Crowded Trade

 26 December 2020

Dear Fellow Investor,   

Crowded trade:

A trading position is said to become "crowded" when it is held by a vast preponderance of investors. Such positions develop when investors become so convinced of the logic of the position and its likely success that they become complacent. Crowded trades are dangerous because if anything occurs to shake the faith of these investors, efforts to bail out can be highly disruptive; few others are left willing to take the other side. Barrons

On 7 December 2020  JP Morgan warns of crowded trades amid markets clear consensus.

 

History shows consensus rarely plays out entirely:

Crowded trades include short dollar, long copper, long Bitcoin and long technology

 

There’s strong consensus in markets right now and investors need to position to hedge against crowded trades, according to JPMorgan Chase & Co.

The last time such a strong agreement on strategy existed was in late 2017 and early 2018, and that time period serves as a reminder that such a consensus view rarely plays out in its entirety, strategists led by Nikolaos Panigirtzoglou wrote in a note Friday. Global stocks reached records in January 2018 amid massive inflows, but extended positioning in risk assets became a concern and the next month the “Volmageddon” volatility spike crushed trades that many investors had viewed as a sure thing.

“For asset allocators, what is thus important is scale exposures to avoid an overly concentrated portfolio,” according to the report. “One way of scaling exposures to the consensus trading themes is by limiting exposure to the most crowded ones.”

Strategists from firms including JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley expect a risk-on environment into 2021 as the global economy recovers from the impact of Covid-19. Positive news on vaccines has bolstered the idea. With central banks and governments pumping in stimulus to counter the pandemic, many see the makings of a bumper period for assets such as high-yield debt, emerging-market currencies and value stocks.

For JPMorgan, those crowded trades include: short the U.S. dollar versus cyclical developed-market currencies, long copper and long Bitcoin. On the other hand, bullish positions on oil and gold are less crowded, as are overweight emerging-market equities relative to developed ones, according to the report.

Still, medium-term equity positioning appears to be average rather than overbought, the strategists said.

“Any equity correction in the near term would represent a buying opportunity,” they said. “We are only in the middle of the current bull market.”

There are opportunities in Malaysia, Japan, Singapore, Vietnam, Thailand and Hong Kong which are uncrowded.  Examples include banks, REITS, oil and gas and hospitality related shares.

Take care  and have a Merry Christmas and Happy New Year Bill

This is a crowded boat. What may happen to the boat ?

Merry Christmas 2020

 19 December 2020

Dear Fellow Investor,

Expect synchronized global recovery in 2021. As Covid vaccines get rolled out, consumers will venture out and spend.   Local economies will loosen restrictions – Singapore on 28 December will increase allowed capacity in restaurants, malls, places of worship and tourist attractions.  This will give an economic  boost to many businesses and raise the spirits of those confined by lockdowns. The same is happening in Malaysia.   Malaysian zoos,  marine parks and museums  are open today after being shut down for the last few months .

Supporting businesses are low interest rates which based on most Central Bank policies should remain low in the next few months. After the 2008 global financial crises the Fed cut rates to zero and kept them there for 7 years.  As they did in 2008, low interest rates will boost stocks as money moves from bank deposits to  quality stocks as well as precious metals and commodities which benefit as a hedge against currency debasement.

Weekly CRB Index traded in New York which is a basket of the world’s leading commodities .

Notice the 30 % rise from the March 2020 lows of a broad section of commodities including crude oil, soybeans, base and precious metals.  This is evidence of economic recovery.

As in 2020 expect technology, healthcare, energy and the financial sectors to outperform.  A gradual return to pre pandemic conditions will support these sectors. Fiscal stimulus, currency debasement and zero real interest rates will boost investment in equities.

