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.