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3: Malaysia REITs - Looking For My 2nd Durian Runtuh
4: Is Insurance Really Necessary?
5: Everyone Must be A Millionaire

Head to the watch list on the above tab to see my what's on my radar and foreseeable future postings =)

Decided to make adjustments on the way I blog & share due to time constraints and other commitments. In the coming weeks you should see them. Short updates but more frequent & concise.

Monday, September 29, 2014

No Suprise - Petrol Likely GSTed

Why petrol is unlikely to escape the GST posted to The Star on 27th September 2014.
My thoughts in blue.

NOW that the Pengkalan Kubor by-election is over, the touchy issue of petrol being subjected to the goods and services tax (GST) will probably see some credible discussion.

At the heart of the matter is the growing call for petrol to be zero-rated under the GST so that there is no tax imposed on the commodity.

The logic is that if petrol were to be imposed a GST of 6%, it would trigger a chain of price increases for consumers and, ultimately, a higher inflation rate.

Government officials, except for a rare comment here and there, have shied away from talking about the GST being imposed on petrol, fearing that it would be politicised. So, when there is a heated discussion on petrol and the GST, the official answer is that a statement would be released on the matter in due course.

But closer scrutiny suggests that it is highly unlikely that the Government would classify petrol as an item that is zero-rated under the GST.
In many other countries where there is GST or VAT including our closest neighbours Singapore, Thailand and Indonesia, petrol is subject to GST. It is of no suprise here that it will highly likely be so in Malaysia.

Firstly, petrol is already an item that is highly subsidised. What is the point of imposing the GST on a subsidised product?

Secondly, there is already a sales tax of 58 sen per litre on petrol being sold at the pump. But the Government does not collect this amount because the total subsidy per litre far outweighs the sales tax.

The amount the Government subsidises per litre depends on the global price of crude oil. Based on previous reports, the subsidy was estimated at 70 sen per litre when crude oil was more than US$115 (RM374) per barrel.

Global crude oil prices have over the past two months been hovering at less than US$100 per barrel. This is despite the war in the Middle East and the confrontation between Russia and the United States and Europe.

Experts are predicting that the outlook for global oil prices will remain subdued for some time to come, unlike previously where any sign of conflict would cause oil prices to flare up.
Because Petronas is contributing 20% (as of 2012) to our national coffers coupled with weakening oil prices, all the more reason to reduce subsidies and subject petrol to GST to compensate for revenue loss from falling prices. Pandan MP Rafizi Ramli estimated that Putrajaya could collect a revenue of at least RM3 billion in GST from fuel and diesel a year, and this will form between 12% and 14% of the total GST collection.

Now the advancement in technology to produce shale gas has changed the dynamics of the oil and gas supply-demand situation.

The production of shale gas has changed the supply-demand situation in global crude oil prices, too.

On top of shale gas taking away some market share from the traditional crude oil, the global economy as a whole is showing signs of weakness. In this respect, the economies of China and Europe are weak.

Assuming the experts are right and the global oil price remains subdued, it should mean that the Government subsidy bill for petrol will keep reducing.

When crude oil is trading at a band of between US$75 and US$85 per barrel, the Government no longer has to bear any subsidy for petrol at the pumps.
This is quite possible as the shale oil revolution is underway and has yet to peak. And below is just the United States (world's largest reserves). There are many other countries with large reserves hoping on the same wagon.
During the crisis in 2008, when crude oil prices fell below US$80 per barrel, the Government collected millions in revenue from the sales tax.

Considering the dynamics in the oil price situation, why would the Government classify petrol as a zero-rated item under the GST?

Petrol, after all, is a controlled price item. By making it a zero-rated item, the Government would lose its flexibility to impose a 6% tax should the global oil price fall below the US$75 to US$85 range, where there is no longer any subsidy and the 58-sen-per-litre sales tax mode kicks in.

