Hedge Funds

 30 Jan 2021

Dear Fellow Investor,

The January world market gains in stock markets have been erased by GameStop a small insignificant company selling computer games  . More than 80 billion US dollars were lost by hedge funds who had short sold the company. Short selling is a bet that a share will collapse. The short seller borrows a  share anticipating it will drop and can be bought back at a cheaper price at a later date. The ratio of GameStop shorts compared to outstanding shares was 88.5 % . In comparison the amount of short selling of Microsoft shares is less than 1% of outstanding shares.  Microsoft is obviously a quality blue chip company and not a target of shortsellers.

One of the hedge funds was Point 72 a 20 $ billion hedge fund who was wiped out. They initiated short sales at US 16 per share  based of negative research reports on the company. Other hedge funds joined in. On the other side of the trade were small traders who dealt with Robin Hood and other low or no cost  on line brokers. Because of the pandemic there are tens of thousands of traders staying at home who trade on line to earn extra income. Millions of these traders subscribe to Reddit, a social media platform where users can post stock market information.  A large syndicate of users conspired to post positive news on GameStop and the news spread like wild fire. Massive orders came in and drove the price  from USD 6 a  share to over USD 500 at the high.   Those who were quick to take their profits made instant fortunes. To initiate a short sale one must have a margin account and place a deposit. There is unlimited risk if the shares go up unlike a share purchase where the risk is limited to the price of the share. When the price goes up, the broker asks for more margin. If the short seller does not meet the margin call the broker will force sell the share which drives the share even higher.

Desperate to meet margin calls, the hedge funds last week were selling popular quality highly liquid  shares such as Pay Pal, Apple and Microsoft. This was happening in all markets

Luckily for us our shares were not much affected as they are not the popular crowd following shares.   They are also high quality companies  not as susceptible  to manipulation as GameStop. As there are  more Game Stock type shares shorted by hedge funds we might see more volatility going into February. Stubborn hedge funds who hold on and do not cover their losing shorts will need to sell more of their quality shares, gold and bitcoin  to meet margin calls.

I do not forecast a market collapse. The background is positive. Interest rates remain low. The USD 1.9 trillion stimulus is making its way through the US congress and there is progress on the vaccine front.  Millions of people are getting vaccinated. Once the dust settles, this is a buying opportunity of quality shares. It is very rare for hedge funds to lose especially against small retail traders. I do not think they anticipated the power, the network effect and scope of social media.  

Keep safe
Bill

Singapore year of the ox gold coins. With the pandemic recovery it could be a good year for Singapore.

Dialog

 23 Jan 2021

Dear Fellow Investor,

This week I will review Dialog which we hold for most of our clients.

Bloomberg daily chart of Dialog showing insider buying and selling

Green arrows represent insider buying while red arrows represent insider selling. Buyers are far exceeding sellers. EPF has been the major buyer. The only reason insiders buy is they think prices will go up.

In the last quarter reported in November 2020 revenue dropped by half from the corresponding quarter in 2019. Drop was caused by reduced oil demand with the Covid issues. Despite the drop in revenue there was a 5.3 % increase in net operating profits  due to recurring revenues from their tank farm storage facilities.

Bloomberg research summary shows a consensus price target of RM 4.50 from current level of 3.26 which is a 35% return from current level.

Dialog is our only oil and gas holding and I  bought it because it’s an integrated oil company meaning it has operations in upstream, downstream and midstream activities. It also has international exposure including Singapore, Hong Kong, China, Japan and Saudi Arabia. I also like it because they have a number of recurring revenue streams which protects them during oil price slumps.

From a business point of view, it is  highly rated by Dynaquest with a 7 rating meaning the business is solid and well managed.  They have consolidated for the last few months in a narrow range but have survived the economic  and Covid slowdown.

With infection and death rates declining and vaccines soon to be rolled out, Malaysia and Asian economies should recover. Demand for oil should recover and this share should out perform.  If you have noticed lately petrol prices locally have been rising. Internationally oil prices have also been rising.  This is another sign of economic recovery.

Take care and Happy New Year

Bill.

From the Perth Mint, Year of the Ox symbolizing diligence, persistence and honesty

Zoom Presentation by heads retail research at CIMB

 16 Jan 2021

Dear Fellow Investor,

Today I watched a zoom presentation by  Kong SehSiang who heads retail research at CIMB. His presentation  focused on investment/ trading opportunities and risks which will drive the KLSE for 2021.

Opportunities are in technology, commodity related shares, and Covid recovery linked shares including reits, banking, oil and gas and consumer products.

He recommended Public Bank, Inari and Telecom.

Risks include slow rollout of Covid vaccines, US/China trade issues, sharp inflation risk and shifts of funds out of Asia and back to developed  markets.     