Take care

Bill

I wish all my Christian friends and clients a Merry Christmas and happy holiday. You may copy this link for an animated holiday card.

 https://www.123cards.com/christmas-ecards/bunnys-christmas/

Cheap oil is behind us

 12 December 2020

Dear Fellow Investor,

Weekly chart of the XLE ETF which represents major  energy companies traded on the NYSE

The index has risen over 25 % from the lows and trades above its 50 week moving average. The KLSE energy index chart is similar and is in an up trend.  This indicates that energy demand is recovering due to positive news on the Covid front.

As Malaysia is an exporter of crude oil and natural gas this is a benefit to our trade and balance of payments. That could be one reason why the KLSE has reacted positively including the banks and financial companies.

On Friday the EWM, the ETF representing the blue chip KLSE shares which trades on the NYSE was up strongly on high volume showing international interest in Malaysia as well as energy shares.  

From the Fleet St Report in London. They are bullish oil and commodities

The key to a green revolution? Oil

On the face of it, you would think oil is doomed. But oil drives transport, and other than a small yet growing share of electric cars, oil allows us to move. Planes, trains and automobiles consume oil, and that won’t change anytime soon, despite our leaders’ political goals.

To start a green revolution, the first thing you’ll need is more oil. Wind turbines, batteries, motors and wiring all require base metals such as copper. Yet they also need lithium, nickel, cobalt, lead, zinc, vanadium, sodium, magnesium, cadmium, mercury and more. These vast machines combat nature to extract the metals we so badly need.

In addition, mechanised agriculture feeds the world more efficiently than ever before. It does so using heavy plant and machinery that is fuelled by oil. Electric tractors and trucks may one day be a reality, but before until they’ve commercially available we’re still going to be using oil. To provide the world with the batteries required is a herculean task.

Governments are determined to see this happen. The greens have won the argument, and governments are stepping forward with vast budgets to ensure this happens. The irony is that to rebuild the energy infrastructure, we will need to consume more oil than ever before. This increased demand will see a structural shift in energy consumption.

The oil price is set by the free market which is the most efficient way to balance supply with demand. The history of oil demand is one of continued growth, with consumption only falling when the global economy has been in recession.

Oil literally fuels economic growth. It does the heavy lifting so we don’t have to, allowing us to become more productive elsewhere.

Demand fell in 2020 as the world went into recession. It also stalled in 2001 and 2009, the last time the economy receded.

But look what happened as the recovery took hold. From 2001 to 2008, oil demand rose from 75 million barrels per day (mbpd) to 87 mpbd by 2008. It stalled following the credit crisis only then to hit 100 mbpd for the first time earlier this year. 

Courtesy of the vaccines, the lockdowns that marked 2020 will come to an end and the world will be back on the move. The Spanish flu came after the First World War. What followed? The roaring 20s; an era of decadence. I suspect that once travel reopens, consumers will flock to the airports with the excess savings they amassed over 2020. The planes will fly like never before.

Oil demand will hit a new high, probably in 2021. It will take people by surprise.

Demand must be met by supply. Knowing that oil is politically out of favour, investors have stayed away. As a result, the oil sector offers a rare sea of value in a highly priced stock market. Share prices have been rising since 2009, and by some measures are more expensive than in 1929; the greatest period of excess ever.

Other sectors such as the banks and heavy industry are cheap too. It is the tech sector that shows the clearest signs of excess. Are they green? Not according to Forbes. They point out that the internet consumes 50% more energy than aviation.

The green narrative will put a squeeze on supply.

US shale production ballooned from 5 mbpd in 2008 to 13 mbpd last year. That kept a lid on prices and enabled global supply to meet demand. The Saudis buckled and oil prices collapsed in 2014 from over $100 to an average closer to $50 over the past five years. The worst is behind us and cheap oil won’t last for much longer.

Cheap oil is behind us

 

You’ve no doubt heard about the gold price – it’s rising. But this isn’t just a trend specific to gold. Commodity prices in general will surge in response to government spending plans. When you compare gold to oil, a single ounce has historically bought 20 barrels of oil. At the depths of the crisis in March, that spiked to 70 barrels, and it has since fallen to 38. If this ratio falls further, it will be clear that oil is staging a comeback.

