A Case of Reality Check

2009 was a stellar year for global stocks recovery. As I had written before, it was more hope than factual when global funds decided to take on an optimistic route. 2010 is expected to be a lot tougher, in the sense that what was expected last year must bear fruit this year, in order to sustain the bullish views across global economy and investments.

Last year (until the beginning of this year) we saw massive inflows of funds into emerging markets particularly like China, frenzily mopping up undervalued equity stocks and real estate properties. Property prices in Shanghai, for example, has even surpassed the previous highs made before the 2007 financial crisis! Things were beginning to look more bubblish and speculative than solid fundamental!

Problems began to emerge towards the end of 2009, in places like Dubai where they were not able to service their massive debts, to the point they need to be rescued by Abu Dhabi's sovereign funds.

Next in line comes some of the European countries commonly known as the PIIGS (being Portugal, Italy, Ireland, Greece and Spain) who appear increasingly unable to service their respective sovereign debts.

The key question in everyone's mind is that will this snowball into a global issue? Thus turning it into a double dip recession, as what some economists have predicted?

Worries about Europe caused the Euro to hit an eight-month low against the US dollar.

The perception of US Dollar may even turn to become a safe haven! Some analysts are also predicting a bullish rally on US Dollar this year against world major currencies!

To Cut or Not To Cut?

For many Malaysians, the first thing that probably comes into mind is the on-going P1 WiMax advertisement that has caused some gender controversies but essentially tried to convince consumers to switch their internet broadband services to the wireless WiMax technology. The latest P1 WiMax technology is supposed to make the experience of broadband internet surfing better and faster, "plug-and-play" with no physical phone line required.



Now that's not what I am referring to. I am referring to the more pressing issue of Malaysia's Government's recent plan to introduce service tax for credit cards from 2010 onwards. To recap, each card holder will be charged RM50 and RM25 for each principal card and supplementary card respectively, starting January 2010. If a person holds 5 credit cards with two supplementary, the total amount could add up to RM300 each year, and that's a big amount to pay for!


Personally, I hold something like 10 credit cards! Well, it's not that I'd like to have so many of them but merely because of the different kind of benefits that each of these cards could offer. For example, some credit card offer 2% rebate on petrol usage, while some others offer better discounts or rebates for supermarket spending, etc. Essentially, the banks have been very creative in rolling out different kinds of benefits to entice consumers to sign up for different credit cards. Since we can't have all-in-one facility, we have no choice but to sign up for these different cards. After all, there is no harm done provided the use of credit cards are not abused.

With the introduction of service tax, the benefits now seem to be muted. Besides the consumers, the biggest losers will be the banks and the sales agents whose livelihood depends on promoting the credit cards to earn a commission!

While the objective of prudent spending appears sound and should be supported, I believe it should not be done at the expense of genuine credit card spenders. The Government should instead impose targeted measures on credit card holders who defaults on payment on a regular basis. For instance, a mechanism to suspend all the credit cards of a particular credit card holder who defaults more than x number of times should be considered. Else, create more incentives for the use of debit cards instead of credit cards instead.

Nevertheless, if you are holding on to many credit cards right now, do not simply cut them apart. Wait for further advice from banks pertaining to this matter. I believe banks are actively pursuing the matter with the Government in order to come up with better measures. With the Government's constant flip-flopping policies, it will not be a surprise if they decide to change it again!

After all, it's also still not too late to make a final decision to cut your credit cards in December, if the situation renders so.

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!

Shall I Accept A Lower Loan Installment?

In view of the current low interest rates environment due to global economic crisis, costs of borrowings have become cheaper and if we were to base on the original loan facility agreement with the bank, the repayment period for the affected loans will be shortened, assuming the same amount of installment were to be paid each month. In some countries, banks are required to voluntarily reduce the monthly installment amount of loans so that the repayment period will not be shortened. In some cases, banks even allow troubled borrowers to stop payment for a specific period of time, or willingly negotiate with the borrower to restructure the terms of loan. The objective of this is simple, that is, reduce the burden on consumers and/or businesses in a challenging time like this.

