Warran Buffet and Japan’s 5 biggest trading houses

 16 Sept 2020

Dear Fellow Investor,

Last week, it emerged that Warren Buffet had invested USD 6.3 billion of Berkshire Hathway’s capital in Japan’s 5 biggest trading houses. These giant conglomerates are involved in everything from commodities, textiles, technology manufacturing, food, retailing, shipping and chemicals. Companies are Mitsui Ltd, Marubeni, Sumitomo Corp, Misubishi Corp and Itochu. They are trading at multi year lows and are paying high dividends. They are also trading at less than book value. My view is that Buffet is anticipating inflation and pricing power. He made a big move into gold recently as another inflation hedge.  His cost of capital to buy the Japanese shares was 0.42 % as he locked in ultra low Japanese rates. Dividends more than cover his cost of carry.   

Commenting on the transactions, Buffet said, "The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships... I hope that in the future there may be opportunities of mutual benefit."  All these companies are profitable, have strong moats and a high barrier to entry. They also are long established. Sumitomo was founded in 1670 while Mitsubishi was founded in the mid 1800s. 

Value in Japan

The Japanese market has been a fertile hunting ground for value investors for many years, especially in the market's small and micro-cap sections.

Berkshire's size means it can't really participate in small-cap stocks, which may be why we have not seen this sort of move before. The fact that Buffett has made his move now suggests that he sees value with these businesses. Shares of all five trading houses were trading at multi-year lows before the deal was announced.

What's also interesting is the fact that this deal has been announced less than 12 months after Berkshire borrowed $4 billion in Japan. At the time, the deal was the biggest yen-denominated issue ever by a foreign multinational. The most significant chunk, 146.5 billion Yen ($1.38 billion) in 10-year debt, carried a 0.44% coupon. Berkshire was able to borrow this money for almost nothing. In comparison, Mitsubishi Corp stock currently supports a dividend yield of 5%.

Considering Berkshire's capital cost, its Japanese investments don't need to achieve an outstanding return to yield a positive return for the conglomerate. Based on this straightforward analysis, it would appear that Buffett has completed an astute deal here. He has borrowed money at almost nothing in the market and invested it in a diversified portfolio of highly respected global institutions.

This could also be a sign that the Oracle of Omaha is becoming more confident investing outside of the United States. In recent years, he has lamented the high prices of U.S. equities. As a result, he has stayed out of the market and allowed Berkshire's cash pile to expand.

Berkshire has also been a net seller of U.S. equities this year. We will have to wait until the third quarter 13F filing is published for further information, but if Berkshire has stayed away from U.S. equities while increasing its international holdings, this could be a signal that Buffett himself is starting to sour on the prospects for the U.S. economy.

It is notable that he has been selling U.S. stocks this year while spending billions in increasing Berkshire's Japanese interests.

Overall, it seems as if Buffett's decision to borrow at near-zero interest rates in Japan and reinvest this cash into diversified conglomerates is a sensible one, which aligns with his value mentality and could help the conglomerate earn higher returns on its capital than it would otherwise be able to do in the U.S. market.

 

Extracted from Guru Focus and Bloomberg work station.

While researching for this letter I reviewed the latest 2020-2021 Japan outlook  from Daiwa Securities. The biggest risk to Japan is a 2^nd wave of Covid but they feel it a low odds probability.  Japan, Taiwan, HK Singapore and Malaysia infection and death rates are dropping and in Taiwan there are no cases. Economies are slowly returning to normal. This is another support for Buffet’s purchases and a proxy for growth in our Asian investments.    

Take care

Bill

Spartacus the serval cat found safe after escape from home

September 14, 2020

MERRIMACK, NEW HAMPSHIRE (AP) — An 18-kilogramme African serval cat named Spartacus has been found safe and sound after escaping from his home and spending days in the New Hampshire wild.

Is the Worst over for Asian Stocks?

