We’re heading into the second half of the year and here in Singapore, we’re finally going to see the Circuit Breaker (CB) measures being gradually relaxed. Fingers crossed that there won’t be another wave of infections so that we have to go back into CB.

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Don’t Expect A Quick Recovery. Our Survey Of Economists Says It Will Likely Take Years. (FiveThirtyEight)

Maybe we should be happy that a bunch of economists are predicting this since we all know that joke and weathermen, economists, and predictions.

This is the thing the bears hate most (The Reformed Broker)

I’m hardly the most optimistic person but Josh Brown has a point. If the market is all about the expectations game, then the bar for expectations right now are being lowered, making it much easier to beat expectations in the coming quarters.

Thinking About Investing and the Economy Post-Pandemic (Joshua Kennon)

I’ve followed Joshua Kennon’s blog for many years now and he is clearly a very smart person. These are his thoughts on the post-pandemic economy and the types of assets to own in this environment.

Forbes article on Kylie Jenner doing a Trump (Forbes)

It’s a super good read into the whole business of fashion and being an influencer. In the social media space, it’s a chicken-and-egg kind of thing if you want to get rich quick- one doesn’t get rich without being famous and one doesn’t get famous without being rich.

Hence, the only game in town is to pretend to be rich or richer than you are, ride on the publicity and make some dough.

By the way, this doesn’t just apply to celebrities. Lots of people in Singapore also doing this in the “I’ll teach you to get rich by XX” training course space.

Matt Levine’s comments on Luckin’ Coffee (link is to a WSJ article on Luckin’)

Matt Levine’s Bloomberg newsletter, Money Stuff, is awesome. I really like his commentary on Luckin’ Coffee which details the basic model that startups sell to investors as well as how Luckin’ perpetuated the fraud that it was growing so fast.

Apparently, it was selling coffee to itself.

If you have a Wall Street Journal subscription, you can check out the link to see how it was done.

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For those who’ve been following me for a while, you’ll know that I really think that most Financial Advisors in Singapore have never really moved on from being anything more than insurance salespeople.

This latest post over at Investment Moats show what’s wrong with the Financial Planning industry. While the data collected by Kyith is by no means comprehensive and only shows what has happened many years ago, I highly doubt that the Financial Planners in Singapore today operate very differently from the late 90s/early 00s and I’ll explain why.

Don’t get me wrong

Before I go and point out the issues I see, I want to state upfront that this is by no means targeting the people who have chosen this profession or in any way about any particular financial planner. I personally know a few and they range from very experienced ones to rookies in the field and by and large, they are not bad people.

I also think that insurance is a necessary expense to protect against low probability but high impact events. The problem with the Financial Planning industry is how the industry evolved from dealing primarily with insurance to one that moved into advising their clients on all areas of their finances.

Proof is in the pudding

Source: Investment Moats

If you look at the examples compiled by Investment Moats, you’ll see that most of the plans (which look like endowment plans) are basically plans where people pay a regular premium in return for an amount that gets returned at the of the life of the policy.

In short, it’s a forced savings account that only matures some years down the road.

A cursory look at the returns per year (XIRR) shows that investing in any one of those plans returns any where from 2-4+ % which is my opinion is pretty weak if you think about the fact that interest rates have been much higher in the past.

The worst part of all this is not that the plans delivered as they promised. In fact, if you go back to the 2000s, I’m pretty sure the plans were being marketed with non-guaranteed returns that were much higher, probably in the 5 – 6.5% p.a. range.

A test for all financial planners

I’ve spoken about how the agency problem is a big one for financial planners in Singapore. Furthermore, the barriers to entry into the industry is low and once they are in, the focus on most training is in terms of sales and not actual financial literacy.

If you look at the returns of the above savings plans, you should probably realise that savers could do better by putting their money in the CPF SA*. Using the same parameters given in the example in Kyith’s article, I came up with a figure of $34,569.07 if the yearly premium of $1,228.80 paid over 20 years was compounded at 5% per year.

