The US Dollar continues to strengthen.

18 August 2018

Dear Fellow Investor,

The background:

The US Dollar continues to strengthen.

The US Dollar is strengthening because  US interest rate rises reflect a real inflation adjusted return. Couple this with  a booming US economy, quantitative tightening, and Trump’s tax cuts with massive cutting of business destroying government regulations. 

In contrast, much of the slower growing developed world including Japan and socialist leaning Europe  pay negative interest rates or rates less than inflation so by default investors go to where their money is treated better which is the USD.

Our performance for the last 2 years has been positive because we focus on companies with revenues in Sing Dollar, USD, Euro and Yen. This includes Inari, Kossan Rubber, Uchi and  Nidec  

Nidec headquartered in Kyoto is the world’s largest maker of micro electric motors and 90 % of their revenues are in USD.  

Kossan, a high quality Malaysian  rubber gloves maker earns most of their revenue in USD

Malaysia has been a port in the world stock market storm because it offers many fine export related businesses and runs export surpluses with China as well as many other countries.

Under Dr M,  Malaysia is building a strong foundation for future growth.  Let’s pray to God to give him the strength to complete his agenda.

On the trade war front, a China delegation will meet the US trade officials at the end of August to sort out their differences on tariffs. For Trump there is nothing more important than the stock market so he will bend over backward to accommodate China.

This will boost  markets world wide.

Mid term elections in the US are in less than 75 days and Trump is losing support from the farmers because of the China soybean tariffs.

This is another incentive for Trump to make a deal to get more votes from the farmers.  

Turkey is another issue but our shares have minimal/ zero exposure to Turkey. Unlike the US and European banks, Malaysian and Singapore banks have minimal to zero exposure.

From Motley Fool:

“Many emerging markets, especially those here in South East Asia, are in much better financial shape than in 1997 and 2008. What’s more, Indonesia is not Turkey. Nor are the Philippines, Thailand, Malaysia or Taiwan.”

Invest well and grow you wealth,
Bill

Today’s critter is :

Southern right whale dolphins are the only dolphins without dorsal fins in the Southern Hemisphere. They are smaller than northern right whale dolphins -- and have more white on their heads and sides. They have slim, graceful bodies which are black on the upper side and white underneath. Their flippers are mainly white and are small and curved. Their flukes are small with a notch in the middle and concave trailing edges.  The range and total population have not been estimated or closely studied.  

 

 

How bull markets work

11 August 2018

Dear Fellow Investor,

There are plenty of worries which dominate the news flow.

Trade tensions, sanctions, currency wars, rising inflation, stagnant wage growth, stock market volatility, massive increase in deficits and political uncertainty are some. Yield curve flattening and asset bubbles are part of the mix. These issues dominate the business news and create fear and uncertainty among the uninformed.

That’s how bull markets work. They climb the wall of fear.

Less spoken about are positives such as US company earnings this quarter are likely to be higher by 20 % compared to the same quarter last year. Companies are buying back more of their shares. Credit in the US is easily available.  Foreign funds are beginning to return to Malaysia and Asia as they buy value at cheaper levels.

We need to look past the noise and focus on value investments.

For those who have been with me through the up and down cycles since 2006, you know what I mean.  We survived and prospered. We continue to prosper.   One of our Singapore holdings Riverstone just reported their second quarter earnings last Tuesday. From Motley Fool research :

 

Here are some important financial numbers for Riverstone for 2018’s second quarter:

• Revenue was up slightly by 0.5% year-on-year to RM 214.24 million.
• Gross profit jumped by 10.6% to RM 48.28 million.
• Profit attributable to shareholders soared 23.9% to RM 33.55 million. Diluted earnings per share for the reporting quarter was 4.53 sen, up by 24.1% from a year ago.
• Operating cash flow declined by 29.9% from RM 37.57 million in the second quarter of 2017 to RM 26.33 million in the reporting quarter. With capital expenditure declining by 30.8% from RM 34.99 million to RM 24.17 million, Riverstone’s free cash flow fell by 17.9% from RM 2.63 million to RM 2.16 million.
• As of 30 June 2018, Riverstone had RM 92.52 million in cash and equivalents, and RM 22.0 million in total debt, giving rise to a net cash position of RM 70.52 million. The balance sheet had weakened compared to a year ago, when there was RM 113.35 million in cash and equivalents, and RM 28.0 million in debt.
• An interim dividend of RM 0.013 per share was declared, unchanged from a year ago.

