, 2009

WASHINGTON - GENERAL Electric Co said on Friday it will pay a planned 31-cent dividend to shareholders, but will evaluate dividend payments for the second half of the year as uncertainty grows over the long-term health of the economy and GE's ability to maintain its top credit rating.
The move comes as analysts continue to predict that the conglomerate will be forced to eventually cut its payments as it tries to stabilise its ailing lending unit and faces a deep recession that is hitting its industrial businesses hard.

GE's board of directors approved the dividend that will be paid to shareholders on April 27. Those who own GE stock as of Feb 23 will receive the quarterly payment. It is the second quarterly dividend GE has paid this year.

The company, which makes everything from locomotive engines to dishwashers, has said it plans to pay a US$1.24 per share dividend this year even as it projects lower earnings and says its lending arm, GE Capital, will be much less profitable.

Company officials have said the company is committed to the US$1.24 dividend, which would be the same amount that GE paid shareholders in 2008. But CEO Jeff Immelt said in a statement that he and the board will review the company's payments for the rest of 2009.

'The Board and I will continue to evaluate the company's dividend level for the second half of 2009 in light of the growing uncertainty in the economy, including US government actions, rising unemployment and the recent announcements by ratings agencies,' he said.

GE plans to shrink the size of its GE Capital lending unit this year, trimming its holdings of risky debt and cutting the work force after the financial crisis led to mounting loan losses. It also expects its industrial side, which makes equipment like aircraft engines, power plant turbines and medical equipment, to post earnings growth of only zero to five per cent.

Ratings agencies Moody's Investors Service and Standard & Poor's are both reviewing their ratings of GE this year. Many analysts suspect the company will lose its 'AAA' rating, largely due to the problems at GE Capital. They also are skeptical that GE will be able to generate enough cash to make the payments.

In a note to investors Friday, J.P. Morgan analyst C. Stephen Tusa Jr. wrote that the Triple-A rating appeared unsustainable, and that a credit rating reduction would likely be followed by a dividend cut.

'Our take is that these events are necessary catalysts of change for a culture that was built to manage earnings in a way that is clearly unsustainable over the long term,' he wrote.

Shares of GE rose 25 cents, or 2.3 per cent, to close at US$11.10.

Shares are already down more than 31 per cent this year in part due to investor worries over the dividend and credit rating. -- AP

Saturday, February 7, 2009

UOB-Kay Hian sees SIA reporting $2.1b hedging loss

Business Times - 07 Feb 2009

SINGAPORE Airlines (SIA) will report a huge $2.1 billion hedging loss equivalent to a loss per share of $1.70, says a local analyst.

K Ajith of UOB-Kay Hian calculates that with jet fuel having slumped from US$119 a barrel in October 2008 to US$54 by year-end, SIA will suffer a hedging loss that will depress its book value from $12.25 a share to $10.55.

The estimate is based on SIA's mark-to-market accounting of its outlay on fuel, which UOB-Kay Hian estimates to be hedged at an average of about US$110 a barrel.

'At present, SIA is trading at 0.9 times P/B. And if it remains at 0.9 times with book value dropped, it should trade at a reduced target price of $9.70,' says UOB-Kay Hian.

SIA, which will report its third-quarter earnings on Feb 10, slid 32 cents to close at $10.74 yesterday.

The impact of the hedging loss is not new - SIA chief executive Chew Choon Seng said at the Q2 results briefing three months ago that fuel was hedged around $115 a barrel. But this is the first time an analyst has worked out the potential loss, albeit that this is a paper loss at present.

Some analysts, such as Vincent Ng of S&P Equity Research, warn against reading too much into paper losses on fuel hedging. 'Hedge accounting generally goes straight to the reserves in the balance sheet, rather than the profit-and-loss account,' he explained. 'Meanwhile, SIA also pays spot prices for half of its fuel needs.'

Also, SIA's hedge contracts go forward some 18 months from the contract date, by which time the actual fuel price could climb back closer to the hedged price.

Nevertheless, few have reason to be upbeat on SIA's immediate prospects - or those of the aviation sector as a whole.

The industry is in a tailspin thanks to the global economic slowdown and the financial meltdown. Passenger and cargo traffic have dived, and combined with excess capacity, this has put pressure on yields.

Analysts expect SIA to have suffered a 10-15 per cent drop in passenger yield in the October-December 2008 quarter due to falling premium seat sales and falls in the key Australian and British currencies against the Sing dollar. Meanwhile, air cargo operations have been racking up losses since the first half of the current financial year, prompting SIA to start grounding planes and to ask pilots to take no-pay leave.

SIA has cut capacity about 3 per cent system-wide over the past two months, including scrapping of several of its relatively recent all-business class non-stop services to New York and Los Angeles.

One of the more upbeat forecasts for SIA is from CIMB's Raymond Yap, who sees a Q3 net profit of $385.6 million, down 35 per cent year-on-year. But Mr Yap expects SIA to post a net profit of only $55.8 million for the January-March quarter, which is traditionally slow.

