The Trump rally has left town.

29  Dec 2018

Dear Fellow Investor,

If you think of getting out of equities now, here’s a look at the S&Ps performance after a 10 % + down quarters since WW 2. This chart is from Beaspoke premium.com

Quarter	% Change	Next Q	Next 2 Q
9/30/1946	-18.83	2.27	1.4
9/30/1957	-10.45	-5.73	-.75
6/29/1962	-21.28	2.78	15.25
6/30/1970	-18.87	15.8	26.72
12/31/1973	-10.2	-3.66	-11.84
9/30/1974	-26.12	7.9	31.9
9/30/1975	-11.89	7.54	22.53
9/30/1981	-11.45	5.48	-3.6
12/31/1987	-23.3	4.78	10.69
9/28/1990	-14.5	7.9	22.6
9/30/1998	-10.3	20.87	26.4
3/30/2001	-12.1	5.52	-10.29
9/28/2001	-14.99	10.29	10.23
3/31/2009	-11.67	-11.67	32.49
6/30/2010	-14.3	10.72	22.02
9/30/2011	-11.8	11.15	24.49
9/30/2018	-15.5	?	?
Average	-13.13	11.28	15.93
Median	-12.54	10.69	23.45

Although the KLSE and SGX are not closely correlated to the S&P  this table shows that there is a high probability that after a major stock market  correction prices will be higher in the subsequent two quarters.

Merry Christmas

So much for the year end Santa Rally! It seems that Santa’s sleigh, this year, has been pulled by a team of White House donkeys rather than ultra-fit reindeers.

The confidence that had once driven global markets ever higher has now been replaced by utter disbelief. Gone is the mantra of buying on the dips. Instead some experts are now advising to sell on the rallies.

The Trump rally has left town. In comes the Trump slump.

But just as the hype over the new administrations promises was greatly over egged, the pessimism over its handling foreign affairs, its clumsiness in negotiating trade deals and its ineptitude in coping with America’s annual budget looks to have been overdone, too.

The market now reckons that the outlook for the global economy is uncertain, and borders on dire. That is understandable, given that the US administration appears to lurch from one crisis to another….

…. and moments of apparent calm are quickly punctuated by public relations calamities and embarrassing high-profile resignations.

Once the confidence has gone, it is very hard to regain.

Just look at the well-intentioned but ham-fisted attempt by the US Treasury to regain the trust of the market by reassuring everyone that banks have enough liquidity in the event of a crisis.

The thought of a banking crisis had never even crossed the market’s mind. After all, US banks had undergone and passed the most stringent of stress tests. But now there are real doubts, given that this administration has spun more yarns than the Grimm Brothers.

Stock market is confidence is in short supply. That can have an impact on share prices, which in turn can affect the price-to-earnings ratio.

But provided earnings are unaffected, it means that we can buy more of the shares we like at lower prices.

Warren Buffett once said: “When investing, pessimism is your friend, optimism is your enemy”. He’s right. But it requires courage.

Commentary by David Kuo of Motley Fool Gold Service

Invest well and grow your wealth
Bill

Critter of the week is a grouper who we visited in the Underwater World in Langkawi last week. The sign said they can live up to 60 years.

Recap of 2018

22  Dec 2018

Dear Fellow Investor,

In this report, we recap 2018 and outlook for 2019. The year has been dull for global equities and this has made it difficult for our portfolios. However ; having taken a defensive stance we have beaten our benchmarks.

The outlook for 2019 is equally tough and the benefits of being cautious will be evident in the coming year and I will take you through the regional differences and effects on shares we hold in emerging markets such as Malaysia, Thailand and Singapore.

Our focus should be damage limitation which is our highest priority. This does not mean sell everything. It means owning assets that will survive now and thrive later plus collect dividends.

After a long bull run, we can see tougher times ahead for developed markets such as the US and Europe. . I have been cautious  since early 2018 as money has been moving from developed markets towards Asia where shares are not as overvalued.  

There are many solid companies in Malaysia/ Singapore  trading at very reasonable valuations of below 12 PE  compared to the popular FANG stocks such as Facebook and Amazon. Amazon before its 40 % drop had a PE of over 160.  HK Land traded in Singapore in contrast has a PE of only 5 and a price to book of 0.7 

They own quality properties in Hong Kong and Singapore that have occupancy levels of over 98 %.

They are managed by Jardine-Matheson   a reputable property company.

With a price to book of 0.7 which is the lowest since 1998  we have a margin of safety.  and limited downside. While we wait for trade and political uncertainties to be resolved we collect dividends and look forward to revenue increases.