As for consumers, because the GST is a consumption-based tax and the price of petrol is fixed, whether it is zero-rated or otherwise may not have much of an impact. The more the consumers use, the more they pay.
Here's the bad news. Consumers have not much of choice as public transport is poor. There is simply no alternative to the alternative. It would cost me RM8 for fares and 3.5 hours of travel per day if I would use public transport from home-work-home. Not acceptable.

For the rural and urban poor, the bigger problem is housing and employment.

For businesses, when there is a GST, the petrol expenses are part of their input tax that can be claimed back. So, technically, they should not complain. They wouldn't complain, they would simply pass the burden to consumers because every business owner will do so.

Lastly, if petrol is zero-rated, would the pump operators pass on any savings in expenses to the consumer? This is highly unlikely.

Also, if petrol is listed as a zero-rated item now, it would be a difficult task and politically explosive to take it out of the list should there no longer be any subsidy on the item.

The only comfort might be that the government would implement some form of new subsidy scheme that will be based on drivers salary and car engine capacity using an upgraded MyKad or a new fuel card to be distributed. Drivers with salary RM 5,000 while driving vehicle engine smaller than 2,000 cc will only be able to fully enjoy fuel subsidy. (these are only rumours)

Therefore, everything points to petrol being a GST item.

Monday, September 15, 2014

US Corp Share Buyback - Double Edged Sword

From The Economist Sept 13th - 19th 2014. My thoughts are in blue.

Companies are spending record amounts on buying back their own shares. Investors should be worried

FINANCIAL excess is more commonly associated with banks than with blue-chip companies. While the rich world’s finance industry—supposedly the brain of the economy—went berserk in the run-up to the 2007-08 crash, other big firms behaved sensibly, avoiding too much debt, keeping their costs under control and their eyes on long-term opportunities in emerging markets. But in the era of weak growth and low interest rates that has characterised the aftermath of that crash, there is growing evidence that the blue chips are engaged in their own kind of financial excess: a dangerous addiction to share buy-backs.

Over the past 12 months American firms have bought more than $500 billion of their own shares, close to a record amount. From Apple to Walmart, the most profitable and prominent companies have big buy-back schemes (see article). IBM spends twice as much on share repurchases as on research and development. Exxon has spent over $200 billion buying back its shares, enough to buy its arch-rival BP. The phenomenon is less extreme in other countries, but is becoming popular even in conservative corporate cultures. Led by firms such as Toyota and Mitsubishi, Japanese companies are buying back record amounts of their own shares.

Intel also does buyback in the tune of $20 billion announced back in July 2014 (before the spike in share price) and expects to repurchase about $4 billion in shares in the current quarter. This amount is similar to IBM. Intel spent $10 billion in 2013 for research and development

Buy-backs are not necessarily a bad idea. When firms buy their own stock in the open market they return surplus cash to their shareholders, in much the same way as if they were paying out dividends. And if firms can’t find opportunities for profitable investment, handing cash back to investors is the right thing to do. In many ways the surge in buy-backs is a symptom of the rich world’s feeble growth prospects.

But it could also be a source of trouble, for two main reasons. First, both short-term investors and managers have incentives that could lead them to overdo buy-backs and neglect long-term investment projects. The announcement of a buy-back scheme can prompt a sudden spike in share prices and a quick buck for the short-term investor. By reducing the number of shares outstanding, buy-back schemes can also artificially boost a firm’s earnings per share. This helps explain why managers whose pay depends on reaching specific earnings-per-share targets like to buy back shares. We will never know as it is only disclosed privately.

