Jeflin’s Investment Blog

The Straits Times Index fell 20.52 points Monday to close at 2,776.98, volume was a trickle at 948 million, while gainers/losers stand at 157/371.

As second-quarter earnings filtered in, we saw that most companies fail to impress with slowing sales and profit margin as compared to last year, and expectations for financial year 2008 had been adjusted downwards.

More importantly, Investors are wary of entering the volatile stock market. To be sure, volatility currently holds sway over all forms of investment, be it stocks, commodities, bonds, properties, etc. Taking up positions for too long could be detrimental to profits as they tend to evaporate rapidly once bad news emerge.

In fact, some analysts lament that the situation is so fluid that their views on the market are rendered irrelevant as soon as their reports are published. Short of a better suggestion, I believe sitting on cash is the safest option now even if high inflation eats away at our wealth.

While I still have substantial investments in blue-chips, I am less concerned about their performance than the poor outlook for Singapore private properties.

Such a trend does not bode well for the economy. Currently, the service and construction sector are the key boosters for our “healthy” economic indicators but the champagne may stop flowing in another year or so. Massive layoffs in the construction sector due to lesser and barely profitable projects are expected.

The sentiment has deteriorated so much that a plethora of properties offering superior location, iconic design and fantastic amenities are left on the racks because no takers are interested or the price offered is too low. In prime locations, prices have dropped so drastically that developers are happy to achieve breakeven or even taking losses to clear inventories.

It is easy to do the math. A developer’s major expenses consist of the land price, construction cost and development charges. None of the three elements have fallen in tandem with the sales prices. In fact, construction fees are continually bursting budgets because of high material cost.

Add to the fact that new building regulations stipulating that bay windows and planters be considered as part of Gross Floor Area, developers are hard pressed to survive, not to mention, making profits. I will discuss more on the implications in future posts.

Meanwhile, let’s look at the upheavals in the global housing market ignited by the US subprime mortgage crisis. I can safely say that, in its aftermath, no nation will be spared. Japan which has barely recovered from the property bubble of the ’90s are once again flirting with a major recession.

Japanese property sector is not in the pink of health and that is an understatement. Property developer Suruga Corp sounded the death knell when it filed for bankruptcy in June after failures in securing new financing from banks. On top of the credit squeeze, it has also been caught by soaring energy and raw material costs.

Last month, rival developer Zephyr Co followed suit by seeking court protection with $893 million in debts. Just this week, Urban collapsed from US$2.4 billion of debts, which marks Japan’s biggest bankruptcy in six years, prompting fears that the property sector is on the brink of a disaster.

Over in Europe, the United Kingdom takes the cake with some analysts billing their housing market as “beyond tipping point.” Austrialia and New Zealand are not having it easy either.

In light of such sobering facts around the world, I think it is timely to remind ourselves to set aside some contingency funds to tie over the financial storm and economic slowdown. Over-extending our resources is the worst thing to do in a bear market. Things will get worse before they get better, so taking any huge positions now is foolhardy.

However, it is not wise to take your eyes entirely off the screen. When the opportunity is right, you should take measured risks. There are several oversold stocks on SGX which are approaching March lows, I see strong support for the Straits Times Index at 2740, so there could be a rally of sorts soon. Try to accumulate undervalued blue-chips gradually if you have surplus cash.

Till tomorrow.

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For those of you hungry for the latest market trends and investment knowledge, here is the first edition of my blog carnival, a selection of recent blog posts covering a mixed bag of investment subjects.

The Dividend Guy discusses the top 3 reasons to drop a stock from his watch list. Points to ponder over are “low dividend growth or cut, a decline in revenue and earnings for more than two years, and a disinterest in the stock.” This topic is a nice follow up to my previous post (How many stocks do you own?)

Afraid to Trade presents recent money flow shift affects hedge funds, saying: “Those who remained long commodities or energy and short financials were crushed in recent weeks.”

What a month indeed, in the face of declining consumption, the market defied the bullish words of T Boone Pickens who expected crude oil prices to keep going up. To be fair, Pickens was right to suggest $150 as a watershed but oil prices had pulled back by 33% since.

Dividend Growth presents Dow 370,000 (an obscure title), saying: “This time I will try to prove that long-term investing and dividend reinvestment are important tools that would enable the shrewd dividend investor through good and bad times.”