Compare that with the $28,317.13 received by the policy holder in Kyith’s story.

Therefore, my test is this:

If presented with a plan by your financial planner, ask them how many of their plans have actually paid the non-guaranteed rate or more and to show you the data.

Given the low-interest rate environments, if any of the plans presented show you non-guaranteed returns close to 5% p.a., you should run and hide.

And if they show you returns of less than that, then why bother since CPF presently gives you that returns but without the additional corporate risk and fees?**

If you have a financial planner that is willing to say, “hey, you can get protection from me, but when it comes to savings, my products aren’t exactly going to be the best bang for your buck.”, then do let me know.

Notes:
*Less chance of default, almost equally long period where money gets socked away.

**I’m sure some of them will point out that the lower returns are due to the plans having some form of insurance as well. But if so, then why not just sell the insurance separately without the savings plan.

This post will come at a time where it’s of no further use to anyone because the deadline for selling the Rights Issue has come and gone but investors have until next Thursday, 28 May to decide whether they want to exercise the Rights and Mandatory Convertible Bonds (MCB).

In brief, the whole point of Singapore Airlines (SIA) Ltd. issuing a 3-for-2 Rights Issue, which gives existing shareholders the right to buy additional shares at a discount, as well as the MCB (295 Rights MCB for every 100 shares) is to raise a boatload of money in light of the COVID-19 situation which has all but brought aviation and its attendant industries to a stop.

The issues are designed to help SIA raise money but without the additional pressure on their liquidity since both issues (as well as the option for another issue of MCBs) aren’t obliged to pay out any cash out.

It’s a smart corporate move since the whole thing is backstopped by Temasek Holdings who is the largest single shareholder in SIA.

Question is: Is it a good deal for minority shareholders?

I was asked by a relative so I did some back-of-the-envelope assessment on the deal and this is what I think. I’ll look at the Rights Issue first followed by the MCBs.

The Rights Issue

Since this is a 3-for-2 Rights Issue, what this means is that if existing shareholders do not take up the offer, their positions will effectively be substantially diluted (40% of the pre-rights level)

So I took the Pre-Rights Issue share price and dropped it by 60%. From the price charts, you can see that on 22 April, SIA was closed at 6.06 while the next day it closed at 4.32 for a drop of slightly less than 30%.

I’m not sure why the market wasn’t fully pricing in the news of the Rights Issue but given the full dilution and assuming the pricing multiples stayed the same, then the price should have fallen to 2.42. Obviously, SIA’s share price hasn’t fallen to that level which means that the market is pricing in some optimism into SIA’s future post capital raising.

On 20 May, the Rights were selling for $0.45 and given that the Rights allows the Rights holder to buy SIA shares at $3.00 per share, then, assuming no transaction costs or arbitrage, a share of SIA should be worth $3.45. On 20 May, the shares were worth 3.57 (and they have increased to about $3.60 in the last few days)

This gives someone who bought the Rights a roughly 4% return if he/she exercises the Rights and if prices stay the same until 8 June when the newly issued shares start trading.

My personal take is that a projected return of about 4% is not worth the trouble given that SIA share price could also drop further.

The Mandatory Convertible Bonds (MCBs)

Now, this issue is somewhat of a different animal.

SIA has a right to call the MCB during it’s 10-year life and depending on when they call it, the return will vary from 4-6% p.a. The kicker is that if they don’t call it and let it mature, the MCB gets converted into shares at a price of $4.84 (at the current equity structure).

I think SIA pretty much has all the upside in this deal. If things look good and they have cash, they can call it early and pay a lower interest rate while if they need to conserve cash, they can always let it mature and dilute equity holders further. Also don’t forget that they’ve got themselves the option of raising more capital in another one of these MCB deals.

Although many investors may think highly of a 4-6% p.a. yield, I would hardly think of this as solid returns. Putting your money in a CPF SA or Retirement Account yields you pretty much the same (of course CPF could always lower interest rates but given that they haven’t despite the low interest rate environment of the past decade, you wonder if there are political constraints to this) but without the business risk involved.

