Bond fever grips Singapore's rich

Article in The Edge.

Surely this has to end badly one day, in my humble opinion. Investors in these bonds do not get properly compensated for the relatively high risk that they take. All thanks to people like Greenspan and Bernanke.


(July 11): Private banks are driving Singapore's bond market to new heights as wealthy individuals clamour for higher returns. Pacific International, a highly leveraged, unlisted shipping company, this week became the latest new issuer to benefit from this apparently insatiable appetite, when it sold a S$300m (US$240.8m) 5.90% unrated three-year bond that attracted S$3.5bn of orders from 93 different buyers. Pacific already has US$2.95bn of debt and an annual interest bill of around US$81m. Despite a weak outlook for the competitive shipping industry, private banks acting on behalf of their clients bought 93% of the deal. 

This was by no means the only bond to have drawn a crowd in recent weeks. Smaller listed companies have also pulled in big oversubscriptions. A S$75m 4.75% 3.5-year issue from construction company Tiong Seng Holdings received S$650m of orders, while property developer Singhaiyi Group pulled in S$800m for a debut S$100m 2.5-year at a 5.25% yield. Surging appetite for yield is allowing more companies to come to the capital markets, giving some in difficult sectors such as Pacific International additional flexibility compared to bank loans. While the additional demand adds to market liquidity, however, market participants worry that inflated order books may be distorting pricing and leading to a build-up of credit risk. "The private bank clients are adamant about getting their hands on the bonds because they know how hard it is to pick them up in the secondary markets," said a debt syndicate banker."The PBs (private banks) inflate their orders to ensure they get at least 10% of those orders, and that just balloons the entire book. Once you see a deal that is more than three times oversubscribed, you can be sure the rest is inflated."A giant order book typically allows a company to push for a reduced cost of funding. Pacific International, for example, squeezed the final yield on its bond by 35bp to 5.90%, a considerable saving.

Few alternatives
High-net worth individuals are turning to high-yield bonds after a choppy period for the city's stock market and government restrictions that have curbed speculative property investments. Cash rates are low, and the yield on the 10-year Singapore government bond is only 2.3%. "Yields are very low and cash returns are next to nothing," said a Singapore-based debt syndicate banker. "Investors have to re-channel funds somewhere, and they pick high-yield bonds as the returns can sometimes match up to equity dividend yields.

Value fund managers go on strike

Partly due to the QE (Quantitive Easing = money printing) programs of the FED (and other central banks) strange things are happening. Lots of rich valuations, for instance:

"Can you put a price on friendship? You can if it’s in a painting by Francis Bacon, whose three-part portrait of fellow artist Lucien Freud has set a record for the most expensive artwork ever sold. "Three Studies of Lucien Freud,” a 1969 triptych by the Irish-born Bacon, sold for $142.4 million in a Christie’s auction Tuesday night in New York." according to this article.

"A 59.60-carat pink diamond sold for $83 million, a record for any gemstone at auction. The oval-cut stone’s price exceeded the previous record by 82 percent at an auction last night in Geneva held by Sotheby’s, which called the gem one of the earth’s greatest natural treasures. Those prices include the buyer’s premium." according to this article.

"Today the Wall Street Journal reported that Snapchat turned down a $3 billion or more all cash acquisition offer from Facebook. The news has taken many by surprise, as Snapchat has no revenue, and is an exceptionally young company." according to this article.

Snapchat is a mobile apps where users can send photo's or pictures that disappear in a few seconds. Needless to say, the apps is quite popular with youngsters, but USD 3 Billion (please notice the "B") is also quite a bit of money, especially if the company has not yet shown any revenue nor profit (only losses).


Property prices in Singapore, Hong Kong, Melbourne, Sidney, Beijing, Shanghai etc, are also sky-high, hardly affordable for young people with average incomes. Also in Malaysia, the property market is pretty hot.

We notice the same in the share market, smallcaps are being played, warrants, all kind of speculative companies (especially in the mining and energy industry).

Greenspan and Bernanke can be truly proud of their "experiment", bubbles start to form in many places.

If there is one thing I learned from 20 years investing in the share market: if valuations are pricey, don't try to find the last value stock, better raise some cash.

The following article is from Bloomberg, stressing this same point:

Value Fund Managers Go on a Buyer's Strike

Wally Weitz beat 90 percent of his rivals in the past five years by buying stocks he deemed cheap. Now he says bargains are so scarce that he’s letting his cash pile up. “It’s more fun to be finding great new ideas,” says Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29 percent of its assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now it is not giving us anything.”

Weitz, whose cash allocation is about the highest it’s been in his three-decade career, joins peers Donald Yacktman and Steven Romick in calling bargains elusive as stocks trade at record highs. The three are willing to sacrifice top performance for the safety of cash as stocks rally for the fourth year in the past five. The mutual fund managers’ comments echo those of private equity executives Leon Black and Wesley Edens, who say steep prices make this a seller’s market.

As the Standard & Poor’s 500-stock index has risen 23 percent in 2013, the average amount of cash in funds that invest in U.S. stocks increased to 5 percent as of Aug. 31, from 3.7 percent the previous year, according to data from research firm Morningstar (MORN). Some fund investors frown upon equity managers who sit on large piles of cash, saying they prefer stockpickers to stay fully invested. “We hire them to run stocks, not time the market,” says Richard Charlton, chairman of Boston-based NEPC, which advises institutional investors.

