Monday, October 31, 2011

Monthly Review - October 2011

Last month I reported that September had been the single worst month for my investment (in dollar terms) ever and that retirement plans were on hold. October was, in many respects, a mirror image of September with very strong gains across the board. Although I did not drain my cash reserves, I did make some additional investments near the bottom of the market and, importantly, didn't do any panic selling.

Mark to market appreciation in asset values, particularly equities, added to the gains from rental income and were compounded by favourable FX movements. A healthy savings rate also contributed to a very good monthly result.

Here are the details:

1. my Hong Kong equity portfolio appreciated sharply. During the month I purchased shares in K Wah, Yangzhou Coal, New World Services and Cosco Pacific;

2. my AU/NZ equities appreciated; ETFs were up sharply in line with the local markets. There were no ETF purchases this month;

4. my commodities gained, led by silver;

5. all of my properties are occupied, however, one tenant missed a payment and is being chased. There was only one minor repair bill;

6. currency movements were very positive, as the NZD and AUD rose against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month;

8. I had onne open derivative position, a put written against the AUD, which was closed out at a profit;

9. savings were good with high income and low expenses.

My cash position decreased due to new investments. I currently hold 16.4 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth increased by 10.47%. The year to date increase is 6.77%

Friday, October 28, 2011

K Wah purchased

This morning I added a few more shares in K Wah (HK:173) to the portfolio. The mid-tier property developer has, like many, taken something of a hiding during the market down turn. However, it is well capitalised and salas of units in its developments (especially Marinello) are going well.

I paid HK$2.18 for the additional shares.

The quest for green shoots

Good news has been thin on the ground recently. Very thin. However, a number of positive items have made the headlines in the last few days:

1. the European Union reaching an agreement to deal with Greece and European banks . Sure, there are a lot of important details which are still missing and the fundamental problem of governments spending too much is not going to go away, but it's still a major step forward from where we were as recently as last week;

2. the inane Occupy movement has failed to gain mainstream support, has lost much of what limited media interest it ever had and is fading away . If anything, most people are sick of the self centred hypocrisy of the "movement" as are the overly tolerant politicians who are finally dealing with the disruption, sanitation and increased crime associated with the protesters' actions. Hopefully the people involved will go and do something constructive in the future;

3. US housing data has improved with both new home sales rising and the inventory of unsold homes falling. The improvements were modest and the overall numbers are still weak (especially average prices), but they are heading in the right direction;

4. US economic data has shown a small improvement;

5. expectations that China has finished monetary tightening and may actually consider easing;

6. declining oil inventories, may suggest that economic activity is picking up again;

7. fears that international trade would fall victim to protectionism have not far;

8. although I couldn't lay my hands on any consolidated data, generally I have been left with the impression that corporate earnings have, on average, exceeded estimates and, most importantly, there appears to be top line revenue growth.

Sure there are still huge problems out there - government spending (especially in the US and Western Europe), inflation (especially food inflation in developing nations), housing in the US and China and many other problems (not least on environmental issues), things look at least a little better now than they did a month ago.

AUD/HKD FX contract closed out at a profit

The AUD/HKD FX contract I opened late last month was closed out this week. As the contract was out of the money, I pocketed the premium for a total return of 2.02%. While this is many multiples of what I could have earned on a bank deposit over a month, it is less than half what I would have earned had I simply brought and sold the AUD over the same time period and a small fraction of the return that would have been generated by buying Hong Kong equities.

While it is not always the case the lower risk equates to lower return, this time it did.

Saturday, October 22, 2011

Businesses under attack don't hire

Around the world businesses are under attack - increased taxes, more onerous regulations and the explicit or implicit risks of more to come. Obamacare, carbon taxes, higher consumption taxes, Dodd-Frank and its equivalents and so on are becoming a global epidemic.

Likewise the "rich" (insert definition of choice, but basically the western world's declining middle class as well as genuinely wealthy) are under attack from rising tax burdens, rising living costs (e.g. education and health care) and face widespread threats of more (the "rich" should pay more etc).