'If we are correct, SIA could achieve a full-year net profit of $1.253.8 billion, about 10 per cent higher than our official forecast of $1.137 billion, but down almost 40 per cent from a year ago,' he said in a paper yesterday.

UOB-Kay Hian's Mr Ajith expects operating profit to decline to $118 million in Q3 2009. He is forecasting an FY 2009 net profit of $915.3 million, below the consensus estimate of $1.1 billion.
Citigroup Global Markets is also downbeat on SIA and has a medium-term price target of $9. Besides the tough operating environment, contributions from subsidiaries and associates will be under pressure, Citigroup said.

'SIA would be earning an ROE well below its cost of capital, which suggests that its share price could trade below book value during this stage of the economic downturn,' Citi analyst Robert Kong noted this week. 'With earnings and price performance volatile, it is difficult to have a long-run fair value for an airline stock.'

Citi forecasts SIA's FY 2010 return on equity will fall to 6.7 per cent, from 9.6 per cent in FY 2009.

Going forward, the issue for SIA is how it manages capacity and costs amid deteriorating demand, analysts say.

S'poreans have what it takes to bounce back

Minister Mentor Lee Kuan Yew spoke at the annual Tanjong Pagar Chinese New Year Dinner last night. This is an edited text of his speech.

THIS year will test the mettle, the strength of character, of Singaporeans. The Prime Minister and Finance Minister have described this worldwide financial crisis that has reached us. This is the first time that all banking systems in all countries are concurrently facing a credit crunch. They have lost confidence in themselves, in their fellow banks and other financial institutions, and even in their customers. United States and European Union (EU) banks have been brought down by complex derivative securities, now called 'toxic assets' because they may be worthless.

In nine months, we will know how US President Barack Obama's economic and financial plans are doing. We will have an indication of when America's economy will bottom out and start to grow again. With luck, it could be by the end of 2009 or in early 2010.

However, many leading American economists contend that (despite) spending the huge sum of money (that Mr Obama's stimulus plan calls for), they may still not succeed in kick-starting the economy. Some argue that prices in the mortgaged housing sector must hit bottom and recover before confidence will return. When they do, banks and financial institutions worldwide will be more confident.

The outcome of America's economic and financial policies will affect the EU, China and Japan, because the US is their major export market. By the end of the year, we will know where the US economy is heading. Singapore's 'Resilience Package' may have to be updated.

Our external trade is more than three times our GDP. Therefore, the level of international trade is a decisive factor for our economy. Indeed, in this globalised economy, no country - neither the US nor the EU, neither Japan nor Singapore - can single-handedly decide its economic performance.

Big countries like China and India can still make substantial 6 to 8 per cent growth despite this meltdown. They have giant domestic markets and can spend to meet their large infrastructural needs. But China's GDP is only one-quarter, and India's less than one-tenth, that of America's. We may get some spin-offs from their growth, but they cannot lift us like a US recovery.

Singaporeans and their government are not in panic. We have got the wherewithal to survive this recession, even if it goes on for several years. We knew such a recession must come from time to time. It is in the nature of the free markets of the Western world that our economy is plugged into. People and systems tend to be carried away by exuberance. Investors get greedy and rush in to buy, believing that prices will only go up. When prices collapse, investors find they have lost huge sums. Despair and depression then set in.

Everyone in the world is poorer - US$7 trillion (S$10.5 trillion) has been wiped off the world's stock markets. According to a BBC report from Davos, the world's assets - stocks, properties, pensions, gold, jewellery, et cetera - have lost 40 per cent of their value. Mr Rupert Murdoch speaking at Davos said personal wealth in the world has fallen by US$50 trillion. Forbes estimated that in Hong Kong, the 40 richest billionaires and millionaires have lost half their combined wealth. Property values have gone down in every country; so have profits for companies and wages for workers.

In Singapore, our SGX market capitalisation lost half of its value last year. Properties at the high end, residential and commercial, have gone down. However, HDB prices have held up because many are downgrading from private condominiums to purchase HDB flats.

Everyone's wealth has shrunk as our assets have lost value. But if you have not borrowed excessively to buy assets and have sufficient cash to service your loans, you can hold on to your investments until the market turns up and prices recover.

We expected stocks and shares to go down so we sold quite a number of stocks and shares we owned and turned them into cash early last year. That's why we were able to buy banks and so on because we had the cash.

Singaporeans need not despair or be depressed. We will have to endure some hardship. But nobody will be destitute, depending on soup kitchens or begging in the streets. Everyone has a home: 95 per cent of Singaporeans are home owners. They will receive U-save rebates and S&C subsidies, GST credits, Workfare Income Supplements and other forms of assistance. Most importantly, the Government has launched the Jobs Credit scheme to save jobs for Singaporeans by giving employers a maximum grant of $300 per month for each Singaporean worker.

These measures will help Singaporeans meet their basic living expenses and defray their utility bills and conservancy charges. Support is tilted towards the lower-income families in two- and three-room flats, and also the middle-income in four- and five-room flats.

