Why bothers about Federal Fund Rate?

The US stock market would have plunged into the deep end if not a timely 75 basis points Fed Rate cut by the Federal Reserve Open Market Committee (FOMC) last week. What is this Fed Rate actually all about? Why are everyone so particular with this rate? I like to shed some light for you.

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The Federal funds rate is the rate that banks charge each other for overnight loans. It is a target rate and not the actual rate because the actual rate is determined by the open market. The key question to understand about this rate is “Why would one bank needs to borrow cash from another"

Example: When a bank needs to raise funds quickly to finance a major industry project, they have no time to wait for deposits from the public or interest from their loans to come it, they have to borrow from other banks which the interest is normally the Federal Rerseve rate.

When the Federal Fund Rate is low, the banks will freely lend to each other. This can spur economic development because it is natural that the lower the interest rate, the higher the demand it will be, for businesses to borrow money.

If the rate is kept too low, it will result in "too much money chasing too few goods". Too few goods often create Inflation. If the rate is kept too high, it will result in Deflation and possibly recession.

The other rate used by the Federal Reserve is called the "Discount Rate". I'll share with you in my next posting.

Tan Kin Lian Blog - How I feel about it

Tan Kin Lian is an ex-CEO of NTUC Income. He stepped down after 30 years of Service in the Company. He maintains a blog and is well visited by averaging 800 people per day. I visit his blog on a daily basis to learn and to share. I like to post a few comments on how I feel about his blog.

1) He avocates against Life Insurance, Endowments, ILPs, Unit Trust and Private CPF approved Health Insurances.

Comment: Interestingly, he did not say all these while being a CEO of NTUC Income and seems not to know what ETF and index funds are. He even came out with several Endowment and Life insurance plans months before leaving the company. He seems to become a saint right after April 07 upon leaving NTUC Income and tell the whole world to be careful with agents and all these insurance companies.

He has his views to the above statement but he have inadequate ground knowledge of why some people simply wants these plans. Readers in his blog start to feel that agents are a batch of liars and only greedy agents will recommend such plans.

2) He seemingly feel that most people does not need a Financial Adviser. They can easily find the cheapest term insurance and invest through ETF.

Comment: It will be great if the public wake up in the morning lining up to buy insurance and knowing exactly what to invest and how much insurance to get. They will read up themselves and do their own regular reviews. There are no need to rebalance an investment portfolio. Readers in his blog generally feel that advisers are only salesman trying to cheat the people out there. Financial Advisers are "CHEATS"

3) NTUC Income seems to have a change in cooperative values after a change of CEO

Comment: The new CEO, Tan Suee Chieh, feels that he needs to run the company more commercially in order to complete with the large players like AIA and Prudential. If not, NTUC Income will sink deeper to a stage where its impossible to fight anymore. Readers in his blog blasted whatever new plan NTUC Income come out with and allow comments seemingly to tell the public that NTUC Income no longer care about the people.

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Generally, many of his postings talk about the same thing. Most of them do benefit the readers but one thing I hated to see are the unfair remarks made towards Financial Advisers and allowed comments that insulted them. (Though many deserved to be insulted, but not all. There are good advisers around.)

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He will gradually destroy the reputation of the advisers in the industry. He probably feels that agents shouldn't earn too much(Maybe his benchmark is $2k/mth, thats what he paid to the salaried consultants in the company. He even tried to cap the commissions of his mobile Financial Consultants at one stage).

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He might form a new insurance company after serving his 2 years non-completing treaty . A company that works like the Budget Airline of the Insurance Industry. No fuzz, no frill, simple objectives. It will be interesting to see how the industry will turn out after his entry...

Impress your family while preparing Yu Sheng

Chinese New Year is just round the corner, you most probably be eating the Yu Sheng during this period. To impress your family, you may memorise the below well-wishes as you prepare the Yu Sheng.

More more info, you may refer to my previous posting on "Yu Sheng" under Customs and Festivals section.

