Stock Talk with a Friend - 30 May, 2006

After an outing tonight with friends, I have learnt the value of combining FA and TA. Previously, I had friends who mentioned this before but tonight it was more clearly elucidated to me in detail. Basically, FA is for choosing the right companies; while TA is for choosing the right time to enter the companies. Markets are irrational and operate based on the semi-strong concept of the EMH (Efficient Market Hypothesis), meaning the share price should reflect all PUBLICLY available information.

The problem is investors are all humans and are thus prone to mood swings. There will be wild periods of exuberance and long periods of fear and moodiness. All these emotions affect the stock market. My friend once commented that the stock market is a "barometer for human emotions". In a way, investing is like a game (not gambling !) of investing and psychology. Psychology lets you see the market trends and tells you when to do something, while rational research and analysis of the company's fundamentals tells you WHAT to do and WHICH companies to pick.

A cut-loss strategy was adopted by my friend who took all losses stoically. I, on the other hand, practice the hold-wait-and-see attitude. Though I do have the holding power, I may have inadvertently given up opportunities to invest my money elsewhere where the returns may be higher. This is basically the concept of opportunity cost and I have yet to learn to mitigate this risk fully.

Perhaps with time and patience, I will be able to successfully combine TA and FA to form a winning combination. In the meantime, I will hold on to my below-water stocks and wait for the market to go bullish again.

Market Update - 30 May, 2006

A short update today. The STI closed at 2,441.54, up 1.63 points on close. It managed to reach an intra-day high of 2,453.02 but retreated sharply near closing time because of concerns that Wall Street would weaken. Notable plays were Yellow Pages, which slid 13.1% to S$1.19 after reporting a less than spectacular profit of S$14.5 million, lower than the expected S$16.1 million. Celestial was also played up 14 cents to close at $1.29 after reaching an intra-day high of $1.32 as investors went bargain-hunting. Hongguo leapt up 8.5 cents to 57 cents after JP Morgan issued a BUY call with a price target of $0.85 (the report can be obtained from my stock links on the right-hand panel). Sentiment is expected to remain weak for the rest of the week as there are no major catalysts to push the STI higher.

Novice Investor Knowledge Section
Lesson 1 - What are shares and how to trade them

I have decided to dedicate a small space to educating novice investors about the stock market. There will be a small write-up every posting to explain various aspects of the market as well as the terms and jargon used. Note: These are from my personal knowledge and are NOT taken from any website.

Buying shares in a company means owning part of a company. A share entitles you to vote at an Annual General Meeting and also means you are entitled to dividends paid by a company on profits made for the financial year. Shares are issued by both private and public companies but only public companies' shares are listed on an exchange (e.g. SGX). An investor has to open an account with CDP (Central Depository Pte Ltd) in order to be able to hold shares.

In order to trade shares, you will need to open a brokerage account with any broker in Singapore. Some examples are Phillips Securities, Kim Eng, CIMB GK Goh and UOB Kay Hian. Once the account is approved, there are 2 ways of trading: either through a broker (a person) or through the Internet using a web-based software (e.g. Phillips' POEMS). Next lesson: More on how the stock market works, the trading hours and how to queue buy/sell orders.

Market Report - May 29, 2006

Somehow, the theme for the stock market these days seems to be: play it up and pick up strength in the morning to give a false sense of security, then start to dwindle and crash in the afternoon. This is what's happening for the past few trading days....the afternoons always seem to be worse off than the mornings. The STI seemed to be doing better in the morning, rising about 6 points to hit 2,447 but by closing time, it had shed all its gains to close at 2,439.91, down 5.11 points. Main contributors to the fall were Capitaland and Keppel Land, both of which fell a stunning 32 cents (7.2%) and 34 cents (7.4%) respectively after failing to clinch the IR deal.

