Unusual Market Correction in US

28 May 2022

Dear Fellow Investor,

The US markets have suffered a 7 week consecutive correction which has not happened since 1934.  The headlines and financial blogs have been universally negative and scream of a market crash and possible recession. Fear and pessimism is at a historical extreme as measured by several sentiment indicators.

On Thursday and Friday  the Dow Jones, S & P, Nasdaq and Russel 2000 small cap index had dramatic reversals rising in the case of the Dow well over 1000 points. European and Asian markets followed. Up volume outpaced down volume by over 80 % showing buyers overcoming sellers.  Open interest on the index futures contracts reversed as short sellers covered their short futures contracts and reversed to long positions. Hedge funds dominate this space while big money institutions with their algos dominate the actual equity side.   The VIX index which signals fear and greed dropped from fear to neutral. 

Of major importance was the price action of the US 10 year treasury bond which is the interest rate benchmark for world economies. In the current environment of extreme uncertainty and fear  a drop in the US 10 year bond shows panic liquidation of all risk assets including gold, equities, bitcoin, and a move to US Dollar cash and US T Bonds. If the US T Bonds move up gradually  it shows money is moving into risk assets. If the yield on the 10 year US  T Bond moves from the current level of 2.74 % to 3.5 % expect a world rally of risk assets.

The possible catalyst for this move was a statement by a US federal reserve governor on Wednesday that they may consider to slowdown interest rate tightening in September which would be just in time for the upcoming November election.   

The only thing in my opinion to upset the apple cart would be some black swan event not discounted by the market.  

On Friday, the Singapore and Malaysia ETF's EWS and EWM traded in New York were both up over 1 % signaling a positive start next week for our local markets. 

Take care
Bill

Should Biden's party lose power in November, expect inflation and energy prices to drop. Oil drilling in the US and oil pipelines will open which will mean the US will be energy independent again as when Donald Trump was president. The US will be able to resume exports to Europe and the UK.

Local and Singaporean Market Under Pressure

21 May 2022

 

Dear Fellow Investor,

 

Our Singapore and Malaysian shares have been holding up while those in the US markets have been under pressure.

 

“Do I sell our under performers now or hold on?”

 

There’s a simple way to answer that question. First, check if the company makes money. If it’s profitable, there’s a chance the stock might recover. If it’s not, you should consider selling.

 

Three examples are Apple, Microsoft and Amazon.  These companies all make money. They have an investment moat and are of the highest quality. It was reported by Barrons that the Swiss National Bank bought 8.2 million shares of Apple on the recent correction as well as large positions in Microsoft, Disney, Amazon, GE, Tesla and other beaten down blue chip shares in world markets.

 

The fund manager reported that in the current market turmoil and currency volatility there are not many alternatives to high quality blue chip shares. If they pay dividends that is so much the better. With interest rates and inflation rising holding cash and bonds is a sure way to lose money.

 

Although the Federal Reserve and most central banks have been raising interest rates, the real interest rates, that is inflation minus the federal funds rate still offer negative returns with the potential of large capital losses in bonds should rates continue to rise.  For example if inflation is 8.5 % and the federal funds rate is 3 % the guaranteed loss is 5 %

 

High quality businesses such as Apple and Microsoft offer dividends, high profit margins, cash flow and have the potential for growth and recovery.

 

The fund manager has also been adding to his physical gold holdings to protect the purchasing power of his shareholders’ funds.

 

The Swiss are known for their conservatism and skill in preserving wealth. This is the space we want to be in for now.

 

I have been looking at some high quality China shares that have been beaten down. PEs are at decade lows which means downside risks are limited. Some pay handsome dividends and offer recovery potential. Interest rates have been falling   which provide a tailwind and the Shanghai lockdown is transitory in my opinion. 

 

Take care

 

Bill

 

Biden has shut down oil pipelines in the US which has contributed to inflation. higher interest rates and the possibility of recession. He has also been attacking free speech via social media to silence his critics. His failed policies have caused him to have the lowest approval rating of any recent president. Now mothers are having trouble getting baby formula because  of government meddling and increased regulations by the Biden administration.  Should the Republicans take back power in November 2022, expect a major turnaround. They will open the oil pipelines and allow drilling for oil again which could drop oil prices by 40 % and solve the inflation problem.  

Stability

Dear Fellow Investors,

 Stability

           Weekly TLT or the 20 year Treasury Bond as traded on the Nasdaq

This chart reflects the climb in US interest rates in 2022. 20 year interest rates have climbed from 0.5 % to now just under 3 % This has resulted in massive losses by pension and bond funds as well as individual bond investors.  It has spilled over into stock markets worldwide. The technology focused Nasdaq is down 32 %, the Dow Jones 14 % and the S & P 12 %. European markets have also been hit. Most Asian markets have also suffered.

Our KLSE and Singapore markets have held up relatively well.  The KLSE since the beginning of 2022 is down 1.47% while Singapore is up 2.16 %

Malaysia has been supported by high palm  and crude oil prices while Singapore has benefitted from strong property and financial  stocks. Inflation and interest rates have been relatively benign compared to the US and UK. Singapore and Malaysia also have virtually no exposure to Ukraine and Russia. To get through the Covid pandemic aid money was given to those having financial stress but not on the scale of developed countries.  Malaysia and Singapore gave out a few hundred million while Biden spent trillions.

Going back to the weekly 20 year US bond chart, price has fallen to the 2017-2019 solid weekly support. This means interest rate stability at these levels and a possible peak in US inflation and a bottoming out of US stock markets. For stock markets to stabilize, interest rates must stabilize as stocks are a derivative of bonds.

On Friday, world markets reversed and closed much higher. The catalyst was a brief statement by Jerome Powell warning that he was concerned about deteriorating liquidity. It was a signal to traders that he might pivot to easy money and a resumption of QE. QE will lower US interest rates and that is why the 20 year Treasury bond on Friday went up over 3 %, a huge and unusual move.

If Powell follows through on his statement expect a good rally which will benefit our holdings. Do expect volatility but rest assured we hold solid companies for you that should get us through the storm.

Keep safe

Bill

Baby giraffe in US zoo fitted with custom leg braces to help it walk properly.

More on Tangible Assets

 Dear Fellow Investor,

Place a Priority on Tangible Assets

Worldwide governments have been unable to protect the purchasing power of the currencies they issue. Inflation in the US is over 8.5 %, in the UK 7.5 % and some countries in Europe over 10 % . Singapore is over 4.5 % and Malaysia at 4 % . This is like a tax affecting everyone rich or poor. 

How can we protect ourselves ?  As governments continue to print money out of thin air and create budget busting programs, the purchasing power  of currencies will continue to decline. We need to allocate our capital into assets which need no support from the government.  These could be productive farmland, precious metals, rental property including REITS, commodity producing companies, and high quality blue chip dividend shares of companies producing basic necessities.  Diversification in these types of assets is the key for wealth preservation.  

In this weeks Edge, Tong's column lists the 200 biggest losers from their 52 week highs in Malaysia, Singapore, S & P 500 and Russell 1000 stocks.  Most have suffered over 50 % or greater losses. Most are highly geared growth stocks trading at high price earnings multiples, declining revenues and suffer from rising interest rates. Netflix Inc, Zoom Communications, Facebook and Pay Pal are on the list. A careful study of these shares will help us avoid potential disasters .   

Because of rising inflation the US Federal Reserve has been under pressure to raise interest rates.  The hawkish rhetoric has been magnified in the mainstream media and has spilled over into stock markets. There has been panic selling and bearish sentiment is at an extreme. 

As mentioned in  a previous report the benchmark 10 year US treasury bond   has not spiked which would be the signal of a market collapse and a world wide bear market.  If the 10 year bond continues to rise gradually, our strategy will keep us safe and help us ride out the storm. Because  the US Mid term election in November is fast approaching, I do not foresee any dramatic interest rate rises or dramatic stock market falls. 

Biden is behind in the polls  by a wide margin and a market collapse would guarantee his party losing power. Biden and his party control the US Treasury and Federal Reserve and they have many tools to control the market.  One tool is the plunge protection team which has unlimited funds to buy equity ETFs should there be a market collapse. 

Our Malaysian and Singapore shares meet the high quality requirements and our shares should benefit with the opening up of the economy. I  read in the Star today that pubs will reopen next week.

Take care

Bill

A giant grouper over 60 years old and weighs over 100 kg from the Underwater sea world in Langkawi. We visited last week and is a great time to travel. not crowded, reasonable costs and friendly locals. Business is recovering after 2 years of Covid.