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What Goes Up Never Comes Down

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The headline reads : “The dollar was trounced once again in Asian and early European trade after a surprise tightening move by the Monetary Authority of Singapore sent the greenback plummeting against all its major trading partners”

Wow, impressive I thought. Our little island is really building a name for itself, so much so that our monetary policy decisions will actually influence the Forex majors.

Well, an amusing sidetrack that is. My interest lies in the reason behind our Government’s reliance on adjusting the SGD’s trading band to control inflation as compared to targeting interest rates. Fair enough, we are by and large an export reliant nation. Our domestic consumption has a high import content as well, which translates the fact that we are price takers in the international market and very susceptible to imported inflation. This has been the case for our monetary policy decision since the 1980s, but isn’t there a need to re look into the issue of combating inflation since the dynamics of our economy has changed in the past 2 decades?

Ultimately, the decision to use whatever monetary tools to curb inflation must have an overarching goal, which is to ensure that excessive price increases will not be a burden to its citizens and affect a country’s growth. With that in mind, I am not sure if using exchange rate targeting polices will be ideal Singapore. We just have to question ourselves, especially in recent years, what factors actually contribute to our inflation. Why is it that our cost of living seems to be creeping up on us every time we become complacent and think that we are comfortable?

I am not too certain that we can attribute a large percentage of our inflation on external factors anymore. With a large influx of foreigners, be it investors or genuine citizens hopefuls, one just simply cannot ignore domestic inflationary pressures like the rise in demand for housing and consumables. Secondly, there’s the Government’s fees and charges like your road tax, ERP,COE, utilities tariffs, and the list goes on, that is ever-increasing. The reason for it?  To control congestion and mange the population surge. One big bloody irony I tell ya especially when they are the ones who opened the floodgates. But I shall dabble more on that in the future.

Thirdly, rising land prices especially with  the government tendering state land to the highest bidder and worse, allowing  these developers to dictate prices for public housing. Again, fingers are pointed to the Government for exacerbating the already high property prices which contributes a huge chunk of overall inflation.

My concern is this. I acknowledge that a rise in the cost of living is inevitable, especially in a land scarce nation like ours. Let’s take property for example, which incidentally contributes the most to inflation.  As much as I want a massive property correction, I have succumbed to the fact that property prices will most likely hover around such prices or perhaps correct a little. I really don’t see it coming down to levels after the 1996 crash, based on the inelastic demand created by immigration and our government being that proverbial slut when it comes to big investor money. Yes, not even with the recent slew of measures to curb rising prices. The recent polices to me are a mere reaction to pacify the noise on the ground. Yes, it might soften the prices for public housing and mass market condominiums, but that’s about it. The bar of having an “affordable” home here is already set, if you can’t reach it, that’s your problem.  Sale of high-end properties like the Good Class Bungalows (GCBs) and the Sentosa Cove area will still remain well bidded just because of the current global economic landscape where hot money will continue flowing to Asia. The last thing that our incumbent will do is to take away the punch bowl from the party and be a party pooper.

But they must recognize that fact that Singapore is not just for the elitists who can blow millions in the casinos or dock their yachts over at our piers just for a party weekend. Singapore is also made up of the aunties who contributed to our economic success in the past, but collects cardboard boxes and sell them for a living now.  It is also for that young aspiring and working  adult trying to make living and start or support a family.

Ultimately, the arrival of the filthy rich to our shores will inevitably push up domestic inflation whether it’s because of their investments, or the high salaries. Hell, even the ever-increasing million dollar salary Ministers, despite good or bad times, does contribute to overall inflation. Who will suffer in the end? Simple. The middle and the lower-income groups which will basically spark a vicious cycle of debt.

Essentially, I am no economist that can conjure the best recipe to curb inflation. But I am sure that the exchange rate targeting measures has its limitations. There is only so much room that the SGD can be strengthened before it becomes uncompetitive for our exports. Thus, whether we look into interest rate targeting factors or introduce certain policies, something needs to be done. Again it begs the question: Is our government running Singapore as a city or a nation?

Written by Nabs

October 19, 2010 at 7:09 am

The More Things Change, The More They Stay The Same

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photo by Anonymous9000

Pardon the hiatus, in a bit of a trading slump. Sheesh.

