Possible blueprint to easing global worries, ECB/IMF theory

(Posted on Wednesday, 3am)

Original post in black. Latest update in blue


Briefly, the US GDP data came in at 2% vs the previous month estimate of 2.5%. This estimate is worrying. First weak data for a long time from the US since mid October.

HSBC Chinese Flash PMI sinks Asian market. 'Flash' is a preliminary PMI before the actual data which is normally release at the end of month or 1st week next month. The data sank to 48 from above 50 which shows contraction. As a result, consumer sentiment weakens sending the Aussie dollar and Asian markets lower.


For the record, the previous month HSBC flash estimates was lower than the actual data released. In addition, the real data from the Chinese was much lower than the HSBS data. But this is how the market trend - relying on fundamentals as well as how the investor interpret the data.  Bookmark here for updates!

IF (a big if) this is a knee jerk reaction, it would be a good time to go bargain hunting. The flash estimates would ease worries of China over heating and hence a possible easing in China's monetary policy - easing of RRR rather than on interest rates!

1. Italian bond yield has been rising. Yesterday, the 2 year yields were at 7.05% as compared to the 10 year yields at 6.87%. In other words, short term bonds are paying more than long term bonds indicating there’s an inverted yield curve in Italy.

What does this mean? Bad for Italy. Let’s hope the ECB and/or the IMF would come to the rescue. Read IMF new announcement.

2. IMF new announcement – IMF announces stepping up a new credit facility. The facility allows IMF members up to

·         Five times the member’s quota for six months.

·         Ten times the member’s quota for 12-24 months loan

Let’s hope this timeframe is sufficient for the member to regain its creditability. What a timely event for Europe members to tap on this facility.

3. There is also a rumor that the two largest economies in Europe will soon announce treaty changes. This is economic convergence!

With the above news circulating, US major indices with triple digit losses recovered and tested the flat line!

As you probably know the European Central Bank (ECB) is the last lender of resort to financial institutions and not for the sovereign members, while the IMF comes in to ‘bail out’ sovereign debts.

Would the Europeans debt crisis ease if the ECB were to lend to the IMF who would then ‘bail out’ the European sovereign debt countries? This may overcome the ECB’s current obstacle. While this may be in the pipeline it would possibly mean that the sovereign debt countries may be able to tap on this facility, to buy time and regain the markets confidence.

When would helicopter Ben come to the rescue? Price stability and employment! I think QE3 may be launched sooner than later (possibility Q1 or Q2, 2012). But would Ben wait for the next market slump before releasing QE3? In other words, the global situation needs to be worst off before QE3 is released.

That’s my blueprint out of this global debt situation for Europe and US and possibly global financial worries. Time is just the solution to end all pain and worries!

Notes: (An inverted yield curve has predicted every US recession since the 1950s and has only once sent a false signal (a recession narrowly avoided in 1967).

Read more on inverted yield curves posted 10 June 2011. Since then, Brazil had cut rates twice leading the yield curve to be normal. However, the inflation in China had just managed to improve. The curve is flattening. But the inflation in India is still on the high side which explains why the stock market has not picked up as compared to the BRIC countries!)

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Markets can stay more illogical than you can stay solvent

(Posted Tuesday, 115am)

The above is one of my favorite phrases. It is also a reminder to me when markets are trending illogically. But what seems illogical to me may seem logical to others!

Take for e.g. global equities fell during the third quarter.  Hindsight: The reasons were with weak manufacturing data, inflation, global growth concerns, rising interest rates, unemployment, Europe debt crisis, etc.

As you probably know, US economic data for the past month or two had been encouraging (the latest existing home sales data rose 1.4%, better than expectation). Inflation fears had fallen with respective CPI in US and China, falling to comfortable levels with lower inflation expectations.

Manufacturing data in US and China has been encouraging. Employment is steady. Global growth is less of a worry with the exception for Europe. Interest rates had fallen in Brazil, Indonesia and Australia with most on hold. In other words, the fundamentals are better and the stock markets rallied.

Here is the first illogical scenario. Instead of focusing on favorable fundamentals, global investors’ mindset is focused on the Europe sovereign debt crisis, PIGS, then Greece, Italy, Spain and France. This week, the baton is passed to the US, with US markets falling due to unfavorable deficit reduction pact by the ‘supercommittee’.

Hence, global investors flee equities and high yield assets to safe havens. Here is the second illogical scenario. The safe haven beneficiary turns out to be no other than the US dollar and government bonds. The current/latest worry is on US deficit, yet investors flee to US dollar and US bonds. Is this a rational behavior? Yes and NO depend on who you are!

