Smart money is buying while the uninformed emotional retailers have been heavy sellers.

3 March 2018

Dear Fellow Investors,

Dolly and I just returned from a relaxing one week holiday in Adelaide. Adelaide is laid back, uncrowded with many attractions including a world class zoo, interesting museums and friendly and honest locals.

My brother and his wife from the US joined us and he left his hand phone in an airport taxi on the way to our AirBB  The next morning my brother’s phone was returned by an honest driver.  

Our hostess had made  calls to the airport taxi operators and they messaged all their drivers.

The Australian economy is doing well. My shopping basket indicator which observes how much people are buying shows Coles supermarket customers have full baskets which include high quality cuts of meat, fish fruit and vegetables .  Australians are very health conscious and spend a lot on high quality food.

We got an objective view of the economy by visiting Phillip Securities who have an office in Adelaide. The office  is manned by an independent fund manager who has extensive knowledge of Australian shares.

He shared some valuable research on the resource sector and the market in general.

For Malaysians who have Phillip PGWA accounts, we can purchase quality shares in Australia without being subject to their high capital gains taxes.  Do call me if you want more information on this.

This can provide us with diversification into a strong AUD currency, a well managed economy and a strict regulatory environment.

Gut wrenching volatility and extreme emotions have dominated world market action in the last 2 weeks.

Smart money is buying while the uninformed emotional retailers have been heavy sellers.

Fears include a potential trade war initiated by Trump, higher interest rates and QT (quantitative tightening).

I am not concerned presently but should the smart money move to the sell side we must take preventive action.  Our shares are holding well. Our  shares are all solid value, low or no debt  and pay solid dividends. Our recent purchase of HL Bank is  of  the highest quality and will benefit from higher interest rates.

Invest well and grow your wealth,

Bill

Today’s critter is a greyhound we met in Gleneig  a seaside resort near Adelaide.

Australians love animals and this greyhound was adopted after having retired from racing.  Perhaps he under performed at the race track and the owner put him up for adoption ? 

Happy Lunar New Year

Dear Fellow Investors,

According to Feng Shui masters, the year of the Earth Dog is supposed to be good for so called fire industries including technology, utilities and the Internet.

My take: We still must do our detailed research. As Peter Lynch said “Investing in companies without performing proper research is like playing stud poker without looking at our cards.”

As a follow up from last week’s letter

From, CNBC:

Two weeks after markets freaked out, the worst appears to be over for now.  

The gut-wrenching tug of war between rising interest rates and falling stock prices seems to be taking a rest, and strategists say the worst of the February correction may be over for now.

  Stocks closed out their fifth day of gains, with the S&P 500 just 4.9 percent away from its all-time high.

The KLSE was not much affected by the world wide stock market panic as it is difficult for bear raiders to short sell shares in the Malaysian market as the bulk of quality shares are held by institutions who will not sell in a panic.

A bear raid was initiated in the US markets by the fear of higher interest rates and a bearish CPI number.  CPI or consumer price inflation is a highly manipulated number by the US government.  Professionals do not focus on it.

The media whipped up the fear and retailers panicked.  There were margin calls and forced selling.  The panic spread around the world.

As calm returned, short sellers around the world were forced to quickly cover and we experienced a V recovery. A short seller faces unlimited risk and can quickly go bankrupt should the market go up.  Cover means to close the position.  

I expect the markets to be quiet next week with the CNY, so continue to focus   on quality.

Dolly and I leave for Adelaide Monday for a week break. Investment questions, you may email me for administrative issues please call our customer service @ 2783 0300.     

Invest well and grow your wealth

Bill

Exotic fish from the KLCC Aquaria

A friend from Canada visited me last week. I took him to the KLCC Aquaria and he was impressed. I was surprised to see they have upgraded their facilities with new animals and exhibits. They even have background music with jungle sounds. A visit would be a good CNY present for your family.

Do not panic and buy at these lows if you have the cash

Dear Fellow Investors,

In October 2008, Lehman Brothers declared bankruptcy. World stock markets collapsed.

Warren Buffet on 17 October 2008 wrote an article in the New York Times and headlined the article BUY !  He bought  over USD 10 Billion. in stocks while the S & P was at 900   In 8 years  his investments have tripled as the S & P is now over 2850.

Since 1987 there have been 10 major corrections in the US markets. Each time those who had the courage like Warren Buffet to buy made money.

Will this time be different ?

I do not think so.
If history is a precedent, my bet is not to panic and buy at these lows if you have the cash. Risk is relatively low .

Earnings yields spreads are positive. What that means is that the risk free return of the US T Bond of 2.85 % is less than the trailing earnings yield of the S & P 500 of 4.1 %.

Notice the blue line. The spread of 1.3 % is positive. If history is a precedent, as long as it remains positive there will not be a recession and market collapse as in 2008.