We are in really interesting times. Internet bubble burst. Real estate crisis, credit crisis. A bubble decade I call it. I read with utmost interest articles on the fabrication of such bubbles, the implications and causes and one thing I find eerily common, that history repeats itself over and over again. And people generally do not learn from past mistakes. Call it herd mentality, greed, but it’s just God’s way of reminding us that at the end of the day, we are all just humans, susceptible to our very own weaknesses.

Looking around today as an average Singaporean in my late twenties, I am amused by how Singapore has transformed itself. Like many other young aspiring adults, the dream of making it big in this island is becoming a distant future. Not that I am not striving mind you. It’s just that when you see countless condominium showrooms filled with people as if it were a warehouse sale, or ridiculous amounts being splashed for public housing, you kinda feel disenchanted with reality. It begs the question, where is all the wealth coming from? It seems that more and more Singaporeans are feeling poorer in their own land. What do you do in such circumstances? You could either follow the Jones-es, leverage your wealth with real low bank interest rates at that moment and commit to that dream home/car or you could stay at the sidelines and be contended with life.

Wealth in today’s world is a very misused word. In the past, wealth is created by input, which can be in forms of labour or capital. This is what I term “real” wealth. However in this decade especially, a lot of wealth is created by perception and sentiment. This is best explained by the root cause of the recent great recession. The real estate in America was hyped up as an asset with limitless potential. Based on this perception and low interest rate environment, banks were willing to lend to each other as well as the the public. Similarly during the internet bubble burst where people actually believed that start-up tech companies will be an instant hit, bidding their value up to millions of dollars based merely on ideas that these companies had. No actual target market for its service, just ideas. Similarly, how private equity entities can leverage on cheap credit,  basing the debt on the assumption of potential returns of their existing and future assets to takeover companies, (just like what the Glazers did to my beloved football club). If the potential fails, it will lead to a spectacular failure immediately and what was built with blood sweat and tears in decades can be brought down in a blink because the fundamentals of the entity is laden with debt after the takeover.

Again,perception and sentiment rears its ugly head.

If you think that the recent great recession has taught us a few lessons, think again. It might be a sobering experience for that average man on the street, who lost his entire savings on an investment gone bad, or became unemployed. However, greed is here to stay…. for the people at the top at least.

Financial reform? What financial reform? Was there even a crisis in the first place? All the elaborate public hearings for the so-called “crooks” of wall street was just a staged show, because really, the recent American Financial Stability Act that was passed last week was a toothless one, teetering on the lines of reform but in essence little changes that will keep Wall Street happy. No breaking up of big banks that they promised, no curbing of the derivatives market that brought the markets to its knees, and yes taxpayers could still bear the brunt if these banks fail again. The funny thing is that, it was big money that caused the mess, and it was again big money that influenced the outcome of the reform. With 2000 lobbyists sent by Wall Street to Washington, the outcome was really imminent wasn’t it? Notice also in the recent G20 summit, all that’s emerged were rhetoric about reducing budget deficit and stabilizing the banks, but absolutely nothing on reining in excessive risk taking which was the core issue of the crisis just months ago. I wonder if these politicians have selective memory or perhaps on a more cynical note, a hidden interest/agenda?

As I mentioned in the beginning of the post, we do live in interesting times, a time where capitalism is being marketed as the most sound and effective system to preserve the status quo of the rich and excessive risk taking is here to stay. From a private equity firm who qualifies for a bank loan on the presumption of potential wealth that is not really there or European governments that do not meet the Maastricht criteria but pretend to do so, the sad truth is, the more things change, the more they stay the same.

Written by Nabs

July 2, 2010 at 10:49 am

The Free Market Rhetoric…

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photo by Limbic

We all know the  story of Robinson Crusoe. He survived a shipwreck and found himself on an inhabited island. In order to survive, he started gathering resources like wood, stone, plants, water, fruits in order to provide for his basic needs of food, shelter and clothing. To build a shelter, he then use wood and vines from a tree and debris from the ship wreckage to make a shovel. In economics, what Crusoe did was create factors of production, that is natural resources, labour and capital. Capital is comprised of any resources, other than land or labour, that may be employed in the production of goods and services. In this case, it would be the creation of the shovel to make his shelter. Thus far I have established what we call a very basic form of a labour intensive economy, which many third world countries are still relying on.

