Very Good Proposal By Bank Negara

There is apparently a proposal by Bank Negara to change the way mortgages are calculated, which will greatly reduce the amount the public can borrow. The computation is supposed to be based on net income and not gross. That could reduce the amount that can be borrowed by 37%.





I think its an excellent idea. The only people who think this is bollocks are those with 2 properties or more. The affordability ratio has gone through the roof. Some may argue that a hike in real property gains tax would be a better move - I think not as it takes more than lesser profits to calm the property markets.


Property rides on expectations. If everyone expects prices to rise in the foreseeable future, its get in now or forever they will be out of your reach. That is the dangerous potion brewing in Malaysia and many Asian property markets. That kind of expectation has be neutered.


When you take things too high, the fall be greater, remember 1993-1997, the swath of liquidity just kept getting bigger and bigger. Just remember that when liquidity is sucked out of the system, you get a corresponding deflating effect, in multiplier effect.


Why property prices needed to be eased down? A survey done by The Edge on housing affordability saw property prices increasing from 5.9x income in 1989 to 10.9x in 2010. Left unchecked, it will soon climb to 15x your annual income.


 


The Global Property Scam


 A massive transfer of income to the very rich has occurred while middle class real incomes stagnated. The middle classes only tolerated this because Central Bankers created housing booms to keep the impoverished middle classes borrowing and spending to give them the illusion of prosperity and stop them from revolting.

How do you do that? You do that by keeping interest rates very low, keep printing money, keep the system very liquid - some have gone to equities but by and large the biggest beneficiaries have been property markets throughout most of the world. Yes, you see obvious bubbles in Singapore, HK, parts of China, Canada, Australia and even certain places in Malaysia. We thank our lucky stars that our property markets did not go through the same correction as the major developed nations - but is that because we did not have a massive contraction in liquidity brought on by a financial scare?

How is this scam hurtful? Well, you propel property prices higher and higher with low interest rates and excess liquidity. It serves to fan the flames of property prices higher, causing a bull run for the prices, causing people to chase and get some action before its too late.
Its never a zero sum game. Much of the froth in pushing prices higher has to be in much much bigger mortgages that people are taking to participate in the run. As long as the public can pay down their mortgages, you won't see foreclosures or a major correction. You and I know that prices have basically gone out of reach of the young and working.



We must applaud Zeti to have the foresight and strategic thinking to tackle this before it gets out of hand. Property owners may sigh and bitch but seriously, there is a price for everything - imagine the price of sugar and flour rising 10x, putting them out of reach of at least half the population. Nothing good can come from that.


Its not that property prices cannot be rising, they are actually a critical wealth builder and saving device for many families. Ask most people, all they are looking for is a few percentage gain a year over the longer term - when its nearly double digits every year for a few years, you know something is out of whack.


While we cannot stop people punting and chasing for homes to buy, we can at least address the amount of leverage they get. If Malaysia's average credit card debt per household gets to the RM80,000 or RM100,000 level, you cannot tell me that is not a problem. Why is it when its property loans, its your business only and not the government?

Flamengo 5 - Santos 4, What A Match!

Is this a genuine posting or just an excuse to feature Zhou Weitong again? Who cares? The match was brilliant. You can see the new blue yeyed boy of football Neymar doing his stuff scoring two goals for Santos. But you can spot the devious trick by Neymar when he comes in from the flank into the box - he will suddenly jibe into the box to trigger a foul to earn penalties. If you look at the run path of Neymar and the defenders in slow-mo, you can clearly see that its a good trick.



Ronaldhino showed that he is not over the whole hill yet. His free kick which gave Flamego the 4th goal was intelligent and well executed. ... and hey, Zhou Weitong also plays football in the mud!!!

RIO DE JANEIRO, July 28 — Ronaldinho scored a hat-trick as Flamengo overcame a three-goal deficit to beat South American champions Santos 5-4 away in an extraordinary Brazilian championship match.

The former Barcelona and AC Milan forward, leading scorer in the championship with eight goals, netted the equaliser and an 82nd minute winner as Flamengo fought back after Santos had raced to a 3-0 lead in 26 minutes.

Borges scored two goals for the hosts before Brazil’s teenage forward Neymar weaved his way past four markers to add a brilliant third in Wednesday’s match.

Flamengo pulled one back when Ronaldinho opened his account, taking advantage of a slip by Santos goalkeeper Rafael to score from close range, then Thiago Neves notched another for the visitors.

Brazil midfielder Elano missed a penalty for Santos before Deivid headed Flamengo’s equaliser from a corner, all before the end of the first half.

The drama continued after the break as Neymar put Santos back in front, before Ronaldinho took command, equalising with a free kick which went under the wall, then scoring the winner with an angled shot.

Flamengo are third on 24 points from 12 games, four behind leaders Corinthians. — Reuters

Using Quant to predict the World Cup

(click to enlarge)


You might as well applaud such a move as nothing much will get done during the World cup month. Possibly meaningless to Americans, but hey, they call the stupid baseball thing World Series and only American teams are playing???!!!




Whilst this report should be taken with a pinch of salt, we find it an interesting exercise and an ideal opportunity to lightheartedly explain Quantitative techniques and demystify the typical
Quant framework.

I am so fed up supporting England during World Cup tournaments, so I am deserting them and going for the very well balanced Spain side, as well as cheering on all the underdogs: Ghana, Japan, South Korea, North Korea, ... to name a few.

I was having lunch with an Englishman and a Brazilian yesterday (yea, business meeting in HK) and they were giving me a hard time when I said I will be supporting Spain. Geez ... I said that if asians were only "allowed" to support their actual country team, then we might as well forget about supporting any team for the World Cup. I said its lucky for them to be accidentally born in England or Brazil. I then asked them if their country teams did not make it to the World Cup for 10 or 20 years, what then, who would you support? That shut them up.

