Does Perennial's 4.65% Bond Have Sufficient Margin of Safety?

It has been getting more interesting for retail bond investors recently, with the launch of Aspial's 5.25% bond in Aug, Singapore Savings Bonds in Sep and now Perennial's 4.65% bond. Does Perennial's 3-year, 4.65% bond have sufficient margin of safety according to Benjamin Graham's criteria of minimum earnings coverage and minimum stock value ratio as described in The Lost Art of Bond Investment?

Perennial was listed following the reverse takeover of St James Holdings in Oct 2014. Hence, it did not have financial statement for a full financial year. Based on Perennial's latest financial statement for the year ended Jun 2015, the minimum earnings coverage and minimum stock value ratio are computed as follow.

Earnings Coverage

Profit before tax	= $57.1M
Adjusted for:
- Deduct: Non-recurring fair value gain on investment properties	= $46.0M
- Deduct: Other non-recurring gains (earn-out, forex)	= $11.0M
- Deduct: Share of results of associates	= $13.8M
- Add: Finance cost	= $37.8M
Total earnings available for covering fixed charges	= $24.1M
Current finance cost	= $37.8M
Add: Interest of proposed bond	= 4.65% x $150.0M
	= $7.0M
Total finance cost	= $44.8M
Earnings Coverage	= $24.1M / $44.8M
	= 0.54

The earnings coverage of 0.54 times is way below the minimum average earnings coverage of 3 times for industrial companies.

Stock Value Ratio

No. of shares	= 1,652.5M
Share price	= $0.975
Market value of shares	= $1,611.2M
Current amount of borrowings	= $1,678.5M
- Add: Proposed bond size	= $150.0M
Total bond value	= $1,828.5M
Stock value ratio	= $1,611.2M / $1,828.5M
	= 0.881

The stock value ratio of 0.881 is lower than the minimum stock value ratio of 1 for industrial companies.

Thus, Perennial's bond does not meet both the earnings coverage criterion as well as the stock value ratio criterion. Based on Benjamin Graham's criteria, Perennial's 3-year, 4.65% bond does not have sufficient margin of safety. Having said that, this does not mean that Perennial will definitely default on this bond, it just means that the risk is higher.

See related blog posts:

• The Lost Art of Bond Investment
• Is Benjamin Graham's Art of Bond Investment Outdated?
• Benchmarks for Retail Bond Pricing

A Jittery September

It looks like the recent "bear" market is over before it has barely begun! Having said that, September was a very jittery month for me, not because stocks had fallen rapidly, but because I was trying to figure out whether and when to buy stocks. Stocks had already fallen sharply in mid August when China devalued its currency, but a look at the calendar for September showed there were several more events that could cause nervous moments for the stock market, with Singapore's General Election (GE) on 11 Sep, US Federal Reserve's interest rate decision on 17 Sep and finally Greece's GE on 20 Sep. Including the renminbi devaluation and US' announcement of higher GDP growth in Q2 in August, there were 5 events to digest in quick succession in order to conclude whether the "bear" was coming or just pretending.

Among these 5 events, 3 have economic significance, meaning they have an impact on the economics of companies and how stocks are likely perform in the medium term. These events help to determine whether stocks should be bought or sold. The other events merely affect the volatility of the stock market, meaning they only determine the timing of any buying or selling decision. The 3 events that have economic significance were China's renminbi devaluation, US higher Q2 GDP growth and US Fed interest rate decision. The events that have volatility implication were Singapore's GE, Greece's GE and, again, US Fed interest rate decision. Let us consider the events with economic significance first.

The reason why China's renminbi devaluation sparked off a global stock market sell-off was because it suggested that China's slowdown was larger than expected. In the absence of any other economic news, this is going to be very dismal for the stock market for months, because every month, there are economic statistics coming out of China and you could expect most of them to be negative. On the other hand, US announced a positive set of GDP growth rates for Q2, which were much higher than that for Q1. The big question is this: Is the world's No. 1 economy going to pull up the world's No. 2 economy (and the rest of the world), or is the world's No. 2 economy going to drag down the world's No. 1 economy (and the rest of the world)? It is easier to answer the second question first, so let me start with that one. Nevertheless, I have to admit that economics is one of my weaker subjects and I do not profess that my answers are correct.