Value managers, who look for stocks that are cheap compared with a company’s earnings prospects, cash flow, or assets, have sat on their hands before, including during the runup in 2007 and 2008 to the financial crisis, says Russel Kinnel, director of mutual fund research at Morningstar. Most of the cash-heavy managers say their decisions are based on individual stock prices, not any attempt to call a market top. Holding cash during market rallies can depress returns. Yacktman trailed 60 percent of rivals this year through Nov. 1 and 82 percent in 2012 at his $11.4 billion Yacktman Focused Fund (YAFFX), according to data compiled by Bloomberg. The fund, whose cash level rose to 21 percent as of Sept. 30, from 1.4 percent at the end of 2008, bested 92 percent of rivals in the past five years. “We are having a more difficult time finding bargains,” Yacktman wrote in an e-mail.

Romick, managing partner of First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. “We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” he wrote. His fund, which outperformed 68 percent of rivals over the past three years, had 40 percent of its assets in cash and short-term securities as of Sept. 30, according to FPA’s website. It beat 97 percent of its peers in the 2008 bear market. The fund had more than one-third of its assets in cash equivalents as of March 31 that year, filings show.

In bear markets, value managers find it easy to put their money to work. Weitz’s Value Fund had 7.8 percent in cash at the end of 2008, regulatory filings show. “It was a wonderful time,” he says. “There was so much to buy.”

Largest bailout in US kept a secret

http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html

Rather long and pretty frightening article, give the financial industry a finger and they take the whole hand.

Just a few items:

• The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion (1.200.000.000.000) on Dec. 5, 2008, their single neediest day.
• Banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.
• Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed.
• Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system
• Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”
• Lawmakers knew none of this. They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages.
• The perceived safety net creates what economists call moral hazard -- the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.
• “The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.”
• “The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”

Bernanke and Quantitative Easing

Bit old, but still funny and highly relevant.

The Bernanke Take

http://www.financialarmageddon.com/2011/08/the-bernanke-take.html

"Thanks to policies that have damaged our economy's underpinnings, caused significant hardship to everyone but the rich, and triggered a mad dash for assets that provide some measure of downside protection, we now have what might be described as the "Bernanke Take" (as opposed to the "Bernanke Put") -- that is, a dramatic increase in crimes involving precious metals and other valuables, as the Los Angeles Times reports in "Soaring Gold Prices Trigger Jewelry Robberies, Police Warnings":

As the precious metal has nearly doubled in value from two years ago, gold merchants have boosted security amid a series of brazen store robberies. Police are urging owners of gold jewelry to be discreet about wearing it.

That stunning rise in the price of gold is having a ripple effect: A rash of jewelry store robberies, street muggings and home burglaries. Now, merchants are stepping up security and police are warning everyone against flaunting their bling.

When Capt. Mark Olvera, who runs the LAPD's Newton Division, spotted a beefy man with a gold chain around his neck the other day, he worried the guy might become a victim. "He looked like he could take care of himself," Olvera said. "But that's a couple thousand dollars ... on him."

So far this year, gold chains have been snatched from the necks of at least 110 people during street robberies in Olvera's South Los Angeles division. His officers are circulating fliers and showing up at churches and community centers to warn residents to stop wearing gold in public, or at least to tuck it under their clothes.

"It's easy money. It's easy to get, and it's easy to get that gold fenced. You see all the ads, 'We buy gold,'" Olvera said. "They sell it, melt it down and there's no regulation."

Nice one, Ben. Can't wait to see what you have planned for us next."

I just had to post this photo, I love it! I am not a fan of Bernanke, I am afraid he will feature in many more postings in the future and not in a positive way.

Ben Bernanke: dangerous moral hazard

The FED under its Chairman Ben Bernanke is engaging in a very dangerous "game" trying to artificially prop up the share market (and bond market for that matter), as predicted by observers like Dr. Marc Faber. It is also doing everything opposite the advice that the IMF gave to the Asian countries in the 1997/98 crisis, rather hypocritical to say the least.


Two FOMC members voted against the proposals and have openly spoken out against the recent decision to keep the interest rates artificially low for an extended time:


"Two Federal Reserve policy makers said the central bank’s commitment to keep its benchmark rate near zero for two years may create a misperception it’s aimed at boosting stocks, which contributed to their opposition. Philadelphia Fed President Charles Plosser said in an interview yesterday that taking action after stocks tumbled “signaled that we are in the business of supporting the stock market.” Richard Fisher, the Dallas Fed chief, said in a speech that the Fed “should never enact such asymmetric policies to protect stock market traders and investors.” Both also said the policy won’t help spur growth. Plosser, Fisher and Narayana Kocherlakota of Minneapolis voted against last week’s Fed decision to hold the benchmark interest rate at a record low until at least mid-2013, the most dissent in almost 19 years. The move followed an 18 percent drop in the Standard & Poor’s 500 Index of stocks from the end of April through Aug. 8.
“It was inappropriate policy at an inappropriate time,”Plosser said yesterday in a radio interview in New York on“Bloomberg Surveillance” with Tom Keene and Ken Prewitt. Policy makers will probably need to raise rates before 2013 and should have waited to see how the economy performed, he said." 


http://www.bloomberg.com/news/2011-08-17/plosser-fisher-say-fed-shouldn-t-prop-up-stocks-through-monetary-policy.html