Some people have sought my opinion whether to accept the reduction in installment amount. My answer to that is why not, even if one has no financial difficulties! After all, one could save a fair amount of commitment each month and assuming one has multiple loans (like myself), the amount of savings each month can be quite sizeable.

There are many advantages reduced commitment can bring to the equation. Among them include:
- excess funds for spending on goods and services. Flow of funds and spending are essential for the growth of economy. An environment without consumer and business spending will just make the already stale situation worse off!

- pay off debts which carry a higher interest rates than one's mortgage loan. Credit card debt is an obvious example. This could lead to significant savings in cost of debt.

- best of all, use the savings from the excess funds to invest wisely. Given that many investment grade assets have been bashed down badly during the past one to two years, great bargains are abundant! For instance, stockmarket is expected to give the best return once the global economy recovers. So for those who have not acquired the knowledge of investing, now is the best time to educate yourself, before it's too late!

Also, keeping extra cash in your pocket at the time of crisis is definitely a wise thing to do. After all, we will not know what may happen next. For instance, job retrenchment, business failure, etc, may just pop up down the road, especially if the economy gets worsen.

One word of caution though, do not expect every bank will voluntarily reduce the installment for you. I know for some banks, you will actually have to write in to request for the reduction. So do not just assume this will be done automatically. Go ASK YOUR BANK now!

Is US Dollar A Bubble In The Making?

Many perceive the US Dollar to be a safe heaven, never mind that the US economy is in shambles and the largest banks and automotive companies are almost to the brink of bankruptcies, never mind that US has been selling Treasury bills by the tons to avert a financial collapse and never mind that the US stock markets have shed its value by about half in less than one year! The US Dollar has in fact appreciated against most major currencies by a large scale except for the Yuan and the Yen.

So what caused the Dollar to appreciate?

- Risk aversion to global markets, due to the crash in most global asset classes and the credit crunch in the US. There is therefore a strong demand for US Dollar to be averted back to the US. Also, severe deterioration in world wide economy following the US footsteps has further caused risk aversion and repatriation of funds from both developed and emerging markets.

With the US resorting to printing money (or technically termed as "quantitative easing" to make it sound diplomatically correct!) in order to bailout the banks and save the faltering economy, questions are asked whether the Dollar's strength can sustain in the future.

In essence, any currency will lose its value when the supply is more than demand over time. The problem with quantitative easing is that by the time the money reaches the level of the common consumer and caught up with the excess money in the market, inflation cripples in and the dollar worth of currency will therefore be reduced. This is not the case when the money is first injected as it takes time for inflation to recognise the new money and catch up.

As such, the current strength in US Dollar will likely be hampered in the long term as inflation or hyperinflation takes effect in the US, as and when the economy recovers.

It is also likely that prices of commodities will again be on the rise by then!

On the other hand, better lock down your mortgage rates before interest rates move up in tandem with inflation or a hyperinflation!

U.S Consumer Aid: Step In the Right Direction?

US President Barack Obama pledged another US$275bn to a program that includes cutting mortgage payments for as many as 9 million struggling homeowners and expanding the role of Fannie Mae and Freddie Mac in curbing foreclosures.

The plan includes US$75bn to reduce monthly payments for borrowers, helps
homeowners with loans owned or backed by Fannie Mae and Freddie Mac to refinance at lower rates. On the other hand, the Government will double to US$200billion funding available for Fannie and Freddie to buy loans.

Further deteriorating market data showing U.S. housing starts and building permits dropped to record lows in January, as builders shelved construction plans to try to clear a glut of unsold houses caused by the slump in demand.

Major doubts remain over the effectiveness of this latest measure. However, it could well be a positive step towards salvaging a catatrosphic mushrooming in defaults and thus putting more pressure on banks, property prices and limiting consumer spending, which is an important element of U.S. economy.

Cheaper Credit Card Debt: What You Should Know And Ignore

Here's a piece of good news for Malaysians with credit card debt! The Central Bank of Malaysia have just declared that interest rates for credit cards will be reduced by 0.5 to 1.5% for credit cardholders, while late payment fees will be slashed to a minimum of RM5 and a max of RM75 (against previous fees of RM10 or 1% of total outstanding balance subject to a maximum of RM100) effective from 31 Mar 2009.