Riverstone is a specialty rubber gloves company with plants in Rawang and Taiping though listed in Singapore. We visited them a few years ago and found them to be very conservative and prudently managed. We like them because it is a simple business and earn revenues in USD. The CEO Mr Wong Teek Soon spent a few hours of his valuable time explaining to us the challenges and opportunities in the rubber gloves business and this understanding gave us the conviction to invest in this sector.

If you as investors take the time to do on the ground research and understand what you are investing in you will be armed with the knowledge to overcome and prosper even though there is an onslaught of negative news flow.

Invest well and grow your wealth,

Bill

Critter of the week is the hooded merganser small diving duck very common in North America. Both sexes have crests that they can raise or lower, and the breeding plumage of yhr male is handsomely patterned and colored.

An emotional frenzy of doom and gloom stoked up among the financial media.

4 August 2018

Dear Fellow Investor,

In the last 2 weeks, some of you  have sent me messages and shared research from leading brokerages including JP Morgan.  The news flow has been alarming and negative. I can understand your concerns. Some famous gurus are forecasting economic collapse. There has been an emotional  frenzy of doom and gloom stoked up among the financial media.

Some of the negative news includes the hysterical trade war rhetoric,  Middle East conflict, crude oil disruption, Facebook, Twitter share price collapse, rising interest rates world wide , Brexit no deal fears, rise of rabid socialist  candidates for the upcoming mid term elections in the US,  etc.   

Lets look at the facts: In the US unemployment is at 40 year lows. GDP as last reported is increasing and last reported at 4.1 %, higher than  previous US administrations including Obama.

Trump’s tax cuts have fuelled business growth world wide while quality stocks are performing well. Interest rates throughout the world are at historical lows though gradually rising.  

This is not the background of a recession- not yet.

The catalyst for the negative news flow has been the escalating trade war.

Why there will not be a trade war:

Below is commentary by Bill Bonner, a brilliant  anti establishment economist and owner of Money Week, a UK financial magazine.   

Fake Wars

The Deep State welcomes war. But, especially in the case of a trade war with China, it must be a phony war.

And here is a good test. We’ll see how well, or badly, we have connected the dots.

According to the picture we see, the Deep State – the more or less permanent, but fluid and schismatic, group of insiders that controls U.S. public policies – uses war to gain public support for policies that actually serve only one purpose… to shift power, wealth, and status from the public to itself.

That’s why the trade war has to be fake.

Real wars threaten the Deep State’s survival. The wars in the Middle East (now also in Africa), for example, help justify trillions of dollars of wealth transfers to the military/industrial/surveillance complex.

But the U.S. has nothing really at stake in these fights; no matter what happens, it will not be invaded, bombed, or humiliated.

Likewise, the wars at home – against poor people and drug users – go on for decades. And no one is better off – except the Deep State industries engaged in the wars themselves (welfare agencies, prisons, police, drug pushers, etc.).

The Donald’s new trade war is a delight, too; already, the sidewalks are slick with greasy swamp water; lobbyists line up around the block to ask for special favors and dispensations. The insiders gain power and money by controlling crony trade deals.

But neither the president nor his crackpot advisors may realize the danger. And here is where it gets interesting: They mustn’t allow this war to get out of hand.

A real trade war with China would be disastrous – for the Deep State itself. That’s why we predict it won’t happen. The 25% tariffs will more than likely never be fully implemented.

Mr. Trump will follow a pattern that is already familiar. He will talk tough. He will stir things up. He will announce victory. And he will quietly back down.

Or else he will not survive as president to the end of his term.

If this scenario plays out expect a recovery in Asian markets.

We must continue with our conservative value based equity strategy to weather the storm.

Invest well and grow your wealth
Bill

Critters of the week are the elephant and the donkey symbols of the 2 political parties in America, the republicans, party of free markets and low taxes and the democrats, party of high taxes, massive regulations, big government and open borders.

What will the management do next to us ?

28 July 2018

Dear Fellow Investor,

Mr Tong in his latest Edge column sums up my value investing approach and how to profit from the current uncertainties and fears dominating market action.  The only way to overcome emotions and profit is to have conviction in your purchases and sales.  This requires careful and objective research into your decision process. It means to access the quality of the company you are considering.

SINGAPORE (July 30): It is important to have conviction in investing. Stock markets are very much driven by sentiment and emotion. This is underscored by the roller-coaster ride we have experienced for the better part of this year. 

