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Traineeinvestor

Traineeinvestor's diary - HK and Far East Focus

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I recently had a tenant ask to terminate a lease on a unit in Mid-Levels early due to personal circumstances. It took less than a week to find a new tenant at the same rent as the old lease.

 

Only one data point but it shows that the leasing market in that segment of the market is still strong.

 

Talking to one of the agents, he said there is plenty of demand for units on HK Island outside the top-end luxury space to lease and to buy, but owners simply aren't interested in selling. Hence, buyers including investors are buying new properties from developers. The 85% (in at least one case) financing and "discounts" are proving attractive. (I appreciate that this isn't exactly news, but another confirmation is always useful.)

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Interesting.

 

GDEP seemed to be able to negotiate lower rents, even in HK Island's "sub-$30,000 sector"

 

And today's charts in the SCMP suggest some weakness in Rents in Midlevels, and Happy Valley

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Possibly - there were three other units in the building available for lease at the same time. All were on lower floors. Two were asking higher rents. The one that was asking a lower rent had a more limited view. It's quite possible I could have got a little bit more if I had been prepared to accept the possibility of a vacancy but I have always preferred to have my properties occupied.

 

One of the key points is that in any price bracket there is a wide range of units on offer - size, location, outlook, interior condition all being relevant - and knowing the right price point for a unit is critical to getting it leased quickly.

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This morning I added shares in PGG Wrightson (NZX: PGW) to the portfolio. PGW is one of New Zealand's leading suppliers of products to the rural economy. Given the increasing demand for agricultural and dairy products, the company should have reasonably secure long term prospects. The negative is the gearing ration which, at around 50% debt to equity is a bit higher than I am genuinely comfortable with (the exact level is slightly unclear due to a recent acquisition of some real estate). The trailing yield is 7.3%.



I paid NZD0.41 per share.

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An excellent yield at over 7%

 

Is that common in NZ now?

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That's at the high end of the market. Getting yields above 4% on good quality shares in Australia or New Zealand is possible.

 

If you look at published yields, most will be grossed up for the imputation (NZ) or franking (Au) credits - showing what the effective pre-tax yield is for a domestic investor. The actual amount of cash paid out is lower. For PGW, the gross yield is a bit above 10%. The 7.3% is what I expect to actually receive.

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Added a few more shares in National Australia Bank (ASX:NAB) to the portfolio at AUD33.09 per share. With the improving UK economy and appreciating GBP, the drag of underperforming UK assets may be behind them. And I can anticipate a 6+% tax free dividend yield while I am waiting.

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Hi T.I.,

I saw your post on AX... and did some checking...

 

It is tough getting updated data on Rents - esp. Charts

=

 





RENTs rising in HK, especially near MTR Stations
CHARTS
Domestic Rents, etc. to end- 2009 / note: they were Higher in 1997-98

Rental%20Indices%20for%20Hong%20Kong%20P

 

Prices moved up faster than Rents to the end of 2012

 

HK-prices-vs-rent-graph-2_zps44a411e4.gi

 

Luxury Rents had been moving up fast into 2011

figure1.jpg

... but in 2012 Luxury Rents started falling

 

OB-UD651_HKRENT_E_20120813060522.jpg

 

Back in 2012 "Real Rents" were near Zero

 

clip_image0016.png

 

=

> new thread: http://www.greenenergyinvestors.com/index.php?showtopic=19179

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I picked up the Business section of today's SCMP, and...

 

Found I had to wade through 10 pages of IPO information ("Global Offerings")

 

I think this is the MOST I have ever seen.

And I notice that the HSI is not at a high.

So there seems to be a strong eagerness to tap the HK market, and raise money.

 

I reckon this must be Bearish for HK stocks.

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I have purchased shares in Gemworth Mortgage (ASX:GMA) at AUD3.29 per share. With a forecast 2015FY dividend of 25 cps this recently listed company should get a re-rating as more brokers start coverage and Australia's self managed super funds keep looking for fully franked dividend yields.

