Sunday 30 October 2016

SSB Interest Rate Estimates – A Year On

Some readers might know that I run a parallel blog at (The) Boring Investor's Statistics that shows some of the investment statistics that I monitor on a regular basis. One of these statistics is a forecast of the interest rates of the Singapore Savings Bonds (SSBs) to be announced in the upcoming month. The interest rates for the SSB to be announced in the following month is based on the average yield (i.e. interest rates) of the Singapore Government Securities (SGS) benchmark bonds in the current month. As an example, the SSB to be announced in Nov (and issued on 1 Dec) is based on the average SGS yields in Oct. The SSB that is available for subscription in Oct, however, is based on the average SGS yields in Sep. Thus, by comparing the average SGS yields for Sep and Oct, you can assess whether you should apply for Oct's SSB (to be issued on 1 Nov) or wait for Nov's SSB.

There is, however, a small issue. Applications for SSBs close on the 4th last business day of the month. In the case of Oct's SSB, it closed on 26 Oct. Thus, if you are thinking of whether to apply for Oct's SSB or wait for Nov's SSB on 26 Oct, you only have the SGS yields from 1 Oct to 26 Oct to compare against the yields for the entire month of Sep. If the yields from 27 Oct to 31 Oct were to change drastically from the yields from 1 Oct to 26 Oct, your forecasts for Nov's SSB interest rates would be incorrect. 
For my (The) Boring Investor's Statistics blog, I usually blog on weekends only, hence, the forecast is carried out and posted even earlier, on the weekend prior to the close of application. This means that the post can sometimes be as many as 8 business days from the end of the month. The forecast error can be larger. As an example, for Oct, the application closed on 26 Oct, but my forecast was posted last Sun on 23 Oct. This means that I have 3 fewer days of data to carry out my forecast.
I usually provide 2 forecasts, one based on the SGS yields up to the date of forecast (known as the equal-weighted forecast), and another assuming the yields for the remaining days of the month to be the same as that on the last available date (known as the end-weighted forecast, because the yield on the last available date has a weight of 3-8 times more than all other days). After providing the forecasts for over a year, how accurate have my forecasts been? Fig. 1 below shows the forecast errors for both methods.

Fig. 1: SSB Interest Rate Forecast Errors

The figure above shows that the average errors for the end-weighted forecasts are smaller than that of the equal-weighted forecasts for all time periods except for the 10-year interest rates. However, on closer inspection, the equal-weighted forecast errors are of higher magnitude and are sometimes postive and sometimes negative, resulting in a smaller error when averaged. When compared using standard deviation, which considers only the absolute value of the errors, the end-weighted forecasts have smaller variance than the equal-weighted forecasts for all time periods. Thus, end-weighted forecasts provide better estimates of the SSB interest rates.

Fig. 2 below shows the forecast SSB interest rates superimposed on the SGS yields for the previous month. When SGS yields are relatively constant for the month, both forecasts yield very good results. However, when SGS yields are either rising or falling, the errors become larger. The equal-weighted forecasts have larger errors than the end-weighted forecasts because they do not take into consideration the direction of the SGS yields. End-weighted forecasts are more accurate as they give more weight to the SGS yields near the end of the month as described above.

Fig. 2: Accuracy of SSB Interest Rate Forecasts

Finally, the most valuable lessons that I learnt from forecasting SSB interest rates over the past 1 year is this: the future cannot be predicted. Although I could enhance my forecast methodology and perhaps provide good estimates of SSB interest rates, the best I could forecast is only 1 month in advance. I cannot forecast the SSB interest rates beyond 1 month. When the first tranche of SSB was announced in Sep 2015 with a 10-year interest rate of 2.63%, I forecasted that the next tranche of SSB would have a higher interest rate and decided not to apply for it. When the second tranche was announced with a 10-year interest rate of 2.78%, I was proven right! At that time, there was even an outcry among the SSB investors who had applied for the first tranche as their SSBs were now less valuable. Little did I expect that the SSB interest rates for all subsequent tranches would drop below that of the first tranche! The 10-year interest rate for the current tranche is only 1.79%, which is much lower than the 2.63% for the first tranche. Investors who bought into the first tranche of SSBs got a good deal after all. Smart alecs like me can only watch the SSB interest rates going lower.

If you are interested in forecasts of the SSB interest rates, you can refer to SSB Interest Rate Estimates at my (The) Boring Investor's Statistics blog. Just bear in mind the lesson I learnt above, which is that the future cannot be predicted.