To recap, Tier I being cardholders who pay at least the minimum amount promptly over 12 consecutive months, will now pay 13.5% in annual interest, from the present 15%. Tier II being cardholders who pay at least the minimum amount promptly over 10 consecutive months, will now pay 16% in annual interest, from the present 17%. Finally, Tier-III cardholders who do not meet the above criteria will have a minimal reduction of 0.5% from the present 18%.

The reduction in interest rates should give rise to savings for credit cardholders. However, i believe this is merely an act of reducing potential debt default (in view of the economic slowdown or possible recession) instead of increasing consumer spending, as consumers face the likelihood of reduced income or income uncertainties due to job losses and business slowdown.

Nevertheless, the silver lining to this is that nobody should use the credit card as a form of borrowing due to the extreme high cost of financing. It is advisable to pay off such credit debts with lower cost of financing such as personal loan, property loan refinancing or make use of tools such as credit balance transfer to another credit card with much lower cost of financing.

Avoid credit card debt!

Interest Rate Cut: How Does It Impact You?

The Central Bank of Malaysia cut its interest rates by 75 basis point from 3.25% to 2.5%. The latest move is higher than the consensus expectation of 50 basis point. The higher than expected rate cut probably reflects a faster than expected deterioration in the country's economy.

In the same token, the Central Bank has also reduced the Statutory Reserve Requirement (SRR) of banks by 150 basis points, from 3.5% to 2%. This potentially neutralizes the expected margin squeeze on banks (due to lower rates) by reducing banks' cost of funds, expanding liquidity in the banking sector and thus increases the capability of banks to restructure loan defaults and helps reduce risk of non-performing loans.

With the latest low interest rates, it's a blessing to loan borrowers but a bane to depositors. For loan borrowers, it is a good time to refinance their existing loans. A low interest rate environment will most likely bring some relief to the property market too.

On the other hand, the lower interest rate should benefit bond yield.

With the slowing economy (and possibility of recession) and volatile investment climate, it is indeed imposing greater challenges to sustaining real wealth creation in the foreseeable future.

$15billion U.S. Auto lifeline

There were fresh news on U.S. Congressional Democrats and White House negotiators agreed on the outlines of a $15 billion plan to give General Motors and Chrysler federal loans to stay in business while requiring them to restructure their operations. An agreement in concept with lawmakers and that negotiations on details were still continuing. However, the plan still needs voting of approval from the Senate.

The legislation would however, include protections for taxpayer money, including the appointment of a so-called car czar who could force the companies into Chapter 11 bankruptcy if the companies don’t come up with a viable business restructuring plan by the deadline of March 31, 2009. Nevertheless, a 30-day extension beyond the deadline is possible if the plan is determined to be positive on a preliminary basis.

Both GM and Chrysler have said they need at least $14 billion in combined aid to keep them from running out of cash by early 2009.

More than a million Americans are believed to be employed in the U.S. automotive sector. Another reason why U.S. Government cannot afford to let them vanish, perhaps?

U.S. Federal Reserve, the modern Santa Claus

The U.S. Treasury Department initially promoted the US$700 billion financial rescue package approved by Congress last month as a vehicle to buy toxic mortgage assets from banks and other institutions to spur fresh lending. However, in a sudden twist of event, it has decided to change its target to focusing on making direct investments in financial institutions and shoring up consumer credit markets instead. This has certainly rocked the equation and many were questioning the rationale of this sudden change of target, thereby causing immense uncertainties.

Apparently, the original plan never got off the ground and U.S. Treasury Secretary Henry Paulson declared that asset purchases were not the most effective use of the funds!

Hey, isn't he the same guy who advocated the original idea at the first place? A sign of "loss of direction"?

With the other significant root cause of the problem being the sky-diving U.S. consumer confidence, this change of target is therefore aimed to help restore credit flows to U.S. households by using financial rescue funds to lure investors back to markets for securitized debt such as car loans, student loans and credit cards.

