We are finally getting back to textbook's environment of risk free rate at 3% after years of QE although it remains to be seen if this can last.
Since Singapore's monetary policy imports rate from the US, do keep buying Singapore T-bills while the interest is still good!
Singapore Treasury bills and bonds (T bills and bonds in short) continue to intrigue me as I studied the recent movements. Things started to get interesting around March 2022 when the US Fed started talking about hiking interest rates. The following table depicts our six month T bill movement - issue date and cut off yield, which is the yield we get when we subscribe, fortnite by fortnite (no gaming pun intended).
Singapore has one the highest home ownership in the world and as such I believe most of us reading this should have a mortgage. Given that mortgage rate is lower 2.99% (about 1.6-2.1% today), we should all draw out maximum mortgage and put into T bills, effective making free money! To illustrate this, if you can borrow at 2% and invest in this, using the 21 Jul 1 year T bill rate of 3.1%, you make 1.1% risk free with no equity. Let's use concrete no.s, say we can borrow $1m from the bank, which is not your capital since you borrowed it, then you buy the 1 year T bill and make 3.1%. After one year, you get back $1.031m, pay the bank $1.02m and voila you just made $11,000 with no capital outlay!
Okay, you say there is duration mismatch. The mortgage can last 10, 20, 30 years, we cannot guarantee T bills will be at 3.1% for 10, 20, 30 years. The latest issue of our 10 year Gahmen bond has a cut off yield at 2.71% (see below). So technically, it is still doable. In fact, this also works if you can borrow at any kind of facility at 1-2%pa (ie lower than the cut off yield).
Now that we know this wonderful trick, the next relevant question would naturally be - so how much did our Singapore T bills yield over time? Here's the shocking conclusion. Read on.
The MAS publishes all the data on T bills and bonds since 1987. Anyone can download all the data via the link below. The average 6 month T bill cut off yield has been 2.07% since 1987. While it has been mostly uninteresting at below 1% over the last decade or so, no thanks to QE, it did hit 3.05% in 2015 (and now 2.99%). In Jun 2000, right after the dot-com crash, it was 4.74%!
https://eservices.mas.gov.sg/statistics/fdanet/BondTreasuryBillsCMTBsAuctions.aspx
We spent 16 years discussing on this infosite about investing, taking risk and trying to make 8%pa. We all know someone, aunties or uncles, or even our own parents rushing to banks every few months to hunt for the highest fixed deposit rate and park money there to earn 1.x%pa. But since 1987, the Singapore government provided this ultimate instrument that can make on average 2%pa and in "good times" 3-4%pa. If you can borrow at 1+%pa which most of us could, we can make free money at infinity%pa.
So, I am shutting down this infosite, thanks for reading folks! (Young Wonder Woman saying goodbye below)
Just kidding.
This chart from The Economist says it all.
Also, we are running out of raw material for our food. Malaysia's export ban of fresh chicken to Singapore was quite worrisome a few months back (see below).
Well, fortunately, we didn't reach this stage. But chicken rice no longer cost $3 and I think we are on our way to find hawker chicken rice cost as much Chatterbox's chicken rice (when it first came out).
Treasury bills or T bills are short term bonds issued by the government for periods of less than 1 year. For the longest time, they only yield basis points due to global quantitative easing (QE) which has drove global interest rates to zero. But in recent weeks, yield on Singapore’s T bills has shot up with the Federal Reserve raising interest rates and our T bills now yield close to 3%!
In financial textbooks, we always talked about the risk free rate. This usually referred to the country's ten year bond yield which was usually at 3-4% in the good old days and this was the basis of all investments because risky assets cannot yield less than the risk free rate. During the great QE over the last 12-13 years, risk free rate went to zero and hence anything yielding 1-2% becomes interesting. This was especially so when disruptive companies promised to grow to the moon, increase their revenue 100x and vowed to change the world. Speculators rushed in where value investors feared to tread.
Now that risk free rate is back to the textbook level of 3%, there is a lot more downside for such stocks with minuscule earnings trading at 50x PER (this translates to earnings yield of 2% which is lower than the risk free rate now and hence makes no sense for value investors). So, if you want to buy Tesla's stock at current 100x PER, maybe you should buy Singapore T bills instead.
