Singapore: Follow Its Savvy and Profitable Money...

By Tony Sagami

Singapore is an amazing city. Well, it is actually a state as well as a city. Like Monaco and Vatican City, it is a small but powerful country.

Singapore is 26-square-miles in size with roughly 5 million citizens and is located at the southern tip of the Malaysian Peninsula, just 85 miles north of the equator. It is the fifth-wealthiest country in the world as measured by per-capita GDP.

Singapore has become one of the chief financial centers of Asia and is quickly becoming the Zurich of the region with its army of private bankers catering to the Middle East, China, and India's new multi-millionaires. As a result, Singapore has amassed some of the brightest minds in the investment business.

Those bright minds aren't limited to the private sector. Unusually, the Singaporean government has proved to be one of the best investors in the world through its two sovereign investment funds, Temasek and the Government of Singapore Investment Corporation, also known as GIC.

Temasek Holdings is an investment company owned by the government of Singapore, has a 350 person staff and manages $172 billion today.

The Government of Singapore Investment Corporation manages Singapore's foreign currency reserves, the third-largest sovereign wealth fund in the world with $330 billion.

With a network of eight offices in key financial capitals around the world, GIC invests internationally in equities, fixed income, foreign exchange, commodities, money markets, alternative investments, real estate, private equity and infrastructure.

Temasek Holdings has posted an average 16 percent annual compounded return since 1974.

How good have these two entities been at investing? Temasek has averaged a 16 percent annual compounded return since its inception in 1974.

Heck, in just the last five years, Temasek has grown its portfolio from $90 billion to $172 billion.

Over the past 20 years, GIC has averaged a nominal annual rate of return of 5.8 percent. That sounds like a lot less than Temasek, but GIC is required to manage its dollars more conservatively.

I consider its performance even more impressive given its large portfolio of fixed-income investments.

As you can see, the men and women running Singapore sovereign wealth funds know what they are doing. And it is a powerful reason to pay attention to what they are buying and selling.

Singapore Smart Money Made
Bundles Off the Bank Crisis

One sector they nailed on the head is American banks.

At the height of the credit crisis, financial stocks were getting crushed. Companies such as AIG, Lehman Brothers, Merrill Lynch, Fannie Mae, MBIA, and Citigroup were on the verge of insolvency.

Conditions were so severe that the government created the Troubled Asset Relief Program (TARP) and doled out $700 billion of troubled assets — such as subprime mortgages — from American banks.

Even with TARP and billions of bailout dollars being given away, banks continued begging private investors for money to replace the trillions they lost from subprime mortgages write downs.

One of those banks was Citigroup, whose shares plunged to below $1 a share on March 5 and many pundits were forecasting that Citigroup would cease to exist, like Lehman Brothers.

Despite that gloomy backdrop, the Government of Singapore's Investment Corporation made a $6.9 billion investment in Citigroup preferred shares in January that were convertible into common stock at a conversion price of $3.25.

Brilliant move.

Since then, U.S. bank stocks have zoomed, and GIC is now saying "enough" and cashing in a big chunk of its Citigroup shares for a gigantic gain.

GIC converted its Citigroup shares into common stock on Sept. 11 when its shares were $4.61, giving it a huge open gain. On top of that, GIC was also paid a handsome 7 percent dividend the whole time, too.

That $6.9 billion investment ballooned to 9 percent of Citigroup's outstanding stock, so GIC sold roughly half its holdings and pocketed a $1.6 BILLION profit. Pretty darn impressive for a six month investment!

GIC isn't finished with Citigroup yet. It owns 5 percent of Citigroup's stock and has another $1.6 billion open gain waiting to be taken later.

GIC's Uncommon Wisdom

GIC stepped up and made a big investment when nobody else wanted to touch bank stocks and is now raking it in. That's what I call uncommon wisdom.

Not only is GIC cashing in on its Citigroup shares, it also took a pass on other banking stocks. GIC passed on a $5.9 billion private placement offering of UBS shares sold by the Swiss government in August.

The Singaporeans loved big bank stocks earlier this year, but have turned into sellers of bank stocks now.

What I am suggesting for you is some monkey-see-monkey-do if you own any big banking stocks, just like Singapore.

I'm talking about companies such as Citigroup, Bank of America, JPMorgan Chase, Barclays, Deutsche Bank, UBS, Wells Fargo, KeyCorp, SunTrust, and U.S. Bancorp. They are ALL sells to me.

The banking industry is far from healthy. So far this year, 95 banks have failed and sucked up $892 million of the FDIC's assets.

Sheila Bair, the chairwoman of the FDIC, expects things to get even worse. She expects bank failures to continue "at a pretty good clip this year and next." That's probably because as of June 30, the FDIC identified 416 banks out of 8,195 nationwide are "undercapitalized."

If GIC and FDIC are right, you could actually profit from falling bank stock prices by investing in an exchange-traded fund, like ProShares Short Financials (SEF), that is designed to profit from falling stock prices.

SEF is designed to return the inverse of the Dow Jones U.S. Financial Index. These inverse ETFs aren't for the faint of heart though because you will lose money if bank and financial stocks continue to rise.

If the smart people at Temasek and GIC are right, this may be a good time to get the heck out of bank stocks.

Regards,

Tony