The broader market was even worse, there were 358 falls to only 209 rises. Most of the losers were, as predicted, China plays once again. Celestial shed another 8 cents to $1.15, a mere shadow of its former $1.95 self. China pharma plays got battered down too:-

• Asiapharm lost 1 cent (1.3%) to close at 75 cents
• C&O Pharma lost 2 cents (6%) to close at 31.5 cents
• Landwind Medical lost 4 cents (9.5%) to close at 38 cents
• Reyoung Pharma lost 3 cents (10%) to close at 27 cents
• Star Pharma lost 4.5 cents (9,6%) to close at 42.5 cents

This seemingly endless battering down of China plays, and in particular today China Pharma plays, seems to be totally confounding and without basis. The China pharmaceutical industry is booming with many more aged folk requiring medicines and drugs. A lot of monies and effort are being pumped into this industry to ensure that it becomes world-class one day. Asiapharm, one of the leading pharmaceutical companies listed on SGX, plans to go international with their certification in 3 years time (UOB Kay Hian Report). Yet, in a cruel world, they have been dealt a cruel blow and have seen their share prices getting slashed time and again.

My friends, this is a good time to BUY if you think the fundamentals are good. But be prepared to hold it for a long time because no one knows when confidence can be restored. There's still the World Cup Fever to contend with, so don't burn yourself up trying to stay above water.

BioSensors - True Value Emerging ? Be Wary.....

Fans and investors of BioSensors and its range of life-saving stents would do well to heed the company's financials. Their loss of US$22 million is larger than expected and there will be a delay in their BioMatrix CE Mark. Thus, revenues may not flow in as well as expected and the company may not be able to make FY 2007 a profitable year. The stock was further sold down today, shedding a further 9.5 cents to close at 72 cents. More downside is likely given the negative newsflow and downgrades coming through.

Personally, I will not take UOB Kay Hian's TP of $1.29 seriously. I recommend an AVOID until the counter stabilizes or when more positive newsflow comes in.

Predictions for the STI and SGX stocks this week

With the Dow Jones up about 67.6 points last Friday and the NASDAQ up 12 points, it would seem that sentiment would at least be mildly positive. After all, the STI being beaten down nearly 10% in 2 weeks is a pretty serious business, and even though analysts may scream "healthy correction !", it has not managed to calm investors' jitters and fears about an impending meltdown.

My prediction is for the STI to trade sideways this week. The last close was at 2,445.02 points last Friday, up 40.57 points. It will probably trade in the range of 2,420 to 2,480 for this week, unless some positive news about the economy of employment comes out to break the resistance. Oil prices have dipped marginally but are still above the psychologically high US$70 level (brent crude oil price was US$70.56, down a mere US$0.15), so I predict this will act as a "buffer" to weaken sentiment and prevent the STI from breaking new ground.

News of the IR announcement that Sands had won the bid, instead of hot favourites Keppel Land and Capitaland, may also bring about adverse reactions to their share prices. The news that Sands had won the bid had caused Sands' share price to soar US$5.96 (9.4%) to US$69.63 on the NYSE. My take is that Keppel Land and Capitaland might suffer at least a 5% drop in their share price due to the strong run-up prior to the announcement of the IR winning bid. This would imply a drop of about 22 cents for Capitaland and a drop of about 23 cents for Keppel Land. Other property counters might be boosted however, by the news of the IR bid win, as this means that property prices would most likely trend upwards from now till construction begins.

Play should still be heavy on China stocks, which has seen recent strong profit-taking. Many good China stocks were sold down in the last 2 weeks to reasonable valuations. While it is true that China companies generally trade at a discount, some companies with compelling growth prospects and a good business model should be allowed to stand out, and their share prices would slowly trend upwards to reflect increased consumer confidence.

Update on Mediaring's Hostile Takeover of Pacific Internet

The directors of Pacific Internet have unanimously rejected a hostile takeover from Mediaring. Mediaring had initially offered US$8.25 per share to acquire Pacific Internet but the directors felt that the offer was "financially inadequate". Currently, Mediaring has a 4.9% stake in Pacific Internet and Vantage Corp. has also reiterated that it would not accept Mediaring's offer as it values Pacific Internet's shares at US$15 per share.

This leaves Mediaring high and dry as the recent share price run-up was due to the release of the news of their impending takeover of Pacific Internet. Now that the deal has most probably fallen through, we have to wait and see what Mediaring's next move would be in order to determine the future of the company's strategic direction. Possibilities include a higher offer than US$8.25/share or an abandonment of the takeover offer. I will be watching the action closely and providing my opinions on the outcomes.

