Bond investing can sometimes fail

Bond investing can sometimes fail, despite being traditionally considered a safe and steady investment. 

Interest rates, inflation, and credit ratings can all affect the value of bonds, and investors need to carefully consider these factors before investing in them. 

For example, the Puerto Rican government's default on its bond payments, which resulted in losses for many investors who had bought the bonds. 

Be wary of the risks associated with high-yield or "junk" bonds, which offer higher returns but also come with a higher risk of default. 

Conclusion:

While bond investing can be a useful tool for investors looking for steady income, it is important to understand the risks involved and to diversify one's portfolio across different types of investments.

https://www.youtube.com/watch?v=s_sNy-SZ4MM&t=2s

Salutica share price had a big drop after having increased from RM 0.375 to a high of RM 1.72 over 13 days from 31/3/2023.

 

Date	Adj Close Price	Volume
3/1/2023 12:00:00 AM	0.26	122,800
4/1/2023 12:00:00 AM	0.255	112,200
5/1/2023 12:00:00 AM	0.255	469,000
6/1/2023 12:00:00 AM	0.25	129,700
9/1/2023 12:00:00 AM	0.255	1,733,000
10/1/2023 12:00:00 AM	0.255	62,000
11/1/2023 12:00:00 AM	0.25	312,100
12/1/2023 12:00:00 AM	0.255	666,500
13/1/2023 12:00:00 AM	0.26	421,600
16/1/2023 12:00:00 AM	0.26	221,200
17/1/2023 12:00:00 AM	0.28	5,650,900
18/1/2023 12:00:00 AM	0.275	596,300
19/1/2023 12:00:00 AM	0.275	425,100
20/1/2023 12:00:00 AM	0.27	507,100
25/1/2023 12:00:00 AM	0.275	674,300
26/1/2023 12:00:00 AM	0.295	4,067,600
27/1/2023 12:00:00 AM	0.295	873,300
30/1/2023 12:00:00 AM	0.285	1,744,400
31/1/2023 12:00:00 AM	0.3	5,086,600
2/2/2023 12:00:00 AM	0.33	6,305,400
3/2/2023 12:00:00 AM	0.335	4,915,400
7/2/2023 12:00:00 AM	0.315	1,166,300
8/2/2023 12:00:00 AM	0.295	1,853,000
9/2/2023 12:00:00 AM	0.3	739,200
10/2/2023 12:00:00 AM	0.315	1,443,900
13/2/2023 12:00:00 AM	0.305	960,400
14/2/2023 12:00:00 AM	0.3	516,200
15/2/2023 12:00:00 AM	0.285	1,524,500
16/2/2023 12:00:00 AM	0.295	528,000
17/2/2023 12:00:00 AM	0.295	112,800
20/2/2023 12:00:00 AM	0.29	222,000
21/2/2023 12:00:00 AM	0.28	883,700
22/2/2023 12:00:00 AM	0.275	224,000
23/2/2023 12:00:00 AM	0.28	83,500
24/2/2023 12:00:00 AM	0.28	322,600
27/2/2023 12:00:00 AM	0.245	7,673,800
28/2/2023 12:00:00 AM	0.24	1,040,200
1/3/2023 12:00:00 AM	0.24	560,400
2/3/2023 12:00:00 AM	0.24	376,200
3/3/2023 12:00:00 AM	0.24	1,895,200
6/3/2023 12:00:00 AM	0.245	204,500
7/3/2023 12:00:00 AM	0.25	259,700
8/3/2023 12:00:00 AM	0.25	296,900
9/3/2023 12:00:00 AM	0.255	171,400
10/3/2023 12:00:00 AM	0.25	345,200
13/3/2023 12:00:00 AM	0.245	348,100
14/3/2023 12:00:00 AM	0.25	518,700
15/3/2023 12:00:00 AM	0.25	85,500
16/3/2023 12:00:00 AM	0.255	190,500
17/3/2023 12:00:00 AM	0.265	195,200
20/3/2023 12:00:00 AM	0.26	215,700
21/3/2023 12:00:00 AM	0.26	219,000
22/3/2023 12:00:00 AM	0.255	137,600
23/3/2023 12:00:00 AM	0.255	69,900
24/3/2023 12:00:00 AM	0.26	54,900
27/3/2023 12:00:00 AM	0.245	86,400
28/3/2023 12:00:00 AM	0.25	40,000
29/3/2023 12:00:00 AM	0.29	2,923,500
30/3/2023 12:00:00 AM	0.285	663,800
31/3/2023 12:00:00 AM	0.375	33,136,100
3/4/2023 12:00:00 AM	0.395	10,750,900
4/4/2023 12:00:00 AM	0.495	37,114,600
5/4/2023 12:00:00 AM	0.46	26,555,700
6/4/2023 12:00:00 AM	0.555	25,778,300
7/4/2023 12:00:00 AM	0.555	12,681,300
10/4/2023 12:00:00 AM	0.68	50,511,800
11/4/2023 12:00:00 AM	0.715	22,859,300
12/4/2023 12:00:00 AM	0.765	37,209,300
13/4/2023 12:00:00 AM	0.875	32,863,300
14/4/2023 12:00:00 AM	1.09	56,461,800
17/4/2023 12:00:00 AM	1.41	41,578,500#
18/4/2023 12:00:00 AM	1.65	60,618,300
19/4/2023 12:00:00 AM	1.16	65,105,300
20/4/2023 12:00:00 AM	0.815	100,220,300

