Flash Alert

Dear Fellow Investors, 

Who will blink first the fierce Russian woman or the bear?

A Brief Reminder:

Don’t Chase Tempting Rallies

US Stock prices rallied an amazing 21% over the last three days. All world markets enjoyed a strong bounce including the KLSE and SGX. The bounce was enough to pull the Dow out of 11 days in a bear market and spread some welcome cheer all over the world.

The rally gave many investors hope that the Covid-19 pandemic is in decline and the world economy will slowly get back to normal.

Unfortunately, the positive news about the pandemic is based more on hope than reality. Covid-19 infections are continuing to increase nearly everywhere – and so are its deaths. It is way too soon to predict with any certainly that the tide has turned in the fight against the virus.

Market history also predicts that further stock market plunges are on the way. Sharp – but brief – rebounds within major downtrends are common. Most of them are traps for investors who jump back into the market only to see it plunge again. The early birds end up feeling like cooked geese when their new losses are added to those they suffered when the crash started earlier.

The safest way to avoid being lured into one of Mother Market's rally traps is to only buy deeply discounted blue-chip dividend stocks on days when stocks are sinking. Stay safely in cash or gold during rallies.

There will come a day when the Covid-19 emergency will really be coming to an end – and a broad recovery will finally get started. That will be time to do some last-minute buying. However, I don't think we are there yet.

That's all for today.

Bill.

An interview of Bill Gates on CNN

28 March 2020

Dear Fellow Investor,

Bill Gates in an interview on CNN Thursday said that if President Trump takes drastic action and shuts down the US as China did infection rates in the US could plateau by end of April. Trump has the legal authority to do so by declaring a national emergency. He is resolute and not afraid to take controversial action and will do so if needed. He does not need approval from congress to do so.

Trump had a call Friday with President Xi to discuss the virus.  That’s a good sign that national leaders are cooperating to fight a common enemy. Perhaps Xi shared with Trump how to shut down China and solve the problem.

Gates mentioned he has donated USD 100 million from his foundation to develop a vaccine/ cure for the Covid 19. He gave a one year to 18 months timeline.

He also mentioned his foundation is working with other biotech firms to find a vaccine/ cure with the current scientific and medical advances  the pace is accelerating.

Gates was cautiously optimistic about discovering a cure.  With the Trump 2 trillion stimulus + a virus vaccine/ cure that would be the catalyst for market recovery.

Some of the world’s most prominent investors are not waiting for a vaccine and are buying quality shares that have been beaten down by the crowd of fearful players.

Shares that a month ago were grossly  overvalued are now undervalued.  The same is true for Malaysia. Even the long term bear, Tan Teng Boo of ICapital is buying beaten down KLSE shares.

The current crash reminds me of the 2008 collapse.  We were holding quality blue chip dividend shares and suffered more than a 25 % drop but we survived by no getting caught up in the panic.  With what cash we were holding we bought Japan Tobacco the cigarette company that  was eventually privatized.  It had a fortress balance sheet, steady cash flow, a well managed simple business and no debt.  They never cut their dividend and steadily advanced amidst the doom and gloom.  Market turmoil was extreme as many banks and businesses failed but smokers continued to smoke and profits continued to roll in.

By 2010 we completely recovered our losses by holding the course and following our quality share dividend strategy the same as we are doing now.  

In the meantime we should be grateful to the Malaysian government in taking strong lock down measures and providing economic stimulus. It benefits all of us. Some of our clients have brought back their children from Australia/ the US and UK.  They have a much better chance in my opinion of survival here than overseas. 

Invest well and grow your wealth

Bill

Critters of the week are our friends at the Bejing Zoo.

Bejing opens public areas at their zoo on 23 March as most zoos world wide remain closed. 

Fear Levels Are Dropping

21 March 2020

Dear Fellow Investor,

Below are 2 charts. The first is the one-month EWM which is the ETF traded on the NYSE representing the blue-chip shares in the Malaysian market. The 2^nd chart is the Dow Jones. On Friday the Dow dropped 4.55 % while the EWM went up 5.42%

EWM up 5.42 % on Friday

Dow Jones down 4.55 % on Friday.

The VIX index which I spoke of last week also took a big drop of 8.2 % meaning fear levels are dropping.  It does not mean the worst of the panic is over but appears that the fear is lessening.  Should price spreads start to narrow meaning volatility drops, it could mean the crowd fear transitions to uncertainty. Only a terrible unknown event could trigger another collapse. Good news such as sustainable progress on the virus infection rates as is happening in China, Japan, South Korea and Taiwan could turn all world markets to the greed or bull phase.  The Dow took a big drop in the last 45 minutes of trading due to a political statement from a New York politician which has nothing to do with Malaysia.

CNN continues to stoke fear in its broadcasts as it politicizes the virus to try to hurt Trump.  They showed a Covid patient in a Florida hospital bed with multiple tubes and breathing apparatus.    He described his agony comparing it to spiders in his throat eating his flesh.  He was smiling and well-spoken so I wonder how bad was his condition? When the reporter asked him about his recovery progress, they cut his microphone.   

On a positive note, polls have shown that Trump’s handling of the virus is over 60 % positive. His skills as a company CEO handling complicated real estate deals are being applied to the current problem.  It seems politicians of both parties are coming together in this national emergency and this gives me hope for a solution.

Covid-19 is a temporary and not a structural issue. In China, there are already the first slight all clear signals and in certain regions everyday life is returning. We should not underestimate the damage but every crisis is followed by recovery and recovery leads to a surge in consumption.    