Gold is deemed to be a safe haven asset. We saw Gold rise when there were problems in MENA and when equities and currencies were plummeting in Q3, Europe debt crisis, etc. The third illogical scenario is Gold (instead of rising, Gold) fell last week and extended losses today! Coupled with the extension of the European debt crisis and Egyptian violence between protestors and security forces, Gold had plummeted more than US$ 100 since testing the US$ 1,800 resistance. Is Gold a safe haven asset? The safe haven investors are saying yes but the markets are saying NO.

What may seem to be a logical trade may be confused by the illogical market. But again, what is illogical to you is definitely logically proven right by the market. Hence, markets can be illogical, stay illogical than you can stay solvent.

Are you confused? Please allow me to explain. There are two herds of investors with different psychological mindset. The majority wins the tug of war.

Whichever, the fundamental and/or technical trading strategy that you are using, remember to bring your umbrella with you? The weather can change anytime, from anywhere.

How far can the market fall? I think the support level on October 4^th should hold. Otherwise, by that time, either Europe and/or the US would have been in very deep waters. If that happens, I would think the helicopter will make its appearance! Don’t forget QE3 is dying to be launched.

Are you keeping in touch with developments from the ECB and the IMF on how the Europe debt crisis can be resolved? Stay tuned!


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The best product for major Illness is?

(Posted Saturday, 7pm)

Financial risk management is the study of financial impacts affecting an income earner in the unfortunate event of temporary or permanent loss of income of self, a loved one, siblings or dependants. One method of risk management is risk transfer. Without the client realizing a financial impact, the planner cannot proceed.

For e.g. the loss of potential income for a breadwinner, age 35, He has a wife and a child age 1. The family saves 35% (CPF and 15% cash savings). Supposing his annual income is S$40,000 a year. In the unfortunate event of premature death, he does not want his wife, sibling or loved ones to shoulder his burden. His potential loss of income for the next 25 years (cost of seeing his child through education and he also plans to retire at age 60) is 40k times 25 years. That’s a whopping S$ 1 million. My responsibility as a financial doctor is to ask if this would be a financial impact. If he does, my next step is to ask for his agreement and I’ll proceed.

Let’s get to the concern upon diagnosis of a major illness. Others would term major illness as dread disease or critical illness, etc. Let’s use Cancer for discussion. Assuming you understand the policy schedule and definition for benefits payable upon the diagnosis of major cancer.

Upon diagnosis of major Cancer, the benefits are payable. I highlighted major because this event is critical, is a dread disease and is grave. Imo, this would seriously impact the potential income of the earner.

Otherwise, I would term this stage of Cancer as ‘not’ major, not critical, early stage. The impact could be resolved by looking into hospital and surgical insurance (a cost reasonable solution), outpatient Cancer treatment or early stage critical illness coverage.

Imo, the confusion comes from the last 2 paragraph, if the insurance agent or financial planner does not get his fact finding right! The client will be paying additional premium.

The client agrees that upon diagnosis of a major illness he wants a solution. As being matured, professional, he shares his concern and financial impact. Upon early diagnosis, he would like a comprehensive hospital and surgical (H&S) plan. He figures that early stage diagnosis would not warrant a loss of income and the H&S plan would cater for his pre, in and post hospitalization expenses. They have emergency funds to see them through for early stage recuperation and other expenses.

Hence, I offered 4 different types of solution from 4-5 insurers. This would provide him an unbiased solution as compared to just one insurer. A preferred insurer may NOT provide choice of cost/premium, yield, features, and benefits from a range of 4-5 insurers. You may be ‘blinded’ by the frog that lives in an island without knowing what the global world is offering! But that’s not the point!

The following is the comparison for Sum assured S$ 300,000, Age 35, Smoker until age 65 (Would most of the audience still earn an income after age 65?)

A: Term plan with critical illness benefits

B: Whole life plan with accelerate/enhanced critical illness benefits

C: Whole life plan with additional critical illness benefits

D: Whole life with embedded critical illness benefits

E: Endowment plan with accelerated/enhanced critical illness benefits

Annual premium  / Type	A	B	C	D	E
Basic plan	1652.25	6743.95	6743.95	3963.30	11624.55
Enhance CI		2049.15		(embedded)	1623.40
Additional CI			4783.65
Total	1652.25	8793.10	11527.60	3963.30	13247.95

Please note that the benefits payable for (A) and (D) is exactly the same if death or diagnosis of major illness were to occur before age 65. Actually, A pays more than D in the event of TPD!

We are human ‘machines’. Like it or not, with the food we are eating, the pressure we face in our daily lives and at work, death is a sure thing, but major illness will certainly accelerate the death benefits.

I am NOT going to dwell into Whole life or Endowment has cash values. But which would you pay for the risk transfer upon diagnosis of a major illness for possible loss of income. The cards are laid upon the table. You, as the client is deemed to be informed, which would you, decide?

