June 30, 2007

Options Trading - In Singapore?

There are a few people actually asked me about trading options in Singapore.

I find it difficult to answer them because I am not sure what exactly they are asking as they just drop me an email or private message me in a forum. Do they mean that they want to trade options listed in Singapore? Or do they mean that they want to trade in Singapore those options listed overseas?

Therefore, I try to answer their questions by using a Q&A format, and hope that they can find my answers useful.

1) What are the Singapore listed options we can trade in Singapore?

Ans : While Singapore claim to be an international fiancial centre, I still find that its financial market lacks width and dept. In the Singapore Exchange, there isn't any listed options available for trading. The nearest is warrants issued by various banks on selected stocks and index. This is not as good as listed options because you can only buy the warrants but not short the warrant. The other alternative is to trade listed options on futures for Nikkei 225 futures, or the MSCI Taiwan index futures. The liquidity is not great and the margin requirement for Nikkei 225 is quite high as well. Therefore, to me, option listed in Singapore are not very tradable.

However, if you still would like to trade Singapore listed option, you may approach brokerage houses like Phillibs Futures, CIMB-GK Goh Futures or other brokerage houses to open a futures trading account. You are required to put a minimum sum as deposit (for margin purpose) before you can start trading.

2) How can one trade US options out of Singapore?

Ans : You can open a trading account with US brokers like interactive brokers or optionsxpress. These are internet brokers whereby you can trade through them as long as you have internet connection.

3) Is there any different between those option listed in Singapore and those listed in US?

Ans : Option is basically a derivative base on an underlying instrument. Therefore, there is no difference. However, the market in US is wider and deeper, and therefore there are alot of liquidity. Morever, listed options are available in US stocks, and therefore it means a wide selection of trading choices for the traders.

The basics of option is the same regardless where it is listed. An option is an option, period. A call option is a call option, whether you are talking about those listed in Singapore or US.

4) Are they any useful site I can go to if I want to learn more about option?

Ans : There are many options website available. One website that I think will be useful for new comers is www.schaeffersresearch.com. It gives out free education materials.

5) I saw many advertisments on Options trading courses, are they any good?

Ans : This is a difficult question to answer as it will depends on indiviuals. However, do be careful with some of the claims. They may advertise that their students make 100%, or even 1000% return trading options. While it may be true, but it may not be the whole truth. The students may make those return in one out of ten trades, with the other 9 trades being loser.

Honda Minako

I did not know that Honda Minako passed away till I watched this video today.

It is a sad thing as I used to listen to her songs during my polytechic days....

June 29, 2007

How to Spot an Investment Bubble

I came across this article and thought it is a good one.

There were three groups of investors in a room — company executives, graduate-level economists students and econ undergrads. This is an experiment carried out by Researchers Caginalp, Porter and Smith. They showed in a study back in 2000 that stock prices could differ from their fundamental values for long period of time. Much of their study was based on experimental markets — where just about every variable was under their full control. The conclusion was that investor ignorance and ineptitude gives the rest of us some great moneymaking opportunities…

The study, as described in James Montier’s Behavorial Finance, included two-hour “trading sessions” in which each participant was given play money to invest in fictitious stocks. The trading session was divided into 15 separate periods where simulated buying and selling could take place. The players were told that one of the stocks would pay a dividend. They were given a table of what it would likely payout, and they were told that the stock would be worthless at the end of the game:

25% chance of receiving 0 dividend
25% chance of receiving 0.08 dividend
25% chance of receiving 0.28 dividend
25% chance of receiving 0.60 dividend

Expected payout = (0.25x0.0)+(0.25x0.08)+(0.25x0.28)+(0.25x0.60)= $0.24

Given the data, one can determine that the stock would likely pay $0.24 per each share held for each of the 15 periods it was owned in the game. If you multiply them together and the stock is at worth about $3.60 per share, and would be worth $0.24 less as each of the 15 periods gone by. There is no need to concern with present values.

The post-grad economists were the most rational of the 3 group of investors. They got it right. They were willing to pay $3.60 a share and valued the stock $0.24 less each period. The other groups’ behavior, however, if not as ratinal.

The undergrads traded in such a way as to create a price bubble. They were not willing to pay full value for the shares — that is, $3.60 — in the beginning of the game. But then in the middle of the action they bid the stock up 270% more than its fundamental value.

The company execs reportedly were even less rational. They started their bids a little closer to the true fundamental value of $3.60, then bid shares up 530% past it!

We have to bare in mind these were experimental market conditions where you could buy and sell without real world concerns. There were no commissions, liquidity problems, or anything else to worry about. If you wanted to buy the shares, you can buy it at the price you want. There was no trickery here.