The story goes on when Crusoe rescued a prisoner (Friday) from native cannibals in the island. Friday became the second inhabitant of the island and he, similar to Crusoe when he first landed, needed to gather resources for food, clothing and build a shelter as well. Crusoe agreed to lend Friday his shovel, in return for 5 coconuts. What Crusoe just did was being a capitalist, that is someone who profits from the economic employment of his capital, even though he does no work with that capital himself. In the true sense of capitalism, instead of lending Friday his shovel in exchange of coconuts, Crusoe should encourage Friday to build his own shovel so that both of them can increase production. Two shovels can be twice as productive as one. Even better if Friday built an axe, so while he focuses on gathering wood, Crusoe can use his shovel to dig for food and they can basically trade with one another. Another economics concept of comparative advantage is introduced here.

However, the question is will Crusoe encourage Friday do build his own tools (capital) or will he continue to exploit his labour and benefit from it? This brings about the current social dilemma in many developing and developed countries. A good government will always encourage capitalism oriented towards the economic self-sufficiency of its citizens. It can do this by facilitating labour oriented toward the creation of equity, and by legislating other economic practices and institutions that do the same. That includes creating level playing fields, allowing for trade unions, curbing elitism or for that matter nepotism.

Essentially, capitalism thrives in all form of governance. The main difference is the ownership and control of the means of production. A communist government for example practices state capitalism, in which all or most means of production are owned and controlled by “the state”. We in Singapore are more familiar to Laissez-faire capitalism, or elitist/corporate capitalism, where most of the wealth is hoarded by small percentage of the population. A majority of us slog for corporations sometimes up to 12 hours a day, six days a week  but we don’t fully get to enjoy the fruits of our labour. Besides getting that salary or bonus, we are essentially building equity for the corporation, not for ourselves. In fact most of us are motivated to work in such a system not by wanting to build our own equity but because of fear of unemployment. This is what I call perpetual indebtedness to the system. A corporation that includes stock options as part of its compensation to employees is a good measure to alleviate corporate capitalism.

What inspired me to blog about capitalism is because I find the words” market forces” being used a bit too regularly whenever a member of our ruling party is  defending the party’s policies. Yes, while free market forces are needed to encourage capitalism and wealth creation, a government’s role is also to ensure that no corporation or wealthy individuals or themselves even hoard the means of production for individuals to build equity. To think of it, how much equity does an average Singaporean create for himself? We rent houses from the government and the banks as we live in a 99 year lease public housing and borrow money from banks in huge amounts to pay for the rent. Unless we fully own equity like private housing or a business, could we then be our own Robinson Crusoe and use our capital to create more equity. The relentless rise of cost of living, corporate bullying (Shen Siong anyone?), no minimum wage structure, ignoring speculation in public housing, cheap foreign labour are signs of Laissez-faire capitalism. Such form of capitalism can be detrimental to an economy as can be seen in the Great Depression under Herbert Hoover, where the government failed utterly to provide desperately needed economic sustenance to working Americans. Or the very recent Great Recession where too much wealth is hoarded in wall street in the absence of regulation and ethics,  and a fall in them posed a systematic risk to the economy.

Capitalism is great in encouraging ambition, but it also can create an increasing income gap and inequality  that can harm the very fabric of our society like a higher crime rate and more broken families. Our gini coefficient, which measures income inequality is already one of the highest among developed countries. A government should ensure that ownership and control of means of production is dispersed as wide as possible to promote enjoyment by the individual of the fruits of his own labour.  The very basic thing it could start with is by ensuring that income levels commensurate with the cost of living.


Written by Nabs

May 7, 2010 at 10:37 am

Banking Shenanigans

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photo by rick

A  second hand car dealer purchases a large quantity of Toyotas from a third world country at a fraction of the original price. He is grinning from the fact that he is able to resell them at a 200% profit margin. The only catch here is that these cars actually have problems with their braking system. Does he give a damn? Absolutely not, all for the name of profits.