To answer the second question, it is worthwhile to consider the answer to another related question: did China pull up US in the first place? Because if China did not pull up US significantly in the first place, then it is unlikely to drag down US significantly in the near future. As an example, the fate of resource-exporting economies such as Australia is very much tied to that of China. When China boomed or slowed, so did these economies. Unlike resource-exporting economies, the main source of US growth was not China. A look at the US GDP Q2 report revealed that the main source of growth was domestic. Hence, it would take more than China's slowdown to knock the wind out of US growth. Now, back to the first question, would US pull up China, the world's factory, with its domestic demand? There are several reasons for China's slowdown, such as over-capacity and over-leverage, etc. Such issues take time to work through, so it will take a lot more than US demand to pull up China. Thus, the conclusion is that neither China would drag down US nor US would pull up China in any significant manner. The world's No. 1 and No. 2 economies will go about their separate ways in the near future. The other economies will be in-between these 2 economies depending on the relative exposure they have to each of them. The key conclusion is this: the world is not going into a synchronised global recession.

By the time I figured the above out, it was early Sep. Sentiments were very fragile then. While I did not mind buying, say, Keppel Corp at the $6.80 price range, I mind a lot if it were to drop $0.30 the day after I bought it. It was not improbable for Keppel Corp to rise or fall by $0.30 in a single day during those days. So, I decided to wait until Singapore's GE was over. Surprisingly, stocks did not move much the following Monday after the GE, despite a landslide win for the governing party. That week was also the week of the Fed meeting and Grecee's GE. Let's talk about Greece's GE first. The key issue about it was whether there would be a replay of the Grexit drama in July, when Greece nearly exited the Euro zone because of opposition to austerity measures imposed by the EU as conditions for bailing out its debts. I managed to figure out beforehand that neither the anti-austerity governing party nor the pro-EU opposition party would oppose the debt bailout package, so Greece's GE was not a key event to consider. The final event left was Fed's interest rate decision on 17 Sep.

US Fed interest rate decision has both economic significance and volatility implications. The economic significance was discussed in Getting Ready for US Interest Rate Rises in Jun. To recap the key points from that discussion, interest rates are not going to rise significantly. However, regional currencies and US dollar-denominated assets like gold, oil and other commodities are in for a rough ride. Volatility in these assets will likely lead to volatility for the stock market. This conclusion is based on economic considerations. However, given the fact that interest rate rises have been discussed for a very long time already, I have a gut feeling that expectations for a drop in regional currencies and USD-denominated assets have been priced in already. There is a possibility of a counter-intuitive rally in the very assets that are supposed to fall when Fed announces a rise in interest rates!

To summarise, these are my conclusion of the key events of the past month that determine whether and when to buy stocks:

• US vs China: The world is not going into a synchronised global recession
• US Fed interest rate decision: Economically negative for regional currencies and USD-denominated assets, but possibility for a counter-intuitive rally in the same assets
• Singapore's GE: Turned out to be a landslide win for the governing party
• Greece's GE: No replay of Grexit

My key conclusion is that the "big bad bear" is not coming and I began to pick up stocks. Nevertheless, I remain wary of stocks with exposure to regional currencies and my warchest is still intact should my analysis be wrong and the bear returns.

See related blog posts:

• Getting Ready for US Interest Rate Rises
• Financial News Can Be Very Scary At Times
• I Don't Know Where The Market Is Heading, But I Should Know Where I Stand

The Big Picture During Bear Markets

Bear markets can be very frightening. They can cause stocks to drop by 40% to 60% and stay there for a fairly long period of time. It can be quite stressful to go through a bear market, especially for young investors. However, it is helpful to look at the big picture, which is this: even though the prevailing bear market might look very frightening, most young investors are still working, and there are 20 to 30 years of income still to be earned. If you include these unearned income in your total wealth, you will find that the prevailing bear market actually only eats up a small fraction of your total wealth. Let us consider the following example.

Starting Salary	$      3,000
Annual Salary Growth	5%
Salary Ceiling	$    10,000
Investment Allocation	10%
Asset Returns	7%
Max. Drawdown	50%

A fresh graduate aged 25 is able to earn a starting salary of $3,000 per month. This salary grows at a rate of 5% annually. Let's further assume that his salary does not grow forever, and his salary ceiling is $10,000 per month. He is able to set aside 10% of his monthly salary for investment, which grows at a long-term average rate of 7% per year. During a bear market, he loses up to 50% of his invested capital in unrealised losses, which can be quite painful for a young investor.