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Sunday 23 October 2016

Singapore Savings Bonds – A Year On

It has been a year since the launch of the first Singapore Savings Bonds (SSB) in Oct 2015. How have the interest rates of SSBs changed in this 1 year and how have they performed relative to the more conventional government bonds, namely, the Singapore Government Securities (SGS)?

Fig. 1 below shows the 10-year interest rates of SSBs (red line). The interest rates are computed as the average of the benchmark 10-Year SGS interest rates (blue line) over the previous month. (Note: There is always a confusion over the "month" of the SSB. The SSB announced in Oct is issued in Nov and based on the average rates of the 10-Year SGS benchmark bond in Sep.). As you can see from Fig. 1, interest rates have been on a downward trend, reflecting the eagerness of central banks around the world to lower interest rates, to even negative levels in some countries.

Fig. 1: SSB 10-Year Interest Rates

The highest 10-year interest rate achieved for SSBs was for the second tranche of SSBs issued in Nov 2015. The interest rate was 2.78%. The 10-year interest rate touched a low of 1.75% for the tranche issued in Sep 2016. The interest rate for the current tranche is not much higher, at 1.79%.

If you had bought the first 2 tranches of SSBs issued in Oct and Nov 2015, you would be happy with your purchase, since interest rates for all subsequent tranches have been below these rates. 

However, the performance of the more conventional 10-Year SGS bond was even better. Fig. 2 below shows the price performance of the 10-Year SGS bond since the issue of the first SSB.

Fig. 2: Price Performance of 10-Year SGS and SSB

On 1 Oct 2015, when the first tranche of SSB was issued, the 10-Year SGS benchmark bond traded at $98.61 for every $100 of bond principal. Due to the fall in interest rates, prices of bonds have been on the rise. A year later, on 30 Sep 2016, the same bond traded at $105.09. Investors who bought the SGS bond would have gained a capital appreciation of 6.6%. On top of that, investors would have received another 2.375% in coupons (i.e. interest) for holding the bond. Since investors bought the bond at less than the principal of $100, the coupons translate to an interest yield of 2.41% ($2.375 / $98.61). In contrast, SSBs are capital-guaranteed, which means that their value stays at $100 regardless of whether interest rates are going up or down. Over the same period, investors in the Oct 2015 SSB would have received 0.96% in interest, being the 1-year interest rate of the SSB. In total, investors in SSB and SGS would have received the following returns over the 1-year period.

Capital appreciation - 6.57%
Interest 0.96% 2.41%
Total 0.96% 8.98%

Thus, the 10-Year SGS bond has outperformed the Oct 2015 SSB by as much as 8.02% over the 1-year period. The main reason is that interest rates have dropped from 2.54% in Oct 2015 to 1.74% in Sep 2016. 

Hence, if interest rates are rising, it is better to stay with SSBs as they are capital-guaranteed. However, if interest rates are falling, SGS are a better choice as they will gain in price. By juggling between SSB and SGS, you can gain from changes in interest rates. This is exactly the conclusion discussed a year ago in Getting the Best of Both SSB & SGS.

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Sunday 16 October 2016

What is My Target Price?

A reader asked me what was my target price for a particular stock in one of my blog posts. I was stumped for a while, and realised that I do not really have a target price for my stocks! I do have valuation limits on what price I could buy or sell a stock, but they are not the same as target prices. Let me elaborate further on the buy side and sell side separately.

Buy Side

Having a target buy price suggests that there is a particular stock that you like to buy but is waiting for the price to fall to the right level. To prevent myself from overpaying for stocks, the maximum price I would pay for a stock is 1.8 to 2.0 times the book value of the stock. It looks like a target price, but it is actually a stock selection criterion. All stocks that fail the criterion would not be considered for purchase. The Price/Book (P/B) criterion works the same way as the Debt/Equity criterion. The stocks either pass or fail the criteria; it is not quite the same as waiting for the price to fall to the right level. The litmus test of whether the P/B threshold is a target price is to consider what happens when the price falls to that level. Nothing happens, until the next review. If, in the next review, the stock is still below the P/B threshold, it would be considered for purchase, assuming it passes all other criteria. Thus, it is possible that the stock is bought at a P/B ratio lower than 1.8 to 2.0.