11 Sept 2020

Dear Fellow Investor,

Is the Worst over for Asian Stocks? Last week I was waiting at the taxi stand across from the KLCC. It began to heavily rain and I resigned myself for a long wait.  As luck was favouring me, a taxi soon stopped. Usually when it rains there are few taxis on the road.  The driver told me that his business improved during the rain. He did not have much competition. I complemented the driver for being out on the road during the severe storm   Most drivers will wait for the rain to stop just like most investors who will stay out the market during times of uncertainty. As Warren Buffet would say we  pay a high price for a cheery consensus.   Is the worst over? Many economist and investors are pessimistic and negative. The crowd view is that the glass is half empty rather than half full.    On a positive note, Asian economies are coming back to life.  Restaurants see more customer traffic.  Mall business is picking up. Airlines passenger loads are increasing. Covid death and infection rates are decreasing. Progress is being made on a covid vaccine. There are fears about the November election in the US but this should not effect the shares we hold.  If Biden wins he is on record that he will raise taxes and increase regulations, this will slow America down and Asia will benefit. If Trump wins he promises to lower taxes and  stock markets will benefit. Asia wins either way. Short term expect volatility. The opposition party in the US is blocking fiscal stimulus to the unemployed to hurt Trump. This is causing a market correction. They have blocked business protection loans as well as personal stimulus payments. I think they will be punished by voters in November and Trump will win. Weekly UST which represents a basket of 7-10 year US Treasury bonds. The UST is the benchmark for interest rates world wide. As long as this index is stable world stocks will not collapse.  It defines the central bank policy of low interest rates. Gold and precious metals continue to be well supported which also reflects the massive liquidity pumped into world markets. Equities are the only game in town but we still need to be selective and avoid popular crowd favourites such as Google, Facebook, Apple, Tesla, Amazon etc. I am looking at Japan and Vietnam for under valued opportunities, I will share my research next week on these markets.    Now is a good time to visit the Taiping Lake gardens. No overseas tourists, no crowds, no Covid, and very reasonable prices. Dolly and I plan a visit.

Opportunities of the week

 4 Sept 2020

Dear Fellow Investor,

To me controlling risk depends upon sorting through an array of stocks available and pulling out a rare opportunity: a high performing, profit generating well positioned company that is suffering a short term mispricing. The goal is to not overpay.

This week will review 2 opportunities we hold which meet these criteria.   

The first is Wellcall Holdings: From a recent analyst report from Interpac Securities:  

Wellcall investment merits are: 1) lean/efficient management that translates into higher margins, 2) sustainable growth in the hose replacement market, 3) attractive dividend yield of 5.8%, and 4) 3) JV with Trelleborg to distribute composite hoses. Risks to our call are: 1) raw material commodity price/exchange rate volatility, and 2) slower than expected economic recovery.

 

Recent company visit to Wellcall Holdings in Ipoh with the CEO and Interpac analysts.

The other share that offers good value at current price is SATS a Singapore listed airline caterer. It has been beaten down by the Covid hysteria but is finding support and heavy insider buying at current levels. SATS is Asia’s largest food and gateway services network. They have a fortress balance sheet and they are leveraging on growth in Asia. They have a large presence in China whose domestic air traffic is recovering. Their Asian cargo handling business is also  recovering.  

SATS is a play on Covid and  progress on  treatments and vaccines. Insiders including large institutions and Alex Hungate the CEO  have been supporting this share at the current price seem to think there is progress on the virus. Following the smart money is always a good strategy.

Warren Buffet recently made a multi billion purchase of  Japanese shares for his Berkshire fund and sold some of his overvalued US shares including Apple. The Japanese market has been ignored for many years by most investors and suffers from gloom and pessimism. Value is there and that is why Buffet bought.   We hold in Japan Nidec the world’s largest maker of micro electric motors. They have performed reasonably well.  Perhaps Buffet bought Nidec ? I will check with their investor relations.

He also bought a large stake in Barrack Gold Mines as he has turned  bullish on precious metals.

Take care

Bill

This dog travelled more than 10000 km to join its owner in Australia after being separated from its owner who had taken a holiday in the US   . It suffered through cancelled flights, quarantines, loneliness, delays .  It immediately recognized the owner after 3 months of separation after being reunited. Reported by CNN.

Keeping the Party Going

 29  August  2020

Dear Fellow Investor,

Keeping the Party Going

Last night the US Federal Reserve made a policy shift which will maintain their 2 % inflation target but leave open the possibility of higher inflation targets . Chairman Powell did not give a clear time frame but indicated negative real interest rates would continue. Negative real interest rates means that inflation now measured by the CPI   is more than the 10 year US treasury bond.  Inflation is now 1.8 % while the US 10 year T bond is 0.75 % which equates to a negative real rate of 1.05 %

That means equities  are the only game in town.    This policy shift  will boost equities world wide.      

 For us as investors it means equities are the only game in town.