HK Land retains 50 % of their earnings for growth and they are expanding into other Asian markets such as Cambodia, Thailand and Vietnam.

Our research team continually searches for undervalued high quality companies which offer a margin of safety plus dividends. This is our plan for 2019. We find shares with limited downside but a potential for large capital gains.

Dolly and I wilI be in Langkawi from 22-27 December to recharge our batteries and visit some attractions such as the eagle sanctuary and nature reserve. You can always contact me via email or WhatsAp.

Invest well and grow your wealth, Bill.

Critter of the week is a zebra from South Africa. The reflection is interesting.

Reasons of company insiders are buying

15  Dec 2018

Dear Fellow Investor,

The background and why company insiders are buying

Paul Tudor Jones, a billionaire commodity and futures  trader was interviewed on Bloomberg recently and asked about his market outlook. He gave an objective and balanced view based on the trend of world commodities.

The CRB index  represents 19 global commodities including energy, agricultural, precious and industrial metals and soft commodities.

As you can see in the above daily chart, global commodities have been in a fierce downtrend for more than 40 days. They are trading at multi year lows.  Jones said that this reflects a global slowdown and deflation.  It means that if the US Federal Reserve raises interest rates in 2019, it would possibly trigger a world wide recession and stock market collapse.  That is why he believes there will be no US interest rate rises in 2019 and a rally of between 10 and 15 % in world stocks.

All individual markets can be manipulated- witness individual shares or crude palm oil -but it would be almost impossible to manipulate all 19 commodities in the CRB Index. That is why the trend of the CRB reflects reality and truth versus  media hype and political  propaganda.

As commodities world wide go lower, it means deflation is a risk and with high levels of private and public debt it makes it more difficult to service the debt. This is why I recommend quality value shares with sold financials . We must avoid highly leveraged companies.

Higher interest rates makes the debt problem worse and that is why the Federal Reserve will according to Jones put interest rate rises on hold for 2019. They may even start QE again.

Doom and gloom is the dominant emotion at present The fear index is at an extreme.  Retailers are dumping shares  while company insiders continue to buy back their shares. Since 2009 we have had over 62 share market corrections of over 6 % and we have stayed the course  and recovered. Odds favour a recovery after this correction.

Invest well and grow your wealth

Bill

Critter of the week is:

the 'Remarkable Award' category  by South African photographer William Kruger -- and is entitled "Vulture and Jackal". 

The end of easy money

8 Dec 2018

Dear Fellow Investor,

The end of easy money

Money Week, November 2018.

After 10 years of QE and, low to negative  interest rates , the party is ending.

Popular growth stocks such as the Fangman stocks have been hit hard.  These include Amazon, Facebook, Netflix and Google . These are all good companies but they are grossly overvalued in terms of cash flow and, price earnings ratios. These shares are all hyped by the financial media and held by most institutions and asset managers.

For the last 5 years value stocks  have underperformed growth stocks but that cycle is changing. It was possible to borrow money at less than inflation to fuel growth. That window is closing.

With interest rates rising and credit being squeezed, those highly leveraged companies are running into trouble.  General Electric is an example. In year 2000 GE was trading at USD 59.60  per share. Now it is trading at USD 7.01.   GE used to be the largest company by capitalization in the world and now it is facing disaster and possible default. What happened ? They took on too much debt -over USD 500 billion  to make questionable acquisitions and  with rising interest rates they are in trouble.  Incompet and ego driven and empire building managers did not help.

Moving forward we need to allocate to only the strongest and well managed companies that offer value.  Value for me means an asset that offers a steady return, recurring revenue, and a reasonable dividend. Value is money now while growth is hopes and dreams  of the future.

There are some good value opportunities in Malaysia, Hong Kong, Australia and Singapore but they are generally ignored and off the radar screens of most brokers, the media and the public.

My team is constantly searching for these and despite all the negative sentiment and bad news we do come up with opportunities from time to time.

Invest well and grow your wealth,
Bill

Critter of the week is a rhino

Today's first photo is another one from the Siena International Photo Awards -- and was taken by Khaichuin Sim in Masai Mara National Park in Kenya.   "I was taking an early ride out from the camp, searching for the Great Migration, when I saw a rhino from far away standing beside a tree. The backlight from the early sun was too strong, so I took a silhouette instead".

The Dividend Machine by Bill Spretrino

1 Dec 2018

Dear Fellow Investor,

Last week, I listened to a pod cast by Bill Spretrino who writes The Dividend Machine, a newsletter which focuses on value investing in US Stocks. Bill walks his talk and personally invests in his recommendations.

For the last 10 years I have subscribed to his letter and his performance has averaged 17 % a year which includes dividends.