In short

Putting more money in SIA at these terms seem like National Service . The dilution is real and the share price of SIA is not going back to levels like $8-10 with this current level of dilution. Using the EPS*, diluted by only the Rights Issue, of $0.231 and a multiple of 15x gives us a price of $3.47 which basically leads me to believe that the market has all but priced in any upside to SIA.

Notes:
Also, this EPS is for the most recent year where SIA had 9 solid months and 3 shitty ones. Of the 3 shitty ones, only 1.5 (?) months of it was a complete shutdown on air travel.

The next quarter (Apr, May, Jun) will be positively worse in terms of earnings and even if air travel comes back, I doubt planes will be allowed to carry the sort of loads that they once used to unless there is a proven vaccine.

1 more until CB lifts! But then again, the phased reopening here in Singapore isn’t much more different from life under CB.

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The Industries Hit Hardest By The Unemployment Crisis (FiveThirtyEight)

Pretty much the same in SG. A good friend and I were discussing this relative to the markets and we have pretty much concluded that unless we see blood in the streets, markets are going to hum along just fine.

My thesis is based pretty much on the fact that even in the worst-hit industries, we’ve barely begun to see real damage in terms of closures or bankruptcies.

That wave should come in the next few months if the economy remains shut or reopens at a slower pace than anticipated.

Indonesia has a problem (Thoughts of a Cynical Investor)

Uh-oh. Last time Indonesia owed dollars that it couldn’t pay back… Funny enough, I’ve also heard other stories of how Indonesia isn’t getting the money it’s supposed to for major infrastructure projects because the Middle East is handing out dough like it used to.

How Do You Value Stocks When Earnings Plummet to Zero? (The Big Picture)

Maybe you CAPE-10 the earnings? I don’t know. Just saying that it still doesn’t look cheap on a normalised earnings basis. You have to believe in the growth story to believe the bull market is still on.

The statistical detective work required to lift the lockdowns (Tim Harford)

Good points made on thinking statistically.

Only 2 more weeks until Circuit Breaker is (hopefully!) over.

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Coronavirus Seemingly Tamed, Chinese Economy Starts to Recover (The New York Times)

Basically, even if supply comes back, where is demand? I don’t think demand is coming back so soon until we (a) get used to a new way of navigating life with Covid-19 and/or (b) a vaccine gets developed.

To combat climate change, release the brake (Tim Harford)

This is a pretty interesting way of thinking about things. Unfortunately, for the really big things, it seems like the government needs to be thinking this way for things to work.

Animal Spirits: Too Young, Too Dumb & Too Inexperienced (A Wealth of Common Sense)

I really enjoyed this episode.

It’s Mother’s Day! Happy Mother’s Day to all Moms out there.

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A “New Deal” for Informal Workers in Asia (IMF Blog)

The pandemic has really exposed class differences in societies. And I’m not optimistic that the spread will narrow. If anything, the recovery in the markets versus the real economy is already widening the difference.

As a good friend put it, I think the Fed is beginning to worry that their rescue of financial markets is not exactly making its way into the real economy. After all, if businesses have to remain shut, it doesn’t matter if they get loans or not.

MiB: Betting Against Fraud and China (The Big Picture)

I really enjoyed this interview. I tend to think of short sellers as bullshit detectives. They call out the suspect business models and especially the outright fraud that somehow gets through due to blind optimism. Chanos has been a particularly adept detective.

As Hospitals Lose Revenue, More Than A Million Health Care Workers Lose Jobs (NPR)

So much for defensive sectors.

Which Portfolio is Right for You? (Of Dollars and Data)

Great piece. It’s not great because of the conclusions but it’s great because of the analysis. Go read it.

Sadly, many investment bloggers in Singapore aren’t at this level. I saw a piece from a relatively unknown blogger who did a piece about the “Sell in May and Go Away” effect on the STI.

Analysis was total trash.

Yikes, it’s already May?