In summary, oil is cheap, demand will rise to new highs while supply will face constraints. It’s the perfect storm.

Our holdings in Wellcall and Dialog should perform in the weeks ahead.

Take care

Bill

Critter of the week is a leopard from Zoo Negara 

Zoo Negara has been receiving generous support during the MCO as reported in The Straits Times

·         Kembara Kitchen delivers frozen food to Zoo Negara

·         Zoo Negara receiving steady flow of visitors

·         Philanthropist offers respite for public, police during MCO

·         Lam Thye rallies support for Zoo Negara

Zoo Negara’s Zoology, Veterinary and Giant Panda Conservation Centre director Dr Mat Naim Ramli said donations and support from the public are also in the form of meat, fish and poultry, allowing the zoo to save money for the coming months.

Turning Point

 5 December 2020

Dear Fellow Investor,

Turning Point

I just finished Wealth, War and Wisdom by Barton Biggs who spent 30 years at Morgan Stanley and was the firm’s leading global market strategist.

He details examples of major market turning points since the beginning of the 20^th century.  One example was the Japanese attack on Pearl Harbour, Hawaii on 7 December 1941. The Japanese had been winning major battles and had taken Singapore, Malaysia, Thailand, Philippines, parts of China  and most of Asia. They were even planning to invade Australia.  Their military forces had the best armaments and equipment and seemed unstoppable.  They were winning battle after battle. They conducted a sneak attack on Pearl Harbour inflicting major damage by killing over 2400 sailors and civilians  and sinking 20 naval ships.  The next day President Roosevelt declared war on Japan and with strong public support and a powerful manufacturing base the tide of battle began to turn.  General Motors, Boeing, Tampa Shipyards and Ford began to produce vast fleets of tanks, bombers, ships  and fighter jets. The battle of Midway  in May 1942 was the turning point in which a good part of the Japanese navy was destroyed.  Now America had a clear path to bomb Japan. That was the bottom of the Dow Jones, the top of the Japanese stock market and the beginning of an 8 year Dow Jones rally. At the time there was great uncertainty and hardship.  There was a military draft and thousands of troops went to war many not returning. There was rationing and austerity. On a positive note, much stimulus was created by the government and there were jobs for all who wanted to work. This stimulus boosted markets.

Now we are at a major turning market point. In the relatively short time of less than a year vaccines have been developed to stop Covid 19. Among the vaccines are Pfizer and BioNtech who have recently passed safety and efficacy tests in the UK.   This vaccine is due to be rolled out next week to millions of UK citizens.    China and Russia have also developed vaccines which are now in use. The whole world has been marshalling stimulus and scientific resources to solve the pandemic.

Stock markets being forward looking have reacted positively and benefit from the stimulus and the chance for an end to Covid.

For one, an effective vaccine will get people back to work, end lockdowns and support the service industries.  Travel, hospitality and the restaurant business will recover.

Characteristics of a turning point are uncertainty and scepticism and this is opportunity. Some shares have yet to recover and this is a low risk chance for us.

Weekly EWH, Hong Kong ETF traded on  NYSE

Hong Kong has recovered over 20 % from March lows on positive vaccine news and China recovery. Singapore, Thailand and Malaysia are also recovering.   

Take care

Bill

Cher rescued Kaavan the lonely elephant who has been alone for 38 years in a zoo in Pakistan.  Cher found an elephant sanctuary for him in Cambodia to enjoy the rest of his life with fellow elephants.

Revisiting the VIX

 28 November  2020

Dear Fellow Investor,

Revisiting the VIX

Weekly VIX (Volatility Index) signalling positive market action in the US markets and by proxy world markets

The VIX is a good measure of extremes in sentiment. The spike high in March  2020 signalled extreme bullishness and triggered a  10,000 point drop in the  Dow Jones.  World markets followed.  Presently we are slowly recovering. There is no indication of a potential collapse. In fact odds favour higher prices for most markets.

