Macro Perspective On World Commodity Markets

30 June  2019

Dear Fellow Investor,

On Thursday evening , I attended a symposium on futures and derivatives organized by Phillip Futures.

The guests  were mainly trade people such as plantation owners and managers who were interested in hedging their production to protect against further downside in the CPO market.

The keynote speaker was Eric Norland, chief economist of the Chicago Mercantile Exchange. (CME)

He shared his macro perspective on world commodity markets and in particular the grain markets. He made the case that grain and oilseed  markets worldwide are showing evidence of bottoming after a 6 year down cycle. Because of this he advised to avoid short hedges in CPO meaning that he does not see much downside from these current depressed levels.

High quality plantation counters also offer a good risk versus reward opportunity based on his analysis.

Eric also showed several interest rate charts as evidence of world economic slowdown. One showed a yield inversion in US treasury bonds  which is a sign of possible world wide recession by 2020/ 2021.

With the globally coordinated monetary  loosening   expect the US Federal Reserve and other central banks  to continually lower interest rates to stop a recession.

This could be inflationary and reverse the commodity down cycle.

He said higher gold prices are an early sign of possible inflation or even stagflation.

He commented on the trade war and the impact on the Chinese and US economies.  I was surprised to learn that the impact is tiny despite the media hype.  

For China the drop in GDP is about 0.1 %. For the US less than 0.2 %

He  advised to be wary of the highly charged Western media who are biased against Trump. Trump has strong support from his middle class base and will probably win the 2020 election. Most Americans do not want socialism, ultra high taxes, increased social benefits and more government regulation and control of their lives which the opposition Democrats promote.

I did not produce a client letter yesterday because of the 10^th annual Phillip Investment Conference.

I would like to thank all of you who came Saturday.

I appreciate your support and I hope you benefitted.

The anxious crowd of over 2500 guests were advised by some prominent fund managers who shared opportunities in the current environment. Most were cautious although one was promoting a small cap fund. .

Mr Ang Kok Heng, our CIO shared a valuable paper on strategy and how to approach investing. Personally I focus on quality dividend producing companies  For the last 20 years it has worked for me. Shares go up and down but the dividends keep coming in.

Next week, I will continue to review our portfolio holdings including Well call and Dialog.  

Invest well and grow your wealth

Bill

Critter of the week is the wolf. These are 4 wolf pups who are born with blue eyes that turn orange in a few months. This is from a new book Wolves by Tom Jackson. I ordered the book and will share more wolf photos when it arrives. 

 

Phillip's Annual Investment Conference - 2019

22 June  2019

Dear Fellow Investor,

Portfolio Review

Last week I reviewed some of our holdings so will continue this week.

We are holding Inari, a maker of radio frequency chips for the Apple I Phone . With trade war rhetoric, a large drop in semiconductor stocks, fear of global slowdown, drop in demand for Apple phones and general doom and gloom , Inari has dropped.   Despite the negative news, Inari is in a net cash position and has recovered from panic lows. They have the cash reserves to ride out the cycle.

Their fiber and optoelectronics sector revenues continue to increase.  Inari is highly correlated to  Broadcom and Apple  which have  advanced from their lows.  Despite the negativity.  I have not sold any Inari shares for our clients.

Inari insiders continue to buy.

Maybank is another core holding which I bought anticipating an economic turn around with the new government .  The turn around is taking longer than I expected but the generous dividends have covered a small capital loss.  We hold for now. I also bought Maybank as they are a leader in fin tech.  Did you know that they were the pioneer in the number system replacing the stand in a long line waiting for a bank teller ?

On 27 June, Thursday evening  Eric Noland, chief economist for the CME will be speaking at the Westin Hotel on the dynamics effecting the oil seeds markets including CPO.  He is flying in from  Chicago as a guest of Phillip Futures to make this special presentation to trade participants. I will be there to take notes which I am happy to share with you.

Our recent purchase of United Plantations has held steady in the face of the onslaught of negative news and broker downgrades.

Not one broker that I know of  is recommending plantation shares. We are in a lonely space and that is the space I like to be in.