Some professionals have written to the newspapers that we are ignoring those in the private condominiums and landed properties. The Government has not overlooked them. They are getting income tax and property rebates, and GST credits. But it is right that the low-income groups should get more help, as they are in greater need.

Ministers and senior civil servants are taking pay cuts of up to 20 per cent as the economy has slowed down substantially. Middle- and lower-ranking public officers would also receive lower salaries, but with smaller reductions. This is to share the belt-tightening that other Singaporeans have to bear in this difficult period.

Most of what we consume is imported. We do not grow our food, nor manufacture the goods we buy. Whatever we do, retailers will find customers more cautious, because they are preparing for what could be a longish period of negative or little growth.

Retailers, like other companies, will get up to $300 per month for each Singaporean employee through the Jobs Credit scheme, and should also benefit from the 40 per cent property tax rebate, which is the least that landlords should pass on to tenants. Along Orchard Road and many other shopping centres, tents have been put up next to shopping malls for the mall tenants and others to sell their wares to passers-by at lower prices. The market will adjust.

This experience will be remembered by everyone, especially by all those who were born after 1971. After 1971 and the oil crisis which caused oil prices to quadruple, our economy has grown steadily year after year. So this generation may believe that Singapore and Singaporeans will automatically go up the escalator every year. This is not so.

In testing times, we must have the guts to face our problems, maintain solidarity and work together, learn new skills and knowledge through the Spur programme that the Government has launched. We will overcome our present difficulties and emerge stronger from the experience.

We will get fresh investments again, higher value investments that will employ more workers who are better-skilled and more knowledgeable. Our standing with investors worldwide is high. They know we are restructuring and that we will pay for our workers to be trained by them, and by other institutes, under Spur (Skills Programme for Upgrading and Resilience) to match the skilled workers that they need. We should take this opportunity to go for training and upgrade ourselves for these higher value-added jobs.

Singapore's security, stability, reliability and good labour relations are well known. Whatever your job, you are better off in Singapore than if you were in a similar job in any other Asian country, including China and India. The only country where, job for job, you can be better off, is Japan. The Japanese have huge reserves, top class infrastructure and a highly skilled, industrious and knowledgeable workforce.

Do not be discouraged by the present hard times. I am confident the younger generation of Singaporeans have the grit, stamina and resourcefulness to bounce back.

My generation of Singaporeans will never forget the 1960s and early 1970s when we had only $100 million in our reserves. (Now our reserves are more than $100 billion.) We faced separation from our then economic hinterland, Malaysia, and 'Konfrontasi' and no trade with Indonesia.

That generation kept their nerve and were determined to succeed. Your parents' and grandparents' generations had hard lives in shanty huts with no running water or modern WC, not knowing what the future could bring. They simply concentrated on hard work and built the foundation for the Singapore of the 21st century. I don't believe that in one generation that attitude has disappeared. Yes, you have had an easier life, but pressed against the wall, like your fathers and your uncles, you will fight back.

We will go through with restructuring our economy. We will retrain and educate our workers to higher levels of skills and knowledge. When recovery comes in the US and EU, as it must, we will be ready for a higher level of economic activity.

Your generation can take Singapore forward to become one of Asia's most vibrant and beautiful cities. We will have a spectacular marina in the Central Business District; the island will have many beautiful streams and water bodies; our housing estates will be clad in exuberant foliage and ringed by gardens, recreational and sporting facilities. This is not a pie in the sky. It will be realised in the next five to 10 years, even with the current financial crisis.

The success of Singapore came from the hard work, resourcefulness and ingenuity of your forefathers and their leaders. You are the descendants of these lion-hearted pioneers. You have it in you to succeed. Joining you are hardworking and talented new emigrants from Asean, India and China. Together we can make the grade.

Tuesday, February 3, 2009

Never break Piggy Bank


1. First, let me wish everyone here good health, good fortune and a very happy new year. This Chinese New Year gathering is timely. It is like a big family reunion and it draws us closer together. Such bonding will help us overcome difficult times together.

2. By now, all of you know that the economic outlook for the world and Singapore this year is grim. There is no need for me to elaborate. All I want to say is that in dealing with our problems, the Minister for Finance and his officials are like a team of doctors. Before they can prescribe the right medicine to cure our economic ills, they must make the right diagnosis. Fortunately, they could draw on the collective experience of the Singapore Government. As you know, many members of the Cabinet have successfully dealt with several recessions before.

3. Let me recount briefly how the Government handled previous economic crises. I do so to show that while each one of them was different and required different solutions, there were also common approaches.

4. The first one was in 1964, soon after we joined Malaysia. I remember this well because I had just started work in the Economic Planning Unit. It was a severe recession and there was high unemployment. The older amongst you here may remember that Singapore was banking on the common market with Malaysia to grow our economy. That, however, did not materialise. To make matters worse, we had to deal with domestic political turbulence, communal tension and racial riots. Tense relations with the central government in Kuala Lumpur, and Konfrontasi by Soekarno compounded our problems. Singapore’s trade fell sharply, reaching the lowest level in a decade. After we left Malaysia in 1965, our Government decided that Singapore could not depend on the region as a hinterland. The solution was to leapfrog the region and make the world our market and hinterland. Against the conventional wisdom at the time, we attracted multi-national companies to set up factories here and we exported to the whole world. By implementing such an export-led industrialisation strategy, we grew strongly for the following two decades.