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Step 1 - When dish is placed on the table. Say "Gong Xi Fa Cai", "Wan Shi Ru Yi" (Congratulation and may you be propersous)

Step 2 - While squeezing the lemon over the fish. Say "Da Ji Da Li" (Wishing you Good luck and blessings)

Step 3 - Place the fish over the shredded carrots and radish. Say "Nian Nian You Yu" (Wish you abundance in wealth every year)

Step 4 - While sprinkling Pepper over the dish. Say "Hong Yun Dang Tou" (May you have good luck at your doorstep)

Step 5 - While sprinkling Cinnamon Powder. Say "Qing Chun Chang Zu" (May you be young forever)

Step 6 - While pouring the Peanut Oil. Say "Rong Hua Fu Gui" (May you enjoy prosperity)

Step 7 - While pouring Plum Sauce. Say "Tian Tian Mi Mi" (May sweetness enters your life)

Step 8 - While pouring the crackers. Say "Man Di Huang Jin" (May gold falls at our feet)

Final Step - While tossing the Yu Sheng. Say "Yue Lao Yue Qi, Lao Dao Feng Shen Shui Qi" (Toss higher and higher till the wind and the oceans rise up for a good year ahead)

How a typical recession comes about?

* Due to some reason, economic activity start declining, GDP start coming down.

* Central Bank lowers interest rate, making money cheaper to try bring life back to the economy

* Companies start to restructure their debt and raise capital to increase productivity.

* Companies will streamline their procedures to maintain positive profit margins,

* Easiest way is through labor layoffs (since labor is normally the most expensive element).

* Layoffs resulted with an increase in unemployment rate.

* Due to the decline in economic activity throughout the market, these workers cannot find another job.

* Disposable income becomes tight, as job security is at risk.

* Consumer confidence in the market drops, resulting in a decrease in consumer spending

* The lower disposable income translate to lower sales which makes the recession felt by the companies.

* The cycle continues......

Quotes from Dr Rachael Tay

Dr Rachael Tay was featured in 20th Jan 08 "The Sunday Times".
She is currently the Director in GYC, an independent advisory firm.

There are 2 quotes that caught my attention. I like to share with you.

1) My Primary strategy is now buy and hold, and rebalance once a year.

2) I was a novice investor then so for part of our children's education planning, we went with an education endowment. I am kicking myself for accepting the low yield of such policies.

2 comments I like to share:
1) How many people knows how to buy, hold and rebalance? They thought that by buying an investment plan once a while is proper investment.
2) How many people knows that Education inflation is often higher than the yield of an education plan? Anyway, for such group of people, it is still better than if they choose to save in the bank.

The Problem with some Insurance Company

When administrative hiccups happened within the Insurance Company, the customers will usually blame the adviser first and not the company.

The adviser cannot push the blame back to the insurance company because when a plan from this company is recommend, we must give them trust on the reliability of the company's administration.

As a result, it not only gave us extra work and reduce our productivity, it also projected badly for ourselves as if we did not do our job as an adviser. There are many instances where i can share. Let me give you one that happened to me last week.


Summary
My client went hospital for a gastroscopy in Jan 05 for gastric ulcer and went through 4 sessions of outpatient observations. He was fully recovered and discharged after 2 months.
He took up a medical insurance on 9th Oct 07, was sent a questionaire in Dec 07, and was imposed with exclusion for gastric ulcer in Jan08. I appealed for him as he was fully discharged over 2 years ago and with doctor's report to prove that.


What the Insurance Company did?
The insurance company sent a letter to say that the report was 2 years ago and want him to go through another gastroscopy to prove that he had fully recovered. The appeal fails.


My client's reaction
1) He was disappointed that he insurance took so long for underwriting and till today not settled.
2) He was confused. He had the medical report to prove that he was already fully discharged and not necessary to go for any following up. He don't understand why he was told to go for another scope.
3) He was not happy with the failed appeal and blame me that I did not help him enough.


My reaction
1) This is just a medical insurance. I recommended him this plan out of care, not for profit. Yet it wasted me a whole lot of time and effort and having to face an angry customer.
2) The insurance company simply took their own sweet time in the underwriting. I'm being blamed by the customer for being slow instead.
3) It is stupid to tell customer to go for another scope to prove that he had recovered. People go for scope only if we suspect there are some problem.


