Friday, November 28, 2008

Monthly Review - November 2008

November was the sixth successive month in which my investments declined in value. However, savings and net rentals were sufficient to result in a small increase in net worth for the month.

In financial terms, my investments declined (again) and the currency moved against me (again). In both cases the adverse movements where much smaller than in September or October.

Here are the details:

1. my actively managed funds all lost money. I am now holding losses on all of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. In a demonstration of the high beta nature of emerging markets and the leverage of the currency factor, some of my funds are down about 50% in HKD/USD terms;

2. my equity ETFs all lost money. I currently have exposure to Hong Kong and India. I added to both positions towards the end of the month;

3. my residual equity portfolio lost money local currency terms and lost more money due to adverse exchange rate movements;

4. my commodity investments went sideways. Fortunately, I only have positions in nickel and lean hogs left and these are very small (even smaller now that they have declined so far);

5. all my properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). One lease has expired and the tenant is staying in place while we see if we can reach agreement on a new lease;

6. currency movements were adverse as the USD strengthened and compounded the loss on my investments this month.

Two portfolio investments were made towards the end of the month (Hong Kong and India ETFs). I made made two small trades in warrants on the Hang Seng Index - one profitable and one loss making.

My income rose during the month but this is not expected to be sustainable. My expectation is that my income will decline by at least 20% from its peak. My spending was moderate. I did have to pay for the airfares and accommodation for our Christmas holiday - however this was already provided for. The resulting savings and the net rentals on the investment properties were greater than the losses on my investments - but not by much. For the month, my net worth increased by 0.37%. The year to date decrease is 4.25%.

Thursday, November 27, 2008

India ETF purchased

I completed my cash draw down on Monday when I added to my position in two India ETFs.

I picked India as for the second part of my attempt to make some investments at what appear to be attractive levels based on my views that:

1. the Indian economy has good long term growth prospects driven by a combination of demographics, deregulation, improving infrastructure and the rapid expansion of a skilled, educated and affluent middle class ;

2. there is considerable scope for interest rate cuts and other government measures to support or stimulate the market;

3. the Indian market has lagged many other markets in bouncing off its recent lows.

I initially placed an order for units in the Lyxor India ETF (stock code: 2810) which I already hold before remembering that the iShares Sensex India ETF is also listed in Hong Kong now (stock code: 2836). As the latter is larger, more liquid and has lower fees I attempted to switch my order from the Lyxor fund to the iShares fund and ended up with some of each. This is sub-optimal but is unlikely to do may any real harm.

I have now reduced my cash position to the equivalent of about 2.5 years living expenses and accrued tax liability.

Wednesday, November 26, 2008

Positive savings rate in the US

According to to the U.S. Bureau of Economic Analysis, the savings rate in the US has risen over the last two financial quarters and is in positive territory.

Although not showing a return to the (modest) levels prior to the consumption frenzy of the last few years, it is still an improvement. Given that an excess of consumption and a deficiency in savings by American households has been cited as one of the causes of the current economic crisis this is, in one sense, encouraging. However, it also has to be remembered that high levels of spending by American consumers were a significant contributor to the last economic boom (both in America and the countries which sold goods and services to those consumers). Less spending by American consumers has to result in less income for the companies and individuals who supplied goods to them. (The economic theory known as the paradox of thrift states that increased savings levels results in lower levels of income for the economy as a whole.)

A few comments on the savings data:

1. American households are doing the opposite of governments and central banks - they are spending less in the face of economic uncertainty and adversity;

2. American savings rates are still significantly below rates in Asia. In fact a savings rate of just over 1% is very low by any measure;

3. the data does not reflect the wealth effect of rises and falls in asset values;

4. if the economy does shed jobs (and incomes for those still in employment declines), it is an open question whether the trend will be reversed as savings are drawn down to fund living expenses and/or households will make further cutbacks in spending thereby perpetuating the economic contraction.

Tuesday, November 25, 2008

Hong Kong Tracker ETF Purchased

This morning I purchased some Hong Kong Tracker (stock code: 2800) at HK$13.00.

While I expect economic conditions to get worse before they start to improve, I also recognise that:

1. the local market has fallen nearly 60% from its high point in early 2008Q4. Historically there have been very few occasions in which such a dramatic decline has not represented a good buying opportunity - if one can take a multi-year view of the markets;

2. gearing is relatively light amongst the Hang Seng Index constituent companies. They are well placed to weather the economic storm;

3. the banking sector is in much better shape than its counterparts in the USA and Europe. Sure they are taking write downs on assets held on their books but the scale of those losses is relatively small;

4. the Hang Seng Index is heavilty weighted towards China. While decoupling has been debunked at least in part, I remain optimistic that China's economy will be a relative out performer over the next few years;

5. the yield is higher than well rated HK$ bonds. While dividend yields from the Hang Seng Index constituent stocks canbe expected to come under pressure, even if the dividends contract by 50% (which is more than the Asian crisis), on a yield basis it is still more attractive than bank deposits and can be expected to recover over time;

6. in terms of valuation parameters (PE ratios, PB ratios) the market is as cheap as it has been for several years. Yes it can get cheaper, but as my attempts to day trade have demonstrated, timing the market is not a skill that I can claim to have any talent for.