Monevator presents How a boring broker will make you richer, saying: “The number one thing to look for when choosing a broker is… boring.”

Indeed, brokers who insist that you trade actively to make huge amounts of money have only one ulterior motive, that is to fatten their own wallets at your expense. As I mentioned perviously, there is nothing certain about investments, only the fees.

Fire Finance presents Mutual Funds - The Economic Cycle of Sectors, saying: “Many experienced investors spice up their portfolio with few sector funds which have a potential to fetch above average returns.”

Online Forex Trading presents 3 Forex Trading Strategies, saying: “Many successful forex currency traders indicate that, if you want to be successful in forex trading, you need to go with the trend. You can determine trends by using the pivotal points and reviewing the market to spot trends on any particular currency pair.”

KCLau presents Average Monthly Household Income in 2007: Is it enough?

Hedge against Speculation presents Start of A New Leg Down.

That concludes my first edition. If you want to submit your blog posts to Jeflin’s Investment Carnival, just email me and I will go through it as soon as possible.

GoldenAgr    0.59     Down 0.035 (5.60%)    32,254,000
Noble Grp    1.97     Down 0.11 (5.29%)    24,679,000
SingTel        3.49     Up 0.02 (0.58%)        23,778,000
Capitaland    4.94     Down 0.06 (1.20%)    22,396,000
Ferrochina    1.21     Down 0.07 (5.47%)    16,105,000
China XLX    0.61     Down 0.015 (2.40%)    13,685,000
Yangzijiang    0.635    Down 0.02 (3.05%)    13,622,000
China Hongx    0.42     Down 0.005 (1.18%)    11,615,000
Oceanus        0.42     Down 0.03 (6.67%)    11,159,000
Wilmar        3.99     Down 0.21 (5.00%)    10,504,000
KencanaAgri    0.27     Down 0.015 (5.26%)    8,791,000
CoscoCorp    2.28     Down 0.07 (2.98%)    8,721,000
Synear        0.425    Up 0.005 (1.19%)    8,308,000
SGX        6.62     Down 0.07 (1.05%)    7,991,000
Gen Int        0.51     Down 0.01 (1.92%)    7,584,000
Biosensors    0.59     0.00 (0.00%)        6,355,000
Li Heng        0.555    Down 0.02 (3.48%)    6,320,000
STX PO        2.64     Up 0.09 (3.53%)        6,265,000
JES        0.24     0.00 (0.00%)        6,149,000
HKLand US$    3.69     Down 0.01 (0.27%)    6,009,000
RafflesEdu    1.01     Up 0.01 (1.00%)        5,984,000
IndoAgri    1.28     Down 0.09 (6.57%)    5,681,000
Mercator    0.385    0.00 (0.00%)        5,546,000
e StarCrusUS$    0.16     Up 0.01 (6.67%)        5,398,000
NOL        2.63     Down 0.02 (0.75%)    5,333,000

One year into the Aug 2007 subprime crisis, and the financial sector is still reeling from the after-effects. Billions of dollars were injected into the money markets and interest rates slashed but the deleveraging journey remains arduous.

In fact, investors must prepare for more pain from the looming avalanche of housing mortgage defaults. It seems that the malaise has spread to prime mortgages which are now defaulting at an alarming rate.

Prime loans are supposed to be the last man standing, after the tanking of subprime mortgages and Alt-A loans (less risky than subprime loans but doesn’t require strict documentation of assets or income). Their failure to shore up the housing market could spell a lengthy recovery from plummeting prices and weak investors’ sentiment.

A vicious cycle for lower sales could also result as borrowers find it harder to get loans, in spite of low interest rates. Lending standards have been tightened which will be even more conservative if if prime loans look shaky too.

As it is, more US homeowners are selling their properties at a loss, pushing the real estate market deeper into the quagmire. Nearly a third who bought since 2003 are in negative equity, meaning their homes are worth less than their mortgage loans.

Because of limited risks as purchasers bought houses with “nothing down” or minimal capital outlay, most of them are likely to conduct short sales or simply abandon their homes in foreclosures. A short sale occurs when a lender accepts a sale price less than what is owed on a mortgage and forfeit the remaining debt.

Banks and mortgage lenders suffer as investors walk away from their homes rather than be saddled with mounting mortgage payments. Just carry a black mark on their credit report which nobody will take a second look in the next bull market.