Anyway, I'd advise my client to go back to the doctor to get another memo to prove that he had fully recovered. It will take at least another 1 months. Haizzz...... (No wonder many "Agents" don't recommend Medical Insurances)

Trip to Bangkok – 15th to 17th Jan

This is my 2nd time to Bangkok. Just to share my itinerary so that next time you can get some idea when you drop by Bangkok.

Airline – Tiger Airways (Free Ticket if you book early and when under promotion. With Airport Taxes, I paid only $149 both ways)
Hotel – Twin Tower (room for 3, $216 for 2 nights), Good hotel, far from Traffic Jams, Big rooms, good service

Travelling - Usually by Meter Taxis and BTS (Don't take Tut-tut, more expensive and use BTS only during Traffic Jam hours as Taxi Cheaper if you have group of 3 or 4)

Day 1 – Flight 6:30am, Reach Bangkok @ 7:50am (LT)
09:30 – Check-in
10:30 – MBK to tailor-make some shirts (650 baht can make you a good shirt, 1000 baht for pants)
13:30 – Platinum Fashion Mall (Make sure you go in group of 3 there for wholesale price)
18:30 – Dinner at Platinum Food court (Oyster Omelette is very nice). The “Tu Chan”(Native Tib-bits there is very cheap)
19:15 – Platunam Centre for cheap and good massage (Foot and Shoulder)
21:00 – Patpong Night Market to see see look look (Don’t be cheated by those who ask you to see Thai-girl show, some will lie to you on the price and trap you in the bar and force you to pay a exorbitant price)
22:30 – Back to Hotel

Day 2
09:00 – Breakfast at Hotel
10:30 – MBK to try shirt
11:00 – Siam Paragon
11:45 – Lunch at Siam Paragon (Good Japanese Food there)
12:45 – Zen, Central World, Big C (Big C, lots of cheap Children clothings)
16:00 – Platunam Wholesale market
18:30 – Proceed to 22 Suhkumwilt for good massage again. (Thai Traditional)
20:00 – To Suda Restaurant near Station Asoke for good and Cheap Thai Food
21:00 – Suan Lum night Market to see see also. (Things generally expensive there)
22:15 – Back to Hotel. Relax by their Bar with live and light singing and enjoy some alcoholic cocktail drinks.

Day 3
08:30 – Breakfast at Hotel
09:30 – To Grand Palace (Wat Phra Kaeo) for sight-seeing
11:30 – To Chinatown to for last minute shopping
12:30 – Lunch at Chinatown with good birdnest soup too
13:15 – Continue shopping at Sampeng Lane and Pahurat Textile Market
15:30 – Back to Hotel
16:00 – Check-out (Good about Twin Tower is the flexible check-in/out timings)
20:00 – Flight back and reach Singapore around 23:30

Going to Land of Thousand Smiles

I'm going to Thailand in 15 minutes time and will be back on Friday.
Not able to sleep for the whole night and I'm going to suffer later.

During this period, I'll stop blogging.
Will keep you guys updated of the places I go this Saturday.

My feel in 2008 for investment

It is a challenge to pick what to invest in 2008 especially after the bull run over the years. 2007 have been slow for developed economies and volatile for the emerging ones. I like to share how I feel for 2008.

Slow US consumer demand.

Consumer spending accounts for 72% of US GDP. The Inflation, high oil prices, housing slump adds negative psychological factors into the consumers mind.

Rising Oil and Commodities Prices

Possible cold winter in the short term may raise oil prices beyond $110/barrel. Tension in Middle East especially from Iran may not help.Other rising commodities price such as corn, wheat, soy beans, steel also help slow down growth.

Sub Prime Issue

Some borrowers may take advantage of the problem and default payment despite having the capability. The sky is still very gloomy. Financial Institutions are expected to write off more money and unwilling to lend money to each other. Insufficent credit in the market is likely to hurt the economy.

Asia Market Decoupling from US

US consumer’s spending is over 7 times more than China and India combined. Although the growth in emerging economies are 3 times more than developed nations, they are generally still dependent on the US growth to sustain current rate of growth.Decoupling is not expected to happen in the next few years.