There are also stocks that I wait on the sidelines before buying. However, I am not waiting for the right price, but the right moment. Take for example, Keppel Corp, which I am interested to average down. Based on my assessment, Keppel Corp has not seen the worst of the Oil & Gas winter yet. Thus, if it revisits its low of $4.64 reached earlier this year, I would not be keen to buy the stock. On the other hand, if visibility improves on its business environment 2 years later but the stock then rises to $6, I would be interested to buy at the higher price. The main reason is to wait for the price to reflect fully the business conditions as well as assess whether the company is able to recover fully. All these take time. I view Keppel Corp as a long-term investment, thus it is much more important to understand the business conditions fully than to buy at a low price.

Sell Side

Having a target sell price means that you are waiting for the price of a stock to rise to a particular level before selling. It also means that if the price does not reach the target level, the stock would not be sold. Similar to the buy side, I have valuation limits on when I must sell a stock, no matter how much I like it. The P/B ratio for selling is 3.5 to 4.0 times. However, it does not constrain me from selling even if the stock does not reach the P/B threshold when the need to sell arises. In fact, rarely has a stock in my portfolio reached the P/B threshold mentioned above. Typical reasons for selling include changes in business fundamentals, triggering of trailing stops, or simply risk management.

Having said the above, I have loss aversion bias. There are some stocks that I regretted buying and no longer wish to hold on to them, but the price has dropped below my cost price. For these stocks, I am usually reluctant to sell at a lower price. Thus, the original cost price becomes a target price for selling these stocks. Nevertheless, if the loss is manageable and there are overriding concerns, e.g. changes in business fundamentals or risk management purposes, the stock would generally be sold at a loss. Just last week, I wrote that I had a 19% concentration in Global Logistic Properties but would be happy to reduce the concentration to 15% if the price recovers to my cost price. This is loss aversion bias at work. On reflection, I realised that the position limit on this stock is 20%, which means that I only have a 1% headroom for averaging down if the need arises. I sold 3% at a loss this week. The same goes for the growth stocks in my portfolio which were at the position limit.


Generally, I do not have target prices for buying stocks. On the sell side, I do have target prices for stocks that I no longer wish to hold and are under-water but not for stocks that are above-water. I think it is more correct to say that I have loss aversion bias rather than have target prices for selling stocks. So, the next time someone asks me what is my target price for a particular stock, I will be more confident in replying that I have no target prices.

Sunday 9 October 2016

How Should I Defend Against the Next Market Crash?

Barely 2 weeks after I wrote The Exit Might Be Narrower Than Expected, both British Pound (GBP) and Gold demonstrated what I have been worrying about. In a space of 1 week, GBP dropped by 3.8% while Gold dropped by 4.4%. GBP dropped after the British Prime Minister announced a timeline for starting Brexit talks with the European Union while Gold dropped on renewed fears of US Federal Reserve raising interest rates on the back of an improving economy. In particular, on Fri, GBP dropped 6.1% within 2 minutes. The sudden drop was rumoured to be caused by a fat finger (i.e. trading error) or computer trading algorithms. Regardless of the actual cause, the fact that the forex markets could not even defend against a fat finger speaks volume about the lack of depth of the financial markets against massive selling volume. It is definitely something that I need to guard against for my own portfolio.

My target asset allocation in the current investing environment is 50% equities and 50% reserves. Although I am wary of the financial markets, I do not believe in holding 100% reserves. During the market turmoil in Jan, I calculated that I need about 35% reserves to guard against a major stock market crash (see Prudence is the Name of the Game). A target allocation of 50%, which is 15% above the minimum required, is considered comfortable and not excessive. Too much cash would lead to erosion of value due to inflation while too little cash would lead to inability to recover from the crash. A rule of thumb that I always use in place of a detailed Value-at-Risk analysis for equities is a loss of 40% at the depth of the crash. Naturally, the loss depends on how severe the crash is and what are the stocks held. During the Global Financial Crisis in 2008/09, the loss was as high as 65%.

Thus, the problem statement becomes how do I invest the 50% in equities such that they will not suffer too much damage and how do I park the other 50% in other assets such that they can preserve their value.


Looking at my current stockholdings, the elephant in the room is Global Logistic Properties (GLP), which has a concentration of approximately 19%. The stock is a transformational experiment in trying to replicate the success of Warren Buffett. To achieve this, I need to be able to do 3 things: (1) identify a good stock, (2) concentrate, and (3) hold for the long term. Therefore, even if a crash is coming soon, I will not sell out of GLP, unless its business fundamentals deteriorate. Selling out entirely would mean that I cannot achieve at least 2 of the 3 pre-requisites required to replicate his success. Notwithstanding the above, I am happy to reduce the concentration to 15% if the price recovers to my cost price.