This year the market has been painful to him as he has given back substantial profits  in the recent correction.

One such share is Apple which is a core Dividend Machine  holding. He originally recommended Apple at USD 90 and it went to over USD 230. The correction has pulled it back to a recent low of USD 170.

He said on the podcast to his worried subscribers ignore the onslaught of Apple bad news such as slowing   Phone sales, China tariffs, Brexit, tech  share collapse  and focus on  value. Apple is now trading at a forward PE of 12.7 which is unheard of for a quality technology share

At the current price Warren Buffet and 3 fellow billionaire investors are adding more Apple to their portfolios.

On the home front, we have been holding Inari for the last 3 years bought at a split adjusted price of 0.95 sen It is currently trading at 1.60.  and some clients are worried.  Inari is a play on Apple as they supply parts for Apple phones.  Should Apple collapse Inari will collapse. My view is since Warren Buffet continues to add to his Apple position I am not worried.

A recent position I bought was Genting Malaysia. The punitive gaming tax rise of 10%  and the cancellation of the Walt Disney theme park project were shocks to the market. As 37 % of Genting Malaysia shares are held by foreigners and sentiment in world markets is weak, foreign sell algos hit the market  and have driven the book value to 0.87, a level last seen 10 years ago during the Asian financial crises.  

I believe Genting will find another partner to develop the theme park . Genting owns the land . In any case 87 % of revenue comes from the gamblers and only less than 10 % of revenue comes from hospitality and theme parks.  Most people go to Genting to enjoy the great food, the headline shows and the gambling. These parts of their business are not affected.

If they want to take their children to a theme park they can go to Sunway Lagoon and other attractions.

The big uncertainty now is the trade war.

In my opinion should there be a positive trade resolution  markets will  breathe  a sigh of relief

The chairman of the US Federal Reserve, Jay Powell heeded Trump’s threat  about raising interest rates and said he may slow down the pace of interest rate rises. The Dow went up over 1000 points on Powell’s statement.

Invest well and grow your wealth
Bill

Today’s critter is a red squirrel from the UK

Views of Dr Chan of Share Investment Research in Singapore

24 November 2018

Dear Fellow Investor,

I will share some views of Dr Chan of Share Investment Research in Singapore on 19 November 2018.

“Expect heightened volatility leading to Trump-Xi meeting next week.

“China just launched its inaugural China International Import Expo in Shanghai where Xi underscored the event as evidence to China’s desire to further open up its markets to foreign goods and services.

During a visit to Singapore China’s Vice President Wang Qishan also shared similar rhetoric, stating that China is ready for US talk on an acceptable trade solution.

Over the last few months China’s response to the US confrontation was to shore up its domestic economy. The intention is to engage in infrastructure development, reduce import tariffs and raise domestic consumption.

With a population of 1.3 billion citizens, China will in time be the largest consumer market in the world. China businesses are tapping into the growth of their middle class.  As Asian businesses have a better understanding of Chinese culture and society they have a better chance in penetrating China’s promising markets.

Currently, China has the highest foreign reserves in the world after decades of amassing foreign assets, China with these financial reserves will withstand the US trade confrontation.”

As Dr Chan said there will be  short term volatility but longer term markets should stabilize.

This will benefit our shareholdings which offer stable dividends, recurring revenue, low debt, reasonable valuations  and the ability to leverage on the China consumption story.

Should there  be a positive resolution between Trump and Xi next week expect a Christmas rally in world markets.  If not there could still be a rally as all the trade war  bad news appears to be priced in.

Invest well and grow your wealth
Bill

Today’ critter is the impressive Langkawi eagle guarding the port.  Over the Christmas holidays we will take  a holiday to Langkawi and visit the eagle sanctuary as well as other attractions.

Canary in the coal mine

17 November 2018

Dear Fellow Investor,

Canary in the coal mine

General Electric was once the world’s most valuable company. It is now struggling to survive. The company’s leverage is extremely high  The company’s bonds have taken a hit and some of their bonds have been downgraded to junk status.

Weekly price chart of GE.

The problem is debt which was used to make disastrous acquisitions and fund over generous company pension plans, and high salaries and bonuses to executives.

This is why I am very wary of companies who take on high debt to expand.

This is why in the current environment of tightening liquidity and trade uncertainty,  my focus is on value rather than growth.

I want streams of recurring revenue, low or no debt and prudent conservative management.  The companies we hold meet this criteria and will survive the volatility.

Growth is a bet on the future while value is based on the present.  Witness the present collapse in the FANG stocks in the US.(Facebook, Amazon, Netflix and Google)  These are all great companies but their valuations are at extremes  It is not how great is a company but the valuation and the prudence of the management  that is important.