After all, banks never change, they will fall all over themselves to lend you money if you show them a good deal, subprime borrower or not.

Here is some choice bites from Charles McKay.

Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

Such classic words ring true in today’s context and possibly apply in any generation. We are animals when caught in the throes of greed and speculation. And those who partaked and encouraged this orgy must pay the price.

I believe, over time, our wounds from this subprime crisis will be healed. Low prices will attract investors back into the residential property market and absorb the oversupply. Once demand is back and inventories decline, we are ready for the next boom.

Meantime, more hardships await and it is a long way off from the end of the tunnel.

UniFiber    0.09      Down 0.02 (18.18%)    62,418,000
GoldenAgr    0.595     Up 0.03 (5.31%)        50,557,000
JiutianC    0.13     0.00 (0.00%)        43,419,000
Gen Int        0.51     Down 0.015 (2.86%)    41,490,000
SingTel        3.48     Down 0.04 (1.14%)    24,816,000
StraitsAsia    2.29     Down 0.09 (3.78%)    21,242,000
China Hongx    0.405    0.00 (0.00%)        20,359,000
Yangzijiang    0.64     Up 0.01 (1.59%)        19,766,000
STX PO        2.27     Up 0.06 (2.71%)        14,676,000
Li Heng        0.555    Up 0.02 (3.74%)        14,470,000
Noble Grp    1.90     Up 0.07 (3.83%)        13,503,000
Oceanus        0.44     Down 0.005 (1.12%)    13,371,000
IndoAgri    1.25     Up 0.08 (6.84%)        11,407,000
Ferrochina    1.24     0.00 (0.00%)        11,351,000
CoscoCorp    2.32     Up 0.05 (2.20%)        10,640,000
Capitaland    5.06     Up 0.10 (2.02%)        8,976,000
KencanaAgri    0.27     Up 0.005 (1.89%)    8,890,000
SunVic        0.355    Down 0.005 (1.39%)    8,343,000
NOL        2.52     Down 0.12 (4.55%)    8,189,000
OCBC Bk        8.21     Up 0.05 (0.61%)        7,578,000
Wilmar        4.18     Up 0.09 (2.20%)        7,341,000
FirstRes    0.885    Up 0.065 (7.93%)    6,227,000
Kep Corp    10.12    Down 0.12 (1.17%)    6,034,000
DBS        18.50    Down 0.08 (0.43%)    5,709,000
StarCrusUS$    0.145    Down 0.02 (12.12%)    5,696,000

When stocks experience a heavy beating, they will usually rally at some point of time. The degree of each rally is of course a fascinating subject for technical analysts.

For those who shun technical jargon, at least concern yourself with a phenomenon known as overhead supply - a “fade” factor for stock rallies. Overhead supply is apparent when you notice pockets of resistance in a stock as it moves up from a slump.

Such behavior actually boils down to investors’ psychology. When a stock price returns to an investor’s entry point, having fallen drastically, the motivation to sell is very strong. Such selling actions hence, severely limit a stock’s upward movement.

Just to illustrate with a simple example, let’s say a stock advances from $4 to $5.50, then declines back to $3, most poeple who bought in late in the $5 region will be trapped with a substantial deficit unless they were quick to sell on a stop loss order. Unfortunately, most people hesitate to do so.

Assuming good news came out of the blue which cause the stock to spike back to $5.50 again, most investors are more than happy to get out. Achieving breakeven and ending the pain of holding a non-performing portfolio for weeks becomes their first priority.

Human nature is pretty consistent in this respect so we can expect countless of such situations; that is to sell and recover their hard-earned money.

If you study a stock’s trend, you can recognize price areas that represent heavy overhead supply and not make the fatal mistake of buying such stocks.

Conversely, a stock that has emerged from its overhead supply will be a safe buy, even though the price is higher. Sufficient demand exists to absorb the stock and move it past the level of resistance.

A stock that has broken into new high ground for the first time has no overhead supply to contend with, which makes it very attractive. We can relate this to an investment method known as “buy high and sell higher,” instead of the usual “buy low, sell high” strategy.

Traders “uptick” a bull market and “downtick” a bear market, thus widening the impact of each cycle. When times are good, let your profits ride but when the market is declining, head for the exit… fast. More discussions on this behavior later.