At the age of 30, 5 years after working, he would have accumulated an investment capital of $22,729, comprising the $300 he set aside every month which grows at the long-term average rate of 7% per year. At the depth of the bear market, he would have lost 50% or $11,364 of his investment capital that he has so painstakingly built up over the last 5 years. Although the losses are significant, he still has 35 years of working life in front of him. Assuming that he continues to set aside 10% of his future monthly salary for investment, he would have an unearned present-value capital of $100,457 (discounted using the 7% long-term annualised asset return), or 4.4 times his earned capital. The unrealised losses just make up 9% of his total wealth, which is a lot more comfortable than the 50% unrealised losses. The figure below shows the amount of earned capital and unearned capital at age of 30, 35, 40 and 45 for the same person.

Total Capital for Different Age Group

As the person increases in age, his unearned capital will reduce as it is progressively transformed into earned capital. At age 35, the unearned capital is still 65% of his total capital, which is equivalent to 1.8 times of his earned capital. The unrealised losses just make up 17% of his total wealth. At age 40, the unearned capital is 50% of his total capital and the unrealised losses make up 25% of the total wealth. Only after the age of 40 would the unearned capital fall below 50% of the total capital and the unrealised losses make up a significant portion of the total wealth. By this time, he would need to take less risk to reduce the amount of potential losses.

The point is, if you are a young investor, the prevailing bear market might look very frightening as you sustain heavy losses in percentage terms. However, if you consider the big picture of future cashflows, the amount of unrealised losses is considerably smaller. I would even say that a few years after you have gone through this difficult period and accumulated more capital, you might look back at this period and realised that the "signficant" unrealised losses that caused so much pain is actually fairly insignificant. As an example, at the depth of the 2000-2003 bear market, my unrealised losses were $50,000, which was equivalent to 50% of my invested capital. It was a very significant loss and very depressing. But by the time I got to the depth of the Global Financial Crisis (GFC) 5 years later, the amount of unrealised loss was around $175,000 to $200,000. The $50,000 unrealised loss sustained during the 2000-2003 bear market that seemed so significant then had paled in comparison. You might not believe me now as you go through his difficult period, but in a few years' time, you will realise that this is true. What is important now is not how much money you have lost, but how many lessons have you gained in investing, so that in a few years' time, as your investment capital grows, you will not make similar mistakes again, which are going to cost you a lot more since your investment capital has increased.

See related blog posts:

• Different Types of Bears
• Investing Is Not A Bed Of Roses
• A Comparison of Risk Management Tools & Strategies

Different Types of Bears

Whenever we speak of a bear market, we tend to think that there is only 1 type of bear markets and all bear markets are the same. However, I can think of 2 different types of bear markets (shortened to "bear" hereinafter); the first one is similar to the market downturn that we experienced recently which is fast and sharp. Let's call it the ferocious bear. Examples of the ferocious bear would be the Asian Financial Crisis in 1997/1998 and the Global Financial Crisis in 2008/2009. The second type of bears is gradual but long-winded. Let's call it the long-winded bear. An example of the long-winded bear would be the one that lasted from 2000 till 2003. The figure below shows both types of bears as happened to the Straits Times Index (STI). You should be able to recognise the bears easily.

Bears on STI

What are the characteristics of both types of bears? For the ferocious bear, the decline is both fast and furious. The speed and fury of the bear usually strikes fear into most investors who are more accustomed to peaceful environments. The losses are usually very severe and come quickly. As the bear progresses, you might think that prices have declined significantly enough, but each time you average down, the losses of the newly invested capital are just as severe. You hope the bear would stop for a while so that you could have some respite. But no, the bear would not listen to anyone and continue its forage, slashing anyone who dares to stand in its path. Not everyone would be able to take it. Some investors would sell out with heavy losses, promising never to return to the stock market. Other investors would continue to do battle with the bear despite heavy bleeding. At the depth of the bear, investors would still wonder if things are going to get worse and doubt any recovery as another bear trap. It is a very fearful atmosphere to be in. However, as quickly as the bear advances, the ferocious bear will just as quickly retreat away. Investors who have the mental strength, intelligence and money to buy during the depth of the ferocious bear will usually make a lot of money. On the other hand, investors who are not accustomed to deal with the bear will lose money.