The second group of stocks is Oil and Gas (O&G). They are mired in heavy losses currently, but the advantage of this group of stocks is that they have their own dynamics and are less affected by global events. If OPEC were to cut production significantly, it does not quite matter to O&G stocks who wins the US presidential election or when Brexit happens. Over the past 5 months, I have mapped out a model to assess the economics of O&G companies in a series of Oil & Gas posts and will follow the plan accordingly.

The third group of stocks is growth stocks. As their moniker suggests, they grow their earnings over the years. Growth stocks can rise a lot during good times as investors chase after them, making them especially vulnerable to a market crash. However, given their ability to grow over the years, their share prices after the crash should be higher than before the crash.

The fourth group of stocks is dividend stocks. There are 2 types of dividend stocks, namely, those which have a constant payout ratio but the dividend varies with earnings, and those which have a constant dividend. My preference is for the second type of dividend stocks. They resemble closest to bonds that have constant coupons, which give bonds the ability to drop less than stocks, as described in What Can We Learn About Stocks From Bonds. If a stock could give me a constant 5% yield on my historical cost every year, I really would not mind if the stock were to drop 50% in a crash.

A small group of stocks that is worth mentioning is the nothing-to-lose stocks. They are considered nothing-to-lose because the amount invested in them is very small, making them easily written off the moment they are purchased. A brief explanation of them can be found in My Oil & Gas Fightback. Since there is already "nothing to lose" on them, it really does not matter if they were to crash 50% or more.


Most of the time, I only need to worry about the risks on the equities portion. This time round, I have to worry about the reserves portion as well due to the extremely low interest rates currently.

Traditionally, the main instrument for parking excess cash is bank preference shares and retail bonds of good companies. However, ever since the redemption of OCBC's 4.2% preference shares in Dec 2015 and the surprise loss of liquidity in retail bonds in Aug 2015 as described in Sneak Attack on My Cash Reservoirs, this instrument has reduced in importance.

Thankfully, around the same time as retail bonds demonstrated hidden liquidity risks, a new instrument was introduced -- the Singapore Savings Bonds. It has 2 important benefits, namely, easy liquidity and 100% capital protection, making it ideal to preserve value and liquidate for stock investments at the depth of a market crash. The disadvantage is that there is a limit on the amount that can be invested.

The other instrument that I have used to park cash this time round is US dollar. Given the impending rise in US interest rates, USD will also rise in tandem as explained in Getting Ready for US Interest Rate Rises. However, there is a limit on the amount of cash that can be parked in USD, as there is not a lot of USD-denominated assets that can be purchased. My preference is not to switch in and out of USD so as not to incur the bid-ask spread.

All other instruments have more disadvantages than advantages. Singapore Government Securities (i.e. government bonds) will fall in value when interest rate rises. Likewise, Gold will drop when USD rises, as demonstrated this week. There is really not many places to park cash safely.


In my opinion, the current investing environment is tricky. But there are also not many places to hide safely.

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Sunday 2 October 2016

What is Holding Up US Share Prices?

If you had read my previous post on What Have We Got After 8 Years of Easy Money?, you would know that the US equity market has gone on an 8-year bull run even though many industries (at least those in Singapore) are facing poor business and/or low margins. Fig. 1 below shows the performance of S&P500 index since 2012, which is mostly on a straight upward trendline.

Fig. 1: S&P500 Index Since 2012

Yet, when you look at the earnings of S&P500 companies over the same period, they have been relatively flat. See Fig. 2 below (source: Cash Piles at American Companies Are Shrinking). This is due to the lacklustre global economy since 2012.

Fig. 2: Flat Earnings Since 2012

Thus, on one hand, we have flat earnings, but on the other hand, we have rising share prices that have increased by about 73% since 2012. The main reason is of course the massive liquidity unleashed by 8 years of low interest rates and multiple rounds of Quantitative Easing by central banks around the world.

However, it is not just investors who are taking advantage of the cheap and plentiful liquidity to bid up asset prices. Companies themselves are also taking up loans to fund share buybacks and dividends. See Fig. 3 below (source: U.S. Profit Recession Means Debt Fuels Most Buybacks Since 2001). Notice also the bottom chart of the figure which shows the flat EPS growth since 2012, which is consistent with Fig. 2.

Fig. 3: Debt-Fueled Share Buybacks and EPS Growth

Share buybacks can provide a boost to share prices in the short run, but when earnings are flat and companies have to take up loans to fund these buybacks, they may not be sustainable. In the short run, share prices can be out of sync with earnings. But in the long run, the 2 must converge. This is another reason why I am not optimistic about the investing environment moving forward.

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