JiutianC    0.135    0.00 (0.00%)        106,503,000
China Hongx    0.415    Down 0.05 (10.75%)    41,089,000
Li Heng        0.53     Down 0.06 (10.17%)    25,668,000
ZhguoPengjie    0.23     Up 0.005 (2.22%)    21,827,000
Yangzijiang    0.65     Down 0.015 (2.26%)    20,377,000
SingTel        3.58     Up 0.06 (1.70%)        20,126,000
GoldenAgr    0.565    Down 0.005 (0.88%)    20,049,000
StraitsAsia    2.47     Down 0.04 (1.59%)    15,612,000
CoscoCorp    2.38     Down 0.06 (2.46%)    15,194,000
Ferrochina    1.26     Down 0.08 (5.97%)    15,153,000
STX PO        2.25     Down 0.13 (5.46%)    15,122,000
NOL        2.75     Up 0.23 (9.13%)        14,950,000
Ezra        1.99     Up 0.09 (4.74%)        14,821,000
Gen Int        0.54     0.00 (0.00%)        14,759,000
Oceanus        0.455    0.00 (0.00%)        14,479,000
Noble Grp    1.87     0.00 (0.00%)        13,470,000
Capitaland    5.00     Up 0.14 (2.88%)        13,185,000
UniFiber    0.11     Down 0.005 (4.35%)    9,651,000
ChinaNTown    0.115    Down 0.01 (8.00%)    8,559,000
Synear        0.395    Down 0.035 (8.14%)    7,945,000
Biosensors    0.595     Down 0.055 (8.46%)    6,601,000
SembMar        3.76     Up 0.01 (0.27%)        6,159,000
IndoAgri    1.26     Down 0.14 (10.00%)    6,075,000
SGX        6.78     Up 0.05 (0.74%)        6,036,000
SunVic        0.375     Down 0.01 (2.60%)    5,928,000

On the eve of our National Day and the opening ceremony of the Olympic Games, there is actually little to celebrate as an investor. The ST Index dropped 27.17 points to close at 2807.54, volume was weak at 1.041 billion while gainers/losers stand at 197/327.

COSCO Corp’s shares plunged 12.2% following the shock “retirement” of president Ji Hai Sheng. Mr Ji was synonymous with the success of the shipping giant and his abrupt exit, clearly a power struggle, does not sit well with investors. Other shipping firms like Yangzijiang and NOL also face selling pressure.

The unwinding of stocks related to energy and commodities also soured investors’ mood on the SGX in recent weeks. Slumping oil prices (a 3-month low of $115 a barrel as of Friday) was the major reason.

Many analysts have actually highlighted that the run-up of oil prices is inflated by at least 1/3 due to speculation. And so it has been proven. I will list a few reasons for the oil slump -

1. The downfall of Semgroup

2. Charges leveled against rogue energy trader, Optiver.

3. Mutual/hedge funds seized by panic and dumping oil futures.

4. Opec chief predicting oil prices stabilizing at $70 per barrel.

5. Tensions cooling off in Iran.

6. US economy stuck in a technical recession and rising unemployment, consecutive weekly oil inventory reports showing increasing supplies.

7. Hybrid/fuel-efficient cars dominating the market, consumers reducing driving trips, etc. to reduce household expenses on fuel.

8. Baltic Dry Index fell another 320 points in July to 7201, implying weak global trade, poor consumer sentiment and a general economic slowdown.

9. Energy consumption in China and Taiwan declining…

Add all of these factors up, and the picture for a bullish oil run is not pretty.

Dow Jones rallied on Friday by spiking more than 300 points as US dollar rallied strongly against foreign currencies. Standard & Poor’s 500 index gained 2.4%, and the Nasdaq composite gained 2.5%.

The financial sector remained in turmoil as Fannie Mae reported a big quarterly loss of $2.3 billion (more than triple of analysts’ forecasts), reflecting a deepening crisis in residential properties. Much of the losses came from write-downs of mortgage backed securities, a situation already replicated in Freddie Mac, two days ago.

Going forward, despite this rally on Wall Street, the situation in Singapore, and hence SGX, is grim. Prime Minister Lee Hsien Loong, in his National Day message, cut the 2008 GDP growth forecast to 4-5 per cent. He also expects a tough year due to the widening impact of a US slowdown.

Tougher times for Singaporeans ahead, rising unemployment is going to hit home soon. Stay tuned for more updates.