You will note that the headline of the JP Morgan report has England as the likely winner even though on team's strength analysis Brazil is tops and in betting Spain is favourite. When arguing over World Cup teams, its highly emotive and hence you have to use data only to remain impartial. Quantitative methods will use past data and then project ahead.

Their goal is indeed to highlight potential World Cup winners by applying quantitative or mathematical methodology traditionally used with balance-sheet, valuations and consensus information to data from the football world. To do so, they focused on data including:
• probabilities to win from a range of bookmakers and exchanges
• official FIFA World Rankings
• results from previous World Cup tournaments and qualifying competitions



In practice, Quants tend to use 4 types of information in their mathematical models:
1. Valuation metrics
2. Market and Analyst sentiment
3. Company fundamentals
4. Price trends

J.P. Morgan Cazenove "Normal' Quant stock-picking Model
VALUATION METRICS MARKET
- PE vs the market
- PE vs the sector
- Forecast growth
ANALYST SENTIMENT
- Recent change in analyst sentiment
- Recent change in analyst growth expectations
- Recent change in analyst recommendations
COMPANY FUNDAMENTALS
- ROE
- Company Risk
PRICE TREND
- Long term trend
- Short term trend

Source: J.P. Morgan

They then translate the above Model into a football-specific Model.
J.P. Morgan Cazenove Quant world cup-picking Model
"VALUATION" METRICS "MARKET
- "Market" Valuations
- FIFA World Ranking
& ANALYST" SENTIMENT
- Result Expectations
- Recent Team Shape
"COMPANY FUNDAMENTALS"
- Consistency in Market Sentiment
- J.P. Morgan Success Ratio Indicator
PRICE TREND
- Trend in probability to win
- Trend in FIFA's Ranking

Source: J.P. Morgan

If you can get the report, its a lot of fun. They looked at the actual FIFA world ranking and then looked at the usual probability in winning. Regressed them and somehow, some of the teams' rankings do not match up with their win probabilities. Portugal, Netherlands and Greece offer a disagreement with high FIFA World Ranking and low indicated probability to win the World Cup.

England, Argentina and Ivory Coast also offer disagreement with a low World Ranking and an indicated high probability of winning. According to the FIFA World Ranking Factor, Brazil, Spain Netherlands and Portugal are most likely to win the World Cup.



Hence based on that alone, a betting person should favour England, Argentina and Ivory Coast, ceteris paribus, and go against Portugal, Netherlands and Greece. On a side note, Greece might play luar kulit (out of their skins) owing to the homeland crisis and on the pretext that they may be booted out of EU soon (hence no more invite to Euro championships???!! ; ) )

They then look at bookmakers' odds to ascertain value against what the computer predict as their real value. They then plat charts based on the 6 month trending winning probability and a 3 month trending winning probability - a lot like 30 day MA and 60 day MA. Hey, a trend is your friend, it applies in everything.

According to the Trend in Probability to Win Factor: Slovenia, France, Ivory Coast and Greece are the most attractive options, having received the greatest increase in probability over the past 6 months.

According to the Trend in FIFA’s Ranking, Algeria, Slovenia, Serbia and Slovakia have the biggest change in World Ranking Points and should be preferred.

But of course, as wonderful the data may be, it still depends on the weightage you assign to each of the 4 factors. Herein lies the problem, JP Morgan assigned equal weightage to all 4.

The very funny part is that the last 2 pages uses the quant models to predict every match. In the quarter finals these are teams, according to the quants:

Netherlands vs Brazil (Netherlands will win)
France vs England (England will win)
Argentina vs Slovenia (Slovenia wins in an upset)
Italy vs Spain (Spain wins)



In the Semis:
England will meet and beat Holland, while Spain will edge out Slovenia.

Ta-dah, England beat the crap out of Spain in the finals. Yea, right!!!??

Asset Class Returns As At end-April 2010

April was relatively uneventful for the major asset classes in terms of total returns—with one exception. REITs scored another outsized gain last month, posting a strong 7.7% total return, based on the MSCI REIT Index. Real estate securities are also far ahead of the pack for 2010 after advancing by nearly 18%, or about twice as much compared to the next-best performance for U.S. stocks in the year-to-date ranking.

The fact that almost all other asset classes were flattish indicates that investors are probably equally bearish and bullish at the same time. Despite the troubles in Euro zone, all asset classes are like marking time. Safe to say that a large number of investors have stayed in cash for the time being but not totally out of it as it could very well rise another 10% from here for no apparent reason.

As I have said a number of times, its prudent to stay about 70% cashed up for the next month or two. The World Cup in June is not likely to bring much activity in all markets bar the US, as soccer still does not wield the delirium there that the rest of the world go through willingly.

In the wake of the price surge in real estate recently, the yield on equity REITs fell to 3.49% as of April 29, according to data from the National Association of Real Estate Investment Trusts. That’s slightly below the 10-year Treasury’s 3.76%. Is that a sure sign that REITs are set to correct? No, although it raises the risk in the asset class.

It’s worth noting that in the past, when the equity REIT yield overall dipped below the 10-year Treasury yield, it’s signaled rough times for real estate stocks. During 2006 and 2007, the yield on the 10 year exceeded the REIT yield. After REIT prices were crushed in 2008, the yield premium over Treasuries soared, reaching more than 7 percentage points over the 10 year in early 2009.Hence you may safely take REITs out of the performing asset classes by next month, and you are basically left with nothing positive, really.

Despite the lush levels of liquidity in the global system, commodities are still working off inventory. That does not bode well for growth emerging markets. Its a standoff for a couple of months.