Pendulum may be swinging back to Asian markets from developed market

Dear Fellow Investor,

The pendulum may be swinging back to Asian markets from developed markets.

That is because Asia is still growing relative to Europe and the US.  Foreign investors are slowly switching back to Asia.

There are many factors affecting  stock markets and investor confidence.  Some include trade wars, emerging market crisis of confidence, world economic prospects and the likelihood of a US recession.

The window for strong global equities performance is closing, especially in the US:

1 Trajectory of non farm payrolls in the US is losing momentum

2 Yield term premium for US Treasuries is on track to turn negative some time in mid 2019

3 Philly Fed US leading indicators point to a US recession in mid 2019.

4 US Residential property markets are sagging. Existing home sales are trending lower.

5 Building permits for multi dwelling buildings are at 29 month lows. Drops in building permits   are a recession indicator.

6 A synchronised global growth slowdown appears to be in place. China exports to the US have dropped 9.7 % since the USD 250 billion in tariffs were implemented.  

7 Interest rates and inflation are picking up.

How do we prosper in this environment ? We need to be in strong companies in strong sectors.

In the KLSE,  For example YTD consumer is up 11.8 %, and Finance up 5.8 %, By using  filtering software  such as MetaStock, Bloomberg, VSA, sharetrading.com we can identify the strongest sectors  and shares and focus our effort on them.

Look for line changes on above average volume for entry.

We avoid sectors such as Construction which is down YTD 36.4%, and Property down 18.2 % .

I have always focused on strong established companies with low or no debt. If shocks happen such as rising interest rates/ recessions all companies will be affected. Warren Buffet in one of his shareholder reports said  that imagine a swimming race where all the swimmers have to carry a 10 kg lead weight. The strong swimmers will survive while the weak swimmers will underperformed or drown.

Invest well and grow your wealth

Bill

Today's 'critter' is a real denizen of the deep... the coelacanth, of which they are now two known species.  They were thought to have become extinct in the Late Cretaceous, around 66 million years ago, but were rediscovered in 1938 off the coast of South Africa.  Coelacanths are a part of the clade Sarcopterygii, or the lobe-finned fishes.  They has no real commercial value apart from being coveted by museums and private collectors.  .  

What was the best investment style: value, growth or momentum investing ?

22 September 2018

Dear Fellow Investor,

A study was made  about investment styles in the US going back to 1896.   The question was what was the best investment style: Value, growth or momentum investing ?

The conclusion was that sometimes value investing works while in other times growth works.  Momentum, however; always works until it doesn’t.

Momentum means if a trend is established there is a tendency of trend continuation. Trends will persist as more and more players join the party.

This is based on emotions and crowd psychology.

Witness the FANG stocks, Facebook, Amazon, Netflix and Google. They continue to make new highs oblivious to nose bleed valuations. The PE of Amazon presently is over 155 which means it takes 155 years to get back the value of the share in terms of earnings.  The growth and momentum crowd continues to buy and make money while the value investor sits on his hands and waits.

At some point the party will end.

It reminds me of a story of a Dutch East India ship which sank in off the coast of Kent, England  in 1740.

The excavators discovered a lovely haul of gold and silver coins. The  not so lovely bit is that the coins were sewn into the clothing of the 234 sailors. The gold and silver coins did not help the sailors  in their watery graves.

My style of investing is combining value with momentum.  It works most of the time as we buy a share when it is attractively valued and there is evidence of insider smart money buying. We buy at a major support off the weekly price chart as price breaks through resistance on abnormally high volume. High volume means participation and interest in the business. Sometimes these breaks signal the beginning of a new trend where the risk is relatively low. If the break fails the risk

to below support is relatively low. We get out before the ship sinks.

In the case of Amazon it is like the East India ship. The sailors have their gold and silver coins sailing toward their port in a calm sea. They are imagining coming back to their families  with their new wealth- perhaps thinking of buying a new house or funding their children’s education.