The experiment showed that stock market bubbles can occur when you have more neophyte investors involved than rational, educated participants.

Many sets of experiments conducted by Caginalp, Porter and Smith under a host of different conditions have shown that security prices typically start lower than the $3.60 fundamental value during the first period, then rise dramatically higher than the fundamental value during the middle to late periods. Sometime late in the game the asset prices begin to fall hard. They usually fall below their fundamental value.

Follow up studies have shown that market bubbles dissipate over time and the main reason is due to one thing: experience. The groups who ignorantly inflated the price they’d pay for shares learned quicly what not to do in their second and third go-rounds. In fact, in the third round each group played, the bubbles were gone completely.

Apply this to something like the U.S. real estate bubble of recent years. There were a lot of inexperienced people wielding a lot of cheap credit buying up real estate assets at sky-high prices. Many made outrageous claims like “prices would never come down again.”

Many of us knew then, as well as now, that such sentiment was illogical. So, where is the bubble today? Could it be China, whereby newbbies start to bid up the share price way, way above their fundamental value? Can it be Singapore whereby the property prices just shoot through the roof?

As Marc Faber puts it, nowadays, everybody is bullish about something, the equity trader is bullish about equity, the bond salesman is bullish about bonds, the art dealer is bullish about art piece, and the wine dealer is bullish about wine!

When the bubble burst, they will be many people that will get burned, but as for now, the party is still on....

June 28, 2007

Is the equity market over value now?

DBS Vikers published a report yesterday, with a target for STI to be at 3750/4200 for 3 and 12 months respectively.
The question is whether is STI overvalue at this point in time.
If we look at the STI price/earnings ratio (P/E), it is currently at 14.61. If we were to take the reciprocal of this ratio, i.e., take 1 divide by 14.61, we get 6.84%. This is what we call the earning yield of the market. We subtract this from the 1 year S$ deposit rate of about 1.8%, we get 5.04%.
Historically, the spread of 5.04% is considerd to be cheap.
Based on this yardstick, I would say that the STI is not over strech. However, there can be correction along the way, and it also depends on the risk appetite of the investors and what happen to the US market.

Why I never place Foreign Currency Fixed Deposit.

Being in the Foreign exchange business has its own hazard. One of those hazards is that I was often approached by friends who want to know if it is alright for them to buy USD, EUR, AUD or NZD. When they say “buy”, they usually mean through foreign currency deposit (FCD).

I am never a believer in FCD because I always feel that this is a ripped-off by the bank. When you are in the foreign exchange business, you see the absurd amount of money the bank ripped you off by pushing you these products. You can simply replicate the risk and payout by going through the FX market at a “cheaper cost”.

So how you do it? Before I dwell into this, you need to understand what you are “paying”.

When you place a deposit in say USD, you need to buy the USD against the SGD. So say you wanted to do a USD100,000 deposit, you need to buy the USD from the bank. From the screen-capture below, you can see that the bank is selling you the USD at a rate of 1.5445. However, the bank is only willing to buy the USD at 1.5315. The difference is what we call the bid-ask spread. The spread in this instant is 0.0130, or 130 pips as we call it in the FX market. This is very wide, consider the spread in the inter-bank market is only 3 pips, or 0.0003. It may look small, but for every USD100,000, you pay extra S$1,270 more!

In the deposit side, you get an interest rate of 4.745% from the bank, not bad you think, compared to a miserable 0.5% you got from your saving account for SGD.

However, in the interbank market, you should be getting 5.32% from the bank in a 6 month USD deposit (see below). You lost another US$292, or about S$450.

So all in all, you pay S$1,720 extra to the bank!

This is the reason why I never, never place foreign currency FD with the bank, the feeling of being ripped of is too great to be ignored!

June 27, 2007

CFA and its value - A personal view.

Nowadays, being in the investment and finance profession seems to be the hottest property in town. This is because there is so much publicity on the profession and everybody thinks that we guys are making big bucks. There is nothing further from the truth.

Anyway, I do receive some questions on my job and how to get into the line, especially if you are not finance or accounting graduate, and whether does a Chartered Financial Analyst (CFA) qualification helps.

As an investment manager, I take care of the company foreign exchange (FX) and FX option portfolio. On a day-to-day basis, I monitor the FX market, read the news and analyze the economic data released from US, Europe, and Japan. Technical analysis is something I used a lot in deciding whether to do a trade or not. I will also be looking into derivative instruments like options and futures enhancing the yield and risk management purpose.