It appears that many more troubled banks, companies or industries have started asking more bailout funds from the Fed, as if they are some kind of Santa Claus freely distributing free handouts! The latest being AIG, whose original US$85 billion bailout has now ballooned to US$150 billion, and the U.S. automotive companies also similarly demanding some large sum of rescue funds!

Last but not least, U.S. leading charge card company AMEX has now been granted a Bank holding status, i.e., they are now much more ready to tap into the seemingly "un-exhaustable" Federal Reserve funds!

To the U.S. Government, they will have a busy task to make sure that their money printing machine is not going to let them down by going overtime!

What Does De-leveraging Mean To You?

In 2007, we had the the buzzword carry-trade, followed by sub-prime. Both have had devastating effects on global financial markets! The latest financial buzzword is "de-leveraging". In simple terms, it means that banks, consumers, companies, and the government need to reduce their debt.

From the early 1920s through 1985, the average level of debt-to-GDP in the U.S. was 155%. The highest peak in history (until the recent debt boom) was in the early 1930s, when debt-to-GDP soared to 260% of GDP. In the 1930s, the ratio then cratered to 130%, and it remained close to that level for another half a century.

In 1985, U.S. started to borrow, and last year, when U.S. finished borrowing, the country had borrowed 350% of GDP! To get back to that 155%, U.S. need to get rid of more than $25 trillion of debt!

For a start, U.S. banks have written off $650 billion of debt so far!

Global stock and asset prices in general have been the victim of the global de-leveraging exercise, pushing prices of equities and commodities to unrealistically low levels. This de-leveraging is being driven by the unwinding of over-leveraged positions, and compounded by fund redemptions and frozen credit markets.

The bottom of the markets will happen when this whole de-leveraging exercise ends - which for now is still uncertain. It is important to take note that Lehman Brothers reportedly has between US$40 billion to US$70 billion of assets belonging to hedge funds that are frozen in its UK arm - and negotiations are still ongoing with the administrator to release them.

When the time comes, prepare for another round of "de-leveraging" exercise!

No Rates Increase For Now

Last Friday, Malaysia's Central Bank decided to put interest rates on hold, thereby squashing speculations that rates might be raised by 25 basis point, to counter the recently published high inflation of 7.7% experienced in June. The latest action by the Central Bank was taken in lieu of the country's slowing economy and therefore meant to avoid putting further pressure on growth and consumer spending, despite inflation being the highest in 26 years! The argument against inflation is that there is a likelihood it may ease going forward given the slowing economy and consumer spending.

From my observations, many analysts (some local and mostly foreign) had taken this piece of action negatively. They perceive that the country is at risk of posting even higher inflation going forward, given the Central Bank's move to retain interest rates. They felt that Malaysia should have raised rates just like many of the other neighbouring countries did! (Herd's mentality, perhaps?) As of Monday, Ringgit was under heavy selling pressure as a result.

Contrary to expectations, the stock market reacted positively as it went up 1.1% on Monday.

One thing is certain. A higher interest rate environment will deter spending on businesses and consumer. Moreover, higher financing cost does not bode well for everyone. This is certainly not good for the economy and the people considering the already slowing growth caused by global credit crisis and high inflation.

In my view, it may not be an entirely bad idea to put on hold certain actions until events are more certain or crystalized.

For those who intend to secure new loans, it may be wise to secure it now and go for fixed rates scheme, particularly for those who do not like to stomach fluctuating cost.

What do you think? Should the Central Bank raise interest rates?

Get-Out-Of-Debt Community

Are you having problems with too many debts getting out-of-hand? Do you need advice on debt related matters from debt consolidation, settlement, consolidation loan, payday loans, dealing with collection agencies, creditors and credit cards? Look no further. I have recently come across a debt consolidation community that provides free debt counseling with experts financial coaches.

They appear to do this for FREE and have helped many people overcoming their debt problems.

I recommend you to check them out should either you, your loved ones or friends need any debt-related advice.

Debt Consolidation

Should You Gear Up or Pay Up?