On Saturday 29 June will be our Investment Conference at Berjaya Times Square. Do check this out if you have time. I will be there to answer your questions about your holdings. It is FOC for clients.

Invest well and grow your wealth,
Bill

Critters of the week is breakfast at the Bali Zoo with the Orangutans.  

 

Portfolio Review

15 June  2019

Dear Fellow Investor,

Portfolio Review

I have been reviewing our holdings and do not see any problems with trade war/ tariff  issues. Our Hong Kong shares as represented by EWH, Link Reit, and Hong Kong Land and have  corrected but as they are high quality blue chip issues they should recover.

Now Hong Kong is caught up in a frenzy of fear and hysteria  as demonstrators flood the streets protesting the government’s new  extradition policy   and the initial Hang Seng market drop was over 2 ½% but on Friday the selling abated.

This may carry on for a few more days but I am not concerned. Business and the pursuit of profits are the main focus of citizens there.   Participating in a demonstration does not put food on the table or pay the rent.

Our Singapore shares are not affected as they are mostly domestic issues.  Vicom, a major holding of ours is a taxi inspection business and its business is 100 % local.  

 Our Sing REITS are also domestic and do pay us good income.  We  hold SATs, an airline catering business  who hold an 80 % market share in Changi airport with exposure to fast growing Asian economies.  We hold Riverstone, a rubber gloves company listed in Singapore. It has the lowest valuation of all the rubber gloves companies including those in Malaysia and has potential for recovery.  The owners have not been selling their shares.  Thai Beverage, listed in Singapore is also domestic as they do not export their spirits and beer.  

Our holding in Japan is Nidec which is the world’s largest manufacture of micro electric motors. They have plants throughout Asia and earn their revenues in USD.  Many of their motors are not available anywhere else. Some are used by US defense contractors so this company should be safe from Trump’s tariffs. So far they are not affected by global stock market fear and uncertainty.

The company has been heavily buying back their shares on the recent correction.

Our  blue chip dividend paying Malaysian shares are weathering the storm but I intend to exit  the under-performers and replace with better opportunities.  I recently purchased United Plantations for some of our managed accounts. This is a quality well run company in an unloved sector. It has been congesting for several months but pays a reliable 5 ½ % yield.  We get a nice pay day while we wait for the crowd to get interested. I attended the UP  AGM  last month and gained an understanding of the plantation sector and the current challenges. I believe these challenges will be overcome  and that is why I invested.

Invest well and grow your wealth
Bill

Critter of the week is a bloodhound

What a nose! Thanks to her super sniffer, heroic search dog, Deja, saves a kidnapped girl’s life. In Cucamonga, California, a child was kidnapped and a K9 bloodhound  found the girl. She was chained in the basement of the house.  3 kidnappers were arrested.

The China/ US trade war may be slightly thawing

8 June  2019

Dear Fellow Investor,

Expect Asian markets to be boosted next week as Mexico backed down from  President Trump’s tariff threat.

Mexico has facilitated a migrant invasion into the US from its Southern border and Trump has tried to stop it.  Trump’s tariff threats did the job and now Mexico has mobilized 6000 troops to stop the migrants.

The China/ US trade war may be slightly thawing.

 President Xi last week in a 3 day visit to Russia said Trump is his friend

 “It’s hard to imagine a complete break of the United States from China or of China from the United States. We are not interested in this, and our American partners are not interested in this. President Trump is my friend and I am convinced he is also not interested in this,” Xi said .

On the domestic front, FDI or foreign domestic investment in the last  3 months has exceeded  all FDI for  2018.  This shows confidence in the new government by professional investors and is reflected in the KLSE by a near term 60 point rally.

Of course it will not be a smooth ride and we must always be on guard and follow our method.

Our value method of investing consists of 3 parts:

1.  Honest management who focus on the shareholders rather than  themselves.

2.  Solid financials with rising sales, profits and growth, low debt and steady rising dividends

3.  A reasonable price with room for capital appreciation

If a company meets this criteria we should allocate a portion of our capital and then carefully monitor the company for change

We would exit our share in profit or loss if the following things happen.