Second, some firms may be borrowing too much to pay for their buy-back habit. American companies, if one includes their global operations as a whole, are only moderately indebted; record buy-backs are being paid out of record profits. But the overall figures are skewed by a few cash-rich giants, such as Google. In 2013, 38% of firms paid more in buy-backs than their cashflows could support, an unsustainable position. Some American multinationals with apparently healthy global balance sheets are, in fact, dangerously lopsided. They are borrowing heavily at home to pay for buy-backs while keeping cash abroad to avoid America’s high corporate tax rate. Intel borrowed $6 billion for the sole purpose of buying back shares. Though the DE ratio is at a 'not to worry' ratio of 0.227 as of writing, the intent borrowing to do this for the first time is worrisome.
Intel's 5 Year Per Quarter DE ratio: It will continue to grow as long as profits do NOT compensate for growing debt

Let's examine IBM's case where profits are not lowering down the debt ratio.
IBM's 5 Year Per Quarter DE Ratio: Ever growing. 2014 saw massive borrowings for buy back scheme.
IBM's 5 Year Per Quarter Gross Profit: Not affected by crisis but also NOT growing 

The difference between a growing business and not.

Intel's 5 Year Per Quarter Gross Profit: Grew when demand needed to replenish inventory during global recovery but relatively flat since peak of 2011
Costco's 5 Year Per Quarter Gross Profit: Ever growing PER quarter
Drawing a line
If firms are overdoing buy-backs and starving themselves of investment, artificially propped-up share prices will eventually tumble. That is why investors need to pay close attention. In the long term they need to ensure that bosses’ pay schemes are designed in a way that does not create a perverse incentive to repurchase stock. In the short term, they must give willing firms a licence to invest. There are some signs that this is beginning to happen. According to a poll by Bank of America Merrill Lynch, a record majority of fund managers now think firms are investing too little; only a minority want higher cash returns. That is welcome: shareholder capitalism is about growth and creation, not just dividing the spoils.

Wednesday, September 10, 2014

Malaysia REITs - Looking For My 2nd Durian Runtuh

What is a Real Estate Investment Trust?
REIT is a company that owns and operates income-producing real estate which covers commercial real estate sector. REIT can also lend money directly or indirectly to other companies to finance acquisition of real estate properties. REIT gives an average investor the opportunity to invest in commercial estate by purchasing a stake in a portfolio that they would not otherwise be able to purchase on their own. These companies are then able to finance their operations by raising money from your money through sales of common stocks.

You may look at my track record of BSDREIT (I highly suggest you read more of this to understand REITs) which has since went private. Here I begin my launchpad for a second time investing into a REIT. Why now? Yields have begun to look juicy and I desperately want to diversify more.

Take note of Market Capitalization (bigger is better), NAV/price (higher is better) & Premium/Discount Rate (-ve is better)

My Thoughts:
A bigger REIT has the advantage of providing ample liquidity during trading. Malls are especially big in Malaysia and diversified asset type coming in second.

Malls and retail REITs have low NAV/Price ratio (less than 1) leading to huge premium rates. As you can see the, 5 of the top 4 are all malls and you have to pay a premium due to the NAV-to-share price. They are too expensive and the valuations is hard to justify further without killing the already very low yield of ~5%-6%.

It is important to note that REITs are supposed to generate a higher returns (due to the higher risk factor) in terms of yield % than Fixed Deposits (3.5%) or Bonds (~4-5%). Because of this no big investor (fund managers) will pour more money into an already overvalued REIT that will lead to even lower yields.

As such I will put focus into drilling down into YTL, AmanahRaya and lastly AmFirst in that order. YTL is particularly interesting: it is averagely sized, has superb yield of 10% and is slightly on a discount now. Stay tuned!

Saturday, September 6, 2014

Balancing Act

This is in response to my September's Portfolio update -> "Because much of the weight of the portfolio is invested in Bursa, it has also been performing up and down. I will need to diversify more.". It is absolutely obvious that my portfolio has several if not major shortfalls. Although it has met my expectation as well as my needs over the last four years there is certainly more room for improvement. I will explain how I revamp my portfolio while minimizing the impact as much as possible.

[1] Define what is my "Inter-asset allocation"
I allocated my investments into the big three: bond, equity and supplementary. These allocations have different weightings according to an investor's profile. My profile is set to 'Aggressive' primarily because I am still young (less than 40 years old). The ideal column serves as an allocation benchmark and the current (or actual) portfolio allocation may deviate from that depending on the investment climate and market conditions.