Screening for stock investment ideas is also something that is part of the daily routine. There are thousands of ways to screen for stock ideas, and there is no correct way because of he difference in strategies. After having some stocks idea list, doing industry research, company financial analysis, valuation, and monitoring the news of the company soon follow. Sometimes the stocks are not covered by any analyst at all, and that makes it more difficult for us to do secondary research. Bloomberg machine is our best friend, and for that matter, is probably any research analyst’s best friend.

On rare occasion we will have company visit and have opportunity to speak to the management, however, since we are not a fund or brokerage house, primary research is not what we will focus on.

Questions I received from others are that if they are currently an engineer or IT specialist, is it easy or possible to switch line and get a job in the investment industry? Does a CFA qualification help at all? Is the CFA examination difficult, and should they self-study or take lesson.

While I cannot speak for others, I can only speak from my own experience.

Many times, I find that people in the engineering or IT line can be better investment professionals than those from the finance sector. The reasons are (1) they are better train in mathematics and analytical skill, and (2) they have industry knowledge in their respective field, and that helps in understanding the companies that they analyze. My ex-colleague used to be an engineer before joining my firm as an investment analyst, and I think he is quite good and fast in picking up financial concepts.

Having a CFA qualification has increasingly become an entry qualification for the investment industry, and in my view, it does help in getting your foot into the door for the job. Furthermore, the knowledge one gain from the program is something that is valuable – it helps one to understand financial statements and various valuation methodologies.

If one is totally new to finance, it will be difficult to self-study, in my view. In fact, CFA institute recommends that candidates without accounting background should take a course in accounting on their own before embarking of the CFA examinations. I myself gone through the program through self-study. It took me 4 years to pass all the 3 level of examination (I retook the level 3 paper).

The passing rate for the exam is about 50%, 55% and 60% for level 1,2, and 3 respectively as I remembers it. Why such a high failure rate in level 1? I think this is because many candidates registered for the examination with a “tic-kam tic-kam” attitude. They reason that if they can pass level 1 exam with a little bit of luck, than they will go on to do level 2 and 3, if not, they will just drop out and forget it. After passing level 1, the remaining candidates are people that are more serious. And if one goes to level 3, he will be very serious about it. Surely, he will not want to drop out in the last level. This explains why the failure rate is lower in level 3 than level one.

At the end of the day, attitude holds the key. There are many investment managers out there without a CFA quailification, yet they are very successful.

June 25, 2007

Term or Whole Life Insurance?

Recently I saw from a forum whereby a reader was asking whether if he should be buying a term insurance or a whole life insurance, and he also ask what is the difference between the two.

To answer his question, I think we should start off by seeing what the similarity is.

Both type of insurance give the insured a form of protection. Should the insured die, the insurance company will pay the beneficiary a sum of money, which is the insured amount. The differences between the two are as follow:

· There is a saving element in whole life policy, and this makes the premium for whole life insurance more expensive. In whole life insurance, part of the premium went to pay for the “insurance protection” element, and part of the premium went into savings. While in term insurance, none goes to saving.
· The term policy will lapse if you do not pay the premium. As for the whole life insurance, because of the saving element, it can be used to off-set the premium and therefore your insurance policy will not lapse immediately.
· Term insurance is valid for a certain term, ranging anyway from 1 to 30 years or more, depending on the insurance company. Whole life, as it name suggest, is valid for life.
· While the premium for whole life insurance tends to be the same as time passes, term insurance premium increases over time, though it normally remains the same for a five year term. This is because the premium for term insurance has to increase to compensate for the risk to the insurance company.

Should one buy term or life? Well, you may have heard of the saying, “buy term and invest the difference”. Before I give my own take on this, I would like to highlight some points concerning term insurance.

Firstly, for term insurance, there is a maximum time period, it can be a 2 year term, or it can be until certain age like 60 years old. Why is this point crucial? In my view, this is crucial because if the term happens to be shorter tan what you wanted and the policy do not allow you to extend it, you may find yourself unprotected just when you need it most! For example, assuming you buy a 20 year term policy when you are at the age of 25. Therefore when you reach 45 years old, your term policy expire and thus you have no more coverage. What if you die immediately after the expiration of the policy? At age 45, you are probably at a time whereby your financial commitment is at your highest.

Secondly, human being as we are, we may not have the discipline to really “invest the rest”. Say you compare a term policy and a whole life policy. The premium for term policy is $50, and the premium for whole life is $350. So you buy the term policy and pay $50 per month, and you invest the balance of the $300. Now, say after a few years, you saw a very beautiful car and you thought of buying it. You realized that you do not have enough to buy it, so you start to think of ways to get the money. And one of the way is to liquidate your investment and to buy the car! If you buy whole life, because of the penalty in surrendering your policy, you may give the idea of buying a miss.