For the long-winded bear, the decline is more gradual but long. Using the last long-winded bear that lasted from 2000 to 2003 as an example, it is actually made up of a sequence of unfortunate events. It started off as the dot-com bust in 2000, followed by the Sep 11 terrorist attack in 2001, US accounting scandals in 2002 and the Severe Acute Respiratory Syndrome (SARS) in Asia in 2003. The losses are severe, but smaller and not as quick as those encountered during the ferocious bear. Attempts to average down usually result in losses but these losses are less severe and easier to stomach. Every day, week or month that you look at your portfolio, you would see fairly severe losses and you would wonder when is there going to be light at the end of the tunnel. It can be very depressing to be mired in heavy losses for a long period of time, but the atmosphere is not one of fear.

How do you manage the 2 different types of bears? Let's start with the easier one, the long-winded bear. Dealing with the long-winded bear is like running a marathon. If you do not finish the race, it is usually because you lack the endurance and drop out half-way. However, if you could persevere and outlast the long-winded bear, you will usually recoup all the losses and make money.

On the other hand, dealing with the ferocious bear needs some skills and luck. It is like running a 110m hurdle dash. Although it is not as long as running a marathon, if you happen to trip over a hurdle, you would not finish the race. Why do I say that? It is because most bears have an economic side to them. As the financial bear is ravaging the financial markets, the economic bear is also damaging the real economy. Not every company will survive the economic bear unscathed. With a long-winded bear, the economic effects are gradual but long-winded. Companies can tighten their belts to tide through the difficult period. But with a ferocious bear, the economic effects are fast and furious. Companies that cannot adjust quickly to the new economic realities will be in trouble. If you happen to invest in weak companies during the ferocious bear, you might not make much money even as the ferocious bear retreats away.

To illustrate further the effects of the 2 types of bears, consider 2 sectors – Property and Oil & Gas (O&G). As you know, property prices in Singapore have been in the doldrums since the Government enacted several property cooling measures several years ago. However, they are not in a sharp decline. Property is considered to be in a long-winded bear. Despite the weak sentiments, you do not expect property developers to be in serious trouble, even though some of them might lose money as the bear progresses. They just need to tighten their belts and hold on until sentiments improve (Note: I am not a long-term fan of properties. See Properties, the Population White Paper and the Land Use Plan for the reasons).

On the other hand, oil prices have been in a fast and drastic decline. O&G is considered to be in a ferocious bear. Not all O&G companies will escape unscathed. Already, some of the O&G companies had to carry out right issues at low prices to raise additional capital. It is thus important to pick the right stocks in a ferocious bear in order to gain from it.

It is not possible to simply say everyone can survive the bears and make a lot of money. Without experiencing it yourself, you will not be able to appreciate the fearfulness of the ferocious bear or the depressiveness of the long-winded bear. However, if you are like most people working and able to set aside some money for investment every month, you actually have the conditions to outlast and profit from the long-winded bear. And if you have been investing for some time and know the value of not investing 100% of your money and keeping some of them in a warchest for subsequent use, you too have the necessary (but insufficient) conditions to outlive the ferocious bear.

Having said the above, not everyone will be able to take the fearfulness or the depressiveness of the 2 types of bears. You need to evaluate for yourself if you are cut out to be an active investor. If you cannot be an active investor, you still can become a passive investor. If you read the above paragraph carefully, "able to set aside some money for investment every month" is akin to Dollar Cost Averaging (DCA) that is normally associated with passive investing. And "not investing 100% of your money and keeping some of them in a warchest for subsequent use" is akin to portfolio rebalancing, which is also a passive investing strategy. The final "necessary (but insufficient) conditions to outlive the ferocious bear" is to invest in an index rather than to pick stocks. While individual companies might not recover, the industry as a whole (or economy) will not fail. Investing in indices is at the core of passive investing. So you see, although passive investing strategies might look dumb and boring, they are actually designed to survive bears! DCA is designed to deal with long-winded bears especially while portfolio rebalancing is designed to deal with ferocious bears in particular (together with index investing)! They have probably been around for as long as bears have existed, and the fact that they have not been sent into extinction by the bears is further proof that they work!

I hope with this blog post, it will help to settle some nerves in the current stock market downturn (I prefer not to rate it as a bear yet). Good luck!