One good piece of news was reported on Bloomberg: Chairman Powell commented in the latest minutes of the Federal Reserve that the  housing market is slowing down in the US and he may pause his rate tightening policy. Also President Trump is meeting  Chairman Xi at the end of November in Argentina  to discuss trade. Should there be relief on these 2 fronts expect an end of year rally in world stock markets.

Invest well and grow your wealth
Bill

Critter today is a thirsty lion from South Africa.

Lions kill more than 95 per cent of their prey at night, and spend the majority of the day resting. Although they drink readily when water is available, they are also capable of consuming sufficient moisture from their prey and plants - making them perfectly adapted to their arid landscape. Yet despite this, lion numbers are decreasing significantly. 

Drain the Swap

10 November 2018

Dear Fellow Investor,

One major uncertainty has been removed that has effected markets worldwide. The US mid term elections are over and Trump’s pro growth low tax low regulation economic agenda will continue.  The Dems were unable to flip the senate  so it is impossible for them to impose their socialist anti business agenda.

In a vote of confidence in Trump’s pro business policies ,  Warren Buffet bought over USD 1 billion of (BERK.B) Berkshire company stock. We hold this stock for some of our PGWA accounts.

Many other company executives worldwide are heavily buying back their shares in the current world market correction.

On the local front there are a few positive signs amidst the cloud of doom.

Japan has extended a multi billion line of credit at just 0.62 interest rate. This will allow Malaysia to retire borrowing carrying an up to 10 % interest rate made by the previous government.

It shows Japan has confidence in a Malaysia recovery.

Anecdotal feedback from some of my business clients is positive for recovery. One client told me if BN had won he was planning to move his business to Vietnam.  Now he will stay.

Dr M is draining the swamp. Every day the news reports authorities catching another swamp creature

A metaphor for what is happening in Malaysia is a farmer planting wheat in a barren field.  With proper maintenance and rain, the wheat will grow and in time there will be a bountiful harvest.  At first the progress is slow but in time green shoots will emerge.

Our value/ dividend investment strategy saved us in  the 2007/ 2008 world market collapse when our share portfolios  dropped over 28 %. Those who held on continued to collect dividends and our equity went on to new highs.

The situation in 2007/ 2008  was much worse: unemployment rising, recession, housing market collapse and fears of a possible depression. None of this is true now.

Invest well and grow your wealth

Bill

Critters of the week are the swamp creatures

Emotional cycle dominating world markets.

3 November 2018

Dear Fellow Investor,

Last week I touched on the present emotional cycle dominating world markets. Fear is dominating but there is evidence of stabilization. Lets look at the news flow in the US which drives world markets and some local fears:

Fear                                    Reality

Trade war	Trump is now talking with China
Interest rates moving up	Interest rates still low from a historical perspective
Liquidity squeeze	Fiat money allows central banks to create liquidity out of thin air
Mid term elections polls suggest Trump will lose	Majority off polls suggested Trump would lose in 2016. Don’t believe polls
Bombing of Jewish temple in NY	Nothing to do with earnings of companies
Recession fears	Recession unlikely with low unemployment, low interest rates and rising GDP
Bubble Nasdaq FANG stocks	Not all stocks in a bubble
Brixit no deal	UK economy booming despite  Brixit fears,
Shooting war with Russia/ China	Unlikely, the whole world would suffer
Growth slowing world wide	Value stocks coming back into play
Middle East turmoil	Not much impact on solid value stocks
Singapore under a cloud of doom	Singapore property beginning to recover, visitor arrivals up
Budget uncertainty	Malaysian budget announced Friday appears to be balanced and will address many of the issues in a positive way. Market reacted positively.
Credit downgrade in Malaysia	S & P/ Fitch reaffirmed Malaysia A- credit rating
Collapse of RM	RM has remained stable despite all the fears

 

FEAR = False Expectation Appearing Real

Markets move in emotional cycles which go to extremes like a pendulum. They return to the mean and then overshoot. Rarely do they stay at the mean.

If you have carefully researched your investments and have conviction in your choices you will survive the storm. If they pay dividends so much the better. This storm will pass.

Invest well and grow your wealth.

Bill

For the next little while I'll be feature some award-winning photos that Patrik Ekdahl sent. The first is a pair of rare Quinling golden snub-nosedmonkeys. They are restricted to the Qinling Mountains in China. Among the most striking primates in the world, these monkeys are in danger of disappearing. Their numbers have steadily declined over the decades and there are now fewer than 4,000 individuals left. 



Photo Credit: Marsel van Oosten.