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Now is the Time to Retire (The Wealthy Accountant)

Well obviously not for all of us but good point on how if you’re planning to retire, then this period of time is the biggest acid test of your ability to do so. Conversely, those planning to retire because their fortunes soared (on paper) during the stock market boom years may have to rethink their retirement plans.

“Deaths of despair”: The deadly epidemic that predated coronavirus (Vox)

While Covid-19 is on everyone’s minds now, it makes sense to think about other underlying structural problems in society and the economy. I’ve always marvelled at economists who look at the data, realise something is afoot, and then go on to solve the mystery. This is one of those mysteries.

Vanguard and Fidelity investors didn’t flinch as the market tanked (Yahoo Finance)

Which is precisely why I believe that as bad as March felt, it wasn’t the worst. The worst has yet to come.

How Boeing Lost Its Way (The Big Picture)

Nice 20 minute video on how corporate culture is shaped by incentives and how short-term thinking can lead to long-term losses.

CPF: Imitate Oz? (Thoughts of a Cynical Investor)

Why Not Give Us Access to Our Own CPF Special Account in these Special Times? (Investment Moats)

Interesting points and maybe I will dig into the data to see what’s feasible but given the Singaporean mentality behind CPF, I suspect many will withdraw everything if they could.

If they are allowed to only take out a token sum (say $500 each month) they’ll complain that it’s too little.

Plus we don’t really want a run on CPF right because all those CPF monies aren’t exactly sitting around in CPF’s accounts and liquidating assets right now is exactly the worse possible time to do so.

Late post today.

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Ban parties not business (The Grumpy Economist)

36,000 Missing Deaths:
Tracking the True Toll of the Coronavirus Crisis (The New York Times)

Just some COVID-19 reads.

Margin of Safety by Seth Klarman (Novel Investor)

A summary of the main points of this classic by Seth Klarman.

Transcript: James Montier (The Big Picture)

Barry Ritholtz’s interview with James Montier. I am a big fan of Montier’s work and coincidentally enough, he mentions “Margin of Safety” in the interview.

Markets have been rallying hard. It’s crazy how much markets have rallied. Almost makes investors feel like March never happened at all…

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How the Worst Pandemics in History Finally Ended (The Vintage News)

Some pandemic history. Goes way, way back.

Economy-related links

How COVID-19 Is Wreaking Havoc On Our Ability To Make Things — Including Vaccines (FiveThirtyEight)

The Next Leg Down Will Involve Credit Cards (The Reformed Broker)

Why the Economy Will Struggle to Restart (The Wealthy Accountant)

Market-related links

What Could Cause Another Leg Down in the Stock Market? (A Wealth of Common Sense)

Why the Stock Market Hasn’t Even Gotten Cheap Yet (The Reformed Broker)

The Softbank Clause (Howard Lindzon)

I’ve said before that SoftBank was a disaster waiting to happen. Basically, it was the dot-com boom concentrated in one company. Check out the link for a list of its duds.

Basically, Masayoshi Son thinks that economics doesn’t matter.

Happy Easter Sunday! It’s a long weekend here in Singapore but it doesn’t really matter much for those on us that are working from home because we’re not considered essential services.

Sorry for not reads last week as it was a little bit of a mad rush getting ready (mentally!) to be cooped up at home for April.

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Words of Wisdom From William Bernstein (A Wealth of Common Sense)

Great interview with a legend. I read Bernstein’s book “The Investor’s Manifesto” and it is one of the better books on investing out there. Check out Ben Carlson’s interview with him.

When Dollar Cost Averaging Matters the Most (A Wealth of Common Sense)

I’ve always said that DCA is a fad that many people (even those that purport to be personal finance experts) get wrong. However, there is one situation where DCA works and that is when the market is heading south. This is one of those times.

Otherwise, most people are better off investing a lump sum and having a read on valuations.

The S&P 500 is mostly concerned with duration (chart) (The Reformed Broker)

Good point.

Economic Policies for the COVID-19 War (IMF Blog)

Quite interesting to see how IMF thinks of the current state of the economy. Basically, it seems like they are preparing for war.