Thirdly, a term is a form of "temporary" insurance whereby one can buy it to provide insurance coverage at a cheap premum. There are a few reasons for doing this, one main reason is that someone who just started ot in the workforce may not have much cash to spend, and therefore look to buy term insurance as a temporary cover. As time passes by, when the person's salary increases, he can than covert it into a whole life policy.

Therefore, my own opinion is that unless you can have the discipline to stay focus on your investment, it may be better to have a mix of both term and whole life policy.

Singpore’s growth may not be as good as it seems

The Singapore economy seems to be doing well lately with the stock market roaring upwards everyday. The Singapore Strait Times Index (STI) has risen from 1976 points in October 2000 to about 3546 points as of 7th June 2007, an increase of 79% over slightly less than seven years.

A more detailed look at the data, however, reveals a different story. The Singapore dollar (SGD) had been weakening against hard currency (which in this case- gold) for the same period. The gold price measured in SGD was around 465.60 in Oct 2000, and had weakened to around 1028 recently, a drop of 220%. Meanwhile, the STI measured in gold term falls from 4.24 STI units per unit of SGD gold to 3.45 STI units for the same period. This represents a fall of about 19.7% for the STI measured in hard currency!

This implies that the purchasing power of SGD falls for the past seven years.

A falling purchasing power of the currency is bad for the ordinary citizens and the have not. This is because during such time, smart operators and large industrial groups accumulated large fortunes at the expense of small savers and the working class. The smart operators can hedge the falling currency through diversifying into asset class and hard currencies, but the ordinary working class either has no such knowledge, or has no such means.

To add to their misery, the Gini Coefficient (a measurement of of inequality of a distribution of income) widens from 0.425 in 1998 to 0.472 in 2006. An indication of the rich getting richer at the expense of the poor.

Furthermore, the Gross Domestic Product (GDP) forecast for Singapore by Monetary Authority of Singapore (MAS) this year is between 4.5 to 6.5%, below that of Hong Kong’s 6.8%. Hong Kong has a cheaper government and without Goods and Services Tax.

The hard question we need to ask ourselves is whether has the life of the ordinary working class improved for last seven years. From the above, I think the answer is a resounding “NO”.

June 24, 2007

Why I start this blog

As an investment professional, I have been approached by many people to give them advise on investment - what to invest, how to invest, what are the hottest investment tips, and what is a good time to invest.

Quite often, I am very reluctant to give them investment tips. This is because the strategy I used will be different from theirs, and therefore what make sens to me does not necessary make sense to them. Furthermore, our risk tolerance are different and therefore it will not be in their interest to invest in the same stock that I invest in. Furthermore, when I invest for my company, I took a portfolio approach rather than a piecemail approach.

Nevertheless, some questions pertaining to financial products are very interesting, and I think I can help them to clarify their doubts and also help them to understand how certian products work.

Many time, the general public just buy the products recommended by their "friendly bankers" without understanding whether the products is suitable for them, and without knowing if they are being ripped off. Sometime, the "friendly banker" have no idea how does the products work.

A case in point was a few years back, my ex-colleague asked me how to investment her money. Her objective was to beat the fixed deposit (FD) rate, and her priority was to have her capital protected and any cost. I therefore suggested that she go and buy Singapore Government Bonds. Since she is not familiar with online financial portal, I suggested that she go to the invest shop of UOB and ask the "friendly financial advisor" to help her. You can imagine how surprise I am when she return and told me that the financial advisor of UOB she saw had no idea what Singapore Government Bond was, and therefore cannot help her.

This makes me realised that there are many people out there that wanted to know more about financial products, and wanted to learn more about investment, but are afraid to take the first step, or are too shy to ask others (maybe they do not want to appear stupid in front of others). I really think that there is no such thing as stupid questions when come to matters that concrn your money. I myself are still learning about investment and financial products, and I am sure that there are many people out there that have a better understanding than me on many things.

However, I start this blog with the intention of helping people so that hopefully, they can understand what financial products they are buying. if they have something that they wanted to ask, they can email me if they think that they do not want to trouble their own financial advisor, or are afraid that their own financial advisor may have conflict of interest. there is no guarantee that I can have answer to each and every questions, but I will try. I also have friends that are managers and district managers in the insurance industry whereby I can ask for their views.

In my subsequent posting, I will start to write about various topics that I think will be of interest to readers. I saw from forum many questions being asked. That will be a good start.