[2] Define what is my "Intra-asset allocation"
Now I can sub categorize my holdings into either of the three major positions. The bond position (25%) is responsible for preservation of capital and serves as diversification into safer asset classes. Because Malaysia is considered a defensive but boring market I have allocated 80% (which includes REITs from Malaysia). Under the equity position (65%), I have Global (incl Japan), Malaysia, Asia ex Japan, Emerging Market. The ideal percentage is solely based on my exposure comfort and investing capability, NOT computed using efficient frontier model. Lastly the supplementary position (10%) crucially acts as buffer in times of market downturn and corrections. It also holds cash should suitable opportunities arise.

My thoughts:
I am seriously too heavy weighted on Malaysia. Even with the introduction of my US portfolio, I will still have huge exposure gaps on Asia and EM.

For the bond position, I should look into securing exposure in Malaysia short term bond tenure and a new REIT which I have been talking about for months.

Gold has been on my radar for a couple of months but have yet to materialize. This will sit nicely into my supplementary position.

I already have some sound ideas and blogged for both bond and supplementary. Equities is what worries me, I have yet to do any substantial research other than listening to The Economist on macro economics. This will need to be addressed as soon as possible.

[3] What's Missing
Portfolio revisions are never final and so is this. I will need to consider how to add my Costco and P&G holdings under Equity global. There might be other sub categories that may be added in the future. I would also like to explore using efficient frontier model for portfolio construction. The old benchmark of 50% FBM Top 100 Index + 50% Maybank 12-Month Fixed Deposit Rate is no longer appropriate and will need to find a suitable replacement.

[4] What's Changed
The old composition has been simplified. Mixed Assets is now weighted into Equities and Bond respectively. REITs will go into Yield Enhancements as part of the Bond position. Cash is now considered Supplementary.

Old portfolio composition. Equities 60%, Mixed Assets 15%, REITs 10%, Bonds 5% and Cash 10%.
New portfolio composition. Equities 65%, Bonds 25% and Supplementary 10%.
Old targets for returns p.a. Equities 12%, Mixed Assets 8%, REITs 6%, Bonds 5% and Cash 3.75%
New targets for returns p.a. Equities 12%, Bonds 5% and Supplementary 3.5%

The resulting impact is that my Time Weighted Annual Return Rate is now 9.4% (previously 8.80%). This is expected as the weightings in equities is 5% higher. You will see the updated portfolio table in next month's market update post.

Wednesday, September 3, 2014

"Society changing" car for the masses

Set to go on sale in Japan by March 2015
LOS ANGELES (MarketWatch) — Japan is going hydrogen, or so breathless reports over the past month suggest.

Toyota Motor Corp. 7203, +1.75% TM, -0.10% which helped popularize hybrid vehicles with its Prius, is set to introduce a hydrogen-cell car for the masses — something which Toyota Chairman Takeshi Uchiyamada said could “change society,” according to a recent Nikkei Asian Review report.

Unlike hybrids, which do emit carbon gases, or electric cars, which tap into grids often supplied by fossil-fuel plants, the hydrogen cell runs with just hydrogen (in its tank) and oxygen (from the air), with the only byproduct being harmless water.

Toyota unveiled the concept version of its first fuel-cell mass offering — the FCV — over the summer. The company plans to launch it domestically sometime before the current fiscal year ends in March of next year, and in the U.S. and Europe by the summer of 2015.

Of course, hydrogen-cell vehicles are already with us, but they’re generally used by fleets, such as city bus lines. The Nikkei report, for instance, notes that South Korea’s Hyundai Motor Co. 005380, -2.80% HYMLY, -0.01%  sells a hydrogen version of its Tucson sport utility vehicle to the city of Copenhagen, among others.

What makes the new Toyota hydrogen car different is the price. While the Nikkei says Hyundai’s hydrogen Tucson goes for about $145,000, Toyota has said its FCV will cost just 7 million yen, or a little over $67,000.