The only way it is justifiable to buy Tesla based on the risk free yield vs Tesla's earnings yield comparison is that Tesla grows its earnings more than 10x from here which means that the future PER is closer to 10x (ie earnings yield of 10%). Even so, current share price has already factored in this scenario, so Tesla has to do more than that for its market cap to go to USD2trn (another 110% upside from its current USD900bn market cap). This is not to say that it cannot be done, just very difficult. Having said that, this valuation math also didn't work when Tesla was USD100bn going to USD1trn in market cap. So speculators in Tesla did make a lot of money so far!
T bills is a good way to park any excess cash that you have because it comes back soon, in 6 to 12 months. In Singapore, you can only buy through the three banks: DBS, OCBC and UOB and no relationship manager will recommend this because they earn nothing. The process is also deliberately cumbersome to discourage buying but you just have to push on. You will be asked to choose either competitive or non-competitive bids and a huge warning would pop up to say that if you choose non-competitive, you might lose money - which could be true with negative interest rates, but not today.
The last bid closed on 21 July and the details are in the table above. If you chose the non-competitive bid, you would have gotten 100% allocation at 2.93%, which is the cut-off yield. Non-competitive bid is 40% of each issuance and unless the amount of non-competitive bid exceeds 40% which is c.SGD2bn, most likely than not, you will get 100% allocation. As for competitive bid, you will dictate the yield you want, but risk getting nothing if your bid is higher than the cut-off yield.
Note: this is 2.93% for 12 months so you only get half the money (ie 1.465%) over 6 months.
Looking at this 6 month T bill at almost 3%pa, some of you might have figured this out - the Singapore yield curve is inverted with 6 month T bill and also the two year bond at higher yields vs the 10 year Singapore bond at 2.7% as of this writing. While the academic theory is not clear, inverted yield curve usually means that a recession is coming. This means that things can get ugly, you may not have income or you need to help someone close who needs money, so you do not know when you need cash. As such, don’t put everything into this one basket. Well, recession aside, inflation is looming and money in the bank is losing value. So if we can claw back 3%, we should seize the day! The next T bill auction closes 4 Aug. See you at the ATM!
Huat Ah!
While researching for another earlier post, I found this - someone tried to calculate the price of a human being by amalgamating what each and every organ can fetch in the black market. It's USD45m according to the Medical Futurist.
We are at a good time to look at the annual dividend list again and as market cycle goes, we are back in the doldrums and therefore see a lot more names just in our beloved little red dot. The criteria have to be added so that we can down to a manageable list.
At the top of the market cap range, we start with Thai Beverage at close to SGD18bn market cap. I have owned this name for a while and I believe this is perhaps one of the rare compounders we can find on SGX. The numbers speak for themselves, double digits margins and double digit ROEs. I would argue that at 16x price earnings, this name is not expensive. Top Glove of Malaysia is another superb company but the numbers do look strange with ROE over 100% and dividend over 20%. That said, we know its strengths and kudos to the managers who brought the company to such global success over time. Alas, both of these strong names are not home grown Singapore companies.
Next up, let's see if we can find more interesting names in the other markets!
Huat Ah!
5 July 2022 Update: Apologies for the mis-information and the anxiety that this post might have caused. While SPH is not longer around, SPH Reit is not delisted and was last traded today at $0.90. Cuscaden's chain offer would only privatize the company if it managed to buy more than 90% of outstanding shares. Since the lowball offer ($0.9372) was unattractive, it only acquired c.62%.
I have kept this post for readers who may still be interested. Will be updating on this name in the weeks ahead now that we have an actual bid at $0.9372 (which means at 15-20% discount from this price, this name will have really good margin of safety and worth taking a very close look) and there should be further developments.
Today is the last day you can trade SPH Reit. This was a stock I owned since its IPO and it is sad that I have to sell it the way I did. It was definitely not trading at my intrinsic value but I have not choice, unfortunately. In Singapore, minority shareholders continue to suffer when stocks are taken private cheaply.