Suddenly disaster strikes, the ship sinks  and all is lost. This can happen in the stock market to those who are not prudent or diversified or those who chase high valuations.

Our recent purchases of Maybank and Genting Resorts   are value stocks trading at a low base showing evidence of insider buying representing momentum building at an early stage. The well covered dividends will reward us as well as the solid fundamentals and low valuations.  

Invest well and grow your wealth

Bill

Critter of the week is a large jungle cat which we saw in Zoo Negara last week. The trainer trained the cat to walk a bar next to the crowd and for his effort was given a juicy fish.

When will the bubble burst

15 September 2018

Dear Fellow Investor,

When will we have a debt crises which will sink world stock, property and bond  markets ?

Ray Dalio, a  hedge fund manager was interviewed on CNBC to get his views. He also comments on the Trump/ China trade war which he does not think will have much impact.  

https://www.cnbc.com/video/2018/09/11/ray-dalio-bridgewater-financial-crisis-economy-debt.html

He said that all major countries world wide are increasing debts to fund growth, welfare and entitlement spending and wars to finance asset bubbles. The bubble keeps increasing.   

When will the bubble burst ? He gives it about 2 years.

He recently published a book The Big Debt Crises a 460 page book which details the dynamics of the crises. You can download via PDF free of charge from his Bridgewater Hedge Fund website. He suggests you read at least the first 60 pages to get the overview and the early warning signs.

Gary Dorsch, a former market maker on the CME and producer of Global Money Trends, a  newsletter I have subscribed to for more than 10 years has many of the same views as Ray Dalio.

Gary runs a personal bond portfolio and is very much in tune with interest rates and his interest rate forecasts have been spot on.  His bottom line view is higher rates plus quantitative tightening will burst the US stock market bubble.  It will affect the whole world.

He recommends taking defensive action now by :

Positioning in high quality value stocks with low debt, low PEs, and dividend payers.  The high flier bubble stocks will get hurt the most. With interest rates going up many growth stocks will be hit.

Based on traditional valuation metrics there is value in Singapore, Malaysia, Japan, Thailand Australia, Hong Kong and China.  If we diligently research we can find opportunity. As Peter Lynch would say we need to turnover 10 stones to find one grub.

Invest well and grow your wealth
Bill

Critters of the week are some exotic animals on stamps from Australia. Next month we will be visiting Perth for a week to check out a value investing opportunity in the natural resource space as well as visit some local attractions.

 

 

The US Trade Conflict: What Should You Do?

8 September 2018.

Dear Fellow Investor,

The US Trade Conflict: What Should You Do?

The United States, China, Europe, Canada, Korea and much of the world 

have been at loggerheads for some months now with tit-for-tat tariffs on 

billions of dollars’ worth of goods.

The conflict does not seem to be abating. Just last week, US tariffs on 

US$16 billion worth of Chinese imports took effect, with Beijing fighting 

back with its own levies on goods from the US worth the same amount.

Why worry about things we have no control over trade policies,  US 

politics, monetary policy  or President Trump’s rhetoric ?

We can control our share selection by our focus on quality companies 

which offer value, solid financials, low or no debt, and those businesses 

that have recurring revenue. 

Our recent purchase for our clients of Kellington Group Bhd fits this 

profile.  

Kellington Group designs, fabricates and installs ultra-high purity gas 

and chemicals delivery systems. They supply to hospitals as well as the 

semiconductor industry. Revenues are derived from Singapore, 

Malaysia, Taiwan and the PRC. They are net cash with a PEG ratio of 0.3. 

PEG means price to earnings growth.

A PEG ratio of 0.3 shows Kellington is undervalued. Should earnings 

increase  which is possible based on a strong trend of earnings growth 

and if the PEG increases to 0.5 expect at least a 20 % jump in the share 

based on the current price of 0.955 sen.  Kellington may also benefit 

from the trade tensions between China and the US. China wishes to be 

self sufficient in semiconductor manufacturing  and Kellington 

produces the vital gases for semiconductor production.   Kellington has 

a facility in China.