Invest well and grow your wealth

Bill

Worst weeks on record

14 March 2020

Dear Fellow Investor,

This is a quick update to say that we’ve just had one of the worst weeks on record and I’ll share a few thoughts.

The difference between a crash and a bear market is that a crash happens quickly, whereas bear markets are drawn out. Yesterday, the VIX (market fear) rose above 80, which is comparable with the 1987 crash and the credit crisis in 2008. Given the enormous swing between bonds and equities, in my opinion, the 1987 crash is the nearest comparable.

5-year chart of the VIX. The VIX is the fear index. The higher the VIX the higher the fear. It is at the highest level since 1987. Every time it has reached these levels the market recovers.

The VIX moved to historical highs

Source: Bloomberg – CBOE VIX Index 

I said the VIX had spiked to buy the dip level last week. Unfortunately, I recommended a modest trade to buy that dip.  Not my finest hour, but I’m confident we’ll be back on track soon.

This week’s crash followed that downward move. In other words, the previous market falls triggered a round of panic selling, presumably a liquidation of some kind that we haven’t yet heard about.
In 1987/ 2002/ 2008 and 2015/2018 the VIX spike marked the low

In any event, I want to remind you of events in 1987. The market fell a bit, rallied, paused and then fell a lot. It took two years to make a new high, and the lowest day was the panic day – equivalent to yesterday (Thursday). Looking at the event today, the fall is comparable as is the VIX spike.

I suspect that the shock is done and equities are rallying hard today, which is reassuring, but there will be aftershocks. So far Justin Trudeau’s wife, Tom Hanks and Brazilian President Jair Bolsonaro have caught the virus. We should expect much more of that as the bad news hits home. The key will be whether the market has accepted that and manages to shrug off virus-related news.
Gold held up right until the end, before falling yesterday. Despite owning gold, I see that as good news because it means all assets have reacted and it is further evidence that we have seen the worst. For the market to collapse from here, we would need to see something terrible happen that we haven’t already thought about – ie, not a virus story or related economic weakness due to the lock down.

I will not make a recommendation today, despite the temptation. Best to let things settle down and see the long-term structural changes begin. Market shocks of this magnitude always lead to significant changes. Perhaps we travel and socialize less, not just next month but permanently. Supply chains will change, and perhaps we won’t embrace cities in quite the same way. It will be fascinating exploring these new trends.

Today’s rally is very welcome and I’ll write a longer update next Saturday. Have a good weekend, try not to worry and stay safe.

Invest well and grow your wealth
Bill

Critter today is a special cat.

“When I first saw him, he immediately stole my heart. His wrinkled pink skin, as fine as a peach, and his turquoise eyes, I was in love!" said Sandra.

An outcome from the drastic action taken by Fed to prevent a stock market crash.

7 March 2020

Dear Fellow Investor,

Since 10 February 2020, the Dow Jones in only 11 days and other world indexes have lost over   9 trillion USD of wealth from stocks. This is more than the GDP of many countries.  This will be devastating for pension funds, the world economy and Trump’s re election and if this continues it could lead to a world wide recession or worse depression.

One hour before the Friday market close as the Dow dropped over 1000 points, March 6 the Boston Fed President, Eric Rosengren, made a speech in which he said, in light of the Coronavirus and the possibility that the 10-year US government bond yield could fall to 0%, "We should allow the central bank to purchase a broader range of securities or assets.  Such a policy, however, would require a change in the Federal Reserve Act."

The Federal Reserve Act was changed in 1932, 1945, 1965 and 1968 to enable the central bank to create more credit whenever the need arose.  It would not be at all surprising to see it changed again now to allow the Fed "to purchase a broader range of securities or assets" to prevent a stock market crash that would be sure to hurl the United States and the rest of the world into a severe recession or depression.

The stock market rebounded 800 points  off its lows on Friday after his remarks.  His speech may push stock prices higher still on Monday, although that is uncertain given the speed at which the virus is spreading. 

The Fed has been driving the economy by pushing up the stock market and other asset prices since 2008.  If asset prices crash now, the impact on the global economy could be devastating.  It would be naive to believe the Fed will not fight to prevent that from happening.  Rate cuts and even more QE won't be enough.  

Therefore, investors should not be surprised if the Fed takes drastic action to prevent a stock market crash.

As reported by Richard Duncan economics.

As an investor, I always follow price and its relation to volume. The last 7 days of price action show ultra high volume and wide price spreads. This reflects climactic action, extreme fear and panic as many uninformed and fearful traders  sell near the low. 

On the other hand, professionals are buying as price has congested and risks are relatively low. There are 2 likely outcomes: a V shaped recovery or sideways recovery action.  

My bet is recovery.  The US Federal Reserve holds the levers of financial  power and they will do Trump’s bidding to make sure he wins re election.  This will indirectly benefit Asian markets including Hong Kong, Singapore and Malaysia.   

Some of the world’s biggest pharma companies including Gilead Life Sciences-  who invented the vaccine for Hepatitus C and Aids are working full steam ahead for a Covid19 vaccine.  They are in the 3^rd month of human trials in China and may have some positive results in another month. Trump just signed Friday an 8 USD billion aid package to tackle the virus issue.  They are not resting and the US and China governments and private industry are taking positive concerted action.

Invest well and grow your wealth

Bill

Critter of the week is a lucky wildcat.