BANKS TURNED THE TABLES ON HOME OWNERS

quote: "Success is a thought process"

Just looking at some time ago...

BANKS WERE EAGER
The process of sourcing for Financing for your New Home, under construction home or refinancing is fairly easy. Banks are falling over themselves to lend out money. Anything can be considered.

CUSTOMERS WERE BOSS
Customers would shop for the cheapest package, the best loan, etc. You find the best loan then you submit into the bank for approval.

and compare it with NOW...

BANKS ARE NOW WARY
Now banks view anything that walks as a sub-prime risk. With properties valuation dropping, many banks have tightened credit. Some banks have stop Term Loans Outright.

CUSTOMERS ARE SQUEEZED
Now, customers are increasingly not in a position to obtain the best possible packages. The old method of finding the best package and then applying for a loan does not work anymore unless you have millions of dollars and a stable income. Now it is, "which bank dare to lend you money." If you pass their Credit ACID tests, then you choose from the packages that they have and you optimise the mix and match of packages.

It is amazing how quickly the tide turns. When that happens, many people inevitably get burnt.

What is sad is, most banks are flushed with cash during the good times. Banks will try to lend money to you when you least need it. Cheap credit leads to asset price inflation, many people end up over-paying for properties.

When the tide turns, property prices start to fall, the bank's Loan to Valuation (LTV) increases. This causes the banks pain, if the fall is severe enough (i.e. >20%), that will typically wipe out the most recent Home Loans which were borrowed at 80% financing. Banks will start to tighten.

During this time, many people will need money for various reasons. And Banks, instead of lending out money to smooth out the economic decline for a soft landing, further tighten their credit, exacerbating the severity of economic slowdown.

It is a typical of a boom and bust cycle. So don't let this BOOM and BUST economic Chameleon catch you... It could be painful.

US GOVERNMENT KNEW ABOUT THE FINANCIAL CRISIS IN 2006

quote: "Success is a thought process"

The fundamentals of the economy is strong, John McCain the US presidential candidate said in 2008.

I think the US companies are probably one of the most competitive on earth. BUT the US economy is fundamentally strong?

US Trade secretary Hank Paulson visited China in 2006 at the behest of George Bush. During the visit to China, he addresses issues such as trade imbalance, and lectures China on over-saving and pressures China to re-value China's currency.

One of the issues was that China used it's massive savings to buy US treasury bonds. This in effect finances the US trade deficits, but on the other hand, it keeps China's Yuan artificially low as the reserves/surplus was immediately shipped out of China.

I remember (though I can't find the article, someone who has it, please send it to me) that Hank Paulson was asking China to diversify it's reserves. He was actively Touting Freddie Mac and Fannie Mae bonds to China, in that visit.

China said, thanks but NO Thanks.

Hank Paulson was the ex-CEO of Goldman Sachs, he has enough knowledge to know that Freddie Mac and Fannie Mae were time-bombs waiting to blow up. The US government was smart enough to ask China to buy those useless bonds as early as 2006.

In fact the problems of Sub-prime dated back to the early 2000, but over-leveraging, off-balance sheet risks and derivatives were probably started much earlier.

What I could not understand is that, what the US government saw was the "train" running out of tracks, but did not do anything to stop the Financial Train from crashing. Neither did it do anything to slow down the train.

Had China bought Freddie Mac and Fannie Mae bonds in large amounts (like Hank Paulson suggested China should do), these 2 over-leveraged companies would have been able to delay facing the "music" and continue to lend irresponsibly. The US government bail-out would not have been necessary and in case they go bankrupt, China would have been burnt the most.

So the key thing to do is, read more, learn more. Do not despair when it seemed hopeless (for hope is around the corner) and do not GREED when everything seemed perfect (Doom often follows greed). So many of these BOOM and BUST cycles are timed almost to perfection for the well-informed to get more wealthy while the rest gets burnt.

If you think that following the crowd is safe, then you would be happy to know that in the USA, 5% of the people control 90% of the wealth. If the crowd is right, then wealth would be distributed more evenly.

Now that things are very bad and it is set to get worst. But do not despair, people like Warren Buffet has begun to take biggest stakes in well run companies whose share prices have been beaten down. So controlling the emotions is the key to maintaining your wealth in this volatile market.

Is it usually good idea to stretch a home loan as long as possible?

quote: "Success is a thought process"


20 years Interbank Interest rate chart (1988 - 2008) - Adapted from MAS, by Paul Ho Kang Sang, www.propertybuyer.com.sg (info@propertybuyer.com.sg)

Recently i was also offered a 3-month sibor package where the monthly installments are fixed, but the principal paid varies with the interest rate.

I think it sounds like a good package as there is some certainty in the amt of monthly installments paid, but any potential pitfalls from this? And the equity accumulation is quite slow due to the length of loan.

Dear Home Buyer/Owner,

To answer your first question. It is important to understand whether you treat the property as a single home, an investment property or simply a property in which you can use as a collateral for your business.

Different people may react differently as a property can be an emotional issue/decision.

AFFORDABILITY
For some it is an affordability issue, therefore stretching the home loan will allow you to stretch your budget to buy the home of your dreams.

COST / FINANCIAL CONCERNS

Stretching the home loan incurs higher total interest cost. However some investors have been known to stretch the home loan as long as possible to maximize their return on invested capital (If this area is of interest to you, I can elaborate more). Longer term loans tend to be more costly because all loans are structured in such a way that mostly interests are paid during the earlier years. So you will see that your outstanding loan amount seems to be standing still.

On the other hand, some people may opt instead of 30 years, to take a loan of 20 years and at the end of every 2 years, they take another 20 years loan, such that the total repayment may still be 30 years, but they end up paying lesser interest. But it is rather troublesome and few people are inclined to do it.

3-Months Sibor with Fixed repayment structured. In this case, the total interests are variable and re-priced every 3 months, higher Sibor means you pay more interests and less principle. But you have some peace of mind such that you don't have to worry about how much to pay, though you are deferring the cost till later to smooth over short term financial flexibility. Over a 20 year period, interbank rates (Sibor) Singapore dollar Sibor has approached reached about 9% in around 1990. If you are paying Sibor + 0.9%, that would mean you are paying almost 10% interests. Fed overnight rates has gone as high as 20% during the recent financial crisis in which banks stop lending to each other or tightened credit drastically. So markets such as the Libor (London), Sibor (Singapore) are technically not immune to fluctuations in the market and liquidity crunch. And as a rule of thumb, a 3-months Sibor fluctuates more than a 6-months Sibor. While the 1-month Sibor is more volatile than the 3-month Sibor

There are quite a few fine prints which you need to note, it could be a Legal fee clawback or lock-in period penalty. Or other forms of administration fees.

If the loan has no lock-in period, then you are largely open to interest rates shocks (if any). Though Singapore market is generally flushed with liquidity and hence low GDP (economic growth) tends have also have low interest rates, but that cannot be taken for granted. We have seen first hand in the US, whose markets have much more depth and yet the funds dried up when banks tightened credit, leading to sky high interest rates. In fact, the Federal Reserve (FED) has to intervene to pump money into the market to reduce the interest rates as seen in the Sub-prime fiasco.

Where is Interest headed?
There is likelihood that interest rates may stay low (same as 2002 to 2005), but this time, there is some marked differences, the M1 money supply is much higher in Singapore. In fact the money supply has grown much faster than the economy in Singapore since around Dec 2006. From 2003, to 2008, money supply M1 doubled. Surely this money will absorbed into the economy over time if they are not being brought outside of the country, hence this is one of the many possible reasons that the Singapore market is rather resilient.

There is also some risks that US bail-out of private enterprises and banks to the tune of almost 1 trillion (1000 Billion USD), plus US annual trade deficit of over 500 Billion (http://www.census.gov/indicator/www/ustrade.html), the USA cannot afford it.

Even China with the largest reserves on earth to the tune of US$1+ trillion cannot afford to bail USA out (considering that much of this research is already in US government bonds and other financial instruments). Collectively USA corporations are very rich, but there is no way the USA government can make them come out with any money.

There is a real risk that USA might expand money supply (aka print more money), there may be elevated inflation risks and therefore interest rate hikes possibilities. Because money supply takes time to filter down, there is usually a time lag effect. Right now, it's anybody's guess. But within 6 months to 1 year my personal opinion is that it will stay at current levels, perhaps with a little room for slight drop.