Abu Dhabi's Aabar buys Singapore's Pearl Energy

It is now official: Pearl Energy has been fully acquired by Aabar Petroleum Investments Co., and will become a fully-owned subsidiary when it gets delisted on the Singapore Exchange. This ends the spectacular run for this counter since it was listed on SGX on 20 April, 2005 at 70 cents per share. The company has seen much volatility in its share price but not before it rocketed to a high of $1.00+ on discovery of oil in several wells. The final straw came when Aabar offered to buy over its shares, and propelled the share price to a high of S$2.05 before settling at S$1.95 (the shares are now suspended). I would have thought that Pearl Energy's price could have gone even higher had they remained listed on the SGX, but I guess we will never be able to see that happen now. :-)

Poverty and the dysfuntional family

Today is the ST, there was a feature on poverty showcasing families of low income as well as children from such families. The writer wrote about the widespread cases of correlation between poverty and family dysfunctionality. The paper goes on to give some real-life examples of poor families and how they cope with everyday life. Among those featured were a family of 5 malay kids supported by their grandmother, an Indian family of four supported by their mother, a Chinese family whose sole breadwinner had renal problems and a 17-year old who had to work hard to make ends meet.

What I found interesting was that 40% of those who came from poor backgrounds were from "broken" families. The breadwinner (most cases the father) had either left the family (because of divorce or death), was in jail or was in drug rehabilitation. The remaining 60%, interestingly, were from families which were whole but whose parents either could not make sound financial decisions, or did not do enough financial planning. It is worth noting that the majority of the poor are people who did not budget for their expenses or make financial plans on a medium to long-term basis. These throw up two implications:-

1. That people who do not know or bother to plan financially will end up in the lower echelons of society in terms of income level and social recognition
2. Financial planning is something which families with children don't seem to know enough of, which results in dysfunctionality and the classic situation of the "problem family"

For point 1, I do concur that financial planning is very important. These days, there are numerous banks and insurance companies touting financial products which are supposed to help us build our "nest egg" and secure our future. Financial planners (formerly insurance agents) have sprouted faster than mushrooms in order to assist families and individuals with the complexities of investing and saving their hard-earned money in high-yielding securities or insurance policies. The amount of financial choice we have in Singapore is staggering due to our level of economic development. Yet, somehow, apathy or lack of education is a stumbling block for many families who are trapped in the poverty cycle. In Singapore, the stark truth is that people tend to despise others who are not as financially capable as them or earning as much. We are a highly stratified society who are highly involved in the proverbial "ratrace" for financial success and monetary gains. Social recognition and "loss of face" are very closely tied to money. It is a sad but true case of a modern society which is moving towards materialism rather than compassion, but more on that in my future postings.

To date, I have heard of friends who have spent an inordinate amount of their take-home pay on lavish items such as branded goods. Others blow a huge chunk of their salary on instalment payments for a new car or a plasma TV home entertainment system. Can we say that these people (most of whom have just started working) don't know how to spend and save their money ? Maybe.....or perhaps it is a case of live today first, worry about tomorrow later.

This kind of thinking helps to reinforce the fact that Singaporeans do not know how to plan their finances, which brings me to point 2. These are people who knowingly spend their money on luxury items or things they cannot afford. Maybe it is a case of upbringing because children who see their fathers or mothers spending lavishly will also tend to do so as a form of emulation, without knowing of the negative ramifications. As the article also points out, parents who constantly borrow money from friends and relatives help to perpetuate the mentality that doing so is acceptable. We, as a nation, should have collective national education to help educate people about basic financial planning. As I understand, there is already a program started by the MAS in 2003 called the MoneySense program, which helps to provide Singaporeans with basic financial literacy. The link is here >> MAS MoneySense.

Going back to the question of dysfuntionality, my wife agrees with me that not only poor families suffer from this, but it is the nature of the problems which differ depending on the income and education levels of the families involved. The ST article does highlight many relevant points as to why low-income families have a higher tendency to become dysfunctional. What we should ask ourselves is: how do we manage people's expectations and how do we manage society's perception of such people ? In our increasingly materialistic society, money has become one of the most important factors to segregate people This creates social barriers and people lose the ability to communicate with others from different "levels". There are cases of unreasonable expectations of the husband from the wife and this can be a possible cause for family friction. Some families may also feel ashamed of their status which may exacerbate the problem as they are afraid to "lose face" if they ask for governemtn assistance. There are a myriad of factors which contribute to this worrying social trend which I will not state in full.