5. The next recession was in 1985. The seeds were sowed a few years before, in 1979, when we instituted a high-wage policy to compel employers to use labour more efficiently. I had just assumed office as Minister for Trade and Industry. We decided that it made no sense for Singapore to grow on the backs of low-skilled, lowly paid workers. We wanted to upgrade the skills of workers and move up the value chain so that our people could earn more. With a favourable external climate and full domestic employment then, it was timely to restructure our economy from labour-intensive industries to higher value-added production. So the National Wages Council recommended high wage increases and we upped the CPF contribution rate to 50%. The economy began to transform itself. The high-wage policy was meant to last only 3 years but we could not put a brake to it as the demand for labour remained high. Soon, our wage increases outstripped productivity increases. Wage costs became too high and our exports became uncompetitive. Growth fell to -1.4% in 1985.

6. Since wage costs were the main cause of the recession, we cut the employer CPF contribution rate by 15%. Taxes and fees were also cut to further reduce costs. But more than cost cutting, we also invested in our future. We upgraded our workforce through higher education and skills training. We introduced fiscal incentives to attract higher value-added industries. The measures worked. We arrested the recession and growth quickly resumed.

7. After another decade of strong growth came a succession of economic crises, beginning with the Asian Financial Crisis in 1997 and followed by the dot-com bust in 2001 and the SARS attack in 2003. The collapse of the Thai Baht in 1997 triggered steep devaluations in the Rupiah and the Korean Won and led to a crisis of confidence in the region. The East Asian miracle unravelled. Foreign investors and fund managers pulled out their investments from Asia. The Singapore dollar fell by some 15% and our stock market plunged by half. Several countries resorted to IMF help. With IMF intervention and tough governmental measures, confidence was eventually restored in the affected countries. Singapore did not need IMF or other external help because of our strong reserves, prudent budgets and sound economy. Nevertheless, we seized the opportunity to adjust our costs, liberalise our financial sector and reform the economy. Within a year, our growth resumed.

8. Then the internet bubble burst. The dot-com bust in 2000/2001 exposed our dependence on the electronics sector. This sector contributed close to two-thirds of Singapore’s non-oil domestic exports then. We responded by diversifying our manufacturing base from electronics to other high value-added sectors like petrochemicals and pharmaceuticals. We signed free trade agreements with our major trading partners. We also promoted entrepreneurship and promising local enterprises. We grew rapidly. Other than for one quarter in 2003 when SARS scared the hell out of us, our growth was uninterrupted until this year.

Key lessons of fighting economic crises

9. I recount our various economic crises to draw lessons in dealing with the current recession, the worst since 1964. Let me highlight three.

10. First, we must remain united and resilient in the face of crises. In past recessions, no matter how bitter the medicine, workers and employers swallowed them and worked hand-in-hand with the Government to tackle our common challenges. The whole population rallied together to pull the economy out of recession. Likewise, we must now confront our problems together, endure short-term pain, and plan for the long term. This year’s Budget has prescribed the right medicine but the pain will not go away immediately. The financial sector in the US and Europe is in deep trouble. The IMF has forecast zero growth for the world economy this year. The International Labour Organisation expects some 51 million jobs to be lost. Global demand for goods and services has shrunk. We can do very little to increase demand for our exports. But we can help companies cut costs and save jobs. Together, we can make the "Resilience Package" work. Companies should only retrench staff as a last resort and landlords should pass on the property tax rebates to their tenants. Banks, both local and foreign, should overcome their risk-aversion and continue to lend as in normal times. Otherwise the credit crunch will choke many sound businesses and stifle new enterprises.

11. Second, we will help you cope with the bad times. We will extend a special helping hand to those amongst us who are most affected by the slump, and cushion the impact on the most vulnerable. This is not to be done by the Government alone but also by the family and the community. Family members who are better off should help out other members of the extended family who may need help. Similarly, each community, like our Marine Parade community, should reach out to the needy and those badly hit by the downturn. But we must do this in a way that does not entrench a crutch mentality or erode our ethos of hard work and sacrifice.

12. Third, do not be demoralized by the current recession but look beyond it. The global recession will end and we will bounce back. So invest in our future. Upgrade our knowledge and skills and remake ourselves to ride the upswing which will surely come. You will notice that we are revamping our primary school education and pouring in billions of dollars into your education and training even though these do not directly help to solve our short-term economic problems. This is to build up our capabilities for the future.

A speed boat in open sea

13. But some of you may wonder: If our economy is fundamentally sound, why is Singapore so prone to recession? Why have we fallen into recession so many times in recent years? Why were we the first in the region to go into a recession last year? Why is our economic outlook so bleak this year when some other countries in our region are forecasting positive growth? The reason lies in the nature of our economy. We are not only a small economy but also an open one which is fully plugged into the global economic grid. Our total trade is 3 1/2 times our GDP, one of the highest in the world.