A newly wed young couple walks into the shop one day.The car dealer, comes to greet them in his sleek looking suit and immaculate showroom. Within minutes, he is able to paint that image of the couple cruising down the highway, in their new Toyota convertible.  The couple is delighted and gives the thumbs up for the purchase. Only issue is their poor credit rating. “No worries!” exclaimed the owner. I can work it out with the finance company. What’s most important is your comfort and pleasure. Within seconds, he whips out the contract and the deal is sealed.

This dealer is a very enterprising  guy. He is constantly seeking other methods to earn money as well. In this world of fantasy, he is actually able to purchase an insurance on the cars that have been sold.  Never mind that ownership has changed hands already. “What an awesome product,” he thought.  He sure knows that the cars he imported have faulty breaks. Sooner or later, an accident will happen and he will be the sole beneficiary of the sum assured! In his glee, he purchased an insurance on the Toyota that the young couple bought. His sum assured is worth 5 times its sale price. Yes, in such a fantasy world, it is possible.

Only that in recent times, such fantasy is actually a reality exclusive only to the filthy rich network of banks and hedge fund companies.

Being able to purchase an insurance on something you do not even own, now that’s taking a page out of Las Vegas.  The logic of insurable interest gets thrown out the drain, because you are essentially able to place a bet on the failure of any principal.  However, when the principal does crash, and the insurer is unable to pay, this will trigger a series of catastrophic financial meltdown that we have witnessed in the last 3 years.

Welcome to the world of banking, where syndicated gambling is being substituted by jargon like credit default swaps and financial engineering. Bullshit if you ask me. The car dealer example I highlighted above failed on the basis of ethics on many fronts. I guess if car dealers were involved in such shenanigans, the law would catch up with them real quick. But just because these bankers have offices in prime districts, dress in fine suits, educated in ivy league schools, earn huge pay cheques, come from esteemed families, the so called creme de la creme of the private sector; they are spared the punishment time and time again. Oh ya, don’t forget that they spend millions on lobbying  as well.

photo by Mike Licht

Selling  products called collateralize debt obligations (CDOs), where mortgages are packaged into so call securities to be sold as an investment is fine.  In fact CDOs have been a source of funding for decades. However, when the underlying collateral is trash, that’s where the problem lies. Now, these bankers  know damn well that the housing market was going to implode. Why? Because I reckon that they essentially fueled the greed cycle.   In the years of irrational exuberance, the average American was living way above their means (greed factor number 1). This was fueled by the fact of low borrowing interest rates employed by the FED.  However, that cycle could have ended if the smaller banks and mortgage houses kept lending conditions stringent. However, they  did not seem to  mind lending the money even though the borrowers  had poor credit ratings or give collateral loans pegged to inflated housing prices. Reason being they knew that they can offload these loans to bigger investment banks at a price. Hence, any loan is a good loan (greed factor number 2). These investment banks gave a whole knew dimension to triple A bonds as they sliced and diced these sub prime loans to create CDOs which can be sold to investors worldwide (greed factor number 3). And then came along credit default swaps which the investment banks created as well.  The ability to place a bet against all these trash without even owning them, (greed factor number 4).

The investment banks defense argument was that they were simply the middleman, taking both sides of the fences. However regulators think otherwise. They were playing God. They flooded the financial system with all their self made time bombs and were pulling the strings on both sides to their own benefit.

Whatever happened to ethics? I spoke to an American banker involved in the structuring of such products once and he said as long as he is able to give his family a good life, he does not question what he does. It’s just a job.

That’s real sad. But, am I being too idealistic?

I sure hope that the reformed SEC can nail Goldman Sachs. People were sleeping for too long. Bankers were earning exorbitant profits at the expense of others, creating financial weapons of mass destruction while the regulator, SEC was  surfing pornography at work. Yes, I kid you not. I do not care if the law suit is politically driven or not.  It’s been almost 2years, and nothing concrete has been laid out yet to regulate the banking sector. Something has to be done. Some can argue that by removing  proprietary trading away from investment banks, the quality of investment advise will be compromised.  Yes, it’s true, but now, the question is not about the quality of performance. Wall street has the smartest brains in town. The crux of the issue here is ethics. If these smart bankers let greed rise above all, then regulators just have to limit the kind of power they have and sift out the bad from the good. It might be a painful process in the short run, but if the financial sector gets so powerful that it poses a systematic risk to the entire fabric of the economy, a thorough overhaul of the financial system got to happen.