# 17.4.2023 Salutica received UMA query

2023-04-17

Blog

Salutica Highlights Legal Dispute With Apple Malaysia in UMA Reply; Share Price Spikes 29%

2023-04-17

Blog

Salutica Gets UMA Query as Share Price Hits Highest in Over Five Years

Salutica's business has faced challenges over the recent years.  The company has been having losses for a few quarters.  Its revenues have contracted markedly.  Accordingly, its share price too has fallen over the last few years.

Its stocks had traded around 25 sen to 30 sen per share in recent past.  This counter had seen trading volume of less than 1 million shares on most days, with occasional infrequent spikes in its daily volumes of shares traded.

Short term traders would probably had been drawn to this stock on 31/3/2023 when the volume of shares traded was a high of 33,136,100.  

For the next 13 trading days, the traded volumes for this stock were high, between 10,750,900 to 60,618,300 on 18/4/2023 when its share price was the highest at RM 1.72 per share.  It closed on 18/4/2023 at RM 1.65 per share.

On 19/4/2023 and 20/4/2023, its share price dropped severely to close at RM 0.815 per share on 20/4/2023.  The volume traded on 20/4/2023 was the highest to date of 100,220,300 shares.

SALUTE Financial Information

20/4/2023 Price per share RM 0.815

Market Capital (RM)	: 347.60m	EPS (cent)	: -1.94
Number of Share	: 426.50m	P/E Ratio	: -

Additional related reading:

https://myinvestingnotes.blogspot.com/2011/04/penny-stocks-pump-and-dump-sell-to.html?m=1

SUNDAY, 3 APRIL 2011

Penny Stocks: Pump and Dump (SELL TO SUCKERS)

Trade-off of limited interest rate hikes by Bank Negara

 Bank Negara’s tempered OPR hikes limit interest rate risks for banking system …

… but there is a trade-off

As with everything in life, there is a trade-off. And as we have always said, there is no free lunch in economics. 

• First, savers could have obtained more had interest rates gone higher. With high inflation, savings are now earning negative real rates (that is, below inflation) (see Chart 5).
• Second, the trade-off is a weaker ringgit — and higher cost of living for all Malaysians. 

The interest rate is the price of money (or credit or time, if one is inclined to be argumentative) — and it certainly is one of the major drivers in foreign exchange movements (see Chart 6); although this relationship is by no means linear or perfect. 

• Can a country maintain a relatively low interest rate while also stabilising its exchange rate?  
• Is the weak ringgit a function of the interest rate differentials between the ringgit and other currencies or are there even more dominant factors? 

https://www.theedgemarkets.com/node/662043

How banks account for their bond holdings and treatments for unrealised gains and losses.