Weekly EWM, the Malaysian ETF representing KLSE blue chip shares. The EWH, EWJ and EWS, country funds for Hong Kong,  Japan and Singapore are showing similar bullish charts.

The KLSE is recovering with an upside bias as news flow regarding Covid vaccines is positive. In the Star headline today, Pfizer and BioN Tech  vaccines will be made available in early January free of charge to 6.4 million Malaysians  if proven safe for humans.  

Once the gloom of Covid is lifted expect market recovery to at least pre Covid levels. Couple this with low interest rates and massive money printing by all world central banks expect new equity highs .  Gold and bit coin corrected last week due to vaccine optimism but the fundamental reasons of wealth protection by holding gold and bit coin have not changed.    Governments will continue to expand their money supplies, increase social spending, and keep interest rates low or negative.  

Governments can not create gold or bit coin out of thin air unlike fiat paper money and credit. Continue to hold gold.

Keep safe,
Bill

Bogie the biker dog dressed in sunglasses, jacket and helmet is a celebrity on Philippines highways

The 11-year-old crossbreed from the Philippines takes daily motorcycle rides with his owner Gilbert Delos Reyes, balanced perfectly with his hind legs on the edge of the seat.

Recovery Continues

21 November  2020

Dear Fellow Investor,

Recovery Continues

According to Bank Negara, real GDP  growth in the 3^rd quarter 2020 came in at -2.7 % which beat the consensus estimates of -4.1 %

Based on BNM charts documenting recovery since the pandemic started in January 1920, wholesale and retail trade, industrial production, gross exports, manufacturing PMI, and electricity generation have recovered.  Credit card spending is still 16 % below January 2020 levels.

Uncertainty about the budget being approved by parliament on 25 November is keeping the KLSE in a holding pattern.

Looking beyond the short term, the finance ministry forecasted Malaysia’s growth  in 2021 to be 6.5 to 7.5 % .

Covid continues to dominate the news cycle. Infections are spreading world wide while death rates are declining.  Governments are imposing lockdowns which effect business and employment. However;  major advances in therapeutics and vaccines are evolving so on balance expect recovery.

Last week, I reviewed our investment in SATS, a Singapore airline caterer. This is a lead indicator of Asian market recovery as their business leverages on airlines and logistics.  One investment moat they have is the licensed cold chains to deliver Covid vaccines which require -79 C  temperatures for safe shipment. 

On Friday the share price closed @ Sgd 4.17 up from the panic low of 2.62 in May 2020.

Asian banks are also recovering from 20 year price to book lows despite the pessimism and fear. OCBC has risen from Sgd 7.81 in May 2020 to Sgd 9.96 on Friday.

High quality value shares are recovering in most markets amidst the backdrop of low interest rates, anticipation of more economic stimulus and massive cash sitting in money market funds earning a yield less than inflation.  I  read in the US there is over 7 trillion USD in these money funds. This could be fuel for a 2021 recovery.  Combine all of that with a Covid vaccine and the odds favour the bulls. Even Warren Buffet, the king of value investors  is buying undervalued shares in Japan for his Berkshire fund.  

Keep safe
Bill

It is now legal to walk your dog in Adelaide Australia after a long dog walking lockdown.   Hopefully Australia will open up soon . Lots of investment opportunities including resource companies are there.

Waiting for his walk.

Light at the End of the Tunnel

 14 November  2020

Dear Fellow Investor,

Light at the End of the Tunnel

In the last 2 weeks, world stock markets including Singapore and Malaysia have staged impressive recoveries.  Commodities including crude oil, gold and palm oil have performed well. Our shares are recovering.

The main catalyst includes a Covid vaccine developed by Pfizer which has shown good results.