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The HKMA injected HKD16 billion to defend the peg today. This is the first intervention since December 2012.

 

http://www.aastocks.com/en/news/HK6/NOW.612772/Count3.html

 

While I have no short term concerns that HKD will be repegged (people have been periodically predicting the end of the peg long before I arrived in HK more than 20 years ago), in the longer term it will either be adjusted or removed. If that were to happen in conditions like those prevailing today, the HKD would be revalued upwards and the relative value of my overseas investments would go down. As far as portfolio construction is concerned, while investing outside HK provides diversification and a closer alignment between household income and expenses, it does add to the longer term risk exposure.

 

Since the cost of hedging is prohibitive, this is largely a case of being aware of a potential event about which I can do nothing.

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OTP is not happy, and has just posted THIS on AX:

=============

 

(As Revised - and posted):
I started a thread here today concerning yesterday's protest March in HK,
where somewhere between 100,000 and 500,000 Hongkongers marched.
I think that this political activity, and the cause that it supports is important
for HongKong, and may even have some bearing on local HK property prices.
I believe my posts reflected my usual passion towards issues, and included
some intelligent comments.
So I was disappointed and puzzled to find it had been moved WITHOUT EXPLANATION.
This post is a request for an explanation.
Can you please state Where it has been moved?
Or why it has been deleted?

==
I thought you might want to know.

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I know Ed will not allow any posts which disparage any company (whether or not an advertiser on AX) (a policy which gets overlooked whenever the corporate is a bank, oil company etc), but I am very surprised that a thread on democracy protests got deleted. He posts far more controversial stuff himself and even has a sub-forum for "truths and controversies".

 

FWIW, successive administrations in the US, Europe and other places have severely damaged my faith in democracy as a form of government. The quality of many of HK's pro-democracy leaders is awful. In short, I do not believe that full democracy is an desirable solution to Hong Kong's political problems.

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Yeah.

I get that point.

But the fact that Hongkongers are willing to march in such numbers will keep politicians on their toes,

 

American seems to have lost that activism, and with the loss has come a real decline in freedom:

http://www.greenenergyinvestors.com/index.php?showtopic=19194

 

I softened my remark on AX, and will instead try a different approach

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One of my investing principles is that bad news is almost invariably followed by more bad news. This fits well with Max Gunther's "when the ship starts to sink, don't panic, jump".

 

For depositors at Bank of Cyprus/Cyprus Popular Bank, this is certainly true. Having had 47.5% their deposits forcibly converted into equity in the local bank at an issue price of 1 Euro, they are now facing massive dilution through a huge capital raising through the issue of new shares and (it would appear) are fighting to have the new issue price set at 0.30 Euros. In effect, whatever notional value had been salvaged by the deposit to equity swap has lost at least 70% of its value in the last year.

 

http://www.bloomberg.com/news/2014-07-03/bailed-in-bank-of-cyprus-depositors-face-share-sale-blow.html

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The EBA report on virtual currencies: http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf

 

I have not read the whole thing (nor do I intend to), but the parts which I have flicked through are mostly adverse to Bitcoin.

 

For those who do not want to read the full report, there is a limited summary here: http://www.ft.com/intl/cms/s/0/9b73f5c6-0387-11e4-817f-00144feab7de.html#axzz36w4gm5Eq

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HEDGING Idea ?

 

In response to this comment from elsewhere:

"I have not really considered hedging. Would the cost justify the protection achieved? If I had hedged myself back in 2009 when "experts" were predicting interest rates to rise "soon", I would have wasted a lot of money over the last 5 years. Of course, now people are predicting that interest rates will rise either later this year or sometime next year (just like they have been every year for he last 5 years). Sure it may happen but even if rates do go up, will it be by enough to justify the cost of the hedge? I don't know but I would need a high level of confidence that it would before I started writing cheques for hedging."

 

I could give some thoughts about hedging. But it might take 30 minutes or so to produce,

and that's pointless, unless there is some real interest

 

The general idea is to take something like 1% - or maybe 0.5% - representing 6 months interest at 1%, and use it to buy some TBT calls. Then calculate how meaningful the income might be from various levels of interest rates.