All I can say to conclude this post is: Be mindful of people's expectations, and try to be financially literate. This will prevent you from suffering should a sudden loss of income occur (e.g. loss of job or breadwinner) and will also help to mitigate the risk that conflicts willerupt because of misunderstandings. To reduce dysfunctionality, we have to educate, manage expectations and provide community support.

Thoughts and Opinions from this issue of The Edge Singapore

IPO Fatigue ? Maybe.....but hang in there

An article by Ms. Audrina Gan mentions that recent IPOs have not been performing as well as their counterparts which have listed a few months ago (from Jan to Apr 2006). Thai Beer's IPO was priced at the lower range of 26-36 cents, finally settling for 28 cents. Also, Pacific King Shipping has scrapped its IPO plans and ING Investment Management has called off its closed-end equity fund. Yesterday's debutante Pacific Shipping Trust sponsored by Pacific International Lines only managed to close at US$0.425, which was US$0.025 below its IPO price of US$0.45. This is already lower than its previously stated IPO price range of 50 to 52 cents.

So what exactly is happening ? Remember that sentiments were very high at the start of the year due to booming economies and strong growth in all sectors. This translated to consumer confidence which meant that people were generally upbeat and optimistic about the economy. In the stock market, this translated into bullishness and people were rapidly ploughing their money into funds, equities and bonds. You can call it herd mentality of sorts as most of the IPOs then opened nearly 80 to 100% above their offer price, creating a euphoria that when viewed on hindsight, seems to be largely misplaced and overly speculative.

Many investors were thrilled by their swift gains and proceeded to pump even more money into shares, creating a small "bubble" of sorts. IPOs also went this way as many were heavily over-subscribed and opened at extremely high P/E valuations. The conclusion is that most of the heady euphoria was contagious, and this helped to boost sentiments to a point which could not be sustaind indefinitely.

Now that the IPO market is settling back to normalcy, I believe the time has come for investors to take a good hard look at each company's prospectus before taking the plunge. I admit I was one of those who tried to grab some quick gains through IPOs too, but I did not manage to get any and thus avoided getting "burnt" by the fallout.

Buying Opportunity for Quality Stocks ?

The Edge also asks the question which is on everyone's lips: is it a good time to pick up some bargains now that the market has corrected so sharply ? Maybe, and maybe not. My perspective of things is that sentiment itself has to be restored first before any upward momentum can be generated. In physics, momentum is defined as the mass of an object multiplied by its velocity (mv). In the stock market, the "mass" is the bundle of stocks which make up the STI, and the velocity represents the rate at which they move up or down. If a large mass of high value stocks like the STI moves downwards at a high velocity, it would invariably drag down the rest of the market due to their sheer "mass" ! I had witnessed this while watching the trading screen. As the STI fell, the bidding for the buy/sell queues also fell. The effect seems to be widespread over all stocks.

Thus, momentum represents the overall sentiment of the market and if this is not restored, then through simple physics, there will be inertia present to drag down the market for a few more days running. Of course, one could argue that markets do not react according to the laws of physics, but this is just an analogy. There will be downside because of fear and uncertainty, but there will also be days of upside as the market corrects due to some short-term good news.

For the overall market and STI to recover and show a sustained rebound, there has to be a CONFLUENCE of factors to increase investor confidence. These could be (but are not limited to):-

• A rate-hike stoppage by the Federal Reserve headed by Mr. Ben Bernanke
• Inflation being kept firmly in control in the USA
• Investor confidence being restored - shown in increase in property prices and bullishness in technology stocks
• Good corporate earnings results from local companies
• Good showings by regional bourses such as Bursa, JSE, Nikkei, HSI and Sensex, just to name a few (markets seem to have a spillover effect somehow)
• Strong GDP growth and increased CPI indicating consumer confidence
• No unusual events such as GST, bus and MRT fare increases
• No major natural or man-made disasters (e.g. terrorism)

Playing China Stocks = Playing with fire ?

Another article in The Edge also mentions China stocks and how some of the selected picks have fallen as much as 52% (Shanghai Turbo) from their 52-week highs. Most of the China stocks which have experienced huge losses seem to be, ironically, the recent IPO debutantes.