My cash levels remain solid with about 2 years of worst case living expenses and accrued tax liability sitting in the bank (earning very little).

Monday, November 24, 2008

Negative equity is back (2)

Earlier this month I commented that negative equity situations had returned to the Hong Kong property market with an estimated 10,000 cases. That number was based on media reports which largely relied on comments from property agencies and other analysts.

On Friday the Hong Kong Monetary authority (which regulates banks in Hong Kong) announced that the number of negative equity cases in Hong Kong had risen to 2,568. This is roughly a quarter of the number reported earlier. Why such a big difference? The obvious reason is that the HKMA figure is as at the end of September. Property prices have fallen further in the month and a half - by 14.6% according to the Centa-City Index - which is likely to account for most of the difference.

The obvious question is how bad will the property and mortgage market get during this down part of the cycle? Some numbers to consider:

1. during the last low point (2nd quarter 2003), an estimate 106,000 homes were in negative equity (about 22% of all mortgaged homes);

2. residential property prices have fallen an estimated 20-30% off their peak earlier this year. During the last down turn prices fell by an estimated 60% over a six year period;

3. in May 2003 the total amount of outstanding mortgage loans was about HK$520 billion. It was just below HK$600 billion at the end of September. This probably represents a high water mark for the next few years at least. 14% growth over a five year period is quite low considering how far the property market advanced during that period. I take this as an indication that the average household inHong Kong is relatively lightly geared and has a healthy cash position (which is consistent with the low loan to deposit ratios at banks in Hong Kong);

4. banks have generally been conservative with their valuations. Even during the boom times they would only lend 70% loan to value and there was relatively little anecdotal evidence that valuations were inflated;

5. interest rates are very low (in both absolute and real terms) - certainly far lower than in 1997 when the market reached its previous peak.

While there is likely to be scope for further downside in the market in response to job losses, cuts in bonus levels, reduced willingness on the part of banks to lend money and general lack of confidence, it is hard to see property prices falling by 60% off their peak levels once again. It is too soon to be buying but the time will come. If I have learned two things from the experiences of previous economic cycles they are that assets acquired when times are seemingly bad will be better investments than assets acquired when times are good and that patience is one of the most important disciplines needed by an investor.

Saturday, November 22, 2008

HSI Call Warrant Sold - loss taken

When the rally I had expected to follow the PRC stimulus package failed to materialise, I took to loss on the call warrants purchased earlier in the week . The sale price us HK$0.105 showing a loss of about 38%. This loss neatly erased the net gains on the four previous short term trades made this year.

The ability to lose 38% of my investment in a few days shows just how much volatility and implied leverage these instruments involve. While this volatility and implied leverage gives the opportunity to make a lot of money very quickly, as I demonstrated this week, it also works the other way when I get it wrong. To illustrate the point, the Hang Seng Index jumped about 5% (in response to the HKMA's stimulus package) after I sold on Friday. If I had delayed the sale, my loss would have been only about 16%.

Incidentally, with the markets being so volatile, a strategy of buying calls and puts at the same time and trying to trade out both sides at separate times may be a valid strategy.

Friday, November 14, 2008

HSI Call Warrant Purchased

This morning I purchased a call warrant on the Hang Seng Index (stock code 15513) at HK$0.165.

Given the volatility which the markets are continuing to experience, opportunities to make (or lose) money through short term trading are quite appealing. That said, I am only using amounts of money which are relatively insignificant. Even if I lost 100% of the amount invested, it would not have any noticeable effect on my finances.

Thursday, November 13, 2008

A healthy state of mind?

Hong Kong share prices have fallen by over 50% from their highs, property prices have come back at least 20% (more at the luxury end of the market), people are being laid off, just about every piece of financial news is negative and both the experts and the amateurs alike are generally expecting things to get worse before they get better.

At a more personal level, our household net worth has fallen by about 19% from its peak (our biggest asset class is leveraged Hong Kong real estate), my income has fallen by more than 20% from its peak, we are carrying quite a lot of debt and our household expenses have risen (primarily due to our younger child starting school).