Banks have some discretion in terms of accounting for their bond holdings (which is part of financial assets and liabilities) and treatments for unrealised gains and losses. 

• Under IFRS 9 (known as MFRS 9 in Malaysia and SFRS 109 in Singapore), bond investments can be measured at cost (if they are intended to be held to maturity) or at fair values (if they may be sold before maturity). 
• And there are guidelines for treating changes in fair value measurements — they can be reflected through either the profit and loss (FVTPL) or other comprehensive income (FVOCI).

Under the first option, gains (losses) are recognised in the Income Statements, meaning reported net profit for the period is higher (lower). 

Under the second option, gains (losses) are disclosed below the net profit line in the Statements of Comprehensive Income. In this case, the gains (losses) have no impact on reported net profit. 

However, both the FVTPL and FVOCI options have balance sheet effects — unrealised gains (losses) will increase (decrease) retained earnings and shareholders’ equity (see Chart 4 for the different approaches in the accounting treatments for bond investments by Malaysian banks).

For instance, Affin Bank and, to a lesser extent, Hong Leong Bank have the highest proportions of bond investments measured at cost, which could indicate that, in the current environment, both their reported net profit and equity may be “overstated”. By comparison, the other seven local banks have, on average, mark-to-market some 63% of their bond holdings. In addition, Maybank, CIMB and Ambank would have adjusted their reported profit lower for a portion of these unrealised losses.

As mentioned above, bond holdings that are mark-to-market will affect balance sheets — unrealised losses or impairments will drag on the capital adequacy ratio of banks. 

Herein lies the importance of Bank Negara’s more tempered path for interest rate hikes. 

• The smaller interest rate hikes mean lower unrealised capital losses, thus limiting the negative impact on lending capacity and/or need to raise fresh capital.
• Smaller interest rate hikes also help keep a lid on the burden for debt servicing, for leveraged households, businesses as well as the government. Government debt and liabilities totalled RM1.5 trillion, or 83% of GDP.

In short, Bank Negara is protecting the lending capacity of the domestic banking system — and economic growth. Banks typically run into trouble because of deterioration in the quality of their assets, when bad debt provisions and write-offs increase. This could still happen if the expected global recession hits hard and affects the ability of businesses to service/repay their debts. At this point in time, however, interest rate risks — that are currently afflicting US and European banks — for Malaysia’s banking system appear low.

https://www.theedgemarkets.com/node/662043

Interest rate risks for the overall Malaysian banking system is low.

 

Is SVB a canary in the coal mine?

Clearly, the situation is quite different in Malaysia. For starters, pandemic cash handouts were far smaller and, while deposits also rose during the pandemic — owing to loan moratoriums and lower spending — it was nowhere near the scale of that in the US. Total deposits increased from RM1.968 trillion to RM2.186 trillion between March 2020 and March 2022, or equivalent to just about 11% growth (see Chart 2).

And while investments in government and corporate bonds also rose at the outset of the pandemic — as a result of excess deposits and lower loan demand — the increase was small, from 17.9% in January 2020 to a high of 19.7% of total assets in August 2021. Currently, the average bond holdings among Malaysian banks is 19.1% of total assets, or about RM645.2 billion, compared with 24% in the US banking system. Of note, 90% of the total are made up of local bonds — only 10% of which are foreign currency denominated bonds (see Chart 3).

Bank Negara’s tempered OPR hikes limit interest rate risks for banking system …

More importantly, Bank Negara Malaysia has raised the overnight policy rate (OPR) by only 1%, from 1.75% to 2.75% over the same period (compared with the 4.75% hike in the US FFR). Yields for the benchmark 10-year Malaysia Government Securities (MGS) have risen by even less — from 3.6% at the start of 2022 to 3.88% currently. The yield differential is less than 0.3%. This means the drop in value for 10-year MGS is only about 2.3%, based on our back-of-the-envelope calculations (see Table 2).