14. Let me use an imagery to illustrate the nature of our economy. Think of Singapore as a small speedboat out in open sea. There are also other ships out there like container ships, bulk carriers and supertankers. When the sky is clear and the sea is calm, we can easily outrun the larger ships and tankers. But when the winds rise and the waves are high, we have to slow down or seek shelter in the nearest harbour.

15. This is what we are doing now – hunkering down in the harbour. What is important is our attitude while in the harbour. We must not idle and wait for the storm to pass. Instead, we should use the time wisely to maintain our vessel, upgrade our engines, go for training, keep ourselves fit, and conduct drills to prepare for the next race.

16. This is precisely what the "Resilience Package" seeks to do - saving jobs, building new infrastructure like a national high speed broadband network, re-training our workers through SPUR and investing in R&D and education.

Not breaking the piggy bank

17. In tackling this recession, we have taken the unprecedented step of seeking the President’s approval to use a small portion of past reserves. A former Ambassador to Singapore, knowing how carefully we protected our reserves, teased me recently that we were finally "breaking the piggy bank!" I promptly corrected him. To break the piggy bank is to allow all the notes and coins to spill out, with no controls over how much is spent. We are not doing that. Our reserves must continue to be protected. In this instance, before approaching the President, the Minister for Finance had first to convince the Prime Minister. They then had to convince the Cabinet. After that, the Government had to convince the President to use his second key to unlock the safe. Not only that. The Government had also to convince the Council of Presidential Advisers. So you can see that the procedure is stringent and many minds are brought to bear on the use of reserves before approval is given.

18. We must continue to exercise great discipline and not dip into our reserves at the first sign of difficulties. We should tap it only as a last resort and when there are compelling reasons. Hence, I am in favour of putting up three "No" signs even as we draw on our reserves in this recession. First, no use of the reserves to support social assistance programmes. As a general principle, the Government must continue to fund such programmes out of revenues raised in the current term of government, not past reserves. Second, no draw for permanent programmes. Permanent programmes like Workfare and ComCare, no matter how meritorious, should be funded by current revenues and reserves. Third, no draw except under dire circumstances when one-off extraordinary measures are required to ward off catastrophe or prevent irreparable damage to the economy.

19. When this economic recession is over, we must continue our policy of growing our reserves by living within our means and running a modest budget surplus. As the present situation shows, our reserves are the best insurance for our own and our children’s future. Use them wisely and sparingly. Never break the piggy bank.


20. Let me now conclude. While the outlook for this year may be uncertain, I am confident we have prescribed the right measures. The Year of the Ox may have coincided with the previous recessions of 1997 and 1985 but the Ox has shown its ability to survive them. It possesses traits such as dependability, hard work and endurance. These are the traits which have seen us through past recessions, and will be indispensable in this time of uncertainty. If we work together and support each other, we will emerge from this stronger than before. This was what happened in previous crises and this time will be no different. In 6 to 9 months’ time, we will know whether President Obama can turn the US economy around. When the US economy recovers, we will bounce right back.

21. And we will bounce back to a very different Singapore. In 3 to 5 years’ time, many development projects which we have started will be completed. Take a stroll along Marina Bay then. You will be astounded by the beauty of our new skyline, the new botanic gardens and the glittering lights at night. Or jog along the park connectors and the waterways. Or go to the old HDB estates which have been upgraded to look like new, with lifts stopping at every floor. It will be a revitalised, vibrant and beautiful Singapore which all of us have a hand in building.

22. I wish all of you good health and much cheer in the Year of the Ox.

Monday, February 2, 2009

Company Results at a Glance

Business Times, 2 Feb 2009

GIC generates returns

Straits Times Feb 2, 2009

DAVOS: The Government of Singapore Investment Corporation (GIC) is confident that it will be able to continue generating reasonable returns for the country's reserves despite a tougher global investment climate.

But the investment manager must continue to manage its investments carefully and cautiously, diversify its portfolio intelligently and manage risks well, said its deputy chairman and executive director Tony Tan.

Dr Tan told The Straits Times that GIC will be able to deliver the sustainable investment returns which will enable the Government to 'prudently draw on Singapore's reserves for budgetary purposes over the long term'.

He said on the sidelines of the World Economic Forum in Davos last Friday: 'This is the best contribution that GIC can make towards ensuring that Singapore continues to progress and prosper.'

Elaborating on GIC's key strengths, he cited three factors that give GIC the edge amid the increased market volatility and financial turmoil.

The first is a long-term investment horizon of '20 years or more', which allows GIC, with an estimated portfolio of US$300 billion (S$450 billion), to ride out fluctuations in the value of its investments over several economic and market cycles.

Dr Tan added that this has become very important since it is the long-term expected real return of the Government's portfolio which will determine how much the Government can draw on reserves.

The Government recently revised the Constitution to enable it to draw on more of the returns from investing its reserves.

