Unlock The Equity Cross Road....

The word goes that when the U.S. sneezes, the rest of the world catches a cold. The above scenario is still pretty much valid, given how the financial troubles in U.S. had led to the global economic meltdown for the rest of the world! So despite all the speculation about the potential decoupling of world's economy from the U.S., it is simply not true as globalization has increasingly turned the world flat and like it or not, Americans are still the biggest spenders in the world, mopping up many products and services the rest of the world has to offer!

However, China has gradually and surely increased its role in the world's economy, given its huge domestic market (served by 1.4 billion people) and the enormous pace of growth averaging 8 to 10%. In time to come, it will not be exaggerating to say that if China sneezes, the world will likely catch a cold too!

Global stock markets have recovered strongly, against the odds, for the past 6 months. Major doubt is now being raised as whether the optimisms have run ahead of fundamentals or it's a mere speculation? The answer, I'm afraid, is highly subjective. Bear in mind that equity market is always forward looking, which essentially means that as an investor, we simply cannot wait until the event unfolds! Yes, it's a calculated risk that we all will have to take.

Recent data seem to have pointed to a sustainable recovery. However, whether one views it as a V, W, U or S shaped type of recovery is again highly subjective! Tan Teng Boo of iCapital Fund Management seems to believe we are at the beginning of another bull run and there will be a V-shaped recovery! However, most other analysts or financial gurus tend to take a more conservative view. Taking a long term view with China and likely India to spearhead future's economic growth, it is likely that we should have seen the worst for now provided U.S. do not spring more surprises or open up another can of worm!

Right now as we speak, global markets seem to be reaching a cross road where the next direction should be. It is understandable that investors are feeling nervy, having witness a dramatic bull rally for the past 6 months. An overheated bull will tend to follow with meaningful short term bear correction. Only then will the bull have an opportunity to recharge.

Mark Mobious, the well-known founder of Templeton Asset Management and investment guru, stated about a month ago that markets could decline between 20% to 30% following the recovery.

As a matter of fact, China's Shanghai market has corrected (or crashed?) about 20% the last couple of weeks, driven by fear of Chinese Government's plan to tighten the domestic credit market. Tightening credit at a time when China's export and unemployment are still weak does not seem to make sense. However, it is also a concern that excessive liquidity could lead to excessive speculation and unproductive output. As such, the latest measure is meant to ensure that credit resources are diverted to productive investments, which will strengthen real economic activities rather than continue to create bubbles in the stock market and the real estate.

To me, it's good to take a pause and re-assess the status quo, rather than taking the gung-ho approach. The faster one climbs, the harder one falls....

Perhaps, it's also a good time to re-assess your portfolio too. Some spring cleaning will always prove to be timely indeed in due course.

Is U.S. Housing Making A Comeback Soon?

Housing, which led the U.S. economy into recession, may be one of the forces that helps to pull it out of the ditch. Although nobody expects a renewed housing boom, at least sales and construction spending are not falling any further.

Some of the signs of stabilization include:

• Home builders are gradually becoming more hopeful, even though surveys show most builders are still very discouraged. The builders' housing market index has risen in four of the past five months.

• Housing starts have increased in four of the past five months after tumbling to a postwar record low. Building permits for single-family homes have risen at a 109% annual rate over the past three months.

• Sales of new single-family homes have risen three months in a row after falling to a record low in March.

• Sales of existing homes have risen four of the past five months, supported by a government subsidy for first-time buyers and by sales of foreclosed homes.

However, residential mortgages either in foreclosure or with at least one payment past due hit 13.16% in the 2nd quarter, the highest percentage ever recorded!

Mortgages somewhere in the foreclosure process reached 4.3% of all mortgages, up from 3.85% in the 1st quarter and 2.75% in the 2nd quarter of 2008

With current U.S. unemployment rate at almost 10%, it leads to the sign that mortgage performance is once again being driven by unemployment. In fact, prime fixed-rate loans now account for one in three foreclosure starts. A year ago they accounted for one in five. While 41 states had increases in the foreclosure start rate for prime fixed-rate loans, 43 states had decreases in that rate for subprime adjustable-rate loans.

Until the U.S. employment situation improves, it is unlikely that there will be meaningful improvement in the foreclosure and delinquency rates.

Data Source: MarketWatch

Is Margin Trading Right For You?

Leverage your money. That's what many of us have often been told or practising. However, not all forms of leveraging is good. For example, not repaying fully your credit card bills and servicing high amount of interests is not a good way of leveraging. To sum it up, you need to weigh the cost and benefits of such leveraging and the associated risk before jumping into it. If the cost outweighs the benefits and comes with high risk, such form of leveraging is obviously not for us!

In equity trading, there are generally two forms of account, being cash account and margin account. Cash account simply means you pay cash up front, before purchasing shares. In countries where settlement period (T+x day) is allowed, full settlement has to be made upon the maturity of the settlement period. Margin account, on the other hand, allows an investor to purchase more shares than his cash deposit allows, normally two times the amount. For example, supposed you have $10,000 in cash deposit, you are allowed to purchase up to $20,000 worth of shares. The other $10,000 is like a form of borrowing from you broker or securities firm, in which they will charge you interest (for the amount of borrowing) based on prescribed interest rates calculated on a daily basis.

Effectively, this is a form of leveraging. Question is, is this a good form of leveraging? Let's explore the advantages and the inherent risks.