The reason why USA is important is because the US market accounts for ~14 Trillion USD in GDP, or about 25% of the world's total output. THe link on GDP, http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

You can ask me more at info@propertybuyer.com.sg or to the site: -

www.propertybuyer.com.sg

BANKS TIGHTENING CREDIT CAUSES HOME OWNERS PAIN

quote: "Success is a thought process"

CNN money reported that Credit Crunch has begun to hit small businesses. Banks are tightening credit discriminately or indiscriminately. That means, on the balance, the small businesses and individuals refinancing their homes will suffer. For existing home loans, banks may be able to lock users in for longer period of time (not by contract, but by lack of alternative options) as home owners are unable to refinance for a cheaper rate elsewhere.

This will significantly hurt home owner's disposable income. As if the problem is NOT BAD enough, over 70% of the US GDP depended on consumption and may directly cause the US economy to slip.

This must be one of those over-shoots and under-shoot moments where all bad things converge at the same time.

And if you lose your job, banks will certainly NOT ENTERTAIN you. While you are stuck with a higher repayment interest rate, you have no option to refinance because banks generally scorn on "ZERO INCOME" unless you have large equity in your home based on the most ULTRA conservative estimates.

email me at loans@propertybuyer.com.sg for a free un-biased mortgage health check (Singapore only).
www.propertybuyer.com.sg

Below CNN Money (By Emily Maltby - 15th Sep 2008)
Credit crunch hits small businesses
If the inability to land a bank loan is preventing you from expanding, you're not alone.

Shock and awe on Wall Street

More Videos

GE tumbles as investors fret over financial stocks
Paulson: Banking system is 'sound'
Credit crunch hits small businesses
Credit card debt, delinquencies rise
Output dives 4x more than forecast
Issue #1: America's Money - Everyday on CNN

More Videos

(CNNMoney.com) -- Stephani Smith's Maui-based healthy meals delivery company had been thriving since 2004, but needed financial assistance to expand its marketing efforts and Web exposure.

"I was the type of business that in times like this people have to cut out," she explains. "More and more people had to let go of the convenience we offered to save money and instead make their own dinners, pack their own kid's lunches, do their own grocery shopping and eat less organically."

Smith approached Leili McKinley of Haiku, Hawaii, business consultancy Soaring Phoenix in February 2007 to get advice on procuring a bank loan that she believed would help her boost business in a tough economy. With a good credit score and a business partner who had connections with a corporate officer at American Savings Bank, Smith would be a shoo-in for a loan, McKinley thought. So Smith reached out to ASB and Central Pacific Bank (CPF) for help.

"But the banks stalled on her," McKinley said. "Every time we called, it was something different - lost paperwork or required documents that had never been asked for. It seemed that their tactic was to see for how long she could survive without the loan before considering her."

She couldn't. After months of holding on, Smith folded her business.

Around 65% of domestic banks say they have tightened their lending standards for commercial and industrial loans to small firms over the past three months, according to the July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, released in August from the Federal Reserve System. That's up sharply from the 50% of banks reporting tighter credit in the April edition of the quarterly survey.

The National Federation of Independent Businesses' most recent Small Business Economic Trends report sings a different tune, saying that that the credit crunch is a Wall Street-only issue. Thirty-four percent of the survey's August respondents, a selection of NFIB members, reported regular borrowing activity. That's in line with historical trends, although 10% said loans are getting harder to land. Only 2% of the owners polled cited the cost and availability of credit as their number-one business problem, far from the record 37% in 1982.

Bill Dunkelberg, chief economist for the NFIB criticized the Bank Lending Practices report's findings, noting that the 52 banks surveyed represent the largest banks in the nation. As chairman of Liberty Bell Bank, a small bank in southern New Jersey, Dunkelberg believes that smaller banks, which cater more to small businesses than to large ones, are doing just fine.

"As a small bank, we're not borrowing deposits to lend out or any of that fancy schmancy stuff," he said. "We have the savings accounts of the little people and we're lending out to them."

But Maria Coyne, executive vice president of community banking for KeyBank (KEY, Fortune 500), a nationwide midsized lending institution, sees banks everywhere clamping down. Even smaller banks that avoided the risky gambles that have decimated Wall Street are hit by the ripple effects of major crashes like Bear Sterns and Lehman Brothers (LEH, Fortune 500).

"Most banks are safe and sound, but these unprecedented times are affecting everything that has to do with banking," she said. "Stock prices have depressed, capital costs have increased, and regulators are more focused on capital adequacy ratios -- even for banks that didn't do sub prime mortgage lending." Banks still want new clients, but Coyne sees them being ultra-cautious.

iReport: How's your business faring?
Credit availability is a mixed story right now, according to Ray Keating, chief economist for the Small Business and Entrepreneurship Council, a small-business advocacy group in Oakton, Va.

"If you are dealing with a bank that isn't in trouble and you have a good track record and relationship with that bank, you'll have less of a problem getting a loan," he said. "But it's only expected that they will want more information to prove to regulators and investors that the loan is worth it. That means that it's a heck of lot tougher for startups and small businesses without track records to get loans."

Entrepreneur Delphine Humphrey, founder of the Mikado Kids Drop Inn childcare center in Arlington, Texas, found financial institutions reluctant to loan her start-up capital despite her great personal credit and a strong business plan developed with the help of experts at her local small-business development center.

"I cried myself to sleep several times," she said, recalling the past year. "We tried four banks and after getting rejected from all four, we decided to get creative." After three months of searching, Humphrey secured a loan from microloan organization Accion Texas. She will open the doors of her daycare for the first time this week.

Tulsa-based business coach Bill Bartmann says it's clear that banks are treating people differently. "They've changed their standards," he said. "They want to see what value you can bring to the bank."

Michele Larson, also a client of McKinley's on Maui, wanted to expand her one-year-old fitness center to another island. She, unlike Smith, procured a loan, but had to jump through hoops with three banks just to get a proposal.

"She was sitting on heaps of cash and had a perfect credit score," McKinley said. "Three years ago, the banks would have come back to her within 30 days. But instead they grilled her on balance sheets, business plan and personal finances for months."

Six months after the time she applied, the bank came back with outrageous terms on the loan. "The conditions were terrible. Basically, the bank wanted to control all my money," Larson said. "Also, there were no fixed rates and at the end of the fiscal year, I had to pay an additional 25% of excess cash flow back to the bank. Thank goodness for my accountant, who helped translate all the jargon and caution me."

Business coach Bartmann, as well as KeyBank's Coyne, emphasize that an entrepreneur's relationship with their bank can make or break a loan today. "It can differentiate you from all the other small business owners who walk into the same bank vying for the same money," he said.

And yet the NFIB remains adamant: "Credit has tightened ever so slightly since 2003," Dunkelberg said. "But there's no seizing up of markets - nothing is frozen on Main Street."

Over on Maui's main street, the view is grimmer. "I'm really shocked that large organizations whose constituents are small businesses are saying that the credit crunch is only affecting Wall Street," McKinley said. "It just seems really off target."

First Published: September 15, 2008: 11:13 AM EDT
Have you had trouble getting a bank loan? Join the discussion.

Market bets that the FED will lower rates

quote: "Success is a thought process"

When the U.S.A. sneezes, the rest of the world catches a cold. Singapore is right smack in the middle of that sneeze as Trade (Import/Export) makes up a large percentage of Singapore's Economy. Weakness in the USA directly impact the economic outlook of Singapore. Major markets are expected to lower rates in expectation of a forecasted slowdown (Source:IMF) of growth worldwide. Interest rates may stay low for at least in the 2009.

Most banks in Singapore charge a Step-by interest rates in which you pay lower interest rates in the 1st year and move on to higher interest rates in the 2nd and subsequent years. In a refinance scenario, the other bank takes over the outstanding loan balance from the previous bank.

However, banks are tightening credit the world over.

If you are expecting some changes in personal circumstances, you may not qualify to refinance your home to get better offers and end up paying elevated rates if the following occurs: -

YOU LOSE EMPLOYMENT
YOU SALARY IS REDUCED
YOUR PROPERTY VALUE DROPS
CREDIT TIGHTENING in general

It may be advisable to get a free mortgage health check to determine your risk level.



Source: IMF, http://www.imf.org/external/pubs/ft/survey/so/2008/RES012908A.htm

"In Western Europe, signs of a future slowdown in credit growth are just now emerging and there is some potential for worsening credit quality as lending has been very robust in some countries and several countries face housing markets considered overvalued, the IMF warned.
Lending in some segments of the corporate sector also expanded rapidly in the first half of 2007 with the rise in leverage buyouts. Weaker quality corporates have already seen a substantial rise in the cost of credit although yields investment grade debt have remained relatively stable. Additionally, a slowing economy will likely exacerbate the tighter credit environment further as unemployment picks up and job growth slows.
Emerging markets have been resilient so far, but face challenges ahead. Emerging market equities have outperformed mature equity markets, but prices in some markets have declined steeply since the start of the year on expectations that the U.S. economy may slow more rapidly. "Signs of spillover are most evident in the sharp fall in private emerging market bond issuance, particularly in some emerging European economies whose banks have relied heavily on external financing to support rapid domestic credit growth," the Financial Market Update stated. Generally, flows to emerging markets have remained positive up to now."

