Friday, October 2, 2009

Singapore loses out as UBS stumbles

Thanks JJ for providing me some materials to add on this dead blog. LOLZ.

Singapore loses out as UBS stumbles

JOYCE KOH AND NETTY ISMAILSeptember 30, 2009

THE Government of Singapore Investment Corp's assets fell more than 20 per cent in the year to March 31 as a collapse in financial markets slashed the value of its stake in the investment bank UBS.

GIC, which invests more than $US100 billion ($114 billion) of the city's foreign reserves abroad, said it continues to lose money on its holding in UBS, though it has made a profit on its investment in Citigroup.

It has also recovered more than half of last fiscal year's loss as stockmarkets surged this year, its chief investment officer, Ng Kok Song, said in GIC's annual report.

Under its chairman, Lee Kuan Yew, Singapore's Minister Mentor and former prime minister, GIC has expanded through investments ranging from British shopping malls to European and US banks.

''The lion city was pretty well mauled compared to other sovereign wealth funds, and is now licking its wounds,'' said Song Seng Wun, an economist at CIMB-GK Securities in Singapore. ''While the worst may be over, given the excesses of the last few years, we could find that this recession could still affect the portfolio in years to come.''

GIC, established in 1981, said annual returns in the past 20 years averaged 5.7 per cent in US dollar terms, from 7.8 per cent reported in the previous fiscal year.

Its portfolio value had fallen about 25 per cent between October 2007 and December last year, the Finance Minister, Tharman Shanmugaratnam, said in March, after GIC bought stakes in UBS and Citigroup during the credit crisis.

GIC last week pared its shareholdings in Citigroup to less than 5 per cent from more than 9 per cent, realising a $1.6 billion profit.

Its investment in UBS will ''take longer to recover,'' GIC said in its annual report. The company said both investments have recovered ''significantly''. It did not take part in the recent placement of 6 billion Swiss franc ($6.6 billion) of UBS shares sold by the Swiss Government.

''The investment thesis was to capitalise on the unique business franchises of UBS in global wealth management, and of Citigroup in global consumer and corporate banking, especially in the emerging economies,'' Mr Ng said in the annual report. ''We maintain our confidence in their long-term prospects.''

The US is home to as much as 38 per cent of GIC's assets. Europe accounts for as much as 29 per cent and Japan as much as 11 per cent, GIC said. In the fiscal year ended March 31, 2008, its US investments were 34 per cent, while European investments were 35 per cent.

GIC's investments in stocks dropped to 38 per cent, from 44 per cent the previous fiscal year, according to the report. It increased its allocations to alternative investments to 30 per cent from 23 per cent in the year ended March 31, 2008. Its cash holding rose to 8 per cent, from 7 per cent. Bond investments fell to 24 per cent of its portfolio, from 26 per cent the previous year.

The company said it cut public equities by more than 10 per cent between July 2007 and September 2008, helping it avert a larger loss. It bought back the equities at the start of the year to restore its portfolio's public equities to its pre-crisis levels.

Monday, March 30, 2009

Article: Saying the Obvious

This is an article by Jeremy Siegel, a very renown professor in Wharton. But when I read through this article, the thing that strikes my mind is: Isn't he saying the obvious???

U.S. stocks raised eyebrows this week and last, closing higher in six of seven trading days, including four in a row from March 10 to 13. But how does the market look for the longer term? In an interview with Knowledge@Wharton, Wharton finance professor Jeremy J. Siegel says he was pleased to see consecutive gains after so many declines. He adds that history provides lots of evidence that stocks remain good long-term investments, especially when they are down 50% from their peak.

An edited transcript of the interview follows:

Knowledge@Wharton: Were you surprised by the four consecutive positive closes that the market had last week?

Jeremy Siegel: I would say, "It's about time." We've had many consecutive declines.... It's time the bulls had a little bit of room to celebrate. Two events sparked the rally. The most immediate reason was Citibank's surprise announcement, around March 9, that its January and February operating data showed a profit. Obviously, Citi is the most beleaguered of all the banks. For it to say that it had a profit in the first two months of the year was surprising, and that boosted the financial sector. Ken Lewis, CEO of Bank of America, said the same thing a few days later. Then we got fairly good news on the retail sales front. The consumer is not tanking quite as rapidly as we had feared. That combination scared the short-sellers who had been counting on the market to fall and fall and fall. They covered their positions, and we had a nice, short cover rally.