See related blog posts:

• The Big Picture During Bear Markets
• Investing Is Not A Bed Of Roses
• Have a Plan

Sneak Preview of SSB Interest Rates

Nobody likes to lose money, so wouldn't it be nice if you could place your bets after the results are known? Well, the Singapore Savings Bonds (SSB) almost just allow you to do that. The interest rates for SSB are computed based on the average yields (i.e. interest rates) for the previous month's Singapore Government Securities (SGS). The applications for SSB will close on the 4th last business day of the month. So, by monitoring the SGS yields for the current month, you could estimate what would be the SSB interest rates for the next month. If the estimated interest rates for the next month are higher than that for the current month, it is advantageous to skip the current month's SSB and apply for the next month's SSB instead. Let us take a look at how this works.

The current month's SSB interest rates are shown below. They are based on the average yields of the previous month's SGS, which are also shown below. The SGS yields can be found at the SGS website. As you can see, the SSB interest rates are very close to the average yields of the 1-year, 2-year, 5-year and 10-year SGS bonds.

	1-Year	2-Year	5-Year	10-Year
SSB Rates for Sep	0.96%	1.02%	2.01%	2.63%
Avg SGS Yield for Aug	0.96%	1.03%	2.03%	2.63%

For Sep, SGS yields have been rising and the average yields (up till 18 Sep) are shown below. Compared to the average SGS yields for Aug, the yields have risen across the board by 0.10% to 0.20%. If there is no significant change to the SGS yields from now till the end of the month, you can expect the SSB interest rates for Oct to be higher than that for Sep by the same margin.

	1-Year	2-Year	5-Year	10-Year
SSB Rates for Sep	0.96%	1.02%	2.01%	2.63%
Avg SGS Yield for Aug	0.96%	1.03%	2.03%	2.63%
Avg SGS Yield for Sep (Todate)	1.12%	1.12%	2.22%	2.83%
Difference (Todate)	0.16%	0.10%	0.19%	0.20%

However, on 18 Sep, US Federal Reserve announced an important decision not to raise interest rates. This caused the SGS yields for that day to drop by as much as 0.1% or 10 basis points, which is considered significant. Since nobody can forecast how SGS yields will move from now till the end of the month, let us assume that the SGS yields for the next 7 working days would be the same as the yields for the latest available date, i.e. 18 Sep. Making this assumption, the estimated average SGS yields for Sep are shown below.

	1-Year	2-Year	5-Year	10-Year
SSB Rates for Sep	0.96%	1.02%	2.01%	2.63%
Avg SGS Yield for Aug	0.96%	1.03%	2.03%	2.63%
Avg SGS Yield for Sep (Todate)	1.12%	1.12%	2.22%	2.83%
Avg SGS Yield for Sep (Estimated)	1.17%	1.13%	2.20%	2.79%
Difference (Todate)	0.16%	0.10%	0.19%	0.20%
Difference (Estimated)	0.21%	0.11%	0.17%	0.17%

The average SGS yields are estimated to continue moving up for the 1-year and 2-year bonds but down for the 5-year and 10-year bonds. Still, the SGS yields are estimated to be higher across the board by 0.11% to 0.21% for Sep than Aug. You can expect the SSB interest rates for Oct to be higher than that for Sep by the same margin.

Among the various SGS yields, the most important one is the 10-year SGS yield, because that determines the annualised return for the entire 10-year lifespan of the SSB. The higher, the better.

However, if 2 SSBs were to have the same 10-year interest rate but different 5-year interest rates, how would you choose? It depends on the individual investor's preference. A higher 5-year interest rate would mean that you can collect higher interest payouts earlier, even though over the entire 10-year lifespan of the SSB, you get the same annualied interest rate. However, because higher interest is paid out early in the SSB lifespan, the interest-on-interest compounding effect is lower. Consider 2 extreme cases in which one SSB pays out a constant 2.63% every year versus another one which pays out only in the 10th year. For the constant-payout SSB, the total interest you will get over the 10-year lifespan for every $100 invested is $26.30. For the bullet-payout SSB, the total interest you will get at the 10th year is $29.64, or $3.34 higher than the constant-payout SSB.

So, if the current month's SGS yields are higher than the current month's SSB interest rates, it is best to skip the current month's SSB and wait for the next month's SSB. However, what happens if the reverse occurs, i.e. next month's SSB interest rates are likely to be lower the current month's SSB interest rates? You can actually choose to invest in the current month's SSB and observe the future trend of SGS yields. Unlike fixed deposits and stocks where you can only get the interest/ dividend on the maturity of the fixed deposit or ex-dividend date of the stock, bonds pay accrued interest for the duration that you are holding the bond. Using the 1-year interest rate of 0.96% for the current month's SSB, you will get accrued interest of 0.08% for each month you are holding the bond. So while you are holding onto the SSB and waiting for the interest rates to rise, you are being paid for waiting. However, please take note that there is an application and redemption fee of $2 per transaction which will cut into the interest earned.

