Uncertainty and fear are friends of the buyer

30 Oct 2016

Dear Fellow Investor,

On Thursday, November 3-6, I will be in Singapore  for a company visit for possible investment, an investment briefing with Charles Lee the Income portfolio manager with Phillip Securities and on Saturday I will attend the Motley Fool Investment Conference.

Motley Fool Singapore  is an independent market analyst which  is not affiliated with any stockbroker and has a good track record since founding 2 years ago. It is an exclusive membership organization with the goal of maximizing profits for its members.

When they launched their service , David Koo, the CEO dressed up as a court jester with a fool hat.

He shared with the audience the reason for the costume and the company name

He shared that In the middle ages many countries were ruled by kings who had absolute power of life and death. The court jester or fool whose job was to entertain the king  was the only person who could tell the truth without fear of having his head chopped off.  

  

Since joining them a two years ago , Motley has told the truth. They focus on high quality companies that pay dividends and are managed by honest and focused managers.

Their team  looks for value that may be overlooked by the investment crowd.

They feel that there are certain  shares in Singapore, Hong Kong  and Malaysia that are currently undervalued due to extreme pessimism and uncertainty.

 Uncertainty and fear are friends of the buyer.

They also as we do look for consumer companies, with low or no debt, recurring income, an investment moat, companies which can raise their prices with inflation and a proven track record of sales and earnings growth.  They like simple easy to understand businesses. They avoid speculative highly geared companies run by cowboys.

I am sure Warren Buffet would recommend this service.  

The last week has been very quiet- low volume- low participation as we wait for the US election results on 9 November.

For the shares we hold, I do not think we will be affected much. Once the results are final- Trump or Clinton - the uncertainty will be removed and we should have a rally going into year end. The reason is simple. 

Fund managers will in concert all over the world push the markets up to get their performance bonuses which are payable based on the results of calendar 2016. 

Invest well and grow your wealth
Bill  

The best performing KLSE index since beginning 2016

22 October 2016

Dear Fellow Investor,

The best performing KLSE index since the beginning of 2016 has been the consumer index.

Weekly chart of the KLSE consumer index. Notice the last price bar. It closed higher as the budget was announced on Friday. It means the budget is friendly to consumer stocks.  

 

Let me share with you a personal experience and I am sure you can share similar experiences.  About 15 years ago, I decided to plant a a  mango tree in  front my house. I went to my neighbourhood nursery in Ampang Jaya and bought a 6 foot mango tree. I asked the nursery owner the cost of transport, fertilizer, and a labourer to dig the hole. The cost was RM 100.  I decided the price was reasonable so I agreed. Today the tree is bearing sweet mangos.

Fast forward to today: I decided to plant 2 more mango trees in the back of my house  so I returned to the same nursery and asked the same owner the price.  The Kuala Lumpur price is now RM 400 per tree- no discount- take it of leave it.  I left it and have decided to look for another nursery with a reasonable price.

I found one in Ipoh and the cost is only RM 50 per tree but that is cash and carry. l will plant them myself so at least will get some exercise and have some money left over.   Even paying the toll and petrol to Ipoh is still worth it.

 

Enjoying the sweet mangos is the same as enjoying the cash from  your quality dividend shares.

 

  

This in my opinion this is how to survive inflation. If possible, do not pay the asking price, live frugally, shop for the best deal and avoid expensive restaurants and  luxuries.  As  investors look for companies that deal with necessities that everyday people need  and can raise their prices with inflation.     

Most of the companies representing the consumer index can raise their prices with inflation. Examples of KLSE consumer index shares are Nestle, Dutch Lady, Padini, Panamay, QL Resources, Kossan and F & N .

In Singapore examples include QAF, SATS, THAI Bev, while in Hong Kong there is Chong Kong Hlds and in the US, Apple fits the bill.

Caveat: I hold some of these shares for myself and client but I am not recommending you buy any of these shares before consulting with your professional licensed adviser.
 