For the uninitiated, the saga began around March with SPH Reit's parentco SPH embroiled in a bidding war sparked between Keppel Corp and Cuscaden Peak. Cuscaden Peak is a vehicle owned by Singapore #1 shrewd businessman Ong Beng Seng who has strong connection with Temasek. The actual shareholding is a bit complicated and I have copied the description from Shentonwire (pic below): https://shentonwire.net/2022/06/02/cuscaden-peaks-chain-offer-for-sph-reit-turns-unconditional/
To cut the story short, Cuscaden won and SPH, Singapore Press Holdings, publisher of The Straits Times, was taken private last month, ending its life as a public blue chip company on the SGX. Some shareholders took umbrage that it was taken out at SGD2.40 while most long term investors would remember this stock should be valued closer to SGD4.00, which was where it traded for donkey years.
SPH Reit was then bidded to be taken private at $0.9372 as part of a chain offer. The latest NAV of the company was $0.92 so at face value, we cannot say it was taken out at a cheap price. But, considering that rent is skyrocketing in sunny Singapore as a result of global inflation and further considering the stock's IPO price was $1 back in 2013 and the current cap rate (4.5-6%) of its five properties are pretty, which means it is not expensive (see pic below), well, I guess we have to admit Ong Beng Seng got the better bargain.
It is very difficult to have win-win transactions in life. Some people live through their lives believing it doesn't exist. Someone has to win and the other party has to lose. While that is not true, it might be so in this case. We, as minority shareholders, did not get our fair exit, with the backdrop of the current worldly state of affairs. Firstly, inflation rate is spiking and we know that properties are one of the best asset classes to own during an inflationary environment. Secondly, we all know that rents in Singapore are going through the roof, so we should see property prices soaring.
Lastly, Paragon, the iconic Orchard property, valued at SGD2.6bn, cap rate of 4.5% seemed to be at a discount. Pre-covid, it was valued closer to SGD2.8bn. Coincidentally, the market cap of SPH Reit is also at the takeover market cap of SGD2.6bn, which means that the rest of the properties come free. Of course that is simplistic because we did not take into the account of the debt. If we do that, then we come back to the NAV of $0.92 which, gut-feel wise, also seemed cheap.
So, are minority shareholders being short-changed?
The short answer, I would say is yes. But as a long term shareholder though, I have also benefited from collecting the c.5% dividend over the last 9 years. So this meant that I have collected 45% of my capital or c.$0.40-$0.44 which meant that I still made a decent profit selling to Ong Beng Seng at $0.9372 considering the dividend gains. It is said that more than half of long term investing gains come from dividends and in this case, that is arguably true.
Unfortunately, for recent buyers, they might be taken out at a cheap price and there is really no good way to fight back. Perhaps Singapore needs to see its share of activist investors who can fight for minority rights and stop corporate raiders from taking listed companies out cheaply.
For interested readers, you can also read about CK Tang
I finally finished this seminal book after reading for almost three years. It was simply too dry and too painful so I used it mostly as a sleep catalyst: i.e. I read it when I cannot sleep. Usually, I don't get pass a couple of pages which was why it took three years.
To be honest the book was marginally helpful. It was written so many years ago that a lot of the case studies are now unrelatable and the whole section on fixed income was simply too technical. I can understand why Benjamin Graham wrote The Intelligent investor. So that his philosophy can be more easily understood by to the layperson. It was definitely a better read.
That said, the book was seminal because it introduced all the original value investing concepts. It described the original thinking about stocks, it popularized valuation methodologies, how we should look at financial records for at least 7-10 years and how we should think about management of companies.
The biggest revelation was that most of the lessons learnt about financial shenanigans that were applicable then were applicable now. Human nature doesn't change and that is always at the crux of investing. In the end, investing is the ultimate battle of wits against a million other chess players. Here's a quote by Seth Klarman that just rings truth all over:
The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning in 1934 with the first edition of Security Analysis. That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful. The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value investing will remain, as it has been for 75 years, a sound and low risk approach to successful long-term investing.
Next up, we look at some of the original valuation methodologies and financial shenanigans!
2022 has become one of the most extraordinary year ever. The stock market reached all-time highs as we tallied 6m deaths (condolences to all the bereaved families) and Russia decided to start a war. A further 10m people were forced out of their homes as refugees, while people in sunny Singapore happily go for overseas tours. Some even decide to visit Ukraine to proselytize! (Dear Singaporeans, please don't do that...) It is a sad year and I am sorry to say, I actually only have more bad news.