This is a huge difference compared to the 15.3% drop in value for the 10-year Treasury. Furthermore, unrealised losses for shorter duration bonds will be much lower. For instance, more than half of Maybank’s bond holdings have durations of less than five years.

In short, total unrealised losses for local banks should be much lower. (Incidentally, the majority of loans [79%] are based on floating interest rates, which are repriced immediately on Bank Negara’s policy rate changes.) Therefore, we think interest rate risks for the overall Malaysian banking system is low. Naturally, some banks will be affected more than others. For instance, Maybank, CIMB, Hong Leong Bank, Ambank, Affin Bank and RHB Bank have a higher percentage of bonds on their balance sheets compared with banks such as Public Bank, Bank Islam, Alliance Bank and MBSB. This could be due to a combination of factors, including deposit inflows, the ability to make loans and the target customer market.

https://www.theedgemarkets.com/node/662043

The fallout of Silicon Valley Bank reverberated around the world

 

The fallout reverberated around the world — turning into a crisis of confidence in the global financial system. 

In Europe, the Swiss government instructed UBS Group AG to mount an emergency rescue of compatriot Credit Suisse Group AG, which, incidentally, is already beset with its own set of problems. 

Since the SVB turmoil, banks have lost tens of billions in market value, some more than others. 

For instance, leading Japanese banks have been harder hit, as they had accumulated foreign bonds in recent years — in the search for yields on the back of more than two decades of a zero interest rate policy, crowding-out by the Bank of Japan as well as slow loans growth in the domestic market.

https://www.theedgemarkets.com/node/662043

Silicon Valley Bank became the second-largest bank to fail in US history

For a quick recap, Silicon Valley Bank (SVB) became the second-largest bank to fail in US history, the biggest being Washington Mutual Bank in 2008, following a run on the bank. 

What happened? 

SVB had an abnormally high percentage of bond holdings (56% of total assets) on its balance sheet and as unrealised losses mounted, worried depositors — mostly Silicon Valley start-ups and venture-capital firms with large, uninsured deposits (of more than US$250,000 per account) — rushed to withdraw their money. 

The sudden huge outflow of deposits forced SVB to liquidate its bonds at current market values (losses), which then tipped it into insolvency (where the values of liabilities exceeded assets). 

The bank had to be taken over by FDIC on March 10 to stem contagion fears. 

Another regional bank, Signature Bank, suffered the same fate and went into FDIC receivership just days later. 

Despite the quick actions, worries continued to spread to other smaller banks, all of which continue to suffer substantially higher-than-normal deposit withdrawals.

https://www.theedgemarkets.com/node/662043

The issues for SVB are, to a certain extent, idiosyncratic — 

• an exceptionally narrow customer base and 
• high uninsured deposits (according to various reports, they ranged from 88% to 96% of total deposits), 
• abnormally high long-dated bond holdings relative to traditional loans and, 
• critically, failure to hedge interest rate risks.

The overall US banking system is, no doubt, suffering from withdrawal symptoms — from excessive government stimulus, near-zero interest rates and massive quantitative easing over the past few years. At the outset of the pandemic, banks were inundated with large deposit inflows — excess savings surged from generous government handout, coupled with little avenue to spend during lockdowns.

Bank deposits increased by nearly US$5 trillion, or 35%, from about US$13.4 trillion in March 2020 to US$18.1 trillion in March 2022 (see Chart 1). Meanwhile, loans to businesses were limited during the pandemic. Banks had to put all these excess cash to work, and many ended up buying Treasuries and especially MBS (new mortgages and refinancing activities saw a huge jump as the housing sector boomed). Then the Fed started hiking interest rates aggressively.

Situation in Malaysia is quite different

Clearly, the situation is quite different in Malaysia. 

For starters, pandemic cash handouts were far smaller and, while deposits also rose during the pandemic — owing to loan moratoriums and lower spending — it was nowhere near the scale of that in the US. 

Total deposits increased from RM1.968 trillion to RM2.186 trillion between March 2020 and March 2022, or equivalent to just about 11% growth (see Chart 2).

https://www.theedgemarkets.com/node/662043