One common question i always received, is "Shall I gear up on my loan or pay up the loan as fast as possible"? The answer depends. Confused? Well, there is really no real right or wrong answer here.... The answer lies with the risk tolerance of an individual and to a certain extent, age too.

First of all, let's break this down into different categories...For those who are in the 20s and 30s, it probably makes sense to take on a greater risk by gearing up, that is, leverage through loans with longer tenure, with the assumption that you have a regular income and/or reasonable amount of savings, investments or businesses that are able to generate some consistent decent returns. These group of people generally can afford to take on more risks and in the worst case scenario, they have something to fall back on.

On the other hand, people who are more than 40s and approaching retirement age may consider taking on lesser risk. Bear in mind that the maximum lending age is generally up to 65 years old. Basically one should make sure that one is able to continue servicing the loan post retirement. Another reason why i like properties such as high-rise apartments or commercial properties that are able to generate positive cash flows. In essence, the monthly rental is more than able to pay off the loan installments so you don't need to worry about it too much!

Overall, you should review your own financial goals, resources (such as savings, investments and other diversifications) and risk appetite in order to come to any conclusion. eg., if you settle your loan first, you may lose out on other investment opportunities that may potentially give you much higher returns than your loan rates. On the other hand, if investment is not your cup of tea or if you have limited knowledge, then early settlement may be the better choice since it is a sure gain. Also bear in mind that all investments come with risk, so you need to be able to bear the risk if your investment decisions turn sour!

Other things to consider include the economy and the likely interest rate direction. Currently i would consider a good time to borrow since the banks are offering very attractive rates to the extent of BLR (Bank Lending Rates) minus 2, which works out to be around 4.75% (assuming BLR = 6.75%). However, in lieu of the current high inflation, banks may raise interest rates going forward. So, you could risk paying more interests in the future! However, i believe the rise should be negligible since the current inflation is cost driven rather than demand.

Another important element is from a tax perspective, it may not be advisable to settle early since there are certain tax benefits that come with investment property such as tax deductibility on loan interests against rental income. Effectively you will be paying less tax on your rental income. If you have two loans for your home and investment respectively, settle the home loan first.

Last but not least, if you have credit card debts (balance transfer and installment plan not included), you may consider refinancing your current property so that you could use the excess funds to pay off the outstanding credit card debts! Like I always said, never ever borrow money through credit card!

Do share with me your thoughts.

JG8D69D

Credit Card Spenders, It Pays To Pay Up!

Effective 1 June 2008, the Central Bank of Malaysia (Bank Negara Malaysia) will introduce a new Tiered Interest Rate Structure on retail purchases using credit card. This structure has been introduced to inculcate prudent financial management among credit card users. Card users who demonstrate good track record in settling at least their minimum payment promptly will enjoy reduced finance charges.

Currently, all outstanding payment after due date will be charged a standard 18% interests per annum calculated on a daily basis. The banks are therefore often labeled as the "legal loan shark" as a result of charging such an exorbitant high rates! Anyhow, the intention was to deter credit card defaults or using credit card as a debt instrument. However, the results often showed an increasing trend of debts and/or bad debts, which is not the intention!

As for late payment, the current policy is to charge 1% on the minimum payment amount.

On the other hand, interest free period is currently set to 20 days, for card holders to enjoy 20-day interest free period upon purchase.

With the tiered structure, different interest rates will be charged based on past payment track record:

Card users with prompt payments for 12 consecutive months - 15%

Card users with 10 or 11 times prompt payments in the last 12 months - 17%

Card users with 9 or less prompt payments in the last 12 months. - 18%

Sounds good for card holders with prompt payment track record? Read carefully! First of all, the interest-free period for card holders who do not pay in full will be effectively removed! That means, although one may pay the minimum payment promptly but without paying full settlement, all amount from new transactions posted will be charged interest on the day the purchase happens! Secondly, the late payment charge is now set at a minimum of RM10 or 1% on total outstanding balances!

The outcome of all these is that the card holder may end up paying much more interests than before if the person does not settle the outstanding card balance in full!

At a start, paying such an exorbitant amount of interest is not right, let alone paying more!

How is this differ from your country?