 

A more perfect hedge (using Hibor) is probably not available

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Thanks for the offer - much appreciated - but I am unlikely to be interested in hedging my interest rate risk. My reasoning is as follows:

 

1. there is no certainty that HIBOR will go up any time soon - the US and many other countries are still spending far more than they take in through taxes and are heavily indebted. There is a massive and practica incentive against raising interest rates by more than a token amount as a "signal";

 

2. HKD is currently under upward pressure - this implies that the banks have inflows of HKD and therfore any localised pressure on HIBOR is currently downwards;

 

3. if I hedge, interest rates need to rise by more than enough to offset the cost of the hedge including the time period when I am paying hedging costs before the interest rate rises take effect;

 

4. a hedge which gets rolled over every six months is only of very short term benefit (at most six months). Combined with #3 this is a very significant argument against hedging.

 

5. I have a partial hedge in place already - cash in the bank which may (or may not) benefit from higher interest rates or, failing which, could be used to repay some of the outstanding principal balances.

 

Example:

 

If I currently pay 1% on HKD10 MM my annual interest bill is HKD100,000

If the cost of hedging is 0.5% every six months (which seems low), the annual hedging cost is also HKD100,000

If interest rates do not rise during the year, I have doubled the cost of servicing the loans and am HKD100,000 worse off than had I not hedged.

If interest rates double after six months, at year end I am HKD50,000 worse off than if I had not hedged.

If interest rates tripple after six months, at year end I am only breaking even on the cost of hedging.

 

And, in all scenarios, the hedge will be reset based on interest rates prevailing at the time.

 

HIBOR based mortgages can be fixed for up to 12 months. While the incremental cost is less than that in the example, it is still a meaningful cost for an uncertain short term benefit.

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/ HK MORTGAGE Loan Hedging example /

 

"HIBOR based mortgages can be fixed for up to 12 months.

While the incremental cost is less than that in the example, it is still a meaningful cost for an uncertain short term benefit."

"If I currently pay 1% on HKD10 MM my annual interest bill is HKD100,000" - T.I.

 

ikp.38HkoYd4.jpg

 

As I have said, I would not use a HIBOR hedge. It is far too expensive.

(As a former banker, I know that banks rarely give their clients fair deals on fixed rate hedges.)

 

TBT - is a 2X Bear Instrument on US -> which closed at $61.07 vs. TLT-$112.86 and a 10yr-rate of 2.532%

 

If you take HK$100,000 to buy a Hedge, that's about USD $13,000.

 

You could invest, 50% of this, as follows: (or maybe 11 contracts each)

 

TBT Calls- : $Price : HK$50K/$6,500: 11 cts each
Jan15-$60 : $4.22 : : 15.4 contracts : $ 4,642
Jan16-$60 : $7.63 : : 8.52 contracts : $ 8,393 = $13,035 x7.75= HK$101,021
===============

 

The question then is how much of a move in rates is needed to cover your cost.

Beyond that, the hedge has a positive payoff.

 

Taking the Jan. 2015 Call, a move to $64.22 is not at all hard to imagine.
TBT last touched at $65 in early May 2014 - when TLT was $110.4, and TNX was 2.65%
Here are the ranges of the last 12 months:
Sym.: Last--- : 12 months range
TBT : $61.03 : $59.54 - $82.80
TLT : 112.86 : 101.17 - 115.19
TNX : 2.532% : 2.402%- 3.036% (10 yr. Note)
TYX : 3.362% : 3.267% - 3.976% (30 yr. Bond)

 

If TBT moves above 64.22 in the next 6 months, you are "ahead" on your Jan. 2015 hedge:

 

TBT since 8/2011 vs. TNX, TYX ... update / 3yrs: TBT : TLT : TNX : TYX

TBT-etc_zpsbd8b2787.gif

 

IMO, this sort of hedge is much more cost efficient than something on HIBOR,

and there's an excellent chance you will "win" on the basis risk you take here.