Would you choose ‘A’ or one of the others because it has cash values? If you are choosing the one with Cash Values, than the whole fact find / diagnosis has to go back to the beginning to change your priority to cash values instead of risk transfer upon diagnosis of a major illness. You can’t have the whole pie and just eat it!


Finally, the best product for major illness coverage (in my opinion) is ADVICE! Similarly, in the medical field, it is not the medication that addresses your concern but you seek the doctor's advice for the right prescription, am I correct?

If you find the post beneficial in risk management or insurance matters, please feel free to visit my blog at seettpat.blogspot.com and choose the categories: Evergreen or risk management. If you find the post beneficial to your friends, siblings, loved ones, dependants, please feel free to forward such that it could reach out to a wider audience.

Please note. NO recommendations are made. The choice is yours. My primary responsibility is to lay the cards on the table such that you are informed to make a wise decision!

Which ILP provides the best returns?

The following was sent by an anonymous who would like to know which Investment link plan would provide/generate the best returns. He is puzzled by the various allocation rates offered by different insurers. What does the allocation rate mean? How does Units Trust differ? 

Allocation rate / Insurer	A	B	C	D
Year 1	30	30	15	55
Year 2	30	60	54	65
Year 3	55	90	102	75
Year 4	105	105	102	100
Year 5	105	105	102	100
Year 6	105	105	105	100
Year 7	105	105	105	100

The following forms part of my opinion. There is NO intention to make any recommendation of any ILP or Unit Trust fund(s).

My response is:

My assumptions follows:

(I could be wrong but I doubt any insurance agent can deliver performance because without having the appropriate license, they could only assist to recommend funds that meet your risk profiling, nothing more.

Without the appropriate license, they are not supposed to choose any funds for you. For e.g. if your risk profiling is ‘Moderate’ or ‘Balanced’, their recommendation is probably within the 50% equities and 50% bonds guidelines. They cannot recommend a narrowly focused country specific fund like China, India or Singapore with a 100% allocation in equities for a risk profile of ‘Balance’ or ‘Moderate’. This is NOT within MAS guidelines!

Some Independent Financial Advisers (IFA) has Market Strategists and Portfolio Manager to assist portfolio management. They provide investment talks/forums to educate clients to an informed decision. Otherwise, your investment performance will depend on lady luck.)

As the information you provided me was just the above allocation rate, I would not be able to provide my opinion on its feature and benefits. Hence, I’ll try to make assumptions and discuss from the (non) allocation rate point of view.

If your annual contribution is S$ 10,000, a 15% allocation rate means that S$ 1,500 is supposedly allocated for investment in Year 1. S$ 8,500 is deducted for Cost of distribution like commission, etc.

The allocation rate that is not allocated for Company A

·         is (100-30) for Year 1, (100-30) for Year 2 and (100-55) for Year 3.

·         That would be 70 plus 70 plus 45 giving a total of 185% not allocated.

·         At Year 4, you would have 5% additional units which would make the break even period to be approximately 37 years or Year 41

Similarly,

·         the break even period for Company B is approximately 22 years or Year 26

·         the break even period for Company C is approximately 25 years or Year 31

·         There will be no break even period for Company D.

The assumption is that if the unit price is unchanged, it would take Company A, B, C to break even in 41 years, 26 years and 31 years respectively.

While the bid offer spread varies with different insurers, the break even period would take much longer. The B/O spread reduces (in addition to) the allocation rate further.

The allocation rate for unit trust is 100%. The break even period is immediate (Bid offer spread is not taken into account)

Whichever/Whatever your intention to purchase an ILP plan is for risk management or for investment, please consider that any addition of riders (as a result of risk management for e.g. critical illness rider, term rider, waiver of premium, etc) will only exhaust your units because there will be deduction for the respective cost in terms of units before allocation rate. This will take the breakeven period very much longer.

We have not even discussed the plan generating yields! Am I correct? A growth in a Unit Trust fund will generate the same amount with the respective ILP plan.

As far as my knowledge permits, IMO, the most important feature of ILP plans is the waiver of premium on diagnosis of critical illness. In the unfortunate event of a diagnosis, the premiums are waived; you just sit back and collect your income/maturity/retirement benefits when the time is ripe!

I hope the above crystallize your queries/concern!

Are Asia Pacific equities impotent?

I think so! One of the main causes of male impotency is distraction, mindset, worries, etc.

The mindset of Asia Pac focused on Europe debt crisis is certainly distracting the better economic data coming out of the US. For most of Wednesday, the 10 year Italian debt was hovering above the 7% unsustainable figure. With the exception for a short duration when ECB were rumored buying Italian bonds, the Italian 10 year debt dipped below 7%.

US data for Wednesday was pretty good again. CPI for October came in lower than expected allowing the Feds to have more foreplay of their tools available. While economist were predicting a 0.4% rise in industrial production, the economy was getting steamed up with a gain of 0.7% far better than what economist predicted. In addition, the US homebuilder’s confidence rose to the highest level since May 2010. (The US market is certainly not distracted).