There are three key topics in 2022-2023 which we will discuss today and they are all bad:
1. Inflation
2. Bear market and valuations
3. Regime change
We have seen inflation in recent months and we are going to see more inflation like we have never seen before. This is a new experience for most of us and it is not pleasant. Essentially, our money in the bank is losing value but it is not visible. $100,000 doesn't actually become $90,0000 but effectively, it does because prices of things we want to buy are going up. The geo-political landscape is making things worse.
Wars are inflationary because everything that is used in the war does not create value add but takes away useful resources that can propel the economy. The Russian-Ukraine war in particular is causing commodities prices to skyrocket and disrupting global manufacturing supply chain especially in autos and semiconductors. But the repercussions can go far and wide. For example, prices of eggs in Singapore also skyrocketed (for reasons unclear to me now). All this happened while the West was trying tame 7-8% inflation, which has not happened for a long time.
This is a big deal and this is bad. We have never experienced 7-8% inflation for more than 40 years. 2-3% inflation, yes and it is manageable. Our wage growth usually beats that and everyone is happy but when inflation is that high, lower income families may not see income growth covering cost inflation. For middle and upper income households, people are also seeing their luxury comfort slipping away. Some cannot change iPhone every year now because it's literally causing a kidney for a donor (see below).
Air ticket prices are rising, so that means less overseas travel even as we open up. Car and COE prices are also going up. In general, it will be just more expensive to live. Corporates are also not doing great. Wage inflation is all the rage now, banks and prominent startups in the US are forking out $100,000 to get fresh grads (It's also a talent war out there). Manufacturing companies see raw material cost increasing and those who can afford to pass it on do so, further exacerbating inflation, those who cannot take a hit to the margins. That is not good for share prices which brings us to the stock market discussion.
We are probably at the start of the bear market. The S&P500 peaked at 4,766 and has dropped 15% since then. The headwinds are so strong that it is hard to see how the market can still go up. We have valuations still at very high levels but topline growth is slowing. The biggest worry though, is not that. It is the US interest rate. For those who studied this either on this infosite or in school or in finance theory, you might remember that valuations are, by and large, determined by interest rates. In textbook language, this is the risk-free rate, which usually meant the 10 year government bond yield.
The reason why 50x PER was ok for a while was that risk free rate was below 1%. So when that happened, equity risk premium was also compressed and investors were ok with 50x PER which is roughly 2% earnings yield. The alternative was to buy US Treasury bonds at 1%, or some boring companies' bonds at 3%, which wasn't that palatable. The cherry on the cake was, of course, 50x internet companies always put in some spectacular growth story, so investors just piled up to buy.
But now, the story has changed. If the 10 year US Treasury bond yield is going to 2.5%, you can no longer justify 50x PER, cherry or not. Calculating the earnings yield again, say the equity risk premium is also 2.5%, we are talking about 5% earnings yield for the market which translates to 20x PER. So in this new regime, a sexy growth stock could trade at 25-30x but 50x is definitely, a stretch. That is one key reason why Netflix and some of the hot stocks of past 5 years collapsed.
In the stock market, every 10-20 years, we see a regime change. We all heard about the Nifty Fifties and the bear market in the late 60s of the era past. In recent times, the late 1990s were led by the internet stocks. Then they collapsed and new leaders from Asia emerged. This was the boom of China that also drove the commodities supercycle. It collapsed with the GFC and we entered the current regime around 2011-2012. The first half was driven by recovery and false starts - remember Brexit and Grexit and the shadow banks in China? The second half was driven by the FANGs. We are now at the bloody ending in this horror movie (maybe The Shining and it's not going to end well). The FANGs have all declined and Netflix, the N here, fell 80% from its peak. This is a watershed moment.
Some of the other FANGs might do well, some might not, it is hard to say. It is probably prudent to trim some holdings if you have and wait for a better entry. In the broader sense, we are in another era now(改朝换代了), we are now in a bear market and cheap valuations, which has long been forgotten as the true compass for investors will now be ever more important. 2022-23 will be turbulent and we just have to wait and see how far this decline can take us before things get settled down.
So meanwhile, keep calm, keep liquidity, stay vigilant and stay safe!
Two and half years ago, we could never have seen this coming. Over 500m infected and 6m deaths.
May the Force be with us all!