Motley Fool Singapore posted a valuable comment which applies:

“Investors like you and me cannot control the trade war 

happening between the US and China. But, what we have control over 

are the investments we make, and how we handle our emotions. Instead 

of focusing on the fears, we should focus on the business fundamentals 

of the companies we own. Short-term fears create opportunities for long-term investors.

Billionaire investor Warren Buffett once said:

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks;  and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

Stocks tend to rise over the long run, despite the short-term worries surrounding the world we live in.

There will always be negative news to spook the stock market every now 

and then. However, if we focus on the long-term picture, these short-

term blips will not matter. In fact, such drops allow us to buy great 

companies at lower valuations.

We should also not time the market by dumping our shares, thinking we 

can buy the shares back later when things become clearer. Buffett had 

this to say when it comes to market-timing:

“People that think they can predict the short-term movement of the stock market — or listen to other people who talk about (timing the market) — they are making a big mistake.”

“If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do. … If you’re right about the businesses, you’ll end up doing fine.”

Always remember: Time in the market is more crucial than timing the market.

The US-China trade conflict may or may not get worse. No one can tell 

for sure. However, what we can do is to focus on the things that matter, 

which is on business fundamentals and our emotions. To borrow 

Benjamin Graham’s words, in the short run, the stock market is a voting 

machine, but in the long run it is a weighing machine. Would you rather 

focus your energy on the things that matter or on the things that don’t? 

It’s your call.

Invest well and grow your wealth
Bill

Critter of the week is the Malaysian tapir. You can visit the wildlife 

reserve in Sungai Dusan to see the tapirs as well as other wildlife. You 

will need to call 03 6046 2400 to get a permit from the wildlife authority 

before visiting. Distance from KL is 110 kilometres.

People are worrying about things they do not fully understand.

1 September 2018

Dear Fellow Investor,

“Everyone is worried,-the fear among investors is contagious, people are worrying about things they do not fully understand . That’s an opportunity, I believe the worst is over. “  

Chen Yu, fund manager of Bejing Capital Asset Mgt Co, who manages over 2 billion Yuan and has over 360,000 social media followers. 

Although Yu’s comment applies to the China stock markets  which are down on average over 26 %  year on year it applies to other markets.  Many quality individual Asian and Chinese companies have underperformed.

For example Genting Malaysia Bhd, who operate the casino and resort has  been flat for the last few months.  It seems stuck in a range. Volume has decreased as few are interested. It shows that investors are worried about what they do not understand.

I have been following this stock for the last few years and my research confirms most of  the important fundamentals are long term bullish.  They have solid  financials,  multiple streams of recurring  revenue, increasing cash flow and are growing with a new theme park in the pipeline.  It is a simple and easy to understand business.

I took a position two weeks ago for all our non Sharia managed accounts.  Our dividend of 3.3 % will give us some income while we wait. In my opinion our risk is low and Genting offers a good space to be in as Malaysia recovers.

As this is a long term position, I am not worried by the day to day fluctuation .

That is why, having detailed knowledge of what you are investing in and the patience to wait for a reasonable price puts the odds in your favour and allows you to sleep at night.

As Warren Buffet said, “ money flows from the impatient to the patient.”

Do not expect instant returns. You need to wait for the herd to be converted and you will be in before them. Your profits will be larger.

Expect volatility in the near term. If you are holding quality assets do not get caught up in the onslaught of negative news and the fear mongering. Rest easily knowing you are getting dividend income and growth potential by owning quality businesses that have stood the test of time.

Invest well and grow your wealth
Bill

Critter of the week is a katydid and are one of more than 6,400 known species in the insect family Tettigoniidae.  Primarily nocturnal in habit, with strident mating calls, many katydids exhibit mimicry and camouflage, commonly with shapes and colors similar to leaves.