He mentioned foreign fund and institutional money flow into and out of  the KLSE. The big boys are out while retailers are the main participants. The recent strength of the Ringgit   is evidence of money flowing into MGS (Malaysian government bonds) and blue chip shares by foreign funds. The 3 year trend of outflows has stabilized.

I recently sold a large position in Heim and Carlsburg  for a client. Both are relatively illiquid and I told the client it might take a few days to get a good price. I parked  sell orders at the mid point between the bid and offer and surprisingly the orders were taken immediately by a buyer. Heim and Carlsburg are not  retailer shares so I would assume they were bought by a  professional.   They are both breweries and will benefit from the Covid recovery. They are also  value shares trading at  reasonable prices paying a solid 3.9- 4.6 % dividend but are not a crowd favourites.

One of the guests asked how long will the Malaysian technology sector run ? Kong advised to watch the Nasdaq and once the trend turns by breaking the 200 day moving average, that could be the top of the KLSE technology sector.   

I personally watch the CRB index which is a basket of diversified commodities to measure the inflation risk. The CRB is currently in a strong up trend and this will continue to benefit commodity related shares including oil and gas. It also is evidence inflation is picking up .

Kong also mentioned about the 10 year Palm Oil cycle which still has 5 years to run and that would benefit plantation shares long term moving forward.

With the MCO (movement control order) extended more people will stay at home and trade and that will benefit Ace/ 2^nd board shares so for traders there are opportunities for fast money.

Keep Safe
Bill

 

Trump’s own political party is stabbing him in the back. They are rhinos. Republican in name only

Value Stocks Outperform Growth Stocks

 9 Jan 2021

Dear Fellow Investor,  

 In the last 7 out of 8 world recessions recovery favours value stocks which outperform growth stocks. Reasons include stimulus and rising interest rates. This will benefit banks, commodity related companies and beaten down consumer stocks.

Weekly chart of Berkshire B shares with a 50 week moving average.

Berkshire B is a holding company founded by  Warren Buffet which holds  a portfolio of value shares. We hold this for some of our PGWA accounts.  It is trading above its 50 week moving average and just broke a new high confirming the up trend. Major holdings include Bank of America, Kraft, and some  recently purchased Japanese conglomerates with a focus on commodities. They recently sold a large block of Apple shares and bought Japanese value shares and Barrick Gold. Buffet is anticipating a return to inflation as evidenced by the recent positioning of Berkshire.

 

                    Weekly TLT which represents the US 20 year Treasury Bond

TLT moves inversely to interest rates. Price is trading below its 50 week moving average and has broken support. The down trend  shows gradually rising rates. Bank shares benefit from higher rates and that is why bank shares are rising. All 3 major Singapore banks rose strongly Friday.

US T Bonds are the benchmark for world interest rates and bear watching as central banks flood liquidity into markets.

Joe Biden and his Democrats will accelerate the debasement.  That is why commodities, gold, stock markets   and bitcoin are well supported.

 Keep safe

Bill 

Happy New Year 2021

 2 Jan 2021

Dear Fellow Investor,   

Happy New Year and it looks like 2021 will be happier than 2020. Vaccines are being rolled out across the world and within a few months economies will bounce back. Stay at home and travel restrictions will be lifted. Consumers will be spending.  Singapore has already started the vaccine rollout. Japan by March intends to vaccinate the whole country  in time for the Tokyo Olympics which is scheduled for 23 July.  Malaysia plans to rollout in February as it was announced on CNA today that we would get our first batch of the Pfizer vaccine by February.  

Economic stimulus and low interest rates will also boost GDP and economic recovery.   Japan has launched the biggest stimulus on record which  has launched a big rise in the Nikkei. Our positions in Nidec, the maker of micro motors, robotics and factory automation systems are benefitting.  Our EWH, the Hong Kong blue chip ETF is also doing well as it is a play on China. China is back to normal as their Covid problem is mostly solved. They  are in progress rolling out a nationwide vaccination drive. Our position in SATS Singapore has risen substantially from the March lows.  

Being an airline caterer they were effected by the drop in airline traffic but as they have a strong logistics arm and exposure to China they are recovering.  They have the cold chains in place to deliver the Pfizer vaccine which needs  minus 70 degrees C to survive. The competitive advantage of SATS is their innovation with regards to AI, robotics, and big data. They also have since their founding in 1972 shown consistent increasing returns on invested capital, Warren Buffet’s favourite indicator.

Doing a sector analysis of the KLSE, the technology index has the best looking chart. It moves from high to high. Consumer products are also performing.  This is in spite of pervading pessimism and bad news for example  the rail project cancellation between Singapore and Kuala Lumpur and the US sanctions placed on Felda and Sime Darby  on their palm oil exports.   Our positions in Kim Loong and United Plantations were not effected.  We hold no construction shares so this rail project news should not effect us.

Happy New Year and take care,

Bill

I would like to recommend a movie now playing on Astro,
Call of the Wild which is a story of greed for gold and a faithful dog named Buck