Below is a headline from the Guardian news in  London:

Scientist behind BioNTech/Pfizer vaccine says it can end pandemic

Exclusive: BioNTech’s CEO Uğur Şahin says he is confident vaccine can ‘bash the virus over the head’

The immediate reaction from this news was positive for value shares.

Recession lock down shares such as Zoom and Amazon were hit while there has been a shift into value shares.  

A good example of a value share which we hold is SATS which is an airline caterer listed in Singapore. A month ago price was at  2.80 and insiders of SATS were heavily buying anticipating a return to normal. As of Friday it has advanced to 3.80. Most of SATS business is in Asia and Asia is gradually opening up. Even Singapore Air has caught a bid.  Singapore and Malaysian banks which have been under stress are recovering from multi year low price to book valuations will benefit from a lessening of pandemic fears.  

The results of the US election are still uncertain. The media has declared Biden the winner but legislative power as to who controls the senate( upper house of congress) is not decided. Without control of the senate, Biden can not get his socialist agenda approved including massive tax increases and phasing in his Green agenda. Odds favour he will not get control.

Foreign funds bought Malaysian shares and bonds last week for the first time in 7 weeks, Singapore and Hong Kong have also seen large inflows of foreign funds.  These funds are buying heavyweight undervalued blue chips.

EWH traded on the NYSE contains blue chip Hong Kong shares most of which have China exposure. It benefits from China growth and pandemic recovery. Notice the 10 % jump in the last 2 weeks.

 

EWM is the Malaysia Fund traded on the NYSE. It holds blue chip value shares. It broke out from a multi month congestion last week showing foreign fund inflow .

Take care

Bill

The benefit of the MCO is it allows us to explore Malaysia without hoards of foreign tourists. A favourite place of mine is Port Weld near Taiping. It is famous for their eagle sanctuary tour.    

No clear winner in the US election

7 November  2020

Dear Fellow Investor,

As of today there is no clear winner in the US election as all the votes are not yet counted. Biden is leading in a few key states which will determine the winner. The odds favour Biden to win although the results are being hotly contested.  Contrary to opinion polls, there was no blue wave in which the opposition party Democrats would sweep to power and have absolute political control in a landslide.  Markets reacted favourably to the results as there was no clear winner and odds favour that the Republicans would continue to control the senate and the upper house of congress. If the Republicans control the senate, Biden could not pass his socialist policies including universal basic income, personal and capital gains tax increases, green new deal which eliminates natural gas and crude oil production, student loan forgiveness, free health care and supreme court packing to install socialist activist judges.

Trading nations including most world markets and  Singapore, Hong Kong, Japan and Malaysia  had strong up moves  on the potential of US legislature gridlock. If Biden is declared the winner, he  will take a less confrontational trade approach to Europe, Asia and China. He wishes to re-join the TPP and renew European trade agreements.

The US Dollar and the VIX dropped while gold, bitcoin and most commodities  jumped  higher.  This anticipates currency debasement, massive money printing and more stock market gains as well as monetary and fiscal stimulus. Mitch McConnell who is the majority leader of the US Senate and Joe Biden although of different political parties are close friends going back many years and may agree on stimulus aid for economic recovery.  

On the home front, the Malaysian budget announced yesterday is the largest in history. There is money for everyone. The technology  and consumer indexes performed well Friday anticipating growth moving forward.

Expect a rebound in 2021  as world growth picks up, lockdowns are less and progress is made with  Covid vaccines and treatments.  China is now distributing a vaccine to  their front line workers and there are 8 vaccines in 3^rd stage trials and if proven will be mass distributed.   

There are very few or no Covid cases in Korea, China, Taiwan and Singapore. Malaysia is making progress. Death rates have dropped. Gradually we are getting back to normal.  Hopefully we can soon travel again.

Take care

Bill

The donkey and the elephant are the symbols of the Democrats and Republicans in the US. The divide gets deeper. Growth, jobs, economic and pandemic recovery could bridge the gap.