To conclude, things are seldom in favour of investors. But with SSB, things are tilted quite overwhelmingly in favour of investors! Not only are you allowed to place your bets after the results are known, you also have a SGS put option to guard against interest rate rises, as discussed in Getting the Best of Both SSB & SGS.

See related blog posts:

• Getting the Best of Both SSB & SGS
• SSB Interest Rate Estimates – A Year On
• SSB Interest Rate Estimates

Two-Timing the Banks For Higher Savings Interest Rates

As you know, some banks have savings deposit promotions that offer higher interest rates for a short period of time. The caveat, however, is that the funds must be fresh deposits from some other banks. Previously, although Maybank had such promotions, I was not too keen on moving funds across banks to take advantage of them. This is because effectively, you could only enjoy the promotional rates only half the time, as you have to keep the funds in other banks the other half of the time. But when UOB (where I also have an existing savings account) joined the battle for fresh funds in May, I decided it was now worth the efforts to two-time the banks and enjoy promotional rates for almost the entire year. After all, there are no rewards for being a loyal long-term depositor to the banks!

The reason why you can enjoy promotional rates almost round the year is because the banks repeat the promotion every few months. Each bank has a different cycle. UOB has a 2-month cycle, i.e. May-Jun, Jul-Aug, etc., whereas Maybank has a 3-month cycle, i.e. Apr-Jun, Jul-Sep, etc. Below are the current promotions by UOB and Maybank respectively.

UOB's Promotional Rates for Fresh Funds (Sep-Oct)

Maybank's Promotional Rates for Fresh Funds (Jul-Sep)

To take full advantage of the promotions, you need to understand what constitute fresh funds. Each bank has a different rule. For UOB, using their own words for the current promotion for Sep-Oct, “Incremental Fresh Funds Balance is calculated on a daily basis as each day-end Account Balance less the Account Balance as at 31 Aug 2015". The key word here is "31 Aug 2015" or the last day of the 2-month promotion period. So theoretically speaking, you could keep the funds in UOB until the second last day of the 2-month period, withdraw it, and re-deposit it back into UOB on the first day of the next 2-month period and still qualify as fresh funds. Effectively, you could enjoy promotional rates for all except 6 days in a year from UOB! Actually, this is the best deal, even better than the two-timing strategy described below.

For Maybank, again using their own words for the current promotion for Jul-Sep, "Incremental Balance in the Account refers to the difference in the average daily balance during the Promotion Period as compared to the average daily balance in the Account for the month of June 2015". The key words here are "average daily balance for Jun 2015" or average daily balance for the last month of the 3-month promotion period. Likewise, you could keep the funds in Maybank for the first 2 months of the 3-month period, withdraw it, and re-deposit it back into Maybank on the first day of the next 3-month period. Effectively, you could enjoy promotional rates from Maybank for 8 months in a year.

How do you two-time the banks for higher interest rates for longer periods? The figure below shows how to move funds from one bank to another.

Fund Movement Across Banks

Each block for the banks in the figure represents their respective promotion periods. For UOB, it has 6 blocks of 2 months each, while Maybank has 4 blocks of 3 months each. The red line/ region for each bank represents when funds in the banks are reset and no longer considered "fresh". As explained above, UOB resets it on the last day of the 2-month period, hence it is represented by a red line at the end of the block. If funds are kept in UOB beyond the red line, they are no longer considered "fresh" for the next promotion period. Maybank resets it based on the average daily balance of the last month of the 3-month period. If you keep the funds for only 1 day in the month, the average daily balance would be quite low. But the longer you keep the funds there, the higher is the average daily balance. Thus, it is represented by a region that is increasingly red. Again, if you keep the funds in Maybank across the red region, they are no longer considered "fresh".