Regardless of the merits of individual proposals (and most are nothing more than a naked grab for revenue so governments unable to live within their means can make electoral bribes to people who, for the most part, take from rather than contribute to the cost of running the country), one of the consequences of the attacks on businesses and taxpayers is that they feel threatened. People who feel threatened don't spend - they go into survival mode:

  • businesses (especially smaller businesses) don't invest in expansion and don't hire - they conserve their cash rather than risk it

  • taxpayers (especially the middle class) faced with the prospect of rising taxes will cut back spending where possible (discretionary consumption spending and charity being the easy cut backs) - they pay down debt and build emergency funds

  • investors divert money away from risk assets into safer investments - in particular government issued or backed securities which do much less for economic expansion than many other forms of investment

Simple message - if you want businesses to invest in themselves and create jobs, take away the threats. This is especially true for countries which do not enjoy a low cost labour advantage.

And yes, I had far too much to drink last night.

Friday, October 21, 2011

Cosco Pacific purchased

This afternoon I made a small incremental purchase of Cosco Pacific (HK:1199). The additional shares cost HK$9.52.

A tightening market for mortgage finance

This week both Citibank and BoCom announced that they would no longer be offering residential mortgages (in Bocom's case "traditional" mortgages). Although not as publicly announced, other banks have been tightening their lending criteria beyond the cooling measures imposed by the Hong Kong government. As a matter of anecdotal support, the bank which has loaned my most of my outstanding mortgages has told me that they will not lend me any more money.

The driving force behind the tightening of the mortgage market is the steady rise in the loan to deposit ratio in the Hong Kong banking system. For HKD deposits, the ratio has risen from around 65.1 in October 2009 to 85.9 in August 2011. A similar increase occurred in the all currency ratio (from 50.1 to 67.9). These ratios reflect an increase in total lending by Hong Kong banks (currently the highest since 2006 which was the earliest year in the HKMA table I was looking at).

Given the tightening of the mortgage market (higher deposits, more stringent borrower evaluation and higher interest rates) and lower turnover in the property market, one would expect that the value of mortgage loans would be falling. It's not. In fact the total value of outstanding residential mortgage loans hit an all time high in August.

Although speculative, I suspect that many borrowers (including myself) are unwilling to repay loans early. HIBOR linked loan taken out over the few years before the tightening began are still paying less than 1% on those loans. Not only is this a negative real interest rate and well below the yield on property, but new loans are more expensive (likely 2-2.25% depending on which bank you approach) and harder to obtain.

For my part, I have no intention of paying off any of the loans on my investment properties early and am increasingly coming to the view that I should not pay off the loan on my home early either. I can revisit if HIBOR starts rising.

Wednesday, October 12, 2011

Cosco Pacific purchased

This morning I added shares in COSCO Pacifc (HK:1199) to the portfolio. COSCO Pacifc is essentially a PRC port operator which also carries on a number of related businesses. The company is selling on a trailing PE and dividend yield of 8.9x and 4.5%. The company's history of paying dividends (annual and interim) is quite consistent and the balance sheet carries a reasonable level of indebtedness. Available information in container volumes for the year to August are encouraging.

I paid an average of HK$9.82 per share.

Monday, October 10, 2011

NWS Holdings purchased

This morning I added some shares in NWS Holdings Limited (HK:659) to the portfolio. NWS Holdings is a diversified conglomerate with its main businesses being toll roads/transport, water, waste management and miscellaneous services. The company is selling at a trailing PE of 7.6x and a trailing yield of 6.6%. The yield represents a pay out ratio of 50%, leaving plenty of profit being reinvested. The balance sheet is solid, with HK$4.5 billion in cash and net gearing of only 7% giving the company the flexibility to continuing expanding its businesses and to withstand adverse economic conditions.

I paid an average of HK$10.62 per share.

Sunday, October 09, 2011

Book Review: The Upside of Irrationality

I purchased this book as in flight reading material for a recent business trip on the strength of a single question on the back cover:

"Why can paying high bonuses lead to lower productivity?"

I was also generally interested in the first part of Dan Ariely's book which deals with the unexpected ways in which we defy logic at work.