REFERENCE:
CHICAGO (Reuters) - U.S. short-term interest rate futures rose sharply on Monday to reflect higher prospects for a rate cut at or before Tuesday's Federal Reserve policy meeting.

Dealers responded to a fresh crisis in financial markets after investment bank Lehman Brothers filed for bankruptcy over the weekend, and to sharply lower calls for the U.S. stock market.

The Federal Open Market Committee holds hold a regularly scheduled meeting on Tuesday.

Implied prospects for the Fed to lower the benchmark fed funds rate to 1.75 percent traded as high as 92 percent and have now subsided to 72 percent. On Friday, prospects for a September rate cut were a slim 12 percent.

A single, quarter-point rate cut is fully priced by the December FOMC meeting.

"It looks like the market is looking at just a 'one and done' scenario," said Rudy Narvas, analyst at 4CAST Ltd in New York.

The Fed late on Sunday announced several measures aimed at mitigating strains in financial markets.

Those moves included enlarging the range of available collateral for the Primary Dealer Credit Facility and the Term Securities Lending Facility.

"It is only prudent to consider all available tools at the Fed's immediate disposal ... The option of adjusting the funds rate per se is probably not at the top of the priority list," said Thomas Lam, senior Treasury economist at United Overseas Bank Group in Singapore.

(Reporting by Ros Krasny; Editing by James Dalgleish)

SIBOR OR NOT???

Between 1988 and Aug 2008, Interbank rates have almost reached 9%. During recession years of 2002 and 2005, interest rates hovered around 1%. However it has risen to 3+% from 2006 to 2007 only starting to fall dramatically back to around 1% in 2nd half of 2008.

Differences between 2002 to 2005 and 2008.

During 2002 to 2005, inflation are low, while in 2008, inflation is still high (~5-6%). This negative interest rate to inflation rate is typically rare. This could indicate intervention.

But then, nobody really knows where the rates will end up. If you cannot stomach the full risk, take some precaution such as a mix of Fixed Rate and Variable Rate mortgage to cushion the risk of fluctuation.

BANKS STEPS ON BRAKES ON LENDING

quote: "Success is a thought process"

Wachovia Corp. A big regional american bank lender has stopped Offering option adjustable-rate mortgages, which let borrowers skip part of their payment and add the balance to the principal. According to Robert Steel, the Charlotte, North Carolina based bank is "tapping the brakes" on risks.

Banks worldwide are indeed becoming more cautious, not less.

That means some people who do not qualify for refinancing with other banks may be stuck with an existing bank. Many banks in Singapore tend to charge a lower interest rate to acquire new customers and in latter years charge more to either recover their profitability.

As interest rate directions especially the SIBOR cannot be accurately predicted, it is safe to say that for some people, certainty of a fixed rate mortgage for a number of years gives them ample time to react to any crisis.


Source: Morningstar.com

As you can see from the chart of 3-month Libor (The London equivalent of Sibor) rates over the past 20 years. It can go as high as 20%.

Many banks are increasingly providing Sibor Plus packages to home owners (Sibor + margin%). While it can offer lower rate in the short term, it can be highly dangerous when a credit or liquidity crisis comes.

Now the question to ask yourself. Can you afford your installment when interest rate hits 20%?

BUYING A PROPERTY IN GEYLANG

quote: "Success is a thought process"

Recently in 2007, a friend of mine bought a property in Geylang. The property is in decent condition, it's Freehold and it is about 1000 square feet. With all the promises of KALLANG Expansion and being near to the city, etc. It seemed too good to be true at S$400,000. She was planning to lease it out for S$1500/- per month.

So here is the calculation: -

Rental revenue --- S$1500 x 12 months = S$18,000
Downpayment 20% --- S$80,000
Cost of Financing S$320,000 @ 2.5% --- S$8,000
So the Return of Investment --- (18,000 - 8,000) / 80,000 = 12.5%

So 12.5% gains is quite OKAY right?

So she went to the bank and tried to borrow money, the banks told her, sorry you have to pay 30% to 35% downpayment.

NOW, new calculation: -

Rental revenue --- S$1500 x 12 months = S$18,000

Down payment 30% of 400k --- S$120,000

Cost of Financing S$320,000 @ 2.5% = S$8,000

So the Return of Investment = (18,000 - 8,000) / 120,000 = 8.3%

Where are you going to get that extra S$40,000 all of a sudden.

People can avoid these pains if they get a PRE-APPROVED LOAN. Just provide the unit number, development name, the banks can usually reply to you in 1-2 days to give you a YES/NO answer. Do bear in mind that some banks may say NO and you have to go check with some other banks and wait some more days. So it is a tedious process. A Independent mortgage consultant such as

http://www.propertybuyer.com.sg or info@propertybuyer.com.sg
can quickly help you get a loan pre-approval (and subsequently get you the best fit loan). So you can put your heart at ease to buy the investment property/home of your dreams.

This is just a simple calculation which does not YET include the Rental property tax of 10% p/a. Conservancy charges, maintenance and depreciation of property as most tenants will want you to re-furbish it, and it can cost $$$. Don't forget stamp duty, lawyer's fees, fire insurance, surveying cost, etc.

DON'T RISK IT, get pre-approved loans first before signing the option to purchase.

Valuing A Property - A layman's approach

quote: "Success is a thought process"

Recently Straits Times pointed out that many condominiums do not have enough car parks. I would have to agree that CAR PARKS space as one of the Valuing criteria.

CAR PARKS ADEQUACY
Car parks are important as many people who stay in Condominiums may own multiple cars. During festive seasons when their family and friends visit, having no car parks is quite inconvenient. One friend said, "After I have moved into this condo, I have no more friends and my family cannot visit me, unless they take the taxi."

However I strongly believe that buyers do NOT sufficiently value this aspect when buying a property or left it too late. Only when the problem surfaced when they cannot even find parking lots when they started to realize this problem. Once the problem is publicized and known, it can and will impact the property value. It is not immediately.

Your thoughts?

Valuing A Property - A layman's approach

quote: "Success is a thought process"

Success is a thought process."

What explains the price differential between 2 adjacent properties? Often you will see 2 adjacent properties sometimes a big enough price gap to warrant a big WHY.


Say for example, Condo 1 is asking an average price of S$900 psf and Condo 2 is asking a S$1200 psf.

What could be the reason???

Here are some possible explanations: -

SIZE
1. Condo 1 offers bigger units and Condo 2 offers smaller units. Towards the pricier end of properties, affordability is an issue. For example: -
Condo1 unit sizes may be in the average of 1500 square feet (10.76 sq feet = 1 sq meter). That means that an average unit would cost around S$1.35m.
Condo2 unit sizes may be around 700 to 800 square feet. That means an average unit would cost S$960k.

AGE
2. If size is not an dissimilar, Condo 1 may be older than Condo 2. Newer units generally command a premium as their design tends to be more up to date with current trends. Over time, property value tends to become higher, therefore newer properties tend to have better finishing, technologies (intercom systems), lighting, marble floors, feature walls, large lobbies, Bigger and faster lifts, air-con lobbies, nicely manicured gardens, etc. You name it, they have it. You are paying for the luxurious lifestyle. Good marbles and feature walls can cost upwards of 30 to 100 dollars (per sq feet).

LOCATION
3. Even if a property is across 1 road, the feel and surrounding attributes may be totally different. In feng shui, the road cuts across the "chi" 气 of the area. That may also explain the price differences. An example of that is Garden Vista a 99 years development (by Far East) in Dunearn Road, the going rates in 2006 were $850 to $900 psf and in 2007 and 2008, Far East was asking $1350 psf onwards. But across the road/highway is Sherwood towers, it is going for $400-$700 psf tops (and it is either Free Hold or 999 years). Location effect, in this case, garden vista is "Bukit Timah" while Sherwood towers is "Beauty world" branded, but of course more factors are at play.

LAND ATTRIBUTES
4. Two developments side by side may have similar finishing, however one may have a stream or is hilly and the other is flat. If developed and planned nicely, the rolling and hilly terrain may enhance the feeling of space and conveys a sense of well-being. As a result, people may like it more and are happy to part with more of their hard-earned money.