 

To over-simplify what the chart shows:
+ A move to maybe 2.68% on TNX will allow you to breakeven on the Jan.2015 Call
+ A move to maybe 2.80% on TNX will allow you to breakeven on the Jan.2016 Call
(note: these estimates are approximate, not perfect)
Hedging now, you are benefiting from:
Low TNX/TYX interest rates, and Low implied Vols. on TBT Calls.*
You can also exit the Hedge when it suits you, you do not need permission from the bank.
===
*Estimate of ATM TBT calls: TBT closed at $61.03 : Jan.exp: 196d= 0.537-Yr: SQRT: 0.757
Jan 2015: $60c: $4.22 / $61c: $3.65-3.80 = $3.72 /0.757= $4.91/61= 8.05%/.4 = 20.14%
Jun 2015: $60c: $5.90 / $61c: $5.40-5.65 = $5.53 /0.979= $5.65/61= 9.26%/.4 = 23.15%
Jan 2016: $60c: $7.63 / $61E $7.63-.2*1.8=$7.27 /1.240= $5.86/61= 9.61%/.4 = 24.03%

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I found this idea carried on MSM (yeah, shocking) very interesting. The idea of a linkage between Bitcoin and gold.

 

Gold backing would give Bitcoin credibility and holders some degree of assurance that Bitcoin will not be debased by endless new issues and Bitcoin linkage will give gold a degree of liquidity (exchange value) that it currently lacks. While there is nothing new in the idea of a gold backed currency, the fact that Bloomberg is carrying the story is itself interesting.

 

http://www.bloomberg.com/news/2014-07-28/gold-bugs-meet-bitcoin-believers-to-supplant-the-dollar.html

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Yeah.

What I find funny about the link between Bitcoins and Gold, is the way that when the price ran up, the Bitcoin hit its peak when it was worth exactly On Gold ounce. So some big holders must have use that level to trigger some sell orders.

 

Clearly some big players do have both of these "non dollar currencies" on their "radar screens"

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HK Dollar

 

Have you noticed the very heavy intervention in the HK FX market in recent days?

 

I read that the Exchange authority Sold over HK$4 billion in local currency on Friday,

and something like HK$40 billion in the last few weeks.

 

They are required to operate to hold the HK Dollar down either side of the HK$7.75-7.85* price range,

and someone is trying to "break the peg" by pushing the HK dollar below HK$7.75.

 

*(prices corrected)

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Yeah - there's been plenty of publicity about the interventions. They happen from time to time and we have to remember that the HKMA has plenty of ammunition to use on this if they choose to.

 

P.S. I think you mean $7.75 - 7.85 :-)

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Martin Spring's excellent On Target newsletter has just arrived and the leading article is "Gold Starts to Recover Its Traditional Role"

 

An excerpt:

 

"This has been particularly noticeable in recent months as the impact of US government sanctions on international banks for failing to comply in full with the dictates of its foreign policies “has become severe.”

Since May the American authorities have extracted almost $12 billion in fines in settlements with France’s BNP Paribas and Zurich-based Credit Suisse. As a result, Dizard says, “the world is finding ways to get along without the dollar.”

Gold is one of several alternatives.

“Not many transactions are actually invoiced in gold as such; instead, gold is used as the settlement medium rather than for the price quotation,” he says.This has been particularly noticeable in recent months as the impact of US government sanctions on international banks for failing to comply in full with the dictates of its foreign policies “has become severe.”

Since May the American authorities have extracted almost $12 billion in fines in settlements with France’s BNP Paribas and Zurich-based Credit Suisse. As a result, Dizard says, “the world is finding ways to get along without the dollar.”

Gold is one of several alternatives.

“Not many transactions are actually invoiced in gold as such; instead, gold is used as the settlement medium rather than for the price quotation,” he says."

 

I am very close to taking a bit of money off the stock market and buying a bit more bullion.

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Don't wait too long

No time like the present, to start buying.

 

Buy a little at a time, if you don't want to make a Timing decision

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