I found The Upside of Irrationality to be an engaging book that explained a number apparently irrational responses to various situations. The (simplified) answer to the issue of why large bonuses don't always produce better performance, and sometimes produce worse performance, is that the higher the stakes the more likely that the recipient of the bonus will succumb to pressure. Also, when as the stakes get higher, people (understandably) start spending more time thinking about their bonus than focusing on the task at hand. As an aside, I wouldn't have minded more space being devoted to what incentive schemes do tend to produce higher performance. The author does address the point but not in as much detail as he devotes to unsuccessful incentive structures.

While he book reads as a discrete list of issues where irrational human behavior is examined and explained rather than a single cohesive look at the subject, it remained an engaging and thought provoking read.

Recommended (although possibly not for people who's compensation includes a large bonus element).

Thursday, October 06, 2011

Even Karl Marx would be sniggering at this rubbish

Widespread ire at the scape goats for the developed world's financial mess is more than understandable - it's justified. (Of course it would help if all the scapegoats were vilified in the same way (politicians, unions, regulators, civil servants etc) but that's another issue...)

But this list of demands from the "Occupy Wall Street" movement is so silly it's actually quite funny.

Sure there's a lot wrong with the world and a lot that needs fixing but rubbish like this is, at best, a demonstration of the failings of an education system, the absence of a moral framework and an abrogation of personal responsibility for ones self. The only thing missing from the list is the author's right to have someone else cook and serve his meals for him.

Maybe I should come up with my own list.

Banning short selling is a bad idea

There have been calls from several broking houses to follow the examples set by some European and Asian markets and either ban or further restrict short selling on the Hong Kong stock market.

A ban on short selling would be short sighted and detrimental to the market and investors generally.

To begin with, short selling in Hong Kong is already tightly regulated:

1. only designated securities may be short sold - all large cap liquid stocks

2. naked short selling is illegal - if you want to sell short, you have to borrow the shares from someone else first

3. short selling requires disclosure - short sales have to be reported on a daily basis and insiders have to publicly disclose short positions

At the risk of stating the obvious, short selling provides many benefits including:

1. a more liquid market with reduced spread - not only due to short selling in expectation of falling share prices but also short selling for abritrage purposes, the smaller spreads actually help long only investors

2. reduces the potential for market manipulation (although this is more of an issue in smaller cap stocks which are not eligible for short selling anyway)

3. reduces the risk of the market becoming over valued (or at least offers the potential to reduce the extent to which the market may become over valued) . Put differently, short sellers give long only investors an opportunity to buy at better price than would otherwise be available

4. provides the potential for support when the market has fallen - at some point the borrowed shares have to be returned to their owner which will require the short seller to go out and buy (or repurchase) the necessary shares. Every short seller becomes a buyer at some point

5. produces a more transparent market and incentivises companies to be more open and honest - allowing short selling gives investors an incentive to look for problems with a company and to invest accordingly

Jake van der Kamp's piece in this morning's SCMP made the excellent point that professional shorts produce some of the most thorough investment research and that such research goes a long way towards exposing issues with listed companies and protecting investors.

Also Sprach Analyst made the valid point that banning short selling simply does not work.

Suggesting that short selling should be banned is nothing new. Hopefully the government and the regulators will ignore the calls.

The really really depressing thing about the calls for a ban on short selling is not the general ignorance that is implicit in such calls, but that it is brokerage houses that are supporting them. These people should know better.

Tuesday, October 04, 2011

Confessional - I got it very wrong

Over the last few months, I've had the distinct displeasure of watching the value of my investments take a very significant reduction in value. Not only did I not sell anything when prices were much higher, I kept convincing myself that shares were, if not cheap, at least good value in the context of a market that was trading at below its long term averages (in terms of PB, PE etc). In rather blunt terms, I got it very very wrong.

I spent a significant amount of time over the weekend crunching numbers and working out where I stand in terms of my possible retirement in early 2012. While the numbers still make sense on paper, the margin of safety has largely evaporated and, subject to finding a job when I go off contract, I will likely continue working until that margin of safety is restored.

