Den of The Lion Investor

You might probably have seen advertisements for the Merrill Lynch Jubilee Series 8 Notes recently.

(If you haven’t, you can download the product fact sheet at the link below:)

Merrill Lynch Jubilee Series 8 Notes Fact Sheet

The Jubilee Series 8 Notes promises 3.15% p.a. for a period of 2.5 years. It also offers “100% principal protection at maturity*“.

A 3 year government bond is currently giving only a yield of 1.86%, so this looks like a good deal.

But wait, we need to read the fine print first (Did you?).

It says:

The Notes are principal protected if held until the Maturity Date. However, redemption of the Notes at 100 percnt of the principal amount of the Notes is not guaranteed if the Note is disposed of prior to maturity, or the Note is redeemed early due to taxation or other reasons.

A lot of people will probably be thinking: “As long as I don’t sell it before maturity, I will get 100% of my principal back.”

Let’s read the finer print and disclaimer on the fact sheet.

The security for the Notes will comprise certain securities issued by Merrill Lynch and the swap arrangements relating to the Notes including the guarantee by Merill Lynch as the swap guarantor. In the event that Merrill Lynch is unable to make or procure payment of amounts due under the securities or the swap arrangements, Jubilee Global Finance Limited will be unable to make the corresponding payments due under the Notes and the recourse of investors is limited to the realisation of the securities and to the termination payment (if any) due to Jubilee Global Finance Limited under the swap arrangements.

Yes, the Notes are 100% principal protected if held to maturity.

But no, the decision as to whether to sell the Notes or not does not lie totally with you.

There are certain conditions whereby the notes can be redeemed by the issuer prior to maturity date. They are:

1. There is an event of default under the Notes
2. The securities backing up the notes are repaid early for any reason, for example because there is an event of default under the securities or for tax reasons
3. The swap agreement is terminated early
4. The Cayman Islands imposes taxes on the issuer or on payments under the Notes which the issuer is unable to avoid

When any of these events happens, there is a risk of significant loss of capital.

A look at the Jubilee Notes Pricing Statement shows the securities backing up the notes to be SGD-denominated notes issued by Merrill Lynch & Co., Inc under its US$110,000,000,000 Euro Medium Term Note Programme. As the Securities are unsecured, they represent long-term unsecured debt obligations of Merrill Lynch & Co., Inc.

Therefore, you are paid the extra yield by taking on the credit risk of Merrill Lynch. And the few other reasons listed above which might not be too exactly transparent. For example, what are the factors that will determine when the swap agreement be terminated? We don’t really know unless we take the trouble to read thoroughly the base prospectus and pricing statement.

The question is, are we being compensated sufficiently to take on all these risks?

You might want to read page 6-12 of the Jubilee Notes Pricing Statement to understand fully the risk factors involved in puchasing this product before deciding whether it is suitable for you. While it has been marketed aggressively as a “100% principal protected product upon maturity“, it certainly isn’t a principal protected product.

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Some pointers (and views of Marc) from this short Marc Faber interview.

What’s your outlook from here?The cyclicals, energy and the material stocks, like steel and iron ore companies will come under pressure. The downside in banks is running out. There are other sectors that are more vulnerable.

What would you be buying?

We should be asking what are the sectors to be sold. He doesn’t see value in equities, commodities and real estate.

Are you saying we should be in cash?

Cash is not good as it is losing its purchasing power due to the “money printing” policy of the Fed.

On the surge in oil prices

He is not sure whether oil at US$140 is justified. There will be corrections along the way, but if the supply of money is being increased, the price will go up if supply is constant. The big upside is gone. Be careful about blindly buying commodities.

On the one investment if he had to make a pick

There was no commitment from Marc. His reply was that he would go for a holiday.

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I’m currently looking for private equity investors for a small scale property development project in Perth. The time horizon is about 12 months, minimum investment sum is A$75,000 and projected returns is 12+% p.a. If you like to find out more, please contact me and I’ll provide you with more information.

The current CPF minimum sum of $99,600 will go up to $106,000 from 1st July this year. This is the amount of CPF monies that you have to set aside before you can withdraw the rest. Upon reaching 55, the minimum sum will be moved to your retirement account, and you will start getting a monthly payout of about $960 from age 64 for the next 20 years.

The Medisave minimum sum will also go up from $28,500 to $29,500 while the cap on the Medisave contribution ceiling will go up from $33,500 to $34,500.

There is also a phasing out of the 50% withdrawal rule for those who are unable to meet the CPF minimum sum. From 1st January 2013, CPF members must meet the CPF and Medisave Minimum Sums first before they can withdraw their remaining Ordinary Account and Special Account balances at age 55.

The complete press release with details of the changes can be found on this page of the CPF website.

Going ahead, you can expect the minimum sum amounts to be revised upwards every year to factor in inflation.

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Following the decision by the Financial Services Authority (FSA) of UK to shut down UK Land Investments, Lee Manning and Carlton Siddle of Deloitte & Touche LLP, the appointed Joint Administrators of the company, released a report on their findings a few days ago.

Creditors (including plot owners) of the company are advised to read the report and see what are the options available to them. The report is confidential so I do not wish to reveal too much of the details here.

Just for your information, the sole owner of UKLI is a person by the name of Baljinder Chohan. He has a number of companies in other countries that have similar names to UK Land Investments yet they do not have a common corporate parent. In addition, there were a number of loans by UKLI to these other companies which were made on non-commercial terms.

If you happen to have any dealings with these companies, I would encourage you to do the necessary due diligence before making any sort of commitment.

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