Personal Comments

1) Market will continue to be volatile. There are more likely bad news than good. Every bad news will shake the market for a while. Only when markets are sick of all the bad news, good and unexpected news will have the capability to rocket stock prices again.

2) Recession in US is possible, but I feel that as long as the US do not go into recession for more than 2 quarters, the growth in emerging economies will continue to post strong growth in the region of 6% to 8%.

3) Rising Oil prices raise liquidity in certain part of the world especially to Oil Surplus countries such as the Middle East and even Malaysia. These are the countries you may consider investing.

4) Defensive stocks may do well. Bonds, money market or even Primary Commodities may do just fine in 2008. Look out for undervalued economies such as Korea, Thailand and even Singapore.

5) Continue to invest. But don’t put everything you have all at the same time. Invest a smaller amount on a monthly basis for Dollar Cost Averaging effect.

Mean Testing in Hospital

Definition of Mean Testing

From Barron's: Principle that holds that Social Insurance programs should be for the benefit of lower socioeconomic segments of society and not for that segment of society that does not require financial assistance.

From Wikipedia: The term means test refers to an investigative process undertaken to determine whether or not an individual or family is eligible to receive certain types of benefits from the government.

The "test" can consist of quantifying the party's income, or assets, or a combination of both.

Current Hospital Susidies

Class A Patients (1-2 Bed) - 0%

Class B1 Patients(4 Beds) - 20%

Class B2 Patients (6 Beds) - 60%

Class C Patients (8-10 Beds) - 80%

There are occasionally very rich and well-off individuals opting to stay in lower wards for heavy subsidies. As a result, the government had subsidises the wrong group of people and the poor are deprived of a bed in hospital due to the higher demand.

After Mean Testing

Patients are expected to be asked more questions with regards to their Personal Income and Housing Type if they are expected to stay in Public hospital for X number of days or more. Patients are then grouped into four bands depending on income, with subsidy levels at 25, 50 and 75 per cent. The well-off get no subsidy.

My Comments

1) Healthcare cost rose 30% in 2006 and expected to go up further. This is a good measure to prevent those who take advantage of the heavy subsidies, especially to the rich who deprived the poor of hospital beds.

2) I believe the above group are relatively small. I don't think there are many rich people prefering to stay in C wards. However, this measure will help prevent an increase of such people.

3) The implementation is expected to be on a limited scale and not too drastic. Hence should not affect the Middle Income people too much in the short term.

4) The people have more than enough time to buy adequate insurance for higher wards such as B1. Whose fault it is for those who don't?

CFA books were delivered

I received my CFA books this afternoon. There were 4,500 pages in total. It is another 148 days before exam. Its too late for regrets. I had spent over $4,000 for the course, CFA enrolment and exam.

I need to read 31 pages per day only to cover the books once. Each page looks so wordy and alien to me. I am not finance trained. I am not working as a financial analyst. I have a job that demands a lot of my time.

Never in my life I am faced with such challenge. Do you think I'm foolish to spend the money and time to take up such course at this time when I'm trying to stablise my income?

As I mentioned, its too late to look back. Looks like its a mission impossible. Tell me which God can I pray to...?

The effect of Trading Calendar

There are some speculative investors who use the trading calendar as a reference as of when to buy and sell for their investments. To me, they doesn't make sense. However trading volume can change sometimes due to speculations by their believers and it may subsequently affect the general sentiments of other investors.

Let me share a few with you today.

1) January or Capricorn Effect
The January Effect occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise.

2) The October Effect
Some investors may be nervous during October because the dates of some large historical market crashes occurred during this month. Black Monday, Tuesday and Thursday all occurred in October 1929, after which came the Great Depression. In addition, the great crash of 1987 occurred on October 19, and saw the Dow plummet 22.6% in a single day

3) Black Monday Effect
The title given to one of the most notorious days in recent financial history. On October 19, 1987 the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline. Interestingly enough, the cause of the massive drop cannot be attributed to any single news event, because no major news event was released on the weekend preceding the crash.