My take on this is that these "newbies" have not had much track record to speak of, and investors may still be unsure of their earnings capabilities. The initial euphoria (see my post above on IPOs) has pushed many of these IPO stocks (like Luzhou, Jiutian and Fabchem) more than 80 to 100% of their offer prices. When the correction came, natually these were the stocks to be hammered down first.

My advice: if you own a stock which is seemingly overvalued (trading at a very high P/E), take profits first before the market decides to correct. If you don't have such stocks, stay away from them till the valuations are more reasonable. Also, there are still good China stocks out there, but the problem is that most analysts agree that because of the competitive and uncertain environment the companies are in (the China market is fraught with peril, supposedly), they are supposed to trade at a discount. These put many of the quality gems in the range of 8 to 10 times P/E. So dear investors, wait for more good news or contract wins to reinforce buying support before taking the plunge. Even then, make sure the company has good corporate governance and a good management team.

Yield Plays - Are they really that "defensive" ??

The issue of yield plays has also cropped up in The Edge, and is a long overdue issue with me. The mag's argument is that high yielding stocks such as SMRT, ComfortDelgro and SPH have all fallen less than 10% during the bear period and are all supported by good businesses and at least 6% dividend payouts. Also mentioned are the REITS as well as other yield stocks such as MIIF.

My question is this: would you really buy into a stock for its yield, or for its capital gain ? Most investors would perk up and answer very smartly: I want BOTH ! I have to acknowledge that most people want to have the cake and eat it as well, but generally capital gains are viewed as being more certain and more robust than dividend gains. My mentality is that dividends are ancillary to the capital gains (that is, if you get them, good for you; but if not, no matter because you have capital gains to cushion you).

Think of it this way, capital gains are also not subject to tax (some dividends still are), and they arrive much faster than dividends (T+3 days as compared to nearly 2 months for some dividends to be declared and paid). My personal observation of dividend stocks are that they provide very slow growth (if any) and you might be better off putting your money in a company which shows good earnings potential (like new rig bulders Labroy Marine for example). Another observation is that high yielding stocks have NOT done too well. MIIF is trading at 88.5 cents, down from its offer price of $1.00. SP Ausnet has yet to trade above water, Omega Navigation is also down from its offer price and Pacific Shipping Trust (which boasts of 9% dividend yield), is trading at US$0.025 below offer price.

These are just my personal opinions, feel free to reject or challenge them, but I personally have sold down my yield plays (leaving only 2 lots in a popular local REIT) and have started down the slippery road of taking more risk and hoping for higher returns.

Market News and Updates

An Artist Impression of what the IR may look like

So at last the long-awaited rebound has occurred. From the starting bell all the way to the close of trading, the STI managed to stay above water, closing at 2,445.02, up 40.57 points. Stocks were mostly up but somehow, sentiment was still dented and trading interest remained cautious. Most of the plays focused on Keppel Land and Capitaland because of the impending IR bid announcement later in the afternoon. The former gained 32 cents (7.4%) to close at S$4.62 while Capitaland gained 10 cents (2.3%) to close at S$4.42. Incredibly, BOTH did NOT get the IR contract. Instead, Sands won the contract because their bid was considered the best for Singapore's development as a MICE (Meetings, Incentive Travel, Conferences and Exhibitions) hub. Imagine the ire of the people who thought either Keppel or Capitaland would win the IR bid ! Genting and Star Cruises never had much chance in the first place and so they wisely announced that they would concentrate their efforts on the Sentosa IR bid. Duh, is anyone surprised ?

Wow....nice relaxing spot for a tryst for two !