DESIGN ATTRIBUTES
5. Not all developments are the same. Different design appeal to different people. As Singapore is generally land scarce, properties are becoming expensive. Older designs used to have balconies. As Singaporeans become more and more utilitarian, the balconies disappeared to become part of the living space. Hence those without Balconies are more highly valued. Of late, as more and more developments are built without Balconies, developments with Balconies are making a come-back due to demand from certain segment of the home buyers who cherished the balconies, they are priced at a premium.

6. Some designs are awkward, they deliberately squeeze out 4 rooms when it should only comfortably have only 3 rooms. There are several twists and turns, corridors are long and space is "wasted". This is because you cannot really put anything along the corridor. Therefore the place feels smaller than it actually is. Though this kind of design may find some fans, it is generally not well liked by the Space minded and bargain hunting Singaporean home buyer.

FENG SHUI
7. Feng Shui, an age old art of harmonious living. More and more people are subscribing to this school of thought. And Feng Shui plays a big part in the valuation of a property. Even if you do not believe in it, many others do. It will eventually affect the price of your property either positively or negatively.

CONNECTIVITY
8. Properties near to major roads, bus stations and train stations are generally valued more. There are about 750,000 cars in a population of 4.6m. About 1 in 6 people own a car. But other family members still need to go to work, go to school, go to buy stuff and run errants, so connectivity is still very important. Despite Singapore's small size and famed public transport system, some private residential areas are a bit off the beaten track. If they are near to public transportation nodes, they are generally of the 99 year lease hold type.

VICINITY
9. Most good properties have good connectivity, but also great vicinity. The locality is near the Sea, near a nice lake, the hills, the forest or near heavily forested areas with lots of shade and foliage. Bukit Timah is one such place, East Coast park, Katong, Siglap, Yio Chu Kang are other such areas.

SCHOOLS
10. In Singapore, most children of school going age (6 to 7 years old) will have to go to Primary school. Being the usual KIASU (a hokkien word to describe, "Afraid to lose out") Singaporean parents, most parents will try to get their children to the best Primary Schools. And in Singapore, priority is given to families living within 1 km of the primary school (subject to the family having stayed there 2 years prior to the registration exercise). With good Primary schools within 1 km, most properties within 1km of the school is highly sought after.

AMENITIES
11. Singaporeans hate to walk. For an average foreigner, it would seem surprising that Singaporeans generally do not have the same sense of distance compared to a foreigner. So there is a premium to be near to the super markets, wet markets, shops and shopping centers.

LAND TITLE
12. In Singapore, most people prefer Free Hold land followed by 999 years lease hold and the least liked is 99 years. For some people from Hong Kong or China for instance, they do not seem to understand what is the big deal about 99 years and Free Hold, because no bodies lives that long. But I tell you, in Singapore, most people prefer Free Hold and that is a fact. If they did not buy free hold properties, it is usually a matter of budget constraint.

13. There is also a difference between Free Hold Strata titled land and Free Hold land with individual title deeds. Though the difference is not always reflected in the price of a property. Free Hold Land has more intrinsic value generally as it cannot be over-written by a majority vote. Strata titled land with properties on it, means that each property owner owns a "share" of the land that their property sits on. And older properties over 20 years old have Strata title laws that governs it, as long as 80% or more vote to demolish or sell the property, even the dissenting 20% of property owner will have to agree. In other words, you have no control over your home, even if you do NOT want to sell it, you may be force to sell it if the majority opts to sell or re-develop it.

FACILITIES AND SIZE OF THE DEVELOPMENT
14. A development needs to be of a certain size in land area in order to economically provide all the facilities. A full facility condominium (Condo) will have facilities such as: -
Swimming pool
Jacuzi pool
Gymnasium
Sauna room
tennis court
exercise bay
children playground
function room
Barbeque pits
Squash court (most condos do not provide this now)

The facilities differential will be create a price differential in 2 different developments.


LAND VALUE VERSUS PROPERTY VALUE
15. Property and buildings depreciate. Fittings degenerate, paints peel. The once sought after property is no longer deemed HOT. However, in land scarce Singapore with an expansive immigration policy, more population and lesser and lesser land is a recipe for higher land prices. Land appreciate, buildings depreciate.

16. Singapore is a country where the government likes to micro manage. Some call it good governance, others call it, "they plug every loop hole". So developers cannot buy large tracks of land and keep it till it appreciate. This is because the Government levies development charge and penalties on delay of building the "proposed" building and/or amenities. So that is out of the question.

However, there are many good gems out there that are DIRTY and OLD and FORGOTTEN. Many old buildings that sit on rather good land asking very reasonable prices.

Why is there such a price differential given that those are gems???

This is because buying and staying in a property is an emotional process. Many gems are over-looked because they are
simply "Dirty and NOT polished". It's definitely a different decision altogether. In this case, this property may be an
investment gem, but not a lifestyle gem, unless you can do some modifications work to it.


http://paulhokangsang.blogspot.com

http://investinsingapore.blogspot.com

WHY IS SIBOR FALLING DESPITE RECORD INFLATION (CPI)

quote: "Success is a thought process"

I have 1 question. Why is Sibor (Interbank borrowing rate) falling despite record inflation?

In Singapore, Sibor is set by the Association of Bankers (ABS). As this is a closed group, I can only surmise that the Sibor Rate is set after banks consult each other and after considering the amount of liquidity available.

In the US, the federal reserve set target interest rates to regulate the economy, But in Singapore, the Monetary Authority of Singapore regulate the foreign exchange against an undisclosed basket of currencies of it's biggest trading partners, in order to control Inflation.

However Interest rates are usually set by banks and the government has a say in the direction of the interest rates, though it is thought to be implicit.

SUCKING UP EXCESS LIQUIDITY: BUT TARGETED INDISCRIMINATELY AT POOR AND MIDDLE-INCOME
With M1 money supply at a historic high, CORE inflation is a natural by-product (housing, ERP, bus fares, SMRT increase, food prices, etc). Adding fuel to fire is the additional inflation caused directly by fuel and resources. So in a sadistic way, the Singapore government has to increase indirect taxes to suck up the liquidity. However the scary thing is, this M1 nett increase is not spread out equally, that means that the Government's indiscriminate and across the board increase hits the poor and the middle-income hardest.

Normally, you would expect that any government should increase the interest rates when inflation is high, so as to slow down economic activity. In Singapore's case, where we import many items, therefore keeping the currency strong reduces inflation.

FORWARD LOOKING: INFLATION TO SOFTEN???
Of late, the USD vs SGD has seen an increasing trend (meaning that USD is stronger vs SGD), this in fact is a devaluation of the Singapore Dollar vs USD (of course this is only versus 1 currency). But this could signify that the Singapore Government views inflation ahead as benign.

If you look at SIBOR, it has also come down dramatically to below 2% for 1 year Inter-bank rate. Surely this cannot be right in an Inflation year??? Usually SIBOR comes down when there is an impending or risk of recession and in any economy, there is a lag effect of at least 6 months or more.

POSSIBLE IMPACT
When the currency trend is established or expected to weaken, smart money is the first to leave the currency. On top of that SIBOR is set to be reduced, this means that some other money parked in Singapore money market may deem the reduced yield too low and leave Singapore in search of higher yield.

But on the other hand, lower SIBOR keeps housing financing affordable. Some property developments in areas such as District 9 and District 10 has up to 40% to 50% foreign ownership. If they are NOT all here to stay but instead buying for investment, lower SIBOR will keep these people from cashing out of the Singapore market (There will be trouble even if foreign owner drops by 10% as that would mean increased selling pressure in an already bearish market). It is highly unlikely that such investors (many from Indonesia, Malaysia, China, India, etc) will keep the money from the sales proceeds in Singapore currency given that their home country deposit interest rates are higher.

As long as property prices stay fairly stable or drop in an orderly manner and gradually, Singapore can ride out the economic trough.


PROGNOSIS
In other words, lowering SIBOR is a calculated gamble to stabilise the property market and ensure an orderly fall (governed by supply and demand) and not panic selling. Although there is a risk of flight of some foreign capital from Singapore, those are potentially lesser evil considering that the property sector is a big sector in Singapore.