The second strength of GIC is its diversified portfolio, which includes many asset classes from equities and bonds to real estate, private equity and commodities.

GIC invests in both the developed markets of the United States and Europe, as well as developing markets in Asia and other parts of the world.

Dr Tan said: 'This diversified portfolio as reflected in GIC's asset allocation strategy enables GIC to work towards a better optimal balance between risk and reward.'

He reiterated GIC's investment aim, which is to ensure minimal losses rather than trying for maximum returns. 'Our philosophy is to look after the downside, and the upside will look after itself.'

Finally, GIC has built up a 'deep pool of expertise' in its staff, who are able to operate in many countries and markets.

Elsewhere in the 30-minute interview, Dr Tan noted the positive feedback the recent Singapore Budget received from business leaders in Davos, and revealed that GIC's cash position has increased.

He also noted that top bankers and heads of large corporations he met were 'very impressed' with the Budget.

They said it reflected a plan not only to weather the present recession, but also one to help Singapore emerge as a stronger, more resilient nation in the future. And all this without the need to borrow.

'This is the vital difference which sets Singapore apart from all the other countries I've talked to. It's the one thing which impressed bankers and businessmen,' he said.

Dr Tan also revealed that GIC's cash reserves have risen above 7 per cent of its portfolio in the second half of last year, having cut back on exposure to equities since mid-2007. He said its current portfolio is 'underweighted in equities, overweighted in cash and cash equivalents'.

Asked about the general sentiment of delegates regarding the crisis, he said: 'Everybody's worried. This is the most serious economic and financial crisis the world has seen in the last 50 years...nobody knows how long the recession is going to last.'

But he said that if the recent slew of fiscal and monetary measures work, recovery could come later this year with the end of recession by 2010.

Where there's a will ...

Business Times - 02 Feb 2009

It's never too late to start one's estate planning early in life, to ensure that one's wealth is passed on to intended beneficiaries smoothly, says BEN TAN KIM LIANG.

ESTATE planning refers to the process of planning for the transfer of a person's estate to the intended recipients before or upon his or her death. A common misconception about estate planning is that it is to be carried out only when one is in the twilight of life.

However estate planning, like other elements of financial planning such as insurance, investment or retirement planning, is best carried out when one is young and healthy.

Estate planning is important as no one knows when he or she will die. It ensures that a person's wealth is passed on to the intended beneficiary or beneficiaries efficiently and smoothly.

Consequences of intestacy

When a person dies without a will, the deceased's property or estate will be distributed according to the Intestate Succession Act that provides rules for the transfer of property.

The Act spells out the rules for distributing the deceased's property to the spouse, children and relatives. The distribution rules under the Act are fixed. If the deceased had wanted to vary the proportion of distribution to certain relatives or to leave his or her assets to charities or non-relatives, such wishes cannot be honoured.

Small estates valued at less than S$50,000 are administered by the Public Trustee, and estates of higher value by application to the courts for grants of letters of administration.

Intestacy could delay the distribution of the estate to the beneficiary or beneficiaries. This delay can create great difficulty if the deceased's family members need the money for immediate needs. The trauma of losing a loved one can be made less painful if there is a will detailing how the deceased's wishes are to be carried out.

Nature of a will

A will is essentially a document by which a testator gives instructions to an executor nominated by the testator to carry out instructions on how his assets are to be distributed upon death. The persons who benefit under the will are called beneficiaries.

Besides specifying the distribution of the deceased's estate among his beneficiaries, the will should appoint guardian(s) for his minor children, if any, in the event that there is no surviving spouse.

When appointing a guardian, it is important to consider the kind of lifestyle desired for the children, such as type of education and religion, which will serve as a valuable guide to both the guardian and the children.

It is common to appoint the surviving spouse as the executor. Sometimes, for reasons such as the intent to minimise possibility of fraud or a need for the executor to possess certain skills, others may be appointed to assume this office.

There is a need to choose a competent and trustworthy executor of an appropriate age (for example, an older person may not survive the testator) who is responsible and willing to administer the estate.

Alternatively, a professional executor may be hired if the administration of the estate is likely to be complicated and to ensure longevity of this office.

Any adult of sound mind can make his own will. The risk is that the will might be rendered ineffective or invalid, causing the beneficiaries to suffer unnecessary expense and uncertainty.
It may be better to consult a lawyer who can provide advice and draft the will according to law. The cost of making one depends on its complexity. The lawyer can provide an estimate of the costs involved before appointment.

Ensure estate liquidity

Estate liquidity refers to the ability of a person's estate to pay taxes and other costs that arise after death, using cash and cash equivalents. Sufficient liquid assets are needed to pay for the deceased's final expenses, medical bills, income and property taxes and related expenses, to prevent the forced sale of assets.

One way to maintain estate liquidity is with life insurance policies. Insurance monies payable in the event of death would be part of the deceased's estate. There is no longer a need to pay estate duty in Singapore, with abolishment of the relevant Act.