Starting with UOB, the funds would be moved there in Jan and you could enjoy UOB's promotional rates for Jan and Feb. In Mar, move them to Maybank which is in the midst of the Jan-Mar promotion. You could enjoy Maybank's promotional rates for Mar only, as they are not considered "fresh" for the next promotion starting in Apr. In May, move them back to UOB to take advantage of the May-Jun promotion, then move them again to Maybank for the Jul-Sep promotion. However, do not keep the funds there for the entire 3 months. In Sep, move them to UOB for the Sep-Oct promotion and finally in Nov, move them back to Maybank. Overall, the funds are considered "fresh" for 11 months in a year :) You could also start the analysis with Maybank in Jan and perform the same movements every 2 months. The net effect is the same: 11 months of "fresh" funds and promotional rates.

By right, the banks should treat all deposits equally and offer the same promotional rates to existing funds as well as fresh funds. Since the banks do not reward long-term loyalty, we just have to play against the banks to get the same preferential treatment.

See related blog posts:

• OCBC360 vs UOB One: The Calculator
• OCBC360 vs UOB One: The Verdict
• Will Bank Deposits Pay Negative Interest Rates?

Sneak Attack on My Cash Reservoirs

It is amazing that after 29 years in the stock market, there is still something new to learn. In the recent market sell-down, I am quite surprised by the speed at which the market freezes. By this, I don't mean the drop in stock prices, but rather the rapid decline in liquidity at such an early stage of a bear market. For less actively traded stocks, the bid-ask spread can be as much as 2-3 cents, which is quite significant for stocks priced below a dollar. Not only that, the bid-ask volume is also quite small. Usually, such low liquidity is only observed near the depth of a bear market. 

So far, the rapid decline in liquidity has not signficantly affected me, as I have not really started buying. But it did spring an attack on my cash reservoirs. As discussed in Behind Every Successful Bear Market Recovery is A Cash-Like Instrument, one of the key aspects of my equity-centric investment strategy is to have cash reservoirs in the form of fixed-income instruments that could be liquidated reasonably easily in bear markets to be reinvested in beaten-down stocks and REITs. Currently, these fixed-income instruments comprise OCBC 4.2% preference shares, CapitaMallAsia 3.8% bonds and, until recently, Frasers Centrepoint (FCL) 3.65% bonds. The ability to liquidate them at reasonable prices is thus crucial. Can you imagine the frustrations knowing that your target stocks are down by 50% but you cannot raise the cash to buy them?

As mentioned earlier, the rapid freezing of the stock market, including the fixed-income instruments, caught me by surprise. During the Global Financial Crisis, I had another preference share, OCBC 5.1% preference share, that declined to around $83 at its lowest point. I reasoned that the large decline was due to the crisis in the global financial sector and OCBC naturally would not be spared. In a normal bear market, I reasoned that such large declines in fixed-income instruments that pay stable dividends regularly would not be common. But the price and bid-ask volume of the likes of Genting 5.125% perpetual securities declined rapidly in the recent sell-down. Initially, I thought it was because people were selling them off to raise cash for Aspial 5.25% bonds. But after 2 continuous days of selling, I realised this could not be the only reason. To avoid the frustration mentioned above when I need the cash, I decided to act too. I sold FCL 3.65% bonds, escaping with a small profit. As for the other 2 fixed-income instruments, I decided to hold them for now. Past experience in bear markets has shown that the psychological benefits of always keeping some cash available (can be in fixed-income instruments) far outweighs the potential monetary gains from being 100% invested. So, I might not sell all of them even at the depth of the bear market.

Given the rapid fall in liquidity for fixed-income instruments, it suggests that I should not be placing so much faith in them. Thankfully, Singapore Savings Bonds (SSB) have been introduced since this month. Liquidity of SSB is less of a concern. There is no capital loss, and you can redeem as much as you want. The bigger issue is you will only get back the money at the start of the following month, so the wait is longer, but redemption could always be planned ahead of time. The other concern is the total amount of SSB is limited to $100K per person. Considering the above benefits, SSB may be a viable alternative/ complement to the fixed-income instruments. Although SSB pay lower interest than the fixed-income instruments, they at least guarantee that they could be sold whenever needed at no loss of capital.

Having said that, I would not be applying for this first tranche of SSB. Given the current market conditions, I prefer to hold more cash and look out for stock bargains. However, I will certainly revisit SSB and its more traditional sibling, Singapore Government Securities (SGS), when the stock market returns to normal.

See related blog posts:

• Behind Every Successful Bear Market Recovery is A Cash-Like Instrument
• Getting the Best of Both SSB & SGS
• A Comparison of Risk Management Tools & Strategies