Many economic and policy tools are already activated to mitigate the severity of the coming slow-down or recession. So sit tight...

http://paulhokangsang.blogspot.com

PRIVATE PROPERTY PRICES IN SINGAPORE - GUESSTIMATES

quote: "Success is a thought process"

Merrill Lynch & Co., Inc. Sells Collateralized Debt Obligations For Lone Star-The New York Times
Tuesday, 29 Jul 2008 07:20am EDT
The New York Times reported that Merrill Lynch & Co., Inc. has sold Lone Star almost all of its troublesome collateralized debt obligations, once valued at nearly $31 billion, for the fire-sale price of $0.22 on the dollar. (Source Google finance/Reuters)

Collaterised Debt Obligations are debt that are mixed with Sub-prime debt and packaged and sold as grade AAA debt/bonds. Obviously these bonds (CDOs) are not as safe as they seemed. I am puzzled by why Merrill Lynch sells their CDOs at S$0.22 to the S$1 dollar. Why such fire sale? It could indicate that they know something that we don't, it's much worst than we think it is.

Which is which?
Merrill thinks CDOs are worth 0.22 for the dollar
Blackrock thinks Sub-prime, Alt-A and some prime debt are worth 0.68 for the dollar.

If we use Blackrock as a benchmark, they have bought at a discounted 32% rate for US property loans which are backed by "in-troubled" property assets, then Singapore's case is no where as worse.

1. Property Supply and demand in Singapore is still fairly balanced (supply is still tight, equilibrium will likely be reached in 2011).
2. There is a lot of liquidity in the market, measured by M3 money supply.
3. The cost of financing a property has been reduced, marked by reduced Sibor, SOR rate.
4. While the economy is expected to slow down quite a bit due to the bleak US economic outlook, it is no where near dire.
5. The major banks are all well capitalized.

If someone holds me at gun-point to make a prediction, I would say private property prices will drop no more than 20% from current 2008 Q3 levels.

Your thoughts?

Singapore Property Price Trend

quote: "Success is a thought process"

Where is Singapore's Private Property prices headed? In order to make accurate guesses, many variables must be used to gauge the past and therefore determine/guess the future.

Let us take a look at the Singapore's M1 Money Supply.


Chart adapted from Monetary Authority of Singapore MAS time-series data.

According to Investopedia, M1 money supply is, "A category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts.

This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency."

In order words, M1 is a measure of how much money is in circulation. And overly quick acceleration of M1 money supply could stoke inflation if the amount of goods and services do not match the pace of the increase in money supply.

Let's take a look at the Singapore Private Property Price Index.

(Source: Singstat.gov.sg)

There do not seem to be much correlation between M1 supply and Property prices. So let's move on to look at the growth rate of M1 money supply. But what explains the huge increase in M1 supply? M1 stimulates the GDP though it is debatable whether there is a lag and how long the lag is.


Chart adapted from Monetary Authority of Singapore time-series data.

By looking at the above chart, it seems that M1 more or less track GDP, except that there is a run-away increase in M1. I am not quite sure what is the break-down or exact source of this increase. I am speculating that it is net inflow of investments from the 2 casinos (integrated resorts). But there is also one other factor, Singapore resident growth (Singapore Citizens plus Permanent residents) has always been rather flat, but if we take a look at the Total population growth (total population is Singapore residents + foreigners on employment passes and working permits), the year where it shrinks, the M1 supply is negative. Subsequent years where Total population has accelerated (largely through foreign employment pass growth), the M1 supply has largely accelerated. There seems to be some correlation.

Between 2005 and 2007, there is a dip in M1 supply, this I speculate could be due to it's conversion into Non-liquid assets, meaning during this time, this money could have gone into Properties and other asset classes which are non as liquid. (because M1 is a measure of liquid assets) By around 2007, the M1 money supply has continued to grow and accelerate. Around this time, the share market has tanked, property prices are showing slow down, and perhaps to an extend consequently, the M1 money supply continue to accelerate.


Adapted from data obtained from Singstat

If we look at the interest rates, it seems to track more closely to the GDP rates. Interbank rates are currently in the 1 to 2 % range. Previously when we see interest rate at this low is during the 2003 recession. This time, the interbank rates seemed to have tracked lower even before the GDP has reduced significantly with projections of GDP of 4 to 5%. This is also while inflation is at >8%. A strong possibility is that there is government intervention in the interbank 1 month, 3 month markets.

What this low interbank rate means is that it will be easier to support the cheap financing of properties and thereby reducing the number of distressed property owners dumping their units into the open market. The continue strong growth of the M1 money supply could perhaps be Casino's (IR) stand-by reserves which has not yet been converted to non-liquid assets or other capital investments.

Even if the M1 money growth rate is zero now, there is still some over S$70 billion in M1 supply. Not all of this currency is required for active transactional use. As long as this money doesn't flow outside of the country, it could still find it's way into non-liquid assets as long as there is a genuine demand.



Household formation in Singapore is about 25,000 a year. Nett immigration continues to be high.

With the onset of about over 30,000 units of private residential (non-landed) properties to be launched between now and 2011, with current stock levels at about 260,000 units at around 5.2% vacancy rate. By the time the total stock reaches 290,000 units, the demand would have more or less leveled. My guess is vacancy rate at around 7%, more or less at equilibrium.

So yes, USA is slowing down and will impact Singapore's GDP. But there is still ample M1 money supply in Singapore as well as a current property shortage.

My guess is that the prices will soften due to the drop in consumer confidence, leading to people hoarding money. While those with properties will hang-on to their properties largely helped by lower financing costs. Yes, I think the property prices will trend lower, perhaps easily by 20%, but I do not think it will be a doomsday prediction of 30 to 40% drop.

As long as there is ample money supply, Supply-demand equilibrium (Looks likely) and an improvement in business sentiment and outlook, you will suddenly see another rally. But don't expect that to be too soon. Maybe 1 to 3 years, it's anybody's guess.

BANKING SYSTEM NOT WELL PROTECTED

quote: "Success is a thought process"

UBS Balance Sheet (source: Google Finance)

Balance Sheet 2008 in millions CHF
Total Assets 2,231,019.00
Total Liabilities 2,214,633.00
Total Equity 16,386.00

If you want to know why is the situation so bad, you only need to look at the balance sheet.

2.234 Trillion CHF in Assets with 2.214 Trillion CHF in Liabilities with Total Equity amounting to paltry 16.386 Billion CHF. Depending on what kind of assets they hold, whether it's properties or CDOs or bonds or others.

An impairment of 5% on assets would cost 111.55 Billion CHF, wiping out the entire Equity base of 16.386Billion CHF. With the recent sale of CDOs from Merill Lynch of their CDOs for 22 cents for the dollar, a 5% impairment is simply theoretical and perhaps even optimistic.

Just say for theoretical sake, a 5% impairment would require fresh equity of >100billion CHF. Surely Sovereign wealth Funds will need to have deep pockets easily to the tune of 300 to 500billions CHF to mitigate the problem.

The entire financial system is over-leveraged. Sub-prime originally would not have been an issue, but it now is, because it causes the over-leveraged Financial system to break down.

How much more money do we need? UBS being one of them, who else needs funding?

Your thoughts?

MGSM Singapore Community News Flash: Issue 1: June, 2008

DEFINING THE DNA OF A LUXURY BRAND, NURTURE VS NATURE?


On 15th June 2008, MGSM Singapore Community and Singapore Human Resource of Institute (SHRI) has put together an event for fellow MGSMers to have an insight on building and managing brand equity as well as to network. We are pleased to have Mr. Richard Yong, Managing Director for Bvlgari South Asian Operations share his personal experience with us

BROUGHT TO YOU BY: -
SPONSORS:

SHRI – Function Room, Wine, Food and Logistic coordination
MGSM – Wine and Food

ORGANISED BY:

Event Concept, Planning, Organisation, coordination
• Paul Ho Kang Sang
• Lin Lin Chua
• Daphne Yuen

Actual day Event coordination

• Louis Soo
• Nicky Kim
• Many from SHRI

Write up and commentary

• Ian Chang

Editor and Compilation

• Lin Lin Chua

quote: "Success is a thought process, Positive thoughts generate positive outcomes."



The evening was well-attended with audience members from a variety of industries. The eager listeners were first treated to a few light remarks from Mr Richard Yong, Managing Director for Bvlgari South Asian Operations, before he started on the night's raison d'etre - "Defining the DNA of a luxury brand, Nurture vs Nature?". He brought us with him on a trip through time as we traced Bulgari's founder's journey from tiny Greek village of Kallarrytes, through Corfu, then Naples, and eventually settling in their flagship store of Via Condotti in Rome.

Richard explained that a luxury brand, development and growth must always keep in mind the brand's origins and core competencies, illustrating his point with numerous examples of creative and versatile Bvlgari designs.

To show our sincere thanks to Mr. Richard Yong.