It’s obvious. When you are a banker surrounded by millions of dollars on a daily basis, and stressed by perpetual performance targets, you will loose the empathy for people ‘s money. Never mind whether it’s  corporate clients or individuals.  You forget that people actually work and slog for their entire lifetime to earn the money which they entrusted you to. Such ramifications can be monumental as we have all witnessed.

photo by Mike Licht

Capitalism is only effective when proper regulation and above all, ethics is present. The idea of socializing loses and privatizing profits must end. Wall Street is actually earning record profits in history, at a time where they also squandered the most in history. It’s just getting plain ridiculous.

Do read this riveting article on Goldman Sachs by the Rolling Stone magazine.  They screwed main street, just like how they did Greece.

Hmmmm, back to our home soil, do you now see the irony that our casino is being built right smack in front of our financial district?

Written by Nabs

April 26, 2010 at 11:10 am

Capitalism in Crisis

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Chart by SASI Research Group

You cannot use debt to solve debt. Which is why I am still baffled by the sustained rebound  of the stock markets around the world since March 2009. However, gains in the financial markets does not translate into improving economies.  In America, Wall Street might be laughing at the expense of Main Street as unemployment is still hovering at 9% and foreclosures are still at all time highs. ( I”ll cover something called corporate capitalism in another post). To add salt to wounds most banks and private corporations are still deleveraging and not lending money into the system to stimulate growth.

Look at the chart above, scary huh. Something’s got to give when government debt is so high that no amount of fiscal spending or  monetary measures like interest rates will be effective anymore. Just look at Japan as a classic example, it’s current debt is around 200% of its GDP. European countries that are in severe deficits like Greece and Italy are not far behind at around 110%. The United States stands at around 60% to 80% debt to GDP ratio.  A time will come  for austerity and that is where the real pain will be felt.

Singapore, surprise surprise is at 117%. But unlike most countries, our debt stems mostly from internal  sources like government bonds for liquidity sake and CPF payouts, which I reckon  is alright. It’s the external debt that will kill you and catch you with your pants down. At least we are not addicted to debt. Can’t say the same for it’s citizens though.

It’s a real interesting time that we are living in. There are so many differing views out there by various economists on the aftermath of the Great Recession. Only time will tell.

Written by Nabs

April 14, 2010 at 9:21 am

Salesman VS Advisor

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This is a long overdue entry. Something I am so passionate about, and hence, should definitely be in my journal to cast my thoughts in stone.

Before I go on, a disclaimer: I might be over generalizing in this entry, but I feel its justified purely based on my experience and discussions with fellow peers.

Having chosen the path of financial planning at a young age, I am now somewhat dis chanted and disillusioned by how the industry has evolved. I like to emphasize the word chosen, as i realize that with entry levels so low in the industry, it seems that this career path is considered an alternative, or a last resort even. Ah yes, MAS did introduce some licensing papers, but who would trust a doctor if they could complete a PHD in a couple of months? 4 years in the industry might not see long to many, but hey, at least I am not myopic, or perhaps I chose not to be. Whatever happened to ethics in work? The thing I observe the most is that people do NOT question their work enough. How does it add value to a society? Is it what they  believe in? For some, work is work, as long as it pays the bills, feed their material desires, supports the family, then that’s it. Coming back to the financial planning industry, I am jaded by the fact that a general consumer does not see it as a professional job, but more like a salesman.

During the onset of the 21st century, along with the ridiculously loose monetary policy of America, Singapore was also prospering well. On came the liberalization of the financial industry. More financial instruments like mutual funds, investment linked plans were introduced to the markets. Coupled with MAS decision to allow CPF holders to participate in collective investment schemes, the market simply took off. The bull run which kicked off around 2003 also fueled the appetite for risk.