Markets are faced with a growing list of uncertainties, not least because of the difficulty in assessing and quantifying the potential damage from a trade war or geopolitical flare-ups. And when investors are uncertain, they tend to err on the side of caution.

As a result, share prices overreact and valuations get compressed. Over time, the picture will become clearer and fundamentals will reassert their influence on stock prices. 

But since markets are very short-term-oriented, this translates into opportunities for longer-term investors — if you can ignore the noise and focus on the underlying dynamics of the business, the secular trend for the industry and future outlook, earnings and cash-flow prospects as well as balance sheet strength. 

Crucially, we must hold on to our convictions, even (especially) when they are against the tide of sentiment.

By: 

Tong Kooi Ong

Last week, I sold all our Power Root shares for a small profit.  We still retain the bonus issue and warrants and will exit when the warrants are credited to your accounts. The reason I sold is because  the recent corporate exercise dilutes our shareholdings. The exercise is mainly for the benefit of the management/ insiders and to the disadvantage of the minority shareholders.

My concern is: What will the management  do next to us ?

There is nothing wrong with their coffee  business as demand for their coffee is rising but I do not feel we are being treated fairly. There are many other quality value opportunities run by ethical managers.  

Our analysts are diligently searching for you.

I advise that you pick up a copy of the latest weekly Edge and read Mr Tong’s entire column. He explains the rational for his recent transactions and why he is a value investor.  

Out of the blue, Mr Trump met with the European trade officials, and they and they worked out a trade deal.  This was a pleasant surprise and caught many analysts by surprise. Many expected an escalation of trade issues. European and US markets rose after the deal.

Perhaps, Trump can work out something with China and that would remove a major uncertainty from investor’s minds.  

Invest well and grow your wealth.

Bill

Today's 'critter's' opossum ..or 'possum' as it is known in the southern and Midwest U.S.A. It is a house cat-sized creature not known in the part of North America. They are table fare for some -- and their pelts have long been part of the fur trade.

SATS 1st quarter results

21 July 2018

Dear Fellow Investor,

On Friday, SATS one of our core PGWA holdings released its 1^st Quarter results.

Yesterday evening, SATS (SGX: S58) released its first quarter earnings for its fiscal year ending 31 March 2019 (FY18/19).

State Of The Business Now

Here’s a look at some of the important financial numbers for the first quarter:

• Revenue came in at S$439.4 million, up 3.0% from a year ago.
• Share of results of associates and joint-ventures (net of tax) was S$15.3 million, down 1.3% year-on-year.
• Profit attributable to shareholders grew by 11.5% to S$63.9 million.
• Similarly, diluted earnings per share was up 11.8% year-on-year to 5.7 cents.
• Operating cash flow rose 96.1% from S$46.6 million in the first quarter of FY17/18 to S$91.4 million. There was only a slight increase in capital expenditure from S$18.9 million to S$19.1 million, and as a result SATS’s free cash flow jumped significantly from S$27.7 million a year ago to S$72.3 million.  
• As of 30 June 2018, SATS had S$439.7 million in cash and equivalents and S$106.5 million in total borrowings.

The only disappointment was the termination of the Turkish airline catering deal as it could not resolve the bureaucratic issues with the Turkish aviation authority. The financial impact was minimal but the potential growth opportunity is lost. As in every business mistakes are made but the ability to cut and minimize losses and move on is the recipe for ultimate success.

On a positive note, there are several promising growth opportunities in the pipeline including  a second joint venture with Wilmar, Marina Bay Sands cruse liner catering franchise  and expansion with Air Asia into India.

CEO Alex Hungate during the earnings presentation commentated on the trade war impact on the aviation industry. Bottom line he thinks passenger and freight volumes will continue to grow regardless of how the trade war progresses.

On Friday SATS closed up 7 cents to SGD 5.17, reflecting the positive results.  

There are signs of recovery in the KLSE.  Last week there was positive foreign fund inflow  into  banking shares and other oversold blue chips. Support is building at current levels.

Consumer spending is picking up. Last week we visited a KLSE listed  finance company specializing in making small loans.  The CEO was very positive moving forward with the change of government. When I asked him about the new government and how it would impact his business his face lit up showing his optimism. 

Optimism is spreading in Malaysia just like a virus.

Invest well and grow your wealth
Bill

Today’s critter is a wombat from the Perth Zoo.

