US Election

 25 Sept 2020

Dear Fellow Investor,

As we approach the 4 November election in the US expect more fighting and bickering between the politicians of both major parties.  Mixed in with the political fighting are the demonstrations, riots, civil unrest,  Covid lockdowns, China trade war  and on a positive note the possibility of fiscal stimulus.  The uncertainty has effected world stock markets. 

If there is agreement for fiscal stimulus, that would remove a major uncertainty in world stock markets and that could be the catalyst for recovery. The other recovery catalyst could be a Covid vaccine.  

Major progress was announced yesterday by Johnson & Johnson  that they have launched 3^rd stage clinical trials to 60,000 volunteers.   Several other major pharmaceutical companies including Sinopharm have also launched 3^rd stage trials. Should a trial prove successful expect a massive share recovery on the day of the announcement. 

Weekly Dow Jones with a 50 day weekly moving average

The recent Dow correction although painful for momentum  and short term players has held the 50 week moving average which is a traditional support area for strong hand investors and institutions. The Nasdaq also is showing support at the 50 week moving average.

Malaysia continues to suffer from the political virus but has the Covid virus under control. Business continues to return to normal . The PM has done an excellent job on the Covid and hopefully can solve the political virus.

Our  plantation and tech shares continue to perform.

We will hold a zoom briefing this Saturday at 11 am. I sent out a survey yesterday and would appreciate letting me know your preferences as far as time/ date/  agenda.

Take care

Bill

 A herd of cows which produce milk for Vinamilk, a blue chip Vietnamese share. Major shareholder is F & N.  

Warran Buffet and Japan’s 5 biggest trading houses

 16 Sept 2020

Dear Fellow Investor,

Last week, it emerged that Warren Buffet had invested USD 6.3 billion of Berkshire Hathway’s capital in Japan’s 5 biggest trading houses. These giant conglomerates are involved in everything from commodities, textiles, technology manufacturing, food, retailing, shipping and chemicals. Companies are Mitsui Ltd, Marubeni, Sumitomo Corp, Misubishi Corp and Itochu. They are trading at multi year lows and are paying high dividends. They are also trading at less than book value. My view is that Buffet is anticipating inflation and pricing power. He made a big move into gold recently as another inflation hedge.  His cost of capital to buy the Japanese shares was 0.42 % as he locked in ultra low Japanese rates. Dividends more than cover his cost of carry.   

Commenting on the transactions, Buffet said, "The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships... I hope that in the future there may be opportunities of mutual benefit."  All these companies are profitable, have strong moats and a high barrier to entry. They also are long established. Sumitomo was founded in 1670 while Mitsubishi was founded in the mid 1800s. 

Value in Japan

The Japanese market has been a fertile hunting ground for value investors for many years, especially in the market's small and micro-cap sections.

Berkshire's size means it can't really participate in small-cap stocks, which may be why we have not seen this sort of move before. The fact that Buffett has made his move now suggests that he sees value with these businesses. Shares of all five trading houses were trading at multi-year lows before the deal was announced.

What's also interesting is the fact that this deal has been announced less than 12 months after Berkshire borrowed $4 billion in Japan. At the time, the deal was the biggest yen-denominated issue ever by a foreign multinational. The most significant chunk, 146.5 billion Yen ($1.38 billion) in 10-year debt, carried a 0.44% coupon. Berkshire was able to borrow this money for almost nothing. In comparison, Mitsubishi Corp stock currently supports a dividend yield of 5%.

Considering Berkshire's capital cost, its Japanese investments don't need to achieve an outstanding return to yield a positive return for the conglomerate. Based on this straightforward analysis, it would appear that Buffett has completed an astute deal here. He has borrowed money at almost nothing in the market and invested it in a diversified portfolio of highly respected global institutions.

This could also be a sign that the Oracle of Omaha is becoming more confident investing outside of the United States. In recent years, he has lamented the high prices of U.S. equities. As a result, he has stayed out of the market and allowed Berkshire's cash pile to expand.

Berkshire has also been a net seller of U.S. equities this year. We will have to wait until the third quarter 13F filing is published for further information, but if Berkshire has stayed away from U.S. equities while increasing its international holdings, this could be a signal that Buffett himself is starting to sour on the prospects for the U.S. economy.

It is notable that he has been selling U.S. stocks this year while spending billions in increasing Berkshire's Japanese interests.

Overall, it seems as if Buffett's decision to borrow at near-zero interest rates in Japan and reinvest this cash into diversified conglomerates is a sensible one, which aligns with his value mentality and could help the conglomerate earn higher returns on its capital than it would otherwise be able to do in the U.S. market.

 

Extracted from Guru Focus and Bloomberg work station.