Siegel: Right. What's interesting about the auto market is that sales outside the U.S. -- around the world, actually -- did much better in February: China was very strong and so was Brazil. This was also true in Western Europe, with some discounting. So auto sales in February were better than expected.

Knowledge@Wharton: It sounds like when the market gets the right combination of signs, there's likely to be an upturn. Are there any signs now that would, in normal circumstances, support a turnaround, or at least a downturn that's not quite as steep?

Siegel: Yes. We had, finally, some good news on housing starts today, which were up more than expected. Of course, they had been totally devastated, but that did surprise a lot of economists. I'm not calling for stability there, because there is still so much oversupply in the market. I tend to look at the weekly jobless claims that come out every Thursday morning at 8:30. They are very sensitive indicators of the labor market. Among all the indicators I look at, they are the ones that give a good read about current trends in the employment area.

Knowledge@Wharton: Taking a longer-term look -- for folks who have just retired, or are about to retire, this market has been a disaster. Should people be shifting money from stocks to less volatile investments earlier in their retirement planning cycle? Or, said another way, should anybody past the age of 50 have a substantial part of their portfolio in stocks?

Siegel: I get more and more of those questions now. I certainly can understand -- it has been difficult for all of us, including myself. You know, I've advocated stocks. It has been a very painful period. Investors must keep a couple of things in mind.
We Suggest...

First, you mentioned the word "50." I don't regard that as very old, I guess, because I'm well past that age. With modern medicine, a person aged 50 can look forward to at least 30 years or more of life. When you think in those terms, over 30-year periods, stocks have done extraordinarily well.

Even over the last 30 years -- despite the last 10 being so very bad -- it might surprise people to know that stocks have beaten bonds and have done well for investors. Once you get that far, it depends on a lot of circumstances. Once you get to 65, are you going to retire at that age? How is your health? Do you have other resources? What are your obligations? It's very hard to give a blanket recommendation.

One thing is very important for investors in stocks to keep in mind: You are now investing when stocks are down 50% from their peak. All the empirical studies, including my own, indicate that once the market has fallen 50%, your future returns are even better. It doesn't guarantee that next year will be good -- we know that in the short run, there's a lot of volatility. But the data are overwhelming. Once you're down 50% from the peak, there are almost no bad outcomes going ahead 10 years. When you're at the peak, such as we were nearly 10 years ago in March 2000, then there are periods of bad outcomes. We have had one of those bad outcomes, to say the least. But once you're down 50%, the chance of further rapid deterioration that keeps you permanently down is greatly diminished.

Knowledge@Wharton: Given the changes we have seen, and some of the ups and downs of the last decade that you just mentioned, has your definition of "the long run" changed at all? What is "the long run?"

Siegel: People can joke and say, "The long run is long enough so that you can be right." I mean, it's a continuous pattern. There's no break. The government issues a 30-year bond.... that's kind of considered the long run. People who are in their 20s, 30s or even 40s and have 401Ks are looking towards retirement. Thirty years is often that period. Obviously, as you get older, and depending on your resources, you might want to shorten it to 20 years or less. As I noted earlier, during the last 30 years -- even though the last 10 have been very bad -- stocks have offered investors a very good return. If you started in 1979, you got a return that was more than 6.6% a year. That is interesting. In the last 30 years, even with the terrible 10 we've had recently, the average return has been higher than the average of every 30-year return from 1871 and beyond. We had 20 fantastic years from 1981 to 2000 and we faltered subsequently.

Knowledge@Wharton: Looking at the broader economy, what will the beginning of the end of the downturn look like? What markers will you be looking for? You've mentioned the weekly unemployment numbers. Is there something that has a broader signal?

Siegel: Sure. There are two types of indicators here. There are the markets themselves. The stock market will tell me that the bottom is near. If we go back and analyze the stock market, it could be six to eight months before the recession officially ends. Let's hope early March was the low -- of course, we can't be sure -- but if it was, we're looking towards September or October as maybe marking the low of the economic cycle. So the stock market will be the first to respond.