To show our sincere thanks to SHRI. Audrey receiving a token on behalf of SHRI.


A mingling session with snacks and wine allowed the listeners to network and further discuss what they had learned that night as well as their own experiences, and Richard was on hand to share challenges that he had faced and how he had overcome them.

Our grateful thanks to SHRI for kindly providing the facilities, snacks and wine as well as MGSM for chipping in with food and wine and for Richard for a thoroughly informative and enlightening talk. He certainly whetted our appetite and created what a luxury brand sets out to create - aspiration and desire.

MGSM Singapore Community News Flash: V1.0 (jpeg)

quote: "Success is a thought process"

A Resource Based View Analysis on "Microsoft Stalks the Online Space"

quote: "Success is a thought process"

by Paul Ho Kang Sang, May 2008
Introduction

Microsoft has been struggling to regain the initiative from Google to maintain its market leadership. Its’ latest quarter sale has been flat, while the latter revenue soared 41%, despite Microsoft being a bigger company. The online advertising-based business model propels Google’s growth, while Microsoft focuses on software sales. The online advertising-based business model propels Google’s growth, while Microsoft focuses on software sales. Leveraging on it’s massive web of datacenters rumoured to exceed 1 million servers, Google has also started providing "cloud computer" personal apps such as Docs and Gmail as well as Google Apps Premier for S$50 per user to enterprises and is starting to make inroads into microsoft’s lucrative office productivity suite. Microsoft has to transform itself for the “Software as a Service” (SaaS) business model to tap this growth trend where consumers in the future will buy services served by the web with advertising based business models, rather than software. To drive this, Microsoft moves away from its previous growth strategy on acquiring small companies for their intellectual properties and assets to complement its existing product lines to buying established companies with ready markets and customers. It acquired AdQuantive for US$6 billion and had recently made an unsolicited bid for yahoo of US$44.6 billion.

Strategic Positioning
Microsoft’s wants to grow revenues from existing offline license sales while hedge against risks arising from the emergence of a SaaS and advertising funded business model. It wants to position itself as a hybrid provider which extends offline capabilities into the online world and vice versa.

Strategic Choices
Positioning for SaaS potentially cannibalize Microsoft’s dominant position in offline software licensing model and plays into the strength of Google and “pose a major disruption to it’s basic business model” (SADA systems, Tony Safoian). Therefore, the strategic choices always limit microsoft’s ability to position themselves. The acquisition of Yahoo may not increase their options.

Strategic Action
Resource based view looks at the bundle of competences provided by a firm such as it’s unique bundle of resources and capabilities. In order to compete, total value is created by the sum of it’s parts involved in a transaction (Brandenburger and Stuart, 1996). We will use also Amit and zott’s value creation and business model construct to evaluate it’s strategy for bidding for Yahoo.

Resources based view
Microsoft’s core competence is in offline software licensing models. It’s business culture is highly competitive, driven to kill off each niche competitor, it has developed many vertical services (such as Instant messaging, internet browser, MSN search, Windows live messenger, specialty search, MSN.com portal, datacenters, etc) all of which may be hard to integrate into seamless web services. I would consider Amit and Zott’s 4 attribute of creating value, (efficiencies, Novelty, Complementarities and lock-in) as resources to understand the possible value of this acquisition.

Efficiencies
With Yahoo on-board, Microsoft will still not have the efficiencies for SaaS transactions due to the legacy of it’s software and infrastructure. It could instead increase the know-how which it has failed to create on it’s own.

However, combining all Microsoft and yahoo users for creating the advertising scale may be appealing to advertisers. They will also become dominant in instant messaging and web-email which they can leverage as a platform for creating an efficient software or search delivery mechanism. However, software on different platforms is hard to scale, lower costs of operations may not materialise. It may increase their search rankings through diverted traffic and specialty sites, but will likely still chase the market leader google, as an efficient search is inherently software algorithm driven. Microsoft engineers have no SaaS experience, it is most likely to propose a hybrid strategy of online plus offline, leveraging on their core offline strengths, though conflicting business strategies.

Complementarities
Microsoft’s online services and features were reactive, created to beat competitors in each niche as it arises. These services are not designed with inter-working in mind hence do not bring significant coherence benefits. However, adding Yahoo subscribers may improve complementarities in web-portal traffic and consolidate its user base. Yahoo has a huge lead in mobile search and emerging markets, these are complementary to microsoft’s geographical reach.

Lock-in
With a successful acquisition, microsoft will almost monopolise web-email and Instant messenger.

Novelty
A hybrid offering of offline and online software + services which if priced correctly could take off. But this novelty will wear off as google is reportedly also preparing an offline version of it’s online google apps.

Summary
Purchasing Yahoo will allow Microsoft to move faster, but the combined resources and capabilities though stronger, may still not be sufficient to challenge google in search and SaaS.


NEWS ARTICLE BELOW

Microsoft stalks the online space

http://www.computerweekly.com/Articles/2008/03/03/229669/microsoft-stalks-the-online-space.htm

Author:
Cath Jennings
Posted:
15:43 03 Mar 2008
Topics:
Internet Portals & Search | Yahoo | e-commerce & e-business
Microsoft's proposed purchase of Yahoo is likely to be the first of several large acquisitions over the next few years as the supplier fights to remain relevant in an increasingly online world.
The importance of such deals to the future of the software giant is evident from the size of the desired transaction, which when initially proposed was valued at £22.5bn in cash and stock. Such a move signals a dramatic change in its acquisition strategy.
By way of comparison, the supplier's largest previous buy was that of online advertising company,aQuantive, for £3bn in May 2007 and five years before that of Danish business applications supplier Navision for £700m.
Both purchases proved exceptions to Microsoft's longstanding rule of acquiring small companies for their intellectual property and assets in order to boost existing product lines. Instead they provided the first signs of the company's now evident willingness to buy market share and/or customer communities if it believes that such a move is necessary to maintain its market position into the future.
ADVERTISEMENT