The wombat is a furry animal with short legs that resembles a small bear. We plan a visit to Perth perhaps in October and hope to get some nice animal photos to share with you our newsletter readers.

Do not built to impress but rather to provide a necessary service at a reasonable cost

14 July 2018

Dear Fellow Investor,

Last week the MOF announced that the LRT 3 project would go ahead with  a cut from 31.65 billion ringgit  to 16.3 billion ringgit.

The previous government had bloated  costs to construct lavish LRT stations  which would rival stations on the Japan’s national railway line. 

Kyoto train station leading to the central business district.

Notice the simplicity of the Kyoto station. It was not built to impress but rather to provide a necessary service at a reasonable cost. A few months ago we visited Japan and we found that the train stations were simple, well maintained, super clean but not lavish expensive structures.  

I am surprised that our local contractors did not visit Japan to get an idea of how to  build cost effective LRT stations.

Dr M realizes the importance of LRT infrastructure so he gave the go ahead to continue LRT 3. He is cost cutting for all the major projects and will eliminate those that do not make economic sense. This will save billions for the taxpayers .  

Last week the KLSE staged a minor rebound with some construction stocks leading the way.  Order books will be cut so there will be short term pain for the construction sector but longer term the economy will be more sustainable as wastage and corruption will be substantially cut.  

A similar thing happened in Singapore. In the last year house prices were up over 9 % so the government decided to prick the emerging bubble by raising down payment requirements for 2nd home purchases. This would make it easier for the average citizen to buy a home and cool the speculation.

Many property developer stocks dropped but Reits however; held up well and Singapore shares in our portfolios were not much affected. Our holdings in Hong Kong land were not effected and advanced to SGD 7.28.

They have properties in Singapore/Hong Kong/ Thailand and Cambodia We have weathered some major storms this year and made progress. We have maintained your capital with our dividend + value strategy. We have avoided the high flying crowd favourite stocks which have resulted in billions of losses for some funds.

If you think about it if you can earn a 5 % dividend yield and if you are careful in your stock selection another 8 % in capital gain that results in a reasonable return of 13 % with very low risk and should markets advance we make more.  

That is my goal but obviously nothing is ever sure and you might pick a stock like Top Glove which is a solid well managed entity but suffered a surprise and shocking  accounting irregularity and took a big capital hit.  I like the rubber glove sector but I do not like buying a high and chasing the hype.  We hold Kossan which has performed well and not effected by the drop in Top Glove.

Invest well and grow your wealth
Bill

Today's ''critter' is the moray eel...of which there are 202 different species.  They're a common sight when scuba diving most warm saltwater coral reef structures of the world . They have some fine examples in the KLCC Aquaria and most Malaysian reefs. 

Phillip Capital 9th Investment Conference

8 July 2018

Dear Fellow Investor,

I thank all of you who attended our Phillip Capital Investment Conference 2018.  I hope you found clarification to the market uncertainties such as Trump’s trade war, rising interest rates, rising oil prices and the collapse of many GLCs.  

Mr Ang our CIO gave a bullish outlook for Malaysia post election. The ministers Dr M appointed will plug the money leaks and cut the corruption  to put the country on a firm economic footing. This will in time attract foreign funds to Malaysia and possible rating upgrades.  

Royce Tan, professional futures trading gave a rousing presentation on futures trading. The takeaway for us as value investors was his slide of a giant great white shark . His advice was to trade with the sharks. Sharks are the metaphor for smart money or insiders. When I buy a share for your portfolios I always confirm with smart money accumulation found on the Bloomberg work station.

All the speakers spoke about the Trump trade war. The consensus view was that Trump will back down as he does not want to risk losing power should US stocks take a dive caused by China trade retaliation. I totally agree.  He won’t go too far and his flip flopping is a negotiating tactic.

Dr Nazri Khan shared his thoughts on KLSE sectors to benefit  in the months ahead. He likes soft infrastructure as Dr M encourages these sectors such as education, health care and consumer stocks.  His advice was to buy hot stocks in the hottest sectors but have an exit strategy. He mentioned that technology firm Cisco went from 10 cents to 100 USD before it collapsed in the 1999 internet bubble.   An alert investor with a disciplined exit strategy would have captured the bulk of the profit.

Invest well and grow your wealth,
Bill

Today's 'critter' is the golden pheasant, or Chinese pheasant. It is native to forests in mountainous areas of western China, but feral populations have been established in at least a dozen other countries throughout the world.  The male is unmistakable.