It is evident that Asia Pacific’s psychological mindset had been too focused on Europe (Greece, Italy, and Spain) and the yield of Italian 10 year bonds. Imo, I can feel that the Asia Pacific investors are tired and drained by the excessive volatility over this period of time.

·         Do we need Brands’ Essence to strengthen and prolong the Asia Pac positive mindset?

·         What would be the Viagra (catalyst) needed to get the equities market up? And sustainable?

·         When is Europe coming out with the EFSF and bank recapitalization literature?

·         Would US and/or China spring a surprise or two?

The Americas is certainly not impotent! Are Asia Pacific equities impotent?


At close on Wednesday, US markets closed lower from a Fitch report on exposure of US banks on Europe crisis. This doesn't look favorable. What are Asian banks' exposure to Europe crisis will determine the Asian market for the week.

Better US economic data overshadows European crisis

(Posted Wednesday 320am)

Last week the US markets ended on a positive weekly note. But on Monday, global equity markets were still cautious as Europe debt fears grow. Traders who were still wary of the Euro crisis pushed Italian bonds over the 7% line on Tuesday. Market is certainly shaking out the 'weak' investors.

US economic data came in mostly positive on Tuesday.

·         Retail sales data rose 0.5% vs 0.4% expectation.

·         New York Empire Manufacturing rose plus 0.61 ending five months of contraction from negative 8.48 last month. Outlook for the quarter (Q4) strengthens.

·         PPI (Producer price index) fell 0.3% which is the first decline in four months from 0.8% in October.

Fortunately, US data and optimistic news from Italy pushed the major indices above the flat line at point of writing.

While the sentiment coming out of Europe had not been encouraging, Asia Pacific has been neutral, preferring to follow leads from the US markets.

Recent data out of US, the world largest economy, had been quite encouraging with higher GDP figures, favorable weekly Initial claims data, narrowing of trade balance data, improved Michigan sentiment, better Retail sales, improved Manufacturing data and lower PPI data. Indeed, this would lessen global growth concerns with a hope that global investors adapt a risk on approach.

At the moment, the US dollar index is still considered high with weak sentiments from Europe. Vix is hovering around 31 which is sitting on the fence. Energy/Crude oil has been steady on the rise briefly breaking US$ 100 per barrel with supply issues rather than demand. Commodities are mixed while commodity currencies are trending on the low side with lack of catalyst to push high yields higher. Imo, this indicates that the market is still finding the next trend. Personally, i have a risk on position on the week of October 26th.

As for Gold, it tested US$ 1800 per oz and is ranging between 1775 and 1800. Gold had primarily been a beneficiary for safe haven as well as risk on. Be wary of price falls in Gold when the US dollar tests 80, plunge in equity markets or Gold/Silver margin calls. Otherwise, Gold is still a good bet till Jan 2012. The support is at US$ 1545 therabouts.

In conclusion, economic data coming out of US is certainly encouraging, lessening global growth concerns, while the European crisis is holding any foreseeable rally. Asia is encouraging growth by cutting interest rates rather than fighting inflation. With Black Friday round the corner, we hope the sales figure would trigger an early Santa Claus rally!


While my blog was posted at 320 am this morning, a similar post by CNBC was posted at 7am this morning, With US Data Improving, Markets May Ignore Europe


Once again, i am happy that the post of my blog precedes the headlines

The blogpost that precedes the headlines.

If you find the above 'good stuff', you may visit my archives by clicking here



Where global economy is heading 4-6 weeks from now? Conclusion

The above blog was posted on September 4^th 2011. The post received lower than expected audience! Sad!

In the post, I was trying to show a relationship between the Baltic Dry Index and global growth. Coincidentally (or not), global markets hit major technical support level on this very day (the 4^th week from September 4^th, that is October 4^th) and reversed.

A summary of October PMI data for Manufacturing & Services, complied by JPMorgan, Markit, HSBC, etc was mixed with the service sector business activity rising for 27 straight months.

Japan, China, Brazil and Russia stood out while India saw fractional growth.

I was researching on major benchmark indices for the US, Europe and the Asia Pacific. I noted that the bottom for the year 2011 was October 4^th. After which, we saw the following (two) weeks till current, major indices rallying (catching a breather during 1^st week of November: noise from Greece and Italy). However, the flight of vultures between Greece and Italy did not dampen the bull’s mood.

The US major indices returned a positive week bringing all major indices back into the black. Let’s hope, the Asia Pacific and Europe sector would follow the world’s largest economy returning positive for the year. See: YTD major benchmark performance 2011 Nov 11th

Was the BDI coincidental or has time proved the outcome? We can still be skeptical, but the fact is global market rallied leaving the year's low on that very day, October 4th 2011!