The aQuantive acquisition was particularly significant in that it saw the supplier put an initial stake in that very important (for Microsoft) online advertising ground. As Kevin Johnson, president of its platform and services division, said at the time, "It is a big bet on advertising monetisation for the long-term growth of the company and this is a significant step forward." He valued the sector at £20bn and said that it was growing at about 20% year-on-year.
Where the Yahoo proposition marks another noteworthy break from the past, however, is Microsoft's indication that, for the first time, it is prepared to (at least partially) finance a transaction with debt - a move that again symbolises its strategic importance to the company.
David Mitchell, senior vice-president of IT research at Ovum, says, "Its relative lack of success in online markets has shown Microsoft that its current strategy [of approaching new markets with home-grown products and supplementing them with small acquisitions] is not working for it and it needs to find a new set. To succeed, it needs to accelerate its efforts rapidly - and the acquisition of Yahoo gives it a major boost."
Nonetheless, he does not believe that the supplier will radically change its acquisition strategy in other parts of the business. Rather than one big software company, he views Microsoft as a "collection of companies flying in loose formation", with each business unit operating in a different way and competing in different markets.
This means that, although the proposed Yahoo purchase is "a major push for the online services business and you could call it a reinvention there", Microsoft's other units will "continue on their current course for the present".
But the decision to finance the move with debt also indicates that the supplier is keen not to put all of its eggs in one financial basket. Richard Edwards, information management practice director at the Butler Group, says that it is likely that Microsoft will be forced to spin off its online business due to anti-trust reasons if the Yahoo deal goes through.
"It is a bit like someone deciding whether they want to invest a certain amount in a new business and, although they have enough assets to fund it upfront, their partner says 'we have other interests and do not want to blow the lot on a deal that could bring the company down if it fails'," he says.
The partner in this instance is, of course, Microsoft's shareholders - one of which is Steve Ballmer, the firm's chief executive, and the other Bill Gates, its chairman - and, to a lesser extent, the other business units.
By the same token, however, the company understands that it can no longer afford to have all of its eggs in one technology basket either. While it has been investing in lots of areas, ranging from mobile and business applications to gaming, for many years in the hope of finding the next big cash cow to sit alongside its Windows operating systems and Office personal productivity applications, the supplier has until now failed to find a major new engine for growth.
David Smith, the lead analyst on Microsoft at Gartner, says, "This deal is of particular interest to Microsoft's bottom line. At the intersection between software and media are advertising-based business models and they have real potential. Microsoft cannot afford to have all of its eggs in one basket - that is pure software licensing - because it is at risk from the online players. It sees that and knows that it needs to diversify."
The online advertising space is also a good option because it straddles both the consumer and professional markets, and Microsoft operates in both of these worlds. As a result, Mitchell says that the supplier's probable aim is to have its online business - or at least the advertising-related piece - account for between 20% and 25% of its revenues within three years.
But to do this, says Clive Longbottom, a service director at Quocirca, Microsoft needs to "take back the initiative" from Google, its nemesis in the web advertising market. Google commands about two thirds of the web advertising market.
"With Google being a runaway financial success, something has to be done to try to get the money flowing back towards Microsoft. Tinkering at the edges just is not on and time is not on Microsoft's side. Therefore, something big is called for," he says.
But it is not any particular part of Google's business that the supplier fears most - rather its general direction. "The worry is that as Google gets its act together with its portal, news feeds and applications, people using Yahoo and MSN will see no reason to stay with those more newsy front ends. Therefore, Microsoft is worried about Google as an entity - not one specific part of it," Longbottom says.
And Ballmer appeared to confirm this view in his letter to Yahoo's board of directors, which was dated 31 January 2008 but made public the next day. The aim of the deal, he said, was to "create a leading global technology company with exceptional display and search advertising capabilities" that would provide "a credible alternative" in a market that is "increasing dominated by one player who is consolidating its dominance through acquisition".
Nonetheless, Mitchell considers that the online services market likewise poses a "very significant threat" to Microsoft into the long-term because such offerings are likely to replace traditional in situ desktop software in the same way that mainframe software was replaced by PCs. As a result, the company has been "making counter-moves" in this area for some time and the Yahoo deal can be viewed as simply upping the ante.
Microsoft's aim, therefore, is to both diversify the sources of its revenue and, says Smith, "to maintain the relevance of the products that have been fuelling its business for a long time".
In particular, this means guarding against the potential long-term margin degeneration of Office, which is one of its most profitable offerings. Office is particularly important because it is what Mitchell describes as "the wedge application". This means that the more it comes under threat, the more that supporting technologies such as Windows, Sharepoint and Exchange are likely to suffer in sales terms.
"A shift to online services is absolutely necessary for Microsoft, giving customers a wider range of choices [in terms of delivery mechanisms] - online only, offline only or blended. It is a transition that will never be completed as the goalposts will continually change. But to make a real difference, Microsoft needs to have made a very significant acceleration of its online business within the next two years - and probably sooner," Mitchell says.
The supplier currently sells Software + Services Live and Online hosted offerings such as Office Live Small Business as well as its Dynamics hosted enterprise applications. But if Google's online personal productivity Apps such as Docs and Gmail start to make inroads, particularly in emerging markets, Microsoft will need to be ready to fight back by becoming a more hybrid supplier - and Yahoo would provide it with a platform to do this.
"If the future is not buying software but consuming services, then Microsoft will be interested in becoming a services business. It has got to keep in the game and so it has to change from a product-centric to a services-centric model. And because Microsoft straddles the two worlds of consumer and business professional, it probably has to do this more than other suppliers - and sooner," Edwards says.
But, although the proposed Yahoo deal may be very important for Microsoft, it is not a do or die one. As Gates said, the company "can afford to make big investments in the engineering and marketing that needs to get done. We will do that with or without Yahoo".
Therefore, Edwards says that "if it cannot make this one work it will have a go with another company". Possibilities include AOL, Amazon, eBay or Facebook - in which Microsoft already has a stake.
But any purchase "would have to have a community aspect to it" he says, because "this is more about eyeballs than anything else. It is a numbers game" and social networking sites, in particular, are starting to offer "a corralled audience for a lot of advertising".
Longbottom agrees. "If Microsoft fails with Yahoo, it has to either sulk in a corner and look silly or respond with some similarly large gesture. It already has a stake in Facebook and it could play this as a leapfrog gesture in that combining it with MSN brings a portal news site together with social networking," he says.
Moreover, if Microsoft brought in Office Live and Office Communications Server, "it would create something that outweighs Google - a long shot, but a possibility", Longbottom says.
Even if the Yahoo deal does go through, Mitchell says Microsoft is likely to make "further acquisitions at scale - potentially two or three more in the next 12 to 18 months" in areas ranging from online advertising and applications, to content production and audio and video content indexing and search. "The mould has now been broken," he says. Microsoft, however, refused to comment.

SUB-PRIME FATIGUE

quote: "Success is a thought process"

I have a personal conjecture. Sub-prime losses total an estimated 350billion or about 50% of total US$700 billion estimated sub-prime borrowings. So far, about 250 billion of losses has been announced as attributed to Sub-Prime. So I estimate that there is about another 100 to 150 billion of losses still hiding in someone's closet. Assuming that Sub-prime contagion does NOT cross over and affect the PRIME borrowers (due to the impending slow down in the US economy), the losses will be well absorbed. Additional provisions that the losses are well spread out and the huge losses do not hit a single bank or financial institution. Also if derivatives, a market that is being viewed as dangerous and risky by some, do not explode and become a crisis, (i.e. the mark-to-model derivatives that banks hold are held to maturity and do not need to be liquidated), I suspect the market just gets on with it. The market has seen rallies and falls with each good and bad news, but increasingly, the market seems to be stabilizing. I can only conclude that sub-prime fatigue has set in.

We all know the global economy is slowing, it is not something new, we all know sub-prime is bad, but after almost US$250 billion of announced and declared losses, the financial meltdown did not happen. The key financial institutions are still standing.

We all know it's bad, it's very very bad. Many have perhaps factored in these bad news. But as long as it doesn't kill you, it cannot be that bad enough. The market is tired of Sub-prime, they want something new to talk about.

BUILDING WEALTH THROUGH SUPPLEMENTAL RETIREMENT FUNDS (SRS)

By: Paul HO Kang Sang

Specially written for Singapore Citizens as well as Singapore based Expatriates.



FUNDS AND EMPTY PROMISES
Many professional fund managers promise you 10%, 15% or even 20%. Sometimes you are even tempted to buy into a theme. There is always something sexier (in terms of investment) out there. However, most funds usually tout the theme with the highest investors (punters) mind share. Such as those that are obvious or those that are already heavily exposed to the media or those funds/themes that had already shown stellar results. Of course it is easy to sell things that everyone are already familiar with. What more, with funds/themes that have a track record already.

As the funds or the segment in focus tracks higher and higher, usually it attracts a strong following. These people bring along with them irrational euphorism (borrowing the term from Mr. Alan Greenspan), leading the stocks higher. These stock prices tend to go higher faster than their economic fundamentals can follow. Thereby exposing the ordinary investor with HUGE downside risks.

LOSING YOUR PANTS
The analogy is simple. Let’s say we throw a TEN-SIDED dice. The last time we threw an 8 (Assuming 8 is the price we bought it at). And assuming if we throw a 9 or 10, we make 1 dollar and 2 dollars respectively. But if the dice is a fair dice, the average expected dice throw (of 1,2,3,4,5,6,7,8,9,10) is 5.5. Therefore the probability that the throw is 5.5 is quite high.

Let’s look at it in terms of downside risks. If you threw an 8. If the next throw is 5.5, you lost 8-5.5 = 2.5 dollars. If the next throw is 10, you only gain 10-8= 2 dollars. But if the next throw is 1, you lost 8 -1 = 7 dollars.

In other words, you are buying into something that gives you consistently upside (max) of +2 dollars while the downside of -7 dollars. The average downside is -2.5 dollars. In other words, each one of these trades you will lost -2.5 dollars. If you bought 1000 shares of bet, you would then lose -2500 dollars. And assuming you bought 5 bets a year, you would (lose) -12,500 dollars a year. How will you know it’s an 8 and not a 1??? Well, the people and the market always tell you, this time it’s different. This time it’s a fundamental shift and a new paradigm. Take a look back at news articles up to 10 years in time. Take a look at what brokers, analysts and fund houses were saying when Straits times Index (STI) was at 3700 points, didn’t they say it will breach 4000 points?

Losing money with each bet is what I call FOOLISH. Just like going to casino, you can win short term, but if you play a large number of times, statistically bets revert to a mean score, i.e. which is, on every game, you lose money. This is called the “house margin” in casino speak. Unless you are playing for fun, same as bowling or any sports or games, you while away your time and you are happy to pay doing that. That's fine.

I enjoy making money and having fun. I like statistical high probability but I like close to 100% certainty even more.

PUNTER’S BEHAVIOUR
Most punters behaviour are characterized by GREED and FEAR.
• Greed when the market is rising. (BUY at HIGHEST)
• Hope when the market is dropping or starting to drop, and (HANG ON while dropping)
• Extreme fear when the market is at it’s lowest. (Therefore punters SELL at Lowest)
I fall into these traps from time to time, but as I constantly remind myself, I tend to fall into it a little less often.