While researching for this letter I reviewed the latest 2020-2021 Japan outlook  from Daiwa Securities. The biggest risk to Japan is a 2^nd wave of Covid but they feel it a low odds probability.  Japan, Taiwan, HK Singapore and Malaysia infection and death rates are dropping and in Taiwan there are no cases. Economies are slowly returning to normal. This is another support for Buffet’s purchases and a proxy for growth in our Asian investments.    

Take care

Bill

Spartacus the serval cat found safe after escape from home

September 14, 2020

MERRIMACK, NEW HAMPSHIRE (AP) — An 18-kilogramme African serval cat named Spartacus has been found safe and sound after escaping from his home and spending days in the New Hampshire wild.

Is the Worst over for Asian Stocks?

11 Sept 2020

Dear Fellow Investor,

Is the Worst over for Asian Stocks? Last week I was waiting at the taxi stand across from the KLCC. It began to heavily rain and I resigned myself for a long wait.  As luck was favouring me, a taxi soon stopped. Usually when it rains there are few taxis on the road.  The driver told me that his business improved during the rain. He did not have much competition. I complemented the driver for being out on the road during the severe storm   Most drivers will wait for the rain to stop just like most investors who will stay out the market during times of uncertainty. As Warren Buffet would say we  pay a high price for a cheery consensus.   Is the worst over? Many economist and investors are pessimistic and negative. The crowd view is that the glass is half empty rather than half full.    On a positive note, Asian economies are coming back to life.  Restaurants see more customer traffic.  Mall business is picking up. Airlines passenger loads are increasing. Covid death and infection rates are decreasing. Progress is being made on a covid vaccine. There are fears about the November election in the US but this should not effect the shares we hold.  If Biden wins he is on record that he will raise taxes and increase regulations, this will slow America down and Asia will benefit. If Trump wins he promises to lower taxes and  stock markets will benefit. Asia wins either way. Short term expect volatility. The opposition party in the US is blocking fiscal stimulus to the unemployed to hurt Trump. This is causing a market correction. They have blocked business protection loans as well as personal stimulus payments. I think they will be punished by voters in November and Trump will win. Weekly UST which represents a basket of 7-10 year US Treasury bonds. The UST is the benchmark for interest rates world wide. As long as this index is stable world stocks will not collapse.  It defines the central bank policy of low interest rates. Gold and precious metals continue to be well supported which also reflects the massive liquidity pumped into world markets. Equities are the only game in town but we still need to be selective and avoid popular crowd favourites such as Google, Facebook, Apple, Tesla, Amazon etc. I am looking at Japan and Vietnam for under valued opportunities, I will share my research next week on these markets.    Now is a good time to visit the Taiping Lake gardens. No overseas tourists, no crowds, no Covid, and very reasonable prices. Dolly and I plan a visit.

Opportunities of the week

 4 Sept 2020

Dear Fellow Investor,

To me controlling risk depends upon sorting through an array of stocks available and pulling out a rare opportunity: a high performing, profit generating well positioned company that is suffering a short term mispricing. The goal is to not overpay.

This week will review 2 opportunities we hold which meet these criteria.   

The first is Wellcall Holdings: From a recent analyst report from Interpac Securities:  

Wellcall investment merits are: 1) lean/efficient management that translates into higher margins, 2) sustainable growth in the hose replacement market, 3) attractive dividend yield of 5.8%, and 4) 3) JV with Trelleborg to distribute composite hoses. Risks to our call are: 1) raw material commodity price/exchange rate volatility, and 2) slower than expected economic recovery.

 

Recent company visit to Wellcall Holdings in Ipoh with the CEO and Interpac analysts.

The other share that offers good value at current price is SATS a Singapore listed airline caterer. It has been beaten down by the Covid hysteria but is finding support and heavy insider buying at current levels. SATS is Asia’s largest food and gateway services network. They have a fortress balance sheet and they are leveraging on growth in Asia. They have a large presence in China whose domestic air traffic is recovering. Their Asian cargo handling business is also  recovering.  

SATS is a play on Covid and  progress on  treatments and vaccines. Insiders including large institutions and Alex Hungate the CEO  have been supporting this share at the current price seem to think there is progress on the virus. Following the smart money is always a good strategy.

Warren Buffet recently made a multi billion purchase of  Japanese shares for his Berkshire fund and sold some of his overvalued US shares including Apple. The Japanese market has been ignored for many years by most investors and suffers from gloom and pessimism. Value is there and that is why Buffet bought.   We hold in Japan Nidec the world’s largest maker of micro electric motors. They have performed reasonably well.  Perhaps Buffet bought Nidec ? I will check with their investor relations.

He also bought a large stake in Barrack Gold Mines as he has turned  bullish on precious metals.

Take care

Bill

This dog travelled more than 10000 km to join its owner in Australia after being separated from its owner who had taken a holiday in the US   . It suffered through cancelled flights, quarantines, loneliness, delays .  It immediately recognized the owner after 3 months of separation after being reunited. Reported by CNN.