Distribution of CPF savings
There is no need to make a CPF nomination if a person wishes to distribute his CPF savings under the intestacy laws. Distribution under the intestacy laws by the Public Trustee ensures that the deceased's family members will receive his CPF savings.

If single, the deceased's CPF savings will be divided equally between his/her parents.

If married with children, half of his CPF savings will be given to the spouse and the remaining half divided equally among the children.

If the deceased is a Muslim, his CPF savings will be distributed by the Public Trustee according to the Inheritance Certificate, which family members can obtain from the Syariah Court (Muslim inheritance law).

A person not wishing to distribute his CPF savings in accordance with the intestacy or Muslim inheritance laws will need to make a CPF nomination.

Safekeeping of documents Make sure that family members know where important documents (such as the will, investment records, insurance policies, bank passbook, loan documents, cheque books, IOUs, etcetera) are kept.

Keep the documents in a centralised location. Having proper records of all the deceased's assets and liabilities will facilitate the administration of the estate and can shorten the probate process.
A person can register information on his will free of charge with the Wills Registry. Information available from the Wills Registry will be useful for beneficiaries or executor(s) in determining whether a will has been prepared or in administering the estate.

Advance Medical Directive (AMD)
By signing an AMD in advance, a person is informing the doctor that, in the event of terminal illness, he does not want any extraordinary life-sustaining treatment to prolong life.

With the AMD, loved ones can be spared the agony of making decisions such as whether or not to switch off the life-supporting machine. Besides, such treatment can be financially crippling, emotionally sapping and physically draining on the family.

Executing an AMD is a serious matter and should be discussed with the family and, if possible, in consultation with a family physician. AMD forms are available at polyclinics and private clinics.

Nothing is certain except death and taxes. The lesson for all is that every one needs to plan early and have a valid will. Even if you don't have pots of money, you can avoid the pain of contests, disputes and heartaches if you make your wishes clear and known in a will.

Estate planning is not about the dying but for the living, especially for those whom we love dearly and who survive after us. We and our loved ones can have peace of mind with comprehensive estate planning in place.

If Dow at 8,000 is artificial, where does this leave the STI?

Business Times - 02 Feb 2009


ELSEWHERE in this issue of BT (see Hock Lock Siew column) we've pointed out the shortcomings of the price-weighted Dow Jones Industrial Average as a reliable benchmark for the state of the US stock market and economy.

In a nutshell, a big reason why the Dow appears resilient around the 8,000 mark (exactly where it ended after Friday's plunge) is that the index guardians have not removed the stocks which have dropped below US$10, unlike what they did in the past.

For the record, as of Friday, there were four such counters - Citigroup at US$3.55, Bank of America at US$6.58, General Motors at US$3.01 and Alcoa at US$7.79.

Readers would note that these are among the stocks most likely to react to bad news from the banking and auto industries but because they have already crashed to rock-bottom levels, their influence on the Dow is severely limited since the index is price-weighted and all price movements are treated equally, regardless of market capitalisation.

To see how distorted a picture the Dow transmits, take this for example: On Friday, a US$3.72 slide to US$54.50 by the stock of Proctor & Gamble (P&G), which has a market cap of US$163 billion, removed 29.6 points from the Dow, while 3M, with a market cap of just US$37 billion (one-quarter of P&G's), exerted almost the same effect of cutting 22 points off the index because its almost-identically-priced shares fell by almost the same amount - US$2.76 to US$53.79.

Meanwhile, the four sub-US$10 stocks mentioned above all fell, but only contributed a combined total of 11 points to the Dow's final loss of 148 points to 8,000, despite having a total market value of US$86 billion.

Even if one accepts that price-weights are one way to construct an index, the failure to replace the low-priced stocks with higher-priced stocks in the Dow have created the mistaken impression that the index is more resilient to bad news than it actually is.

Speaking of resilience - or rather the lack of it - traders might have noted that Wall Street's January performance was a 7-9 per cent loss for its major indices, not a particularly auspicious portent for those who believe in the old market adage 'as goes January, so goes the rest of the year'.

It might simply be yet another bit of superstitious market folklore with no fundamental grounding, but if Wall Street had posted a January gain, you can bet your last dollar that opportunistic brokers and analysts would have used it to offer hope to the investing public and to urge clients to buy.

The smart money, however, would stick to the two central tenets of investing in this new age of high volatility, low returns and bankrupt US investment banks - 'sell into strength' and/or 'buy in anticipation, sell on news'.

Both have proven effective throughout 2008 and again so far in 2009.

Last week's gains before US President Barack Obama presented his stimulus bill to the House of Representatives, followed by an immediate collapse when the bill was passed, leads us to believe there's no reason to expect any different in the weeks ahead, especially when the news from the US could be mostly negative.

In its report over the weekend, research outfit Ideaglobal noted that the US Conference Board has said the US jobless rate may reach at least 9 per cent by end-2009 and that Q4 inventory buildup does not bode well for current and coming quarters.