I did mention that jobless claims are sensitive data. The first sign will be not that they're robust, but that they're not getting worse. We might actually see a reduction. Those numbers have been holding at around 650,000 jobless claims a week of people receiving unemployment benefits. We should also look at monthly payroll numbers, which have also been in the 650,000 range of losses. They will begin to moderate. They're going to be down to 400,000 or 300,000. Then, hopefully, by the middle of the year, they will be zero or even slightly positive. Now, that doesn't mean normal. Normal growth is 200,000, just to keep the economy growing at the rate of the growth of the labor force. But we should see moderating trends in the payroll loss and in jobless claims that tell us that the worst of the recession is behind us.

Knowledge@Wharton: To end as we usually do, could you give us your sense of what the individual investor should be thinking about? We've talked about people nearing retirement, and retirees.

Siegel: The problem with the safe government bonds -- although they have done well during the last five years -- is that their yields are so low. Even long-term treasuries are at 2.5% or 3%. I like inflation-protected bonds better, but even their yields are low. I would repeat that once the stock market has gone down 50% and you invest in it, you can expect, on average, a yield over five to 15 years of 6% to 8% after inflation. There's no bond that is that good.

I will say, by the way, that the so-called junk bond, or high-yield bond, looks attractive. You're getting 8% to 10% on many of them. You need a diversified portfolio. You need to go to a mutual fund that does a good job on diversifying. Those may also be attractive for individuals. But despite the discouraging returns on stocks, once they're down as much as they are now, history is very emphatic that they should be part of your future portfolio.

Sunday, February 15, 2009

Temasek Portfolio falls 31%

What a nice headline, just days after Ho Ching stepped down as CEO. I supposed all Singaporeans with fully functional brains would be clever enough to know the reason why, despite the government insisting it has nothing to do with the poor performance of the portfolio. For the uninformed, major stock market indices are not exactly a good benchmark to compare the portfolio against with. We have to look at the component and structure of the portfolio before a good benchmark can be established. Jumping into comparing with major market indices is simply a no-brainer simplistic lazy manner of comparison.

Almost anyone can achieve a relatively 'beat-the-market-major-stock-indices' portfolio as long as it is relatively diversified especially in today's economic climate where bad news land upon bad news. Probably I am wrong to say that, and itself a naive, unsupported suggestion, but a decline is a decline. By stating:

Mrs Lim also reiterated that the two companies are long-term investors, and should be evaluated as such.

'This is not the first major decline in markets that they have seen, and will certainly not be their last,' she said.

So what are they trying to say? When portfolio performs well it's the 'extraordinary' efforts of the Temasek/ GIC management. But when the portfolio performs badly, it's the global market's fault. It's normal. It's acceptable. And it's nothing much to throw a few billions away as long as you take in long term views. If you look at stock history, it has always been a rising trend especially when you take a much longer view, simply because technology advancement has to improve the economy as a whole. A simple economic model Cobb-Douglas Model Y = AF(K, L) would show that technology becames the main economic growth driver as capital and labor reaches it's limits (Solow Growth model). In other words, given that explanation, no matter what happens, the people at Temasek/ GIC will never be held responsible for any poor performance and will always enjoy credit for 'strong performance' even when the entire market is performing well.

This brings me to the topic of finance obsession among today's Singaporeans who view the finance industry as an ultra cool and rewarding (monetarily speaking) job. I myself used to be one of the cash-cow-chasers but has since grown to be disgusted at the kind of personality and character of students who view themselves as future bankers-and-I-am-gonna-earn-millions.

The local newspapers are all fired up again with the recent release of Financial Times MBA rankings for 2009. NUS and NTU were filled with joy as they made quantum leaps in their rankings. While NUS boost their 35th spot, they stare in envy as NTU boosted a seemingly impressive 24th spot, while knowing behind their back an upcoming SMU is ready to roar as well (since only MBA with 5 years history can qualify).

But then, it’s all just marketing. Simply leverage tools that both universities would deploy to entice the naive students to register for the universities in 2009. How powerful is marketing? They would use a MBA ranking to boost that the undergraduate programmes would be superior as well. After all, if the Masters programmes are good, needless to say, so would be the undergraduate programmes. Right? Well…maybe not entirely true.

Such rankings are subjective. And it’s kind of pathetic that our local universities need to derive joy and happiness from an external foreign source. Wharton was labeled number one 8 times for the past 10 years and no where on the website would they even bother to boost the rankings. Reason? Because they know they’re good, and they know they have strong alumni and they are world renowned. Harvard Business School isn’t bothered if they are number 1 or 2 or 3. The business cases they produced each year are humongous, and it was used all around the world, even in ‘Number 1’ Wharton. Why can I say that? Coz I am now at UPenn and I study them almost every day.