 

The whole world is expanding credit and money supply.  Paper money is just that paper money and based on the laws of common sense and  supply and demand we have more paper chasing real goods. It takes virtually no effort and low cost of capital to print billions of currency notes compared to producing rubber gloves, houses, milo, Apple I Phones etc.  

This means quality companies that produce real in demand goods will survive and prosper while paper fiat currencies will depreciate.  

If crooked Hillary wins the US election expect money printing on steroids. It might be prudent to buy some physical gold as an insurance policy. Even the Donald will print should he win. 

Invest well and grow your wealth,

Bill

Anyone autistic boy who can’t be touched or hugged by anyone has connected for the first time - with his new service dog.

Five-year-old Kainoa Niehaus travelled to the 4 Paws For Ability centre in Ohio from Japan after two years of waiting for an animal to become available.

His mum Shanna shared a photo of her son resting his head on Tornado.

"See this moment? I've never experienced a moment like this," she wrote underneath the post.

 

 

Reaction to news indicator

16 October 2016

Dear Fellow Investor,

Reaction to news indicator

One of the most powerful of market indicators is the reaction to news indicator. If price recovers or stabilizes on bad news it means the bad news is already discounted in the price. 

 

Daily chart of the Straits Times Index as of Friday 11 October 2016

 

 

After 5 consecutive down days the STI washed out the lows going back to June 2016 and then reversed to close higher. There was follow through to the upside following the spring.  This is the classic reaction to news indicator. Price stabilized and then went up on bad news.

The bad news was the Friday 11 October reported negative Singapore GDP numbers. 

 DBS Group Research:

"GDP fell by 4.1 per cent quarter-on-quarter in the third quarter, far more sharply than anticipated. Additionally, second quarter growth was revised down. With these outcomes, (third quarter growth) now stands at 0.6 per cent, the lowest since the global financial crisis of 2008/2009.

 

Based on the latest GDP numbers posted on Friday  Singapore  is now in recession and GDP has hit the 2008/ 2009 recession lows.

Now is a good time to pick up quality issues in this time of market fear, pessimism, doom and gloom and uncertainty. This also holds true for Malaysian quality shares.  Many great companies are trading at value levels.

How do we protect and grow our capital ? It is simple. We buy value at a discount and wait for the cycle to turn.

We are mindful to invest in companies generating rising cash flow, low debt to equity  and trade at historical low valuations. This gives us a margin of safety and allows us to ride out the volatility.

Our Singapore portfolios are heavily weighted towards quality equities that produce dividend income as well as potential capital gains. We have also included selective REITS that produce stabile and rising income. Our cash position is on average 20 %  

How has this worked? Since the beginning of 2016 the STI is down 3.1 % while our average STI returns are 4.3 % in Sing Dollars.  This is in a challenging environment where SGD money market rates are at 1 % and many retired Singapore citizens cannot survive on savings income alone and are forced to work in low wage, menial part time jobs.

Those retirees who had the foresight to build investment portfolios of high quality dividend shares/ Reits  perhaps do not need to work as the dividend income from their portfolios provide for their living expenses.  They can enjoy their retirement visiting the many world class parks, museums and other attractions as well as great nearby Asian destinations.

Invest well and grow your wealth, 

Bill  

 

 

 

 

 

The best time to buy is maximum pessimism and the best time to sell is maximum optimism .

9 October 2016

Dear Fellow Investor,

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. The best time to buy is maximum pessimism and the best time to sell is maximum optimism .

            "  Stock investor John Templeton (2012- 2008) "


Fund manager Ken Fisher repeated

Templeton’s quote on a Bloomberg interview Wednesday.

He reviewed the current uncertain pessimistic sentiment effecting most world markets such as volatile oil and gold prices, interest rate fears, high debt to GDP, low growth, possible collapse of Deutsch Bank in Germany, Brixit, media frenzy about the US election and so on.

He stated that the main stream media fuels the pessimistic, negative fires and scares the average investor who is content to leave his savings in a bank earning a tiny return. The below chart of money flow proves the point.