“I could not believe my ears when I heard Toyota was thinking about selling its fuel cell vehicle for ¥7 million,” the Nikkei quoted an unidentified Hyundai executive as saying.

Toyota’s competitors aren’t far behind either: Honda Motor Co. 7267, +1.41% HMC, -0.32%  is also planning a consumer model for next year, while Nissan Motor Co. 7201, +0.85% NSANY, -0.52% is joining with Daimler AG DAI, +0.99% DAI, +0.50%  and Ford Motors Co. F, -0.06%   to produce a fuel-cell car for 2017, according to the Nikkei.

Some obstacles remain, however, with the first and foremost being a lack of hydrogen fueling stations.

According to a Wall Street Journal report, Japan currently has just about a dozen hydrogen stations. Toyota hopes to create a network of its own, with affiliate Toyota Tsusho Corp. 8015, +1.79% building the stations and French partner L’Air Liquide SA AI, +0.27%   providing the fuel.

Construction on the first Toyota Tsusho station began Monday, though the project is slated to yield just three locations over “the next several months,” the Journal said.

And while the government is lending a hand, the Nikkei says, the entire nation is expected to have just 40 stations by the time the FCV goes on sale.

As for foreign markets, the situation is mixed. The Journal report notes that green-friendly California has just nine hydrogen stations for cars and two for buses, although another 69 are under development. Meanwhile, South Korea’s total is expected to hit 43 by the end of next year, and Germany is shooting for 100 by 2017, it said.

Price may also be a factor, with the Nikkei noting that $67,000 isn’t exactly cheap, even if it does bring the technology within the reach of average consumers. It quoted Prime Minister Shinzo Abe as saying last month that subsidies of “at least 2 million yen” per car would be made available, though Reuters reported at the time that the plan was only an outline, and details were still being finalized.

Meanwhile, dealers who sell such vehicles will need to invest about ¥5 million for a device that can check for hydrogen leaks, the Nikkei said.

Still, complimentary technologies could help make hydrogen cars more cost-effective. A separate Nikkei report out last month said Honda is making progress on using its FCX Clarity hydrogen-fuel-cell sedan to supply energy to a model home in Fukuoka. So instead of plugging in your electric car at home to charge it, you could plug in your hydrogen car to power your home.

In fact, Toyota said back in January that a fully fueled FCV would be able to power a house for a week or to drive about 300 miles without refueling.

And although the cars will likely remain more expensive than hybrids and electrics for the foreseeable future, the various reports on Toyota’s hydrogen ambitions suggest this won’t be a zero-sum game. The dawn of the automobile saw internal combustion completely crowd out electric cars, but the present situation may be more like the record player, which after World War II was able to support three different standards (33 RPM, 45 RPM and 78 RPM) seamlessly.

My thoughts:
I'm not suggesting that you purchase Toyota shares. This piece of news is interesting, one thing leads to another. 

The hybrid invention was just a transitional phase, the generation of battery-electric vehicles is almost reaching maturity, you can't squeeze more juice of out it. No 'substantial' battery tech breakthrough has been seen for the pass two decades.

Gone are the days when oil was ~$140/barrel. With the shale oil revolution prices are plummeting. Now ~$80/barrel. India's and China's increased consumption won't help. Shale is being harvested everywhere; from US to Canada, Russia, Argentina and even Brazil. 

The United States by far the largest user of oil is now a net exporter of oil for the 1st time since 1949.

Not good for crude oil producing countries, the black gold is starting to lose its glitter. That includes Malaysia, where Petronas is used as a piggy bank for the national coffer. That's why new taxes come in place to compensate for the loss of oil revenue.

Bad news for Proton and Malaysians. We will continue to fund a worthless entity for decades to come. And we will continue to use internal combustion engines because we need to pay a humongous amount of money to get a FCV. Even a Hybrid is out of reach for many Malaysians.