Make no mistake, I love my university and I think I have benefited quite a lot from studying there with so many opportunities abound. But I think we Singaporeans ought to have more confidence. We seem to be all caught up in rankings and deriving satisfaction from praises from others. Primary and Secondary Schools market their schools by wasting money on banners and posters boosting individual results (in some minute areas such as ‘Overall Most Improved Award’ or ‘5 7-As students produced in 200X’….omg, what is the world coming to). Does it really make a difference to the education standards the students are getting? It just contributes to an elitist-mization of schools. After being top for so many donkey years, the new elites came up with Integrated-Programme. While it doesn’t sound any elitist, we all know it’s the usual suspects that have this programme.

Singapore has too small a population to get really selective in the quality of their students and I would boldly say the quality of students across the 3 local universities is very similar with probably marginal differences in more competitive courses such as Medicine. Of course, there are outliers every where. Even in UPenn, not all are as impressive as they may seem to be. After all, it’s an Ivy League right? Singapore students ain’t too bad as well.

What makes a school good? The alumni they produced and the influence that comes with it. With so many alumni controlling the business world, politics, social programmes, charity etc, it’s no wonder the Ivy Leagues and Oxbridge (and many others as well such as LBS, Insead, MIT, Stanford) had such strong influence and reputation. However, one can also argue that it takes time for the universities to do so. After all, not even Stanford Business School becomes famous overnight, and Silicon Valley contributes to its rise as well. But I do think the marketing and competition especially among biz schools in Singapore is kinda irritating, pardon my language, creating a false elitist ‘phenomena’ among the business school students. I got pissed off when some biz students start to display an air of superiority in front of me. Don’t you?




Wednesday, February 4, 2009

Been Busy: Gov't Spending is No Free Lunch

I haven't been posting for a long time ever since I left Singapore. Time isn't really on my side and I have been busy with work and studies. There is, however, one interesting article that I think it's worth a read. For the macronians, quoted entirely from WSJ written by Robert J. Barro:

Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues. Now we have the extreme demand-side view that the so-called "multiplier" effect of government spending on economic output is greater than one -- Team Obama is reportedly using a number around 1.5.

To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requiring a cut in anyone's consumption or investment.

The explanation for this magic is that idle resources -- unemployed labor and capital -- are put to work to produce the added goods and services.

If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.

What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one.

A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP -- consumption, investment and net exports. In other words, the social cost of one unit of additional government purchases is one.

This approach is the one usually applied to cost-benefit analyses of public projects. In particular, the value of the project (counting, say, the whole flow of future benefits from a bridge or a road) has to justify the social cost. I think this perspective, not the supposed macroeconomic benefits from fiscal stimulus, is the right one to apply to the many new and expanded government programs that we are likely to see this year and next.

What do the data show about multipliers? Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II. The usual Keynesian view is that the World War II fiscal expansion provided the stimulus that finally got us out of the Great Depression. Thus, I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists.

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.

We can consider similarly three other U.S. wartime experiences -- World War I, the Korean War, and the Vietnam War -- although the magnitudes of the added defense expenditures were much smaller in comparison to GDP. Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 -- the same value as before. (These estimates were published last year in my book, "Macroeconomics, a Modern Approach.")

There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.

As we all know, we are in the middle of what will likely be the worst U.S. economic contraction since the 1930s. In this context and from the history of the Great Depression, I can understand various attempts to prop up the financial system. These efforts, akin to avoiding bank runs in prior periods, recognize that the social consequences of credit-market decisions extend well beyond the individuals and businesses making the decisions.

But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.

Mr. Barro is an economics professor at Harvard University and a senior fellow at Stanford University's Hoover Institution.

Sunday, November 30, 2008

Principles of Economics simplified, and what it really means

I can't help it, this video is hilarious. And for some 'shocking' facts, check it out.

Friday, November 21, 2008

Are foreign workers any good?

No, I do not really want to debate on the merits and/or pits and falls of having foreign workers in the country. No doubt, they have their merits, although it's hard to educate the man on the street to understand the economics behind this. But I do think that the the social cost, which are mostly intangible especially in the initial stage, have to be considered.