Banyan Tree also released their IPO to the public, hoping to raise S$407 million through the issuance of shares priced between 87 cents and $1.07. Banyan tree offers premium spas, resorts and hotels and their two most famous brands are Angsana resorts and Banyan Tree resorts. What a nice relaxing time one can have at such resorts, assuming one has the income level to support the "premium" pricing. The IPO will list on July 14 and this will be one of the more "relaxed" IPOs to hit the market. As long as you think trading in this counter is too frenetic, just visit their spas to chill out. As a shareholder I assume you will get discounts and special privileges for their spas and resorts ! Hey, after all, Prime REIT gave out Wisma cards to its shareholders offering them discounts and incentives. Hmm...wonder why SUNTEC REIT can't do that huh ? *Hint Hint*

BioSensors Analysis of Results and Market Reaction

Apparently, someone got wind of BioSensor's huge losses early yesterday and starting to sell down the counter. It dropped a whopping 21.5 cents from $1.03 to close at 81.5 cents, after touching a low of 71.5 cents. BioSensors is a company which makes drug-eluting stents and so a lot of money is pumped into research and development. From their Profit and Loss statement for FY 2006, their licensing revenues had dropped a massive 81% from US$50 million to a mere US$9.3 million. This drop in revenues was further compounded by the almost doubling of R&D costs to US$19 million from US$9.6 million. Their net loss of US$22 million was wider than analysts' most pessimistic expectations (they had expected it to be around US$11 million).

What we can learn from this is to always be wary of companies which spend large amounts on R&D and which have limited abilities to generate revenues. It's not that I don't believe in these companies and their prospects, but sometimes investors need to take a long hard look at a company and what is has been achieving all this time. It was inconceivable that a company which was making such a huge loss could actually trade at $1.03. The market realized this and adjusted its price accordingly to $0.815, and the downside risk is still there because of its under-performance. This also mirrors the example of Samudera Shipping, which saw its share price plunge about 10 cents due to a profit warning.

Moral of the story: You have to be wary and be knowledgeable about the companies you invest in. I am a believer of value investing and FA and I feel that a company with good growth and earnings visibility would not be sold down in the long term.

Stock Market Meltdown ? Think again..........

Those who have followed the STI for the last 2 weeks would have experienced a feeling of impending doom, to say the least. To recap, the index has lost 85 points last Monday, 66 points this Monday and 32 points today. Recovery and rebound was a very weak 7 points yesterday, taking the total fall in the STI to about 260 points or 10% since 2 weeks ago (if someone can provide exact numbers I would be very grateful !). This extreme bearishness has not been seen by myself since I started dabbling in the market in Dec 2004.

As one can see from the Shareinvestor chart, the day started off pretty OK but the index started diving from then on. From the 2,433 level it fell to a low of 2,376 before rebounding to close at 2,404. This easy breaching of the psychological support level shows that the key support at 2,400 is fragile and will probably not hold in the short-term. The market now points towards a downtrend and many people on share forums have termed this entire phenomenon as a "meltdown" in the stock markets.

It was even reported that people had lost their entire profits from the four months to April 2006 in just 2 weeks ! Although my portfolio is also in the red, I would like to espouse Warren Buffett's teachings about value investing and hold on to my stocks. Fundamentally, there is nothing wrong. Technically, however, sentiment is turning from bad to worse and the steep falls in Nikkei and Hang Seng Index have not helped the situation. This, coupled with a weak FTSE market and fears of US inflation (and not to mention Ben Bernanke's off-the-cuff remarks which have spooked the market) have created a climate of fear, uncertainty and apprehension.

The BEAR emerges from hiding ! Lo and Behold !

There are only 2 dominating emotions when playing the stock market: Fear and Greed. Greed rules in a bull market, while fear rules in a bear market. Today, I can safely say that the bear has emerged from hiding and totally MAULED the bull....ouch ! Biosensors is an example of a fallen star...it lost 20% in one day alone to close at 81.5 cents, after news of huge losses was picked up by the market after lunch.

My personal take on the situation is as such: this is just a CORRECTION and not a MELTDOWN. Don't be alarme by doomsday soothsayers saying this is the start of a stock market crash. Remember that short sellers and contra players are out in force to push the market down. This factor, coupled with weak sentiments, creates a sellers market.

Let's hold on to good stocks and ride through the storm ! Some prudent advice:-

• Don't hold on to stock whose fundamentals have changed
• Don't lock up your essential cash in stocks, use only spare cash
• Do NOT panic sell, use a rational mind to think through the events.
• Do NOT attempt to SHORT the market unless you have a high risk tolerance level, the bottom may not have arrived yet for stocks like China Fish, Biosensors and Celestial.
• If you want to play contra, I would also advise against it as the risks are very high

Good luck to all tomorrow !