'The 'Bad Bank Plan' may be delayed. . .The White House says GDP data shows the crisis in the housing and financial sectors has spread to all areas of the economy', noted Ideaglobal. On Monday, the Commerce Department will release its December personal income and spending report, which is not expected to be encouraging given rising job losses and deepening anxiety associated with the housing crisis. There are also a slew of earnings reports due, which are expected to add to a volatile week ahead.

The trading pattern in the five days to come will follow a by-now familiar pattern, in which the Straits Times Index's direction is set by the Hong Kong market as well as so-called advance programme trades from the US - the word 'advance' suggesting that these trades are to buy or sell STI components before the expected move on Wall Street, not after.

A final thought is appropriate - is the STI's resilience around the 1,700 mark related to traders' belief that the Dow will hold at 8,000? If the latter is based on a distortion that might one day be corrected, where would this leave the STI?

Why the Dow is holding at 8,000

Business Times - 02 Feb 2009


TO MOST casual observers, the fact that the Dow Jones Industrial Average (DJIA) has bounced back every time it dipped below 8,000 points over the past few months - even when there is bad news - suggests that the 8,000 mark is where the 'support' or the magical 'market bottom' lies. This means that as soon as the index nears 8,000 on the downside, chartists and traders will start calling a 'buy' on the market.

Closer examination, however, reveals that the bounces around the 8,000 mark are simply a function of the way the index is constructed. Because the Dow is price-weighted, it is also inherently flawed.

In Thoughts from the Frontline weekly newsletter dated Jan 23, writer John Mauldin correctly points out that the divisor for the DJIA is 7.964782, which means that for every dollar an index stock falls, the DJIA falls 7.964782 points, regardless of the stock's capitalisation.

As a result, if the stock of Microsoft, with a price of US$17 and a market cap of US$156 billion, was to crash to zero, the DJIA would only lose 135 points (17x7.964782). But if the same was to happen to IBM, with a smaller market cap of US$124 billion but a higher share price of US$92, it would cost the index to lose a whopping 700 points.

Now consider the four financial stocks currently in the DJIA - Citigroup (US$3.90), Bank of America (US$6.78) Amex (US$16.70) and JPMorgan (US$25.43) - using last Thursday's prices.
If all four stocks were to crash to zero, the DJIA would only lose 300 plus points, not that huge a loss in the context of the market, yet imagine the repercussions on the US and global economies if these four institutions collapsed totally.

Most of the news on Wall Street these days centres on the crippled financial and auto sectors. But because the share prices of these companies are now so low, these stocks do not affect the DJIA by much (General Motors' shares, for example, are now just above US$3).

In other words, because the index stocks most affected by bad news are already battered to rock-bottom levels, the DJIA doesn't seem to fall much when bad news is released, thus giving the mistaken impression of resilience to adverse news and of strong support around 8,000 points.

By right, these financial and auto stocks should have been removed from the index, given that it has been past practice to replace stocks whose prices drop below US$10.

For some reason, the DJIA's guardians have been reluctant to do the same now, possibly because of the political fallout that might ensue - imagine the repercussions of removing pillars like Citigroup or General Motors.

This then leads to the inevitable conclusions: the DJIA is not comparable over time; the only reason the DJIA appears well-supported around 8,000 is because the collapsed financial and auto components have not been replaced as they should have been; and that movements in large-price stocks are magnified because the index is heavily skewed in favour of these counters.
If the index was to be correctly re-balanced by removing the battered financials and autos and replacing them with stocks with prices above US$10, you'd have to wonder whether the 8,000 mark would hold as well as it has.

You'd also have to dismiss arguments that it is safe to buy since the index is at its lowest level in many years because historical comparisons are invalid - unless, of course, the same re-balancings that were done in the past are performed now.

How to overcome such a large distortion? The most commonly accepted solution is to use market-cap weights, but this too has its drawbacks.

Last Thursday, the market-cap weighted Straits Times Index (STI) rose 0.64 of a point to 1,766.72, a move that a casual observer might interpret to indicate a mixed or quiet session. Far from it - if you stripped out warrants, the rest of the market only recorded 95 rises against 188 falls, a gain/loss ratio that indicated market weakness rather than a mixed session.

Peer beyond the numbers and it would have been readily evident that an 11-cent rise by big-cap SingTel to $2.76 pushed the STI up 11 points, thus creating the mistaken impression of a slightly firm or mixed market. Assuming SingTel had not risen and everything else remained the same, the STI would have recorded an 11-point fall, leading a casual observer to correctly surmise that the market had been weak that day.

Similarly, on Dec 29 last year, a sudden 87 per cent surge by CapitaMall Trust in the final minute of trading helped push the STI up 54 points, once again creating the mistaken impression of a session that was much stronger than it really was.

Still, using market-cap weights is probably a much better way to capture what's going in a stock market, at least for most of the time and over longer time periods. The alternative is to use price weights, which has been shown to lead to even more inaccurate conclusions.

On this last point, local investors - chartists and fundamentalists alike - would do well to take into account just how distorted a picture the price-weighted DJIA paints of the US economy and market, while also pondering whether 8,000 is really where its 'support' lies. If Dow at 8,000 is artificial, where does this leave the STI?