In terms of tangibility, the area of the foreign workers' dorms along Old Tampines road is always filled with rubbish especially on certain hill slopes, and pictures of foreign workers relaxing and partying on the slope after work form in my mind. Whatever happen to green and clean Singapore? Ok, probably this is a sweeping statement and the new generation of Singaporeans aren't too particular about keeping the environment clean. But if you are to ply along the dorms of foreign workers, more likely than not you will see the same scenario. The psychological impact on locals is also evident, and I believe I do not have to talk about it too much.

The government allocates 20% of local university places for foreign students and if you belong to the engineering school or faculty of sciences, that would be most apparent. While I do not object to welcoming foreign talents with open arms since having them around increase competiton and raise the overall quality of the university, 20% is a bit too much in my own honest opinion. The ministers gave the reason of locals not wanting to study these important majors with most opting for business and arts. Well, one can't blame the young 18 year olds from having such preference given the much glamor and $$$ associated especially with the heated marketing campaign and competition among SMU, NUS Business School/ FASS and NTU Business School/ School of Humanities and Social Sciences. On the other hand, no marketing effort to spruce up the dull and boring image of engineering and science was done.

Technology is associated with being hip, world-changing, full of impact, and highly lucrative in universities such as MIT, Stanford (ok, having Silicon Valley next door is a marketing ploy in itself) and also universities in Japan and Taiwan where technology is the main catalyst of economic growth. Electrical Engineering, one of the most 'common' engine majors where NUS/NTU students do not view it with much pride, is actually one of the most competitive course to get in alongside traditional competitive courses like medicine and law in the National Taiwan University. But Singapore isn't doing so bad, with 80% of the global market share in microchip processors and a vibrant life science research center, the Biopolis.

So why aren't the students here viewing technology as an attractive option? Some, or rather, most said engineering/science subjects are too boring. So are they? Or is it the way it was being taught? Business/arts subjects are relatively easier to be perceived to be more interesting since it is mostly qualitative and can be related to real life easily, while the poor engine student struggles to make sense how knowing digital signal processing or linear predictive coding or symbol synchronization can make a difference to his life. This is one of the Singapore Economy-Education Paradox (ok, there's no such term, i coined it myself), where the economy's star industry is not reflected in the education system despite the close connection between the labor force and education. Another example would be while Singapore has one of the best ports in the world, no one seems to be very interested in logistics and port management. In fact, there is no such specialized bachelor degree offered in the 3 local universities. The closest one can find is the Bachelor of Engineering (Industrial & Systems Engineering) offered by NUS and till recently, the Bachelor of Science in Maritime Studies (with Business Major option) offered by NTU, as well as the 3 local business school bachelor degree with concentration in Operations Management.

And then the controversial issue of too many MOE scholarships being given out to foreign students especially those from India and China. With their home countries coming up as super-powers, which student in their right mind, in all logic and patriotism, would choose to settle in tiny limited opportunities Singapore? The resources spent on each undergraduate MOE scholar are immense, estimated at a conservative S$125,000! And that is no small figure. For those unfortunate Singaporeans who didn't get to be admitted into the local universities end up having to spend a fortune on private institutions such as SIM or MDIS, and also most commonly opt to go over to Australia and UK.

For the uninformed, one can get a very good undergraduate/ masters education in countries such as Germany, France, Sweden and Switzerland at a bargain. Look beyond the normal destinations. Sure, there may be some language barriers but there are also some english programmes. Education in Germany is in fact free! And there's Lund University and Stockholm School of Economics, both free as well (although there are plans to charge international students now) Or take the University of St. Gallen, which is one of the more renowned university in Switzerland. Total annual tuition fees is only 1170 Swiss Francs or in today's exchange rate, around S$1480. Take in the estimated living expenses of 2000 Swiss Francs per month, the annual education in Switzerland would cost around S$ 31,000. Almost equivalent to (just) the annual tuition fees at aussie universities. And I believe Europe would be a nicer and enriching place to receive your education than Australia.

Sunday, November 16, 2008

Cost of Living

This is kinda random. I was reading through Bloomberg when this heading attracted me.

Cost of Living in U.S. Probably Dropped by the Most in Almost Sixty Years - "Prices May Have Tumbled as Economy Sank: U.S. Economy Preview "

Well, with the USD strengthening so much against the SGD, I was pretty devastated. I can still vividly remember the rate is 1.43 in May. And now it's 1.52 and going on strong.....And apparently the rental fees I am inquiring will be increased 2-5%....