4) Santa clause Rally
The rise in stock prices that sometimes occurs in the week after Christmas, often in anticipation of the January effect.

5) Halloween effect
The Halloween indicator is a theory that the period from November to April inclusive has significantly stronger stock market growth on average than the other months. This gives rise to an investment strategy known by the saying Sell in May and go away, in which stocks are sold at the start of May and the proceeds held in bonds or a deposit account; stocks are bought again in the autumn, typically around Halloween (the end of October).

Partially extracted from:
http://www.wisegeek.com/what-is-the-calendar-effect.htm
http://www.investopedia.com/terms/c/calendareffect.asp

Quotes from Mark Laudi

Mark Laudi was featured in Sunday Times on 6th Jan 07. He shared how he views money and financial planning.

Mark was previously a television journalist, who spent 7 years with Business News Network CNBC Asia. He is now a businessman dealing with digital content production and distribution. He also produce video news report on the stock market.

You can see his blog articles regularly at http://investorcentral.blogspot.com/

There are 3 quotes from the Sunday Times article that I found particularly insightful. Maybe you can pick up a thing or two here.

1) "Savings are the most boring but most necessary aspect of financial planning. Whether you choose to invest in mutual funds or stocks, you need to have the money first and the only way to get it is to pay yourself first."

2) "At the supermarket, you buy items when they are on offer, not when they are expensive. Why shouldn't people invest in the stock market in the same way?"

3) "I buy undervalued assets for long term gain. Its the sort of philosophy that allows you to sleep well at night."

US Reccession Looming???

Be Careful, Guys. Just penning some thoughts.

a) US Labour Data are not favourable

* US unemployment rose from 4.7% to 5.0%

* Non-farm Payroll (New jobs creation) only 18,000 against expectation of 75,000 and last month of 115,000

* During the festive season of December, Unemployment rose and job creation dropped. What do you think will happen in January? More layoffs after the season?

b) Home prices falling in US

* Home Prices falling, Credit Defaults. Sub-prime crisis

* Consumer less money to spend

c) Oil Prices rose above psychological barrier of $100/barrel

* It is Winter now, February is known to be the coldest time of Winter. More oil is expected to be used? This winter is seemingly colder than the last with more reports of snowstorms than previous.

In 2000, the technological bubble only accounts for 13% of the US GDP and it resulted in a recession. In 2008, we are talking about the spending capabilities of the American consumers, which accounts for 72% of the US GDP.

Can China and India help pull US out? The Chinese consumer spent $1 trillion in 2006, The Indians spent $650 billion. Americans spent $9.5 trillion. A 10% fall in American spending need to be fed by nearly 95% increase spendings by the Chinese and 130% by the Indians spendings.

Anyway... "They are only indicators!" "No one knows what will happens tomorrow"... Its your call..."Its too early to say anything concrete."

The 2 "PPPs" in trouble

The First PPP in trouble is "Pakistan Peoples Party"

The party was founded in 30th Nov 1967 and Zulfikar Ali Bhutto became its first chairman. The party creed is: "Islam is our faith; democracy is our politics; socialism is our economy; all power to the people."

The Pakistan Peoples Party is considerably more liberal than other political parties in Pakistan and is known to fight for such issues as women's rights (its previous leader was a woman) and the rights of the poor and the oppressed.

Benazir Bhutto was assassinated on 27th Dec. Her son Bilawal, an Oxford University Undergrad, has been chosen to take over her Pakistan People's Party. Her husband, Asif Ali Zardari will runs the party when his son is away.

Her son is only 19 and legally not fit for election. Party members feel that he is too young to run the party. Whereas her husband has been repeatedly accused of corruption - though he denies the charges and has never been convicted in court. Meanwhile, Makhdoom Amin Fahim, their party vice-chairman would most probably be their candidate for prime minister.

Without the charismatic figure of Ms Bhutto, the party is in trouble for this coming election.



The second PPP in trouble is "People's Power Party"

On 29th Jul 07, some former Thai Rak Thai Party MPs agreed to contest the 2007 elections as candidates of the People's Power Party. This was after the Thai Rak Thai Party was dissolved by the Thai Supreme Court on May 30, 2007. Former Bangkok governor Samak Sundaravej was elected People's Power Party leader.