Under pining the earnings yield spread is the recent massive Trump tax cut which has reduced taxes across the board including the drop in US corporate taxes from 35 % to 21 %.

This will and is boosting earnings to compensate for gradual rises in US interest rates.  Couple this with the Trump wholesale elimination of the business killing Obama regulations, the background for world equities is positive.

Expect  the recent weakness in world markets to subside and be patient. It could take 2 to 3 months.

We are positioned in solid blue chip companies with low or no debt and with our cash are picking up quality shares to take advantage of the panic. We collect our dividends while we wait.

Invest well and grow your wealth.

Next Friday will be spending the Chinese New Year in Adelaide and back the following week. If you need any assistance please call our customer service desk at 03 2783 0300. You may also email me.

Bill

This is a snowy owl from Northern Canada. They are arctic birds and like the cold.   

Value in markets by identifying money trees like redwoods.

3 February 2018

Dear Fellow Investors,

The Redwood trees in Northern California are the tallest trees on Earth. They can live for over 3000 years.

Notice the size of the man standing next to the giant Redwood

Imagine all the storms, droughts, and forest fires these trees have experienced and yet they are still standing strong.

We find value in markets by identifying money trees like redwoods. These are shares that grow over time, survive adversity and continue to grow stronger.

We may be entering into a period of adversity. US Interest rates are rising, bond prices are falling and stocks are correcting. The water is heating slowly but not yet boiling.  World wide, investors are demanding higher rates to compensate them for a falling US dollar and rising budget deficits. Some investors are asking why should I hold shares and get a dividend payment less than a risk free US
Treasury bond ?

We need to be mindful of managing our risks should the water start to boil.

The shares in our portfolios are solid companies with low or no debt  which mitigates interest rate risk. They are like money trees compared to killer trees.

Debt is the killer of capitalism. Debt adds uncertainty and risk. Good businesses don’t need much debt to operate. Debt also reduces operational margin of safety and manoeuvrability.  

As long as our companies continue to grow earnings and have solid balance sheets we will survive and prosper over time.

I have moved to a defensive position. keeping cash reserves to take advantage of lower prices should they come.

Should major supports in shares we hold break down, we will lock in our profits and live to fight another day.

Invest well and grow your wealth
Bill

This dog is a survivor !  Saved by the technology of a microchip.

APOLLO, Pa. — A family has been reunited with its dog 10 years after the dog went missing.

Debra Suierveld and her family assumed their dog Abby had died after she ran away in 2008 from their home in Apollo, but decade-old sadness turned to joy on Saturday when Suierveld received word someone had found the dog.

The black Labrador mix showed up on George Speiring’s front porch in Lower Burrell, 10 miles west of Apollo. 

Speiring contacted Animal Protectors of Allegheny Valley, which discovered the dog’s microchip and was able to contact Suierveld.

Finding a winning horse.

27 January 2018

Dear Fellow Investors,

Finding a winning horse.

Professional horse gamblers make money by looking for an undervalued horse. This would be a horse that will go off at long odds and can reward gamblers with a large payoff.

The true odds are masked to the public. For example, a high quality horse will be run out of the money a few times to make it look bad. 

This will raise the odds each time the horse lost as the crowd of gamblers would not be interested to risk their money. When the crowd lost interest, the insiders would bring the undervalued horse home first at high odds and reward those in the know with a huge payoff.

Another insider tactic is to plant fake news in the Daily Racing Form which rates horses, bad news would be planted by insiders to trick the public.

Horse racing just like the stock market is dominated by syndicates, smart money, fake news and insider manipulation.   

How do we identify smart money ? In horse racing we watch the tote board. The tote board records the money flow into the betting pool. There are patterns of money flow that will tell you when smart money is betting on an undervalued horse  When this happens, we follow the smart money and jump in with a large bet.  

In stocks we follow  price and volume.(IVSA) Insiders can not hide price and volume as it is reported to the exchange in real time.

Skill in reading price and volume can be learned by practice  There are simple patterns which can put the odds in your favour.

For example, some unloved Malaysian banks have been congesting for the last few months. The news flow has been negative and the investment crowd lost interest.

One fine day 3 weeks ago, Hong Leong Bank suddenly broke the congestion on high volume and a wide range price bar.

This was a sign, that smart money knows something.

I bought for all our clients and the share went in the money. There was no drawdown Risk was below support which is small compared to the potential return.

The crowd was not interested but I was.

This method works in all markets and short term does not need to focus on currencies/ politics or interest rates which we have no control over.

When I operated this money flow horse system in the US, I was able to earn a reasonable living.  

Of course to enhance returns, I did extensive research to know the fundamentals including the blood lines of the horses, the track conditions, past racing results the jockey’s backgrounds, etc. That further puts the odds in your favour.  

Now the crowd is chasing hot upstream oil/ tech shares and they may go higher but the odds are against you. Be on guard

In the US markets including the S & P, Russell 2000 and Nasdec there are over 500 shares with PEs stretched to over 150  Some are large caps. These are crowd favorites hyped in the media and the stock brokers. 