Despite shares being the best investment asset classes from empirical studies, averaging in the 10-12% range, most punters only make less than 5% returns or worse, negative returns. Because they let GREED and FEAR get in their way. Actually this is a trap for most ordinary investors.

BENEFITS OF CERTAINTY
Things with certainty are: -
• Cost reduction. (Every dollar saved is every dollar earned, SIMPLE MATHS)
• Tax efficiency

RISKS AND LIMITATIONS
The risks of putting money in SRS are mainly related to Singapore dollar currency risks and policy risks. Singapore's equity market is still considered shallow in depth and the total market capitalization of companies listed in Singapore are still small. The investment is also not as liquid and carries a 5% penalty on early withdrawal and the withdrawal amount counts as income earned and is taxable at the sliding income tax rate.

The key inadequacies are the limited investment opportunity set, although SRS claims that they do not regulate where you can invest, however the 3 local banks allowed to operate SRS will NOT let you invest the money outside of Singapore, i.e. NYSE, Nasdaq, HKSE, etc. This severely limits the investment opportunity set.

There are some doubts as to whether these limitations are a broader policy strategy from the Singapore Government to keep the liquidity in the country or whether it is purely a bank administrative cost-benefit equation. This is considering that 2 of the 3 banks are heavily government involved/influenced and the 3rd bank UOB is believed to toe the line on government unspoken policies and broader strategic plans.

THE SUPPLEMENTARY RETIREMENT SCHEME (SRS)
(Ministry of Finance, Singapore, http://www.mof.gov.sg/taxation/srs.html)
Supplemental Retirement Scheme (SRS) is one such program. Any tax relief is money earned!!! (You can’t get more certain than that, that is 100% guaranteed)

As long as you are a tax payer, there are potential benefits to be had, of course there are certain short-falls as well which I will also mention.

Take a look at the TAX BRACKET above.

CASE STUDY: Taxable income of 100,000 SGD.

The first S$80,000 is taxed at S$4,300
The next S$20,000 is taxed at 14%, i.e. S$2,800
Total Tax = S$7,100

As you notice, the contribution cap is not the same, this puts the Singapore citizen at a disadvantage.
• For a Singapore citizen, he/she is eligible to invest/contribute up to a maximum of S$11,475 (15% x 17 x S$4,500).
• If you are a foreigner, your SRS contribution cap is S$26,775 (35% x 17 x S$4,500).

As SRS is tax deductible. If you contribute: -

S$11,475 → Taxable income becomes S$100,000 – S$11,475 = S$88,525.
The taxable income becomes S$4,300 (1st S$80,000 income) and
14% of S$8,525 = S$1,193.5 = S$5,493.50.
Tax Savings = S$1,606.50 (or 14% RETURNS outright almost IMMEDIATE)

If S$26,775 → Taxable income becomes S$100,000 – S$26,775 = S$73,225.
The taxable income becomes S$900 (1st S$40,000 income) and
8.5% of S$33,225 = S$2,824. = S$3,724.
Tax savings = S$7,100 – S$3,724 = S$3,376 (or 12.61% outright almost IMMEDIATE)

INVESTING THE SRS MONEY

Insurance professionals descended onto SRS like bees to honey. Banks alike, they are keen to peddle their products. They are not keen to tell you about SRS. Also, if the banks have to tell you about SRS or if you asked about SRS and If you have money to put aside outright, they WANT YOU. They want you to buy FUNDS, Insurance and Trusts, etc. As has happened with Insurance on SRS.

If you already have an SRS account or is determined to have an account, most vested interest groups are eager to give the impression that it’s for insurance needs and for investing in funds, I suspect, from whichever gives them the most commission. From the second year of SRS’s existence, insurance pounded onto SRS monies. Apparently they were successful as the awareness was low. Over the subsequent years, insurance as a percentage of SRS total funds usage dropped back gradually, in my personal opinion, thankfully.

In fact, most SRS investors are still (just my opinion) not very sophisticated as can be seen by the high levels of CASH holdings of 22% and Insurance at 34% and Singapore Dollar Fixed Deposits of 6%. Shares only take up 12% of all SRS monies.

From the breakdown of the funds used in SRS, I would say most people who did SRS did not fully benefit from the secrets of this scheme but instead ended up buying some form of financial products. If they understood what they got into, fine, if not, it's sad. It surely seems that they do NOT understand. But the outlook is positive, more and more people seemed to be taking charge of their investments as “others” and Shares have been on the increase.


(Chart adapted from Ministry of Finance, Singapore, SRS Statistics)

BUYING SHARES WITH SRS
However there are a lot of companies such as utilities, rail or REITS which have high asset backing (a low Price/Book ratio) and gives consistent dividends of between 5 to 10% with some additional capital gains.

“SRS investment returns are accumulated tax-free (with the exception of Singapore dividends from which tax is deducted or deductible by the payer company under section 44 of the income Tax Act)” (Finatiq, http://www.finatiq.com/helpcentre/Hcr_Basics_SRS.shtm
). And only 50% of the withdrawals from SRS are taxable at retirement.

Say your returns are 5% (capital gains) and your dividends are 5% (after company tax, @ around 20% company tax, you would get ~4% dividends. Your total untaxed returns are 9%.

Let’s say you are now 40 years old and retirement age is 67 years old. Therefore you have 28 years of investment horizon.



(Source: Ministry of Finance, Singapore, http://www.mof.gov.sg/taxation/cumulative.html)


COMPUTING THE RETURNS OF SRS INVESTMENTS

Since the LUMP sum is given to you as a "TAX relief", you invested S$11,475, but actually you only paid S$9868.5. You deposit the money in Latest December the year prior, the tax returns are filed in April the next year, while the tax assessments are out in July or August. Therefore, by 6-7 months’ time, you will get your 14% returns or 12.61% returns (if you are a foreigner) If you have 14% tax savings + 9% returns on 11475, that will give you S$1032.75. (Note: the returns are simply my rough estimates) During this time, the money can already be put to use in the SRS account.







At S$9868 dollars over 28 years at 9% each year, the returns would have been $110,197 or S$17,940 lesser.

That initial boost in returns gives you an extra 0.59% per year over 28 years. Your overall portfolio is only expected to be around 14% better, but in dollar quantum that is S$17,940 better. For our foreign friends, the quantum is S$37,700 better.

In other words, this SRS Scheme allows you to compound your TAX SAVINGS while only paying tax on the initial amount many years later. Considering inflation and returns that you could have made over the years before you have to pay TAX, the tax ends up being CLOSE TO NOTHING.

TAX ON WITHDRAWAL AT 67 YEARS OF AGE
At 67 years old, if I withdraw all S$128,138 (Capital gains are NOT taxable, though dividends are taxable, but they are already taxed at source), but only S$9,868 dollars is considered as SRS initial contributed amount, of this only 50% of this is taxable, I.e. S$4,934 is taxable.

• Taxable SRS withdrawal = 50% of S$9,868 = S$4,934

Assuming same tax rate, income at 67 years old = S$100,000. With an additional S$4,934 taxable income, I incur extra tax of 14% of S$4,934 = S$690.76

This S$690.76 can easily pay out of my additional returns of S$17,940. The nett gain is still S$17,249

DILIGENT SAVER & INVESTOR

Now, if you consistently contribute year on year into SRS, you would get that additional boost of returns each year (in the form of tax relief) thereby compounding your returns even more.

I am not against making fast money, it is just that I don't know how. If you know of something please LET ME KNOW, I'm open to it, let's share. All I know now is that if you consistently make high probability calculated bets, you have a high chance of winning and if you make almost certain bets with almost NO RISK, then you almost surely will win. It's just that it is very slow. Over time, you will see many many opportunities, but always grab those with high certainties. RULE Number 1: Never lose money. Rule number 2: always refer to rule number 1.

The writer: -

Paul Ho is a keen investor but with very little money. Although he does not have a financial license and is not able to make recommendations to individuals, he is happy to help you take a look at your portfolio and give you his personal opinion. Paul currently does it as a hobby helping his friends by giving them his honest opinions on what strategies are good and beneficial for them.

References: -
1. Ministry of Finance, Singapore, http://www.mof.gov.sg/taxation/cumulative.html

2. Finatiq, http://www.finatiq.com/helpcentre/Hcr_Basics_SRS.shtm

3. Dollardex.com, http://www.dollardex.com/sg/index.cfm?current=../contents/srsfaq&contentid=1287



quote: "Success is a thought process"