I have also considered where we will be if I find myself dealing with an extended period of unemployment. Some back-of-the-envelope calculations suggest that I would have enough cash on hand in Q1 next year to cover about 42 months of living expenses (including mortgage payments) if I don't pay off the home mortgage or 14 months of living expenses if I do pay off the home mortgage in full. (These numbers assume no new investments made and no existing investments sold.) Given the number of variables involved, I need to put together a spreadsheet to get a more accurate picture but it is unlikely that I will have any kind of near term cash shortage.

Lastly, I have to consider whether I should keep buying shares, take the losses on some of the existing portfolio or just do nothing and let the cash build up. I have not reached any conclusions on this issue.

Monday, October 03, 2011

Monthly Review - September 2011

Last month I reported that August had been the single worst month for my investment (in dollar terms) ever. The losses in September were nearly three times those of August. Retirement plans are on hold, which raises the likelihood that I will need to start looking for a job when I my contract finishes early next year.

Mark to market declines in asset values, particularly equities, were massively greater than the gains from rental income and were made much worse by adverse FX movements. Even a healthy savings rate and positive cash flow from the properties were unable to make more than a token offset of the losses. My equity investments have produced negative returns this year and many positions are now below cost.

Here are the details:

1. my Hong Kong equity portfolio declined sharply either in line with the market or due to industry or company specific factors. Some of my largest holdings (HWL, CCB, Hua Han, Yanzhou) recorded particularly large losses (on top of the large losses incurred in August). A few companies dropped by more than 50% during the month. In no case was the fall in share price accompanied by a negative company specific announcement (although in some cases there were broker downgrades). During the month I purchased shares in Tontine Wines, China VTM, Sinopec, Hang Seng Bank, CNOOC and Jiangsu Expressway; ETFs were down sharply in line with the local markets. There were no ETF purchases this month;

3. my commodities fell significantly, led by silver;

4. all of my properties are occupied (the one vacant unit will be occupied at the end of this week), the tenants are paying on time. There were some minor repair bills which needed paying;

5. currency movements were very negative, as the NZD and AUD fell against the HKD/USD;

6. my position in bonds remains small. No bonds were purchased this month. One of my early RMB bond purchases matured;

7. I have one open derivative position, a put written against the AUD;

8. savings were good with high income and low expenses.

My cash position decreased due to new investments. I currently hold 18.1 months of expenses in HKD cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth fell by a staggering 10.70%. The year to date decrease is 3.35%%

Yanzhou Coal purchased

This afternoon I added some additional shares in Yanzhou Coal (HK:1171) to the portfolio. The company is on a trailing PE of 6.7 and a dividend yield of 4.7%. While many (most?) brokers are predicting meaningful growth in earnings and dividends for the current and next financial years, at current prices such assumptions are not really necessary to justify a purchase. The only negative is the relatively high debt level.

I paid HKD14.78 for he additional shares.

Off topic: a literary binge

Nothing to do with personal finance, but I've spent the last several weeks on something of a literary reading binge. This was, in part, inspired by glancing at a (obviously subjective) list of the greatest novels of all time and, in part, by a desire to read something a bit different from my usual fare (mostly non-fiction with a lesser amount of popular fiction).

Books read:

1. Tender is the Night - F Scott Fitzgerald

2. The Great Gatsby - F Scott Fitzgerald (previously read at school)

3. Jane Eyre - Charlotte Bronte

4. The Trial - Franz Kafka

5. Portrait of the Artist as a Young Man - James Joyce

6. The Picture of Dorian Grey - Oscar Wilde

I'm currently on Joseph Conrad's Heart of Darkness.

I actually enjoyed reading all of these (with the exception of Jane Eyre which I found rather dull and marred by a plot line that required a most unlikely coincidence to "work"). The Trial was rather disturbing and it's easy to find parallels with daily life. However, Tender is the Night was the most thought provoking - I was left thinking to myself "I don't want to be Dick Diver".

I haven't quite found the courage to take on one of the door stopper long novels like Ulysses or War and Peace.