The above chart shows cash flows into US money market funds since early 2015 out of Mutual Funds (Unit Trusts) are rising.   It is evidence of pessimism by retail investors.

Although the KLSE has been well supported at current levels many retail investors are pessimistic and have reduced their equity unit trust holdings. They will regret this decision.   Selling fear is a wrong decision.

Bear markets/ recessions do not start on pessimism so in my opinion I take the opposite view.  There could be a good rally in the last quarter of 2016.

No matter who wins the US election, both will spend and keep interest rates low.  There is a strong seasonal tendency that after a Democrat wins the US presidential election the next year markets will go up.  Democrats are big borrowers and spenders.

Clinton is a democrat but Trump is also more of a democrat than a Republican so if Trump wins that should also be market positive.  Most of the big guns in the Republican Party have abandoned Trump to support Clinton. Even the Bush and Romney families are voting for Clinton.  This is why if Trump wins he will act as an independent with no debts to special interests and the Republican Party establishment. He will borrow and spend.

This could be more bullish than should Clinton be elected.

Oil prices appear to have turned.  The agreement between Saudi Arabia and Iran appears to have put a floor on the oil price at USD 50 per barrel.  Russia may soon join the group. This is bullish for the Malaysian and Singapore economies as higher oil prices will filter through the economy.
 

Since June 2015 crude oil has been congesting with no direction. Notice the higher bottoms since August 2016 and the absorption at the high. This in my opinion is selling absorption. After a challenge of a new high short sellers will come in to drive the price down. It looks like they are failing as commercial traders come in to absorb the selling.  To confirm this, notice the higher bottom in mid-September.  If price breaks out on high volume expect a run to USD 60.

If oil runs to USD 60:

We still need to be mindful of what companies to invest in as I have mentioned in my letters. Most of all avoid highly leveraged companies.

Invest well and grow your wealth,

Bill

 

 

 

 

Why should we buy Singapore?

 

2 October 2016

 

Dear Fellow Investor,

Why should we buy Singapore ?

CAPE RATIO

• The cyclically adjusted price-earnings ratio (CAPE) says Singapore is one of the cheapest markets in the world 
• The price-to-book ratio (P/B) is at a level that has historically been followed by huge market gains 
• The market’s dividend yield is one of the highest it’s ever been 

 

What is CAPE ?

CAPE is cyclical adjusted price earnings ratio which is a long term valuation model  adjusted to a 10 year business cycle.  

 Singapore is one of the cheapest markets in the world with a CAPE ratio of 11.5. For developed markets, only Spain, Portugal, Norway and Italy look cheaper. It’s also cheaper than Korea (12.7), Hong Kong (14.3) and Taiwan (18.2). Singapore’s shares are only slightly higher than China’s, which trades at a CAPE of 11.3. The 

CAPE is a long-term valuation measure. It doesn’t suggest that shares are going to bounce sharply in coming weeks. But a low CAPE represents good value if you have a long-term perspective, and markets with low CAPEs tend to outperform over time.

Price to book ratio

Price to book ratio is at a crises low . Notice the blue circles on the chart. The 1988, 1998, 2008 crises are circled.  Are things that
bad now ? Is Singapore going to sink into the sea ?

 

Dividend Yields

Dividend yields in Singapore are the 2^nd highest in Asia just after Australia.  
  Singapore are the 2^nd highest in Asia just after Australia.   

 

Summary

The CAPE ratio shows Singapore to be one of the cheapest markets In the world.  The P/B ratio suggests Singapore shares offer an unprecedented  undervalued opportunity while generous dividend yields offer income as well as protection during market volatility.

PEs averaging 12.3 also show an undervalued, unappreciated market.   Risks are high levels of debt and the economy at a standstill but history suggests now is a good risk/ reward opportunity.  

 

Singaporeans are resilient, hard working, thrifty, educated and business minded . My bet is recovery.

Phillip offers PGWA cash accounts that allow us to invest and manage  Singapore and Asian equity investments.  Please contact me if interested.

Invest well and grow your wealth

Bill