Hydrogen is easy to harvest via water-splitting or nano harvesting from the sun - virtually any country can do this. The Middle East OPEC countries will need to start thinking and planning ahead, oil dependence has to be reduced towards other sectors for a more lasting economic growth. Otherwise they will have to start to ride camels once again.

Just like how combustion engines replaced horse wagons. There will be one day where a new tech eclipses the old. This may be it.

Monday, September 1, 2014

Aboi's Updates For September 2014


Here's the link for my last market sense: Aboi's Updates for June 2014
For those who find it hard to follow I suggest reading through my previous posting on how I am using technical indicators as a trend seeker.
  1. First Attempt on Tech Analysis Part 1
  2. First Attempt on Tech Analysis Part 2

Recap my June's commentary. 

Volume is a huge surprise. I did not follow more recent news but something is brewing, smart money is planning for a move. The volume coupled with lower closing shows an up thrust which to me is a sign of weakness. -> The twenty point drop did happen the day after my June's posting. Ever since Bursa has been trading sideways. Indicators do suggest that the trend will be as such. Until after BNM's two MPC meeting and after Budget 2015 I will not change my end of year Bursa target of 2000 (assuming no financial crisis). Resistance and support lines are loosely created, I'm not interested as I believe it's gonna trade sideways until our Budget announcement.

I will now highlight key things from AMP Capital's economic update (FoC, updated every Monday):
1. Ukraine crisis has become more complicated due to Russian intervention. 
2. US economic data is pretty favourable; strong home sales & increased consumer confidence.
3. Japan data disappointing; softness in household spending and increased unemployment.
4. Europe upcoming ECB meeting to discuss about deflation worries and possible 50/50 QE program.

Portfolio unreversed gains & losses
Because much of the weight of the portfolio is invested in Bursa, it has also been performing up and down. I will need to diversify more. Equities are not performing. Funds have been compensating for the losses but not enough to cover. I've stopped increasing my position in Aberdeen's World Fund. You may read about my post Aboi To Finally Invest In Aberdeen Islamic World Equity Fund about exposure into developed markets: US, Europe and Japan.

Portfolio composition. Equities 60%, Mixed Assets 15%, REITs 10%, Bonds 5% and Cash 10%.
Targets for returns p.a. Equities 12%, Mixed Assets 8%, REITs 6%, Bonds 5% and Cash 3.75%.

**Changed Aberdeen from BUY to HOLD, US stock market is overpriced.
**HwangDBS Select Income fund gross income declaration of RM0.005/unit (reinvested all into 85 new units)
**Kenanga Growth Fund gross income declaration of RM0.06/unit. (reinvested all into 484 new units)

#1 Portfolio target for the fourth portfolio year @ RM140k for April 2014 has already EXCEEDEDPortfolio target for the fifth portfolio year @ RM152k for April 2015. The TWRR (time weighted annual return rate is now at 9.58% (down 1.32%vs my target of 8.80%).

What's up for my 2014?
***Please NOTE that KEEP IN VIEW is not the final decision***
[1] Invest roughly 25% of cash balance in Aberdeen's Islamic World Equity Fund. 
        -> Completed, no more new positions.
[2] Par my remaining cash balance to less or equal to 10% level. 
        -> Completed, see portfolio.
[3] Invest in a new mREIT: Time To Revisit mREITS in 2014 when yields are right. 
        -> Keep in view.
[4] Invest another fund, diversify further into small cap-medium cap companies where I have no exposure. 
        -> Keep in view, likely to be utilizing EPF account 1.
[5] Possible buy of gold commodity: Speaking Of Recent Gold Demand Trends. My opinion is that gold will see resistance at $1340. 
        -> Keep in view, central banks purchases is supporting gold prices making it difficult for me.
[6] Taking a look (not necessarily invest) in Padini holdings. 
        -> Incoming.
[7] Put some cash into Fixed Deposit. 
        -> Completed, very small amount. It will be used every 2 years :)

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.