Massive fear campaign in the US underway

18 Dec 2021

Dear Fellow Investor,

Massive fear campaign in the US underway

The Dow on Friday was down 505 points but yet held weekly support. The Nasdaq was slightly down . 

This is an epic fear campaign from the top man.  Joe Biden announced , “Unvaccinated Americans face  a winter of death and illness.” This was on all the headlines in the mainstream media including CNBC and CNN. To reinforce this message of fear, Covid experts and government officials  were paraded out saying the new variant, Omicron  was spreading uncontrollably and  we must prepare for lockdowns and restrictions on family Christmas gatherings.

Scared money went into the safety of US treasury bonds pushing the 10 year treasury yield down to 1.407 %. The US Dollar strengthened slightly, stocks sold off and gold caught a bid while crude oil dropped fearing supply chain disruptions and Covid travel restrictions.  

This is the classic fear trade and spells opportunity. As revealed in a recent letter the MMRI indicator measures if it is safe to buy a market dip in oil, gold, crypto and stocks. It measures the US 10 year treasury yield times the dollar index divided by 1.61. Presently after last night it was 82.3 which means buying the dip is low risk.    

Lets take out our list of quality local and Singapore shares and take advantage of this opportunity.  

From HL Bank research

...foreign shareholding may have bottomed. Foreign shareholding of Malaysian equities has

been hovering around 20.2% (record low) to 20.4% for the most of 2021 (Nov: 20.3%). We are

inclined to believe this has scrapped the bottom of the barrel as (i) these levels are below the

GFC-low of 20.7% and (ii) foreigners have been net sellers on Bursa in 7 of the past 8 years

(including 2021) with a cumulative net outflow of -RM68bn. Surprisingly, Budget 2022’s “market

unfriendly” measures did not result to foreign net selling in Nov as one would naturally expect

(recorded a slight net buy of +RM167m instead), suggesting their shareholding could have bottomed.

Will they return? Post GFC (i.e. since 2010), the KLCI has displayed a pretty decent correlation

of 69% to foreign shareholding levels; the correlation reading would be even higher at 76% if the

Covid period were excluded (where retailers bought up the market despite foreign exodus). As such, with foreign shareholding showing signs of bottoming out, we reckon this should limit

downside risk to the market. The question of them returning though is a tough one, especially given Malaysia’s country specific headwinds from the Prosperity Tax and higher stamp duty.

Stocks that we like which have low foreign shareholding levels vs their historical averages are

Maybank and Public Bank which we hold for our managed accounts.

The US Federal Reserve reversed course and said inflation is not transitory and is now endemic and persistent. They also announced tapering and raising interest rates which in my opinion is another lie.  This added to the fear. Biden has the lowest popularity of any modern president  and since he controls the treasury and Central Bank it is unlikely monetary policy will be tightened.  If he did his own party might try to get rid of him.  The midterm election is next November and based on current polls Biden’s party will lose control of Congress.

Thank God Malaysia has gotten Covid under control. Booster shots are being rolled out and we are free to travel and enjoy family gatherings .  Unlike in the US, our  prime minister has not embarked on a fear campaign and is supportive of recovery.

Next week is Christmas, so I will not produce a market report.

For our Christian friends and clients we wish you a Merry Christmas and Happy Holiday.

Bill