Quite clearly, margin trading allows you to trade more than what you have, and therefore, allows you to make more money if your share price projection turns out to be correct. However, the same holds true (i.e., more losses) if the share price goes against your direction!

Here's the added risk when the direction of the share price goes against you. When the amount of shareholding falls below a certain predetermined amount (by the broker or securities firm), the broker is entitled to issue a margin call. What a margin call simply means is that you will need to top up the shortfall immediately or latest by the next business day.

For example, supposed you have cash deposit of $10,000 and you have bought shares worth $20,000. Let's say share prices have gone down by $6,000 and you now have $14,000 remaining. Your net cash position now is %$4,000 ($10k - $6k loss). Assuming margin requirement is 30%. you will need to maintain a minimum of $4,200 ($14k * 30%). In this case, there will be a margin call given your net cash position runs below the safety margin.

Failure to top up within the set timeline will render the broker disposing your shares. Worst of all, it can be done without your knowledge!

To further add salt to the wound, your losses could be blown out of proportion as you continue to top up your margin but the market further deteriorates against your expectation!

You need to be also aware that the amount borrowed incurs interest on a daily basis. As such, it is an added cost of investment. As such, there are holding costs should you decide to hold on to a stock.

In conclusion, my advice is do not trade margin account unless you absolutely understood the kind of risk that you are dealing with and is prepared to take on such risk without major adverse consequences. Personally, I do not and will never trade with a margin facility. Simply, it's way beyond my tolerance of risks!

How To Invest In Overseas Equity Market?

For those who would like to diversify their portfolio investments beyond the local shore, this article sets to explore the ways to do so. Just to emphasize, I am articulating on direct or active investment instead of passive investment such as investing in unit trusts.

Thanks to globalisation and increased investors' appetite for better investment returns, many Malaysians have started investing offshore (In part this is also due to the fact that Malaysia stock market is no longer favoured by foreigners and is lagging far behind stockmarkets in Hong Kong, China or even Singapore in both performance and liquidity).

If you are interested in investing in multiple key global markets, the one that instantly comes to my mind is Interactive Brokers (IB). IB offers a very comprehensive list of financial markets to invest in, ranging from North America (U.S, Canada, Mexico) to Europe and Asia Pacific (Australia, Hong Kong, India and Japan) region. The products offered are also wide ranging, from equity to forex, derivatives, bonds, ETFs, CFDs and so on.

IB's brokerage rate is also one of the lowest available. For instance, to trade in U.S. stocks, the brokerage charge is only US$0.50 per lot (of 100 shares) with a minimum $1 brokerage per order!

Application for an account can be done easily through the web (online). Even Agreements can be digitally "signed" online! The only manual work which you need to provide them is a copy of your Passport and a signed copy of certain local Authority Form such as W-8BEN in the case of trading in U.S. For added convenience, you may fax them a copy of these documents or simply scan and email a copy to them.

One word of caution though, the trading software for IB is not that user friendly. So it may take some time for you to get used to it. However, step-by-step guides are readily available from their website. All you need to do is to run the videos.

For those who are interested in trading in the U.S. market only, my preferred broker is ThinkorSwim (ToS). Brokerage rate is higher at $1.50 per lot or fixed at $9.95 per trade (whichever is lower and subject to a maximum of 50 lots for fixed rate) but the trading software is much more user friendly and feature packed. Among them include the ability to display multiple chart patterns all in one screen.

The beauty about these online brokers is that you can also do virtual trading, that is, trade without real money! This will give you a sense of better confidence before starting real trades, and is ideal for beginners who would like to get familiarise with the trading platform and/or test certain trading strategies.

To start real trading, you will need to deposit funds first into the trading account. In other words, there is no more T+x day type of settlement. All trades are cash up front but you may choose to trade with a margin facility.

Funds can be easily transferred from your local banking account to the U.S. designated account using wired transfer or more commonly known as Telegraphic Transfer (TT) in Malaysia. You will need to bear the TT charges (charged by both local and foreign banks) as you do the transfer. Just inform the broker about the transfer and they will notify you once the amount is successfully banked in. Normally, this should happen within the same business day.

Trading platform is much more sophisticated compared to our local markets as you can literally set your trading criteria (e.g., entry price, stop loss and profit target) and walk away without ever watching the screen again! You can even set orders such as market order, stop order with or without limit and OCO (One Cancel Other) orders. Once you learn how to do it, trading is very easy and a peace of mind in case you are busy at work or go to sleep!

Other than signing up with online brokers, the other viable option is to trade via your local investment bankers or stock brokers. A number of local Investment brokers have for the past couple of years rollout offshore trading in order to cater for this increased interests. Among the Investment Brokers offering this service include CIMB, OSK, Kenanga, Maybank and RHB Investment Bank.

However, do take note that this type of trading is not done online. The arrangement is between yourself and your local broker. Orders can be instructed by you and your broker will forward the trade instruction with their respective counterpart in the particular country of trade. Exchange rate is determined by the broker on the day of trade. There is no standard brokerage rates apply so you will need to verify with your preferred broker before trading. There will also be some signing of paperwork required before you want to start trading offshore.

Generally, this type of 3rd party or indirect trading will be more costly than online trading. It will probably be fine if you do not intend to trade offshore frequently and do not have the time or patience to learn a new trading platform. Also bear in mind that there will be a delayed trading execution given the offline mode of instruction and involvement of 3rd party.