1.  If the crowd starts to run up the price  we should consider to sell if the share goes into bubble territory.

2.  If there are major fundamental changes in the business such as related party transactions, issuing rights to fund an acquisition that may be unrelated to their core business and issuing convertible bonds.

3.  Change in management, changing the auditor, lawsuits, shifting location

4.  Heavy insider selling which must be reported to the exchange. Insiders would be the CEO or company management. We were holding Hovid for our clients and I noticed the CEO and his managers were heavily selling their shares before the collapse so I exited. These fellows know the company better than anyone.

These are company specific but macro factors such as trade wars, politics, interest rates  and currency fluctuations sometimes effect all companies so if we are careful when we screen potential investments for the 4 criteria I mentioned we will have a good chance to recover when the whole market drops.

A good example of this was the Thailand floods in 2011  which effected F & N who had plants there producing milk.  The floods effected production and F & N shares dropped sharply to RM 16. Many uninformed  investors sold on the drop but as the floods receded F & N recovered and moved to a new high.

As you know F &N is a high quality value share with  good shareholder friendly management founded in Singapore in 1883.  A temporary flood has little effect on their long term business. Company insiders were buying F & N near the low when Thailand was flooding. We bought with them and are still holding. 

Insider buying and selling is in my opinion the best way to access the fundamentals of a company. Those who run a company know it better than anyone and money talks. It is available to you on the Bursa website as well as the Bloomberg work station.

Invest well and grow your wealth
Bill

 

Critter of the week is a mule deer from Canada. Notice the giant ears and alert posture. I suppose if we adopt the behaviour of the mule deer we can be alert to danger and opportunity in the market 

Donald Trump Tweeted

1 June  2019

Dear Fellow Investor,

On Thursday Donald Trump tweeted that he will impose a 5%  tariff on Mexican imports in punishment for  not stopping  the free flow of illegal migrants storming into the US. If Mexico refuses to agree, tariffs will rise 5 % a month until Mexico takes action  

On this news world markets dropped losing several hundred billion of value.

If that was not enough. Trump threatened Hong Kong with sanctions for allowing an Iranian oil tanker on its way to China to  transit Hong Kong. He has also threatened sanctions on Europe if they bypass the US controlled SWIFT money transfer system to conduct trade with Iran.

Trade war news headlines and sanction threats   seem to be a daily occurrence so what is the solution for us as investors to survive the volatility ?

In a word own and buy Quality Value Stocks preferably with rising dividends.

Our fund manager Kevin Christopher  competed a research study using Warren Buffet’s favourite indicator  Market Capitalization  over GDP

This measures the value of the stock market relative to the gross national product.  The indicator low of 86 % in 2008 reflected the world stock collapse and a deep value area. Presently we are at 118 % which is a 5 year low and does represent value for selected stocks.

Kevin then presented a study of 32 KLSE value stocks showing cumulative returns . All showed positive returns over the last 12 years. Many of these we hold

Presently, as we hold quality value shares in our portfolios we can hold the shares we own and not worry about the latest Trump headline.

Yesterday, I attended a one day workshop on Value Investing by 2 Singaporeans whose main focus is the SGX . They reviewed our Singapore holdings and  liked our holdings with the exception of Kepple Reit.  I agree with their analysis so we can sell Kepple Reit and replace with a better one.

They reviewed the Singapore property market and said the recovery is still not happening due to the government’s restrictive policies. Another words the government does not want another property bubble.

They said banks are OK as interest rates may rise. Valuations of banks in Singapore are at multi year lows.

I trust their opinions as they use a very objective method of value investing modelled from the Warren Buffet method.  They also mentioned there was deep value in Hong Kong as valuations in Hong Kong are at recession levels.

They advised to avoid the US markets as valuations are generally over stretched.

Invest well and grow your wealth
Bill

Our annual investment conference will be on 29 June. Main topic will be trade war. For clients no charge. If interested please send me your name, IC and phone number and I will forward to our administrator for registration.

 

Critter of the week is a rare white panda with red eyes.