PPP won 233 of the 480 seats in December 23 polls and dealt a blow to the military, who tried to purge Thailand of Thaksin's influence after ousting him in a bloodless coup in September 2006.

PPP have faced charges of vote buying, that former TRT members banned from politics have appeared in public to support PPP and that several CDs banned have been distributed in rallies. Yesterday, Thailand's Supreme Court has agreed to consider a case accusing the People Power Party, which won recent elections, of being a proxy of ousted premier Thaksin Shinawatra.

This military is seemingly trying very hard to destroy PPP in a "legalised" way. PPP in trouble indeed.

Life is full of surprises. Buy an Insurance!!!

Just for laugh. You better get an insurance, just in case...

CPF changes from 1st Jan 08

Hey Guys, just to update you on the CPF changes wef 1st Jan

1. Interest Rate Changes
ai) An extra 1% interest will be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA).
aii) The additional interest received on the OA will go into the member’s Special or Retirement Account to enhance his retirement savings.
b) Savings in the Special, Medisave and Retirement Account will be pegged to the 12-month average yield of the 10-year Singapore Government Security(10YSGS) + 1%.
c) Government will maintain the 4% floor rate for two years if the 10YSGS yield plus 1% is below 4%. After two years, the 2.5% floor rate will apply for all CPF accounts.

2. Medisave Required Amount
ai) CPF members who turn 55 and meet the Minimum Sum must set aside a Required Amount in their Medisave Account when they make a withdrawal.
aii) If members have less than the Required Amount in their Medisave Account, their Ordinary and/or Special Account balances in excess of their Minimum Sum will be used to top up the Required Amount.
aiii) The Required Amount will be raised from the current $11,500 to $14,000.

3. CPF Minimum Sum Topping up Scheme
ai) CPF members can top up the Special Accounts of their spouse and/or siblings who are below age 55, using cash and/or CPF.
aii) The topping up limit will be the prevailing Minimum Sum less the recipient’s net balances in his Ordinary and Special accounts

4. CPF Investment Scheme - Lower Expense Ratio
ai) Expense ratios on new investments in funds (unit trusts and investment-linked insurance products) under CPF Investment Scheme must not be higher than the specific allowable limits by CPF Board.
aii) The Board will review these ratios from time to time.

5. Housing Withdrawal Limits
a) To encourage prudence in the use of CPF savings the cap on the CPF withdrawal limit for the purchase of private residential properties and HDB flats financed with bank loans will be reduced from the current 126% to 120% of the Valuation Limit.


Extracted from www.cpf.gov.sg

Review of 2007 and 2008 Resolution

Its time to review my 2007 Resolutions and set new ones in 2008.

Review of 2007

1) To create my personal website and blog

- Decided not to get a website due to time constraints

2) To be a Certified Financial Planner

- I acheived it and got myself with another Associate Estate Planning Certificate
3) To achieve stablised income of $2,000/mth or $24,000/yr

- I get less than $2k in the month of March and April, but end of year exceed $24k
4) To achieve IPPT Silver in 2007

- I got my IPPT Silver

What I feel about 2007

Health - Good. No major illness in 2007. Gym and jogging at least once a week.

Career - Confused. I can advise, but can't talk well. My small statue and boyish look is a disadvantage. I need a lot of improvement in my communication skills and gaining of mass. I want to continue making Financial Advisory a viable career.

Money - Depressed. 5 yrs in the industry. Barely making ~$2k per month. Most of my peers are making $3-$5k average and I feel lousy.

Lifestyle - Great. Happy meeting people and add value to the society. Flexible timing and diversed lifestyle let me know what life is about.

Family - Don't dare to think in 2007. Don't think I can support one yet.

My 2008 Resolutions

1) To achieve stablised income of $3,000/mth or $36,000/yr

2) To pass CFA Level 1 examination

3) IPPT Silver in 2008

4) Gain weight from 58kg to 62kg thru weights training

5) Toastmasters Competent Communicator

All these are my personal feelings and resolutions. Not that great to think about World Peace, Global warming yet.