Of course when that happened, the banks did not want to miss out on the party. Hence, traditional banking models of deposits and lending expanded into a world of unit trusts, insurance, structured deposits, equity linked notes, bonds etc. A whole new revenue model brought about realization to the banks that such products brought about lucrative profits. People associated with the sales side of a retail bank were suddenly flushed with commissions, recognition and bonuses. One would think that in a traditional bull run, a market would consolidate after 2 years or so. But that did not happen. That triggered a mass recruitment of so called bankers to effectively bring in more sales. With banks coming into the picture, an industry which fundamentally should be driven by advice became a purely sales driven one. I always liken it to selling fishes in the market. Prudent advice on cashflow management, risk control,  became a story telling session of the hottest investment or insurance product in the market. The banks were happy, the insurance companies and asset houses were happy, and the clients were happy. From a client’s perspective, during the good times, less questions will be asked, advice is cheap, and all they needed was a sweet tongue and a transactor. The banks duly obliged.

Fast forward to today, the major investment banks blew up in spectacular fashion mainly because they took unwarranted risks. But to me, the real pain comes over at the consumer banking side, where hard earned money of the young, old, educated, retired simply vanished. Loads of law suits between consumers and banks came about. Hell, even our property tycoon Oei Hong Leong was not spared. He had a tiff with Citi Private Banking. Who’s to blame? A deadly concoction  of excessive risks, chasing high returns, sales driven bankers/advisers contributed to what Alan Greenspan terms as “irrational exuberance.”

I believe that the position personal bankers, financial advisers, relationship mangers are so loosely used by financial institutions that it does not matter anymore. If banks and other financial companies adopt such a myopic approach to financial planning, than we might as well be regarded as sales executives instead. MAS is naive to assume that by imposing compulsory training hours and system to the industry, a strong ethical culture will evolve. At the end of the day, most banks only focus on the bottom line. With a culture of chasing targets and high commissions attached to products, prudent advise is often compromised.

If Singapore truly wants to become a global financial hub, then I suggest it takes a page from the developed countries like the UK and Australia, where fee based advising is more prevalent. In fact in the UK,  the commission structure will be siphoned out in 3 years. MAS response to the current crisis is to reduce commissions, alter KPIs to be less sales centric and increase basic pays for the bankers. It remains to be seen whether this is merely a knee jerk reaction to appease the general public for the short term before the banks are back to their shenanigans again.

Which do you prefer? A salesman or an adviser?

Stage Advisory Process Commission-based Fee-based
A 1. Objectives
2. Fact finding
3. Analysis
4. Recommendation
Nothing paid here Majority of the fee earned here
B 5. Implementation/ product purchases Majority of the commissions paid here Minority of the fee earned here
C 6. On-going review Commissions repeatedly paid here for sales of unnecessary products Fees earned here for providing on-going service

Written by Nabs

September 23, 2009 at 10:25 am

So, you want to trade?

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I cannot imagine that a book on Forex would teach me life lessons. But that is essentially what trading is all about and why I have became so fixated or passionate about it. It used to be solely for the money, but that will lead to greed, which translates into failure.

I was put backed into perspective by a certain person close to me about doing it because of the passion and not being so myopic about earning quick money. Trading is all about achieving financial freedom. That’s the target. Hard work, discipline and focus are the means. It’s all about creating a profitable system and having the discipline to stick to it.  So here’s the plan for the next 6 months,

1) Acknowledging unconscious incompetence
2) Translate it into conscious incompetence
3) Make a change to conscious competence
4) Repeating it till I arrive at unconscious competence

In achieving that, I have purged myself of my bad habits and replaced them with productive, automatic good habits that allow me to perform successful actions without thinking about them.

Failure is like cancer, and you don’t treat cancer by cutting it out, cos by then, it will most probably be too late. You treat cancer by preventing it and you treat success by creating good habits from the beginning. This way, you are preventing failure. As you trade, you will need to get into the habit of thinking through all the details potentially involved in that trade. You will need a checklist. You will need to get into the habit of creating a trading plan and maintaining the discipline. That habit forces you to think before you act. This where unconscious competence comes in, avoiding impulsive, emotional actions that generate unsuccessful trades. Ignorance will be the death of traders.

And yes, I got this idea from a Forex book. Real applicable to life if you ask me..

Written by Nabs

May 20, 2009 at 4:24 pm