To support equities year on year money supply growth in the US for July 2020 rose 36.9 %  . This is an all time high which include unprecedented QE, stimulus packages and central bank asset purchases.  Much of this money will find its way into equity opportunities world wide including Asia. China as almost all central banks in the world are following Chairman Powell’s easy money lead.  

For those of you who I manage money for, my focus is on safety and capital preservation.  Buying and holding value shares in well managed businesses which pay dividends and have low debt is my method. Chasing the high flying shares in crowded spaces is not my style. Having at least a 10 % allocation in precious metals/ gold mining companies will hedge against the disastrous irresponsible fiat money policies of the central bankers.  

Tomorrow, Saturday, will hold a Zoom presentation at 11 AM and the topic is Gold and resource stocks. 

Take care

Bill

I hope you enjoy the illustration of the helpless kitten and his benefactor

  

Malaysia is returning to normal

 22  August  2020

Dear Fellow Investor,

Last week a group  from our Phillip office took a short break to Kota Kinabalu for a diving holiday. Their flight via Air Asia was full both ways showing demand for this sector is strong. They stayed at a 5 star hotel for a  very reasonable price as there are many empty rooms and no tourists competing for those rooms.

Business in KK is picking up and life is returning to normal.   

Malaysia is returning to normal. For the first time in 24 weeks foreign funds were buying beaten down value shares in the KLSE.  Foreign funds  are also buying MGS (Malaysian Gvt Securities) to lock in  relatively attractive interest rates.   

Warren Buffet shocked markets last week by selling a large part of his Apple shares and Wells Fargo Bank. He used some of the proceeds to buy a stake in Barrack Gold, the world’s 2^nd largest gold miner

The shock is that Buffet has always been bearish on gold as he believes gold has no intrinsic value and very little utility value. At least Barrack is a business and is a leveraged play on the gold price. If gold rises profit margins increase for gold miners.  

As 25 % of the costs of running a gold mine are energy, if oil prices fall or remain stable that benefits the miners.  

The point is actions speak louder than words. What Buffet preaches and what he does with his money are different.

Follow the money and not the talk.

Gold is an anti- government/ anti- establishment asset similar to bit coin which can not be created out of thin air by a politician or central banker.     Politicians print money to get votes but they can not print gold. That is why the establishment  discourages investing in it.

 It is the ultimate store of wealth and that could be the reason Buffet is buying gold miners and reducing exposure to some of his overvalued technology shares.  He feels inflation is coming and gold protects against inflation.

Our United Plantation shares have slowly broken to a new high as investors are realizing that there is value in this beaten down sector. Dialog is showing some life. They just released a positive earnings surprise.  They are a very conservatively managed oil company with a proven business model which earns residual income from their storage tank farms and earn money no matter the oil price.  

We will be holding a zoom meeting Saturday at 11 AM. This is a continuation of last week’s topic on Non Consensus Investing. If you have time this may benefit you.

Take care

Bill

 

This is a heart warming story I wish to share with you.

 

JAKARTA (Reuters) - Two critically endangered orangutans have been rescued from captivity on Indonesia’s Java island and sent to a rehabilitation centre on Borneo to assess whether they can be released back into the wild, a conservation group said.

“Samson” and “Boboy”, both male and estimated to be around 20 years old, were suffering from malnutrition when they were removed from an amusement park and a private family home, according to a statement from International Animal Rescue (IAR).

The two Bornean orangutans had been identified as being illegally held in captivity in October last year before a rescue was arranged, said Darmanto, the head of Indonesia’s nature conservation agency in Central Java.

Undervalued Trading

15  August  2020

Dear Fellow Investor,

Yesterday, on the KLSE  there was a shift from high growth, high PE  speculative shares including small and mid cap counters into Maybank, Public Bank and Genting. Maybank, Public Bank and Genting are high quality dividend paying blue chips which are unloved by the crowd.

They are trading at undervalued levels and effected by the Covid . Casino traffic has dropped while net interest margins have been under pressure effecting all the banks.     It is difficult to find any positive analyst reports on these shares. News flow is extreme pessimism.  

Opportunity ?

The opportunity is Non-Consensus Investing or being right when everyone else is wrong by Rupal Bhansali

I was attracted to this book because Bhansali worked with George Soros for 10 years as an analyst. Her job was to select shares for his hedge fund.

Her book reveals insights into how to select quality companies trading at discounts to their intrinsic value. A metaphor of hers that makes the point , “a non-consensus investor treats markets as a shopping mall where things go on sale as opposed to an auction house where you must bid the highest price to get what you