I should be lamenting the losses, kicking myself for not selling at the highs and worrying about the future. I find that I am doing none of these things. So why do I not feel worried about the future or upset about the losses:

1. even though my income has fallen by 20%, it is still considerably higher than our expenses. We are accumulating cash each month and have two incomes;

2. while our properties have declined in value, all but one (possibly two) are worth more than we paid for them, all have positive equity and collectively they are generating a positive cash flow each month and the p+i mortgages are being amortised a little bit each month;

3. I have been through two previous serious economic downturns and survived both. The keys to getting through are in part maintaining a positive cash flow, letting go of losing investments which do not have a serious prospect of recovering and building a cash reserve;

4. recognising that the opportunities that recessions generate later on will more than make up for the pain experienced during the down side of the cycle. The cash reserve that we are building up will fund future investments at (hopefully) very attractive prices;

5. sure I have made several loss making investments but it could have been a lot worse. I could have been one of the buyers of Lehman mini-bonds, speculated heavily in derivatives or have invested in shares on margin. Things could be a lot worse.

Maybe I am simply too optimistic? Or it may be that I am simply benefiting from having managed my personal finances prudently for several years.

HSI Put Warrant Sold

Yesterday I purchased some put warrants on the HSI (code: 15499) at HK$0.161. This morning I sold them back at HK$0.191. Net of transaction costs, I made a return of around 16% on the transaction. Regrettably, the amount involved was very small and in absolute terms the profit was nothing to get excited about (enough for three or four decent dinners with Mrs traineeinvestor with some nice wine).

This was the fourth short term trade this year. So far I have three profitable trades and one loss making trade. The numbers are not meaningful and I have no real intention of putting more money into trading activities. I am content for trading to remain an occasional hobby.

Wednesday, November 12, 2008

HSI Put Warrant Purchased

One of my vices is having delusions about making a living as an active trader of investments (shares, commodities etc). Needless to say, the urge to trade actively is one that should be (and usually is) constantly suppressed. Occasionally I allow myself to play with relatively small amounts. So far this year I have made 4 short term trades. Three have made money and one has lost money for a small net gain. I suppose I could say that it is not doing me any harm.

As examples: I lost money on a silver trade in August and made some money buying put warrants on the Hang Seng Index in March.

Today I purchased some HSI put warrants (15499) at HK$0.161 in the expectation that the HSI will weaken in the short term as the initial optimism over China's stimulus package falls away.

Tuesday, November 11, 2008

Negative equity is back

This should not come as a surprise to anyone but the number of negative equity cases in the housing market is back to an estimated 10,000. Most of these would have been people who purchased in the first eight months of this year with less than the standard 30% deposit.

Given the well regulated nature of the Hong Kong banking sector, banks can only lend up to 70% of property's value. Buyers who want to borrow more must either get insurance ( from the Hong Kong Mortgage Corporation) or go to a finance company for a second mortgage. Both of these are expensive options. However, given that banks have become more conservative in valuing properties for mortgage purposes some home buyers have been forced to resort to them. In effect it is the most marginal buyers who are now facing negative equity.

There is, as yet, no indication that mortgage defaults are rising from the extremely low levels experienced over the last few years.

Lastly, during the SARS epidemic at the end of the Asian financial crisis in 2003, negative equity cases peaked at an estimated 103,000 cases.

Sunday, November 09, 2008

Book Review: Time: A User's Guide

Like many people, I find that time management is one of the areas of my life that seems most difficult. The pressures of trying to accommodate all of the things one either has to do or would like to do into a busy schedule, over which I seldom seem to have any control, is a constant source of frustration. I've been grappling with this issue from much of my career. Traditional time management books and lectures seem to be of little use. Even good ones do not really explain why we feel like we are under so much time pressure. Late last year I made a conscious decision to try and address the time issue. Some of the techniques I decided to adopt were picked up from other books or searching the internet. A few are mentioned below. Stefan Klein is the first writer (at least that I have read) who explains why we get so stressed about time management.

Klein's book explains why people often complain about the lack of time in their lives and offers suggestions to help people address the issue. The book looks at the differences between long term and short term memory, how we respond to stimuli and the negative effect of distractions to getting things done. These points are important in explaining how inefficiently we often use the time which is available. Along the way, Klein also explains why attempts at multi-tasking not only do not work but are also counter productive and the differences between night owls and day larks.

Klein offers some practical advice for managing time issues better - not only to make better use of time but to reduce the feelings of stress that seem so common in our society. Klein's six suggestions are:

1. exercise a degree of control over your schedule. The more control over your schedule, the less stress you will experience and the easier it will be to get things done;

2. live in harmony with you biological clock. Night owls and day larks work to different schedules and trying to fight your body's natural clock is counter productive;

3. cultivate leisure time. Create some free blocks of time to destress and switch off from short term stimuli (such as mobile phones and blackberrys);

4. experience the moment. Even when you are bored and have nothing to do (waiting in line), simply observing and thinking about your surroundings can help;

5. learning to concentrate. The mind cannot concentrate on two things at once. Avoid multi-tasking - it is counter productive;

6. setting priorities. While time management books will often talk about things being urgent or important, Klein suggests comparing the consequences of not getting things done as a means of determining priorities.

Some of these will be difficult to achieve. Trying to schedule uninterrupted blocks of leisure time is not easy if you work in a demanding job and have young children at home. Still, having been attempting some of these techniques even before reading the book, I can confirm that they do work. Some of the examples I have been putting in to practice during the course of this year include:

(i) turning off my mobile phone, set my office phone to bust and turning off my computer monitor at work for short blocks of time (15-20 mins). This gives a perceptible boost to my productivity;

(ii) scheduling some "me" time each day. If I am stuck in the office until 2 am one day to meet a deadline, I will take time out the next day or so (during office hours if need be) to go to the gym, browse the bookshop, dash home to pick up one of my children from school etc. Put differently, I make sure that for at least 2 or 3 days a week, one or two things that are important to me take priority over anything else.

Time: A User's Guide is highly recommended.

Wednesday, November 05, 2008

Taiwan ETF purchased

The feeling that I am sitting on too much cash and the sight of markets which are 50% below their recent highs finally proved too much for me and I made a modest investment into a Taiwan ETF (stock code 2837). My purchase price was HK$4.83.

Why Taiwan? The investment was largely based on fundamentals - it is one of the cheapest of the better regulated Asian markets - and the expectation that continued improvements in relations with Beijing will result in tangible economic benefits and improved sentiment/investor confidence.

Incidentally, the range of ETFs listed in Hong Kong has been growing. In addition to ETFs for Hong Kong, PRC, India, Nasdaq, Russia and commodities we now have ETFs for Taiwan and Japan. (There are a few others, but they generally do not have sufficient trading volume even for a small investor like me.) This is good news as it will reduce the need to look to high cost managed funds for equity investments.

Saturday, November 01, 2008

Bank valuations lowered (again)

The latest on-line mortagee valuations available on HSBC's website have been reduced again. This is the second reduction in the last two months. For the properties we own, the drawdown from the peak valuations set in the first quarter of this year ranges from 19% to about 6%. As a generalisation, the more expensive properties have shown the biggest percentage declines and the smallest properties the lowest percentage declines in value. Recent sales data from Centaline suggests that the HSBC valuations are reasonably close to market values.

I have no intention of buying another property this year as (i) I think that the market has potential to fall further and (ii) my wife and I are each facing a period of job uncertainty and we wish to keep a cash buffer against the possibility of unemployment. I will hold off. However, when I do start buying again, I may well look outside Hong Kong to markets in the UK, Australia or New Zealand where falls in the value of property and falls in the currencies combine to make a more attractive investment proposition. Of course, investing overseas has its own issues, but if the return is there, it may well be worth it. As an added factor, at the rate the JPY is appreciating in response to the unwind of the carry trade, using a JPY mortgage to purchase a property in one of the markets hit hard by the credit crisis offers the prospect of making money on the mortgage as well.

Monthly Review - October 2008

October was the fifth successive month in which my investments declined in value. It was also the worst of the five months in terms of investment losses. In financial terms, my investments declined sharply (again), the currency moved against me (again) and my income fell (again).

In effect the rise of emerging markets, the rise in Hong Kong property prices, the rise of commodities and the fall of the USD which had combined to work so strongly in my favour for four years have all gone sharply into reverse and the trends seem to be accelerating.

Here are the details:

1. my actively managed funds all lost money. I am now holding losses on all of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. In a demonstration of the high beta nature of emerging markets and the leverage of the currency factor, some of my funds are down about 50% in HKD/USD terms;

2. my equity ETFs all lost money. I currently have exposure to Hong Kong and India;

3. my residual equity portfolio lost money local currency terms and lost more money due to adverse exchange rate movements;

4. my commodity investments lost money. Fortunately, I only have positions in nickel and lean hogs left and these are very small (even smaller now that they have declined so far);

5. all my properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth);

6. currency movements were adverse as the USD strengthened and compounded the loss on my investments this month.

No investments were made in October.

My income once again declined during the month and is expected to decline further over the next few months. My expectation is that my income will decline by at least 20% from its peak.

My spending was moderate. The resulting savings did not even come close to matching the losses on my investments. For the month, my net worth decreased by 6.34%. The year to date decrease is 4.6%.