Look to other shares in Japan, Malaysia Hong Kong and Singapore where value does exist to protect your self when the bubble bursts-

Invest well and grow your wealth,

Bill

Today’s critter is a golden eagle from Canada. It is huge bird which waits patiently and strikes swiftly when hunting.  It is a good metaphor for us as investors. Strike quickly when the opportunity comes.

“ The crypto currency bubble will not end well.”

20 January 2018

Dear Fellow Investors,

The bulls continue to charge:

From CNBC Friday.

Some of these fellows will get horned by the bulls.

I ask these fellows is it worth the thrill of showing you are brave  by outrunning a charging bull ?

It is like dealing in high flying penny stocks or even worse dealing in crypto currencies such as bitcoin.

As Warren Buffet remarked to Betty Quick last week on CNBC . “ The crypto currency bubble  will not end well.” The same goes for high flying stocks making new highs every day.

My first goal is to preserve client’s capital and earn a reasonable return. In 2017 we met our goal and outperformed our benchmarks: the KLSE and SGX.

We are on course to do the same in 2018.

Security by Obscurity

This is the same strategy we employed in 2017 and will employ in 2018.
In business as in nature, the ability to keep out of sight of predators is an advantage.

Who cares about coffee machine micro processors made by Uchi or cooking gas supplied by Gas Malaysia ? They are important but they occupy humble boring corporate niches. 

The same goes for Wellcal who make custom rubber hoses for the oil industry. These businesses are relatively small or boring, not experiencing hyper growth or offering  a technology revolution. I believe that this obscurity can offer a layer of protection from competitive disruption.

Hot fields such as electric cars, renewable energy, disease prevention, robotics attract too much attention like the charging bulls in our above illustration. There is nothing wrong with these technologies but they are like charging bulls as their shares  gain momentum and attract the investment crowd.

Our recent investments in Nidec are one step removed from the charging bulls  as they supply to the hot industries  Nidec is like the seller of shovels to the gold miners. A gold mine can easily go bust but there are always customers for shovels.

It was just announced that the US Government will shut down. At least business will not shut down so I would not be too concerned. 

We will continue our search for obscure companies with company visits, on the ground research and our industry contacts to put the odds in our favour moving forward

Invest well and grow your wealth
Bill

For bird lovers today’s critter is a striking seagull from Iceland  

Stretching For Growth

13 January 2018

Dear Fellow Investors,

The world equity rally continues. Will Malaysia follow? From 12 Dec 2017 the KLSE has rallied from 1740 to 1840 reached on 9 Jan 2018.

This in my opinion was a year end window dressing rally pushed by large asset managers   to improve the appearance of a portfolio to be presented to clients.  

Because most of the gains were made by large and highly liquid institutional shares such as Maybank, Tenaga, Maxis, some oil shares etc , I consider this to be as Mr Tong of the edge reported in this weeks stock market column to be “Portfolio Pumping”.

The shares we hold in our Malaysian portfolios did not go up much in this rally but in the preceding correction during October/ November 2017 they did not go down either.

This rally was inspired by the bullish upcoming election news flow by the media.

We purchased HL Bank for our clients to participate in this rally We made some profits but the selection was based on reasonable valuations, solid fundamentals and my anticipation of higher interest rates in the next quarter which will boost net interest margins.  

Since we bought on a break out of accumulation on high volume our risk is low compared to potential return. Our purchase was based on risk/ reward and backed by fundamentals rather than media hype.

If you are holding pumped up media hyped shares with weak balance sheets and shaky management this might be time to take some profit.

You might consider as a replacement  the rubber gloves sector.

The chart below shows increasing demand growth  which translates to profit growth. PEs are elevated but if earnings growth is higher , valuations are justified.

Stretching For Growth

According to data from MARGMA (Malaysia Rubber Gloves Manufacturer Association), demand for rubber gloves around the world has grown consistently over the long term, rising by nearly 6% per year from 103 billion pieces in 2005 to 190 billion pieces in 2016.

Source: MARGMA

Future growth is estimated to be between 6% and 8% per year, which is a reasonable estimate in our view given (1) the historical long run growth rate for the rubber glove market, (2) rubber gloves are an indispensable and consumable item used in the healthcare industry, and (3) a relatively low level of rubber glove consumption outside the US, Japan, and Europe. 

To the third point, the US, Japan, and Europe collectively account for 18% of the global population but 70% of global glove demand; there thus appears to be plenty of room for glove demand to grow in other countries.

The same message of portfolio pumping applies to Singapore/ Hong Kong and world markets as well. We need to be selective and invest base on earnings growth as well as valuation.

Invest well and grow your wealth
Bill

Today’s critters are some flamingos.

We saw quite a few of these on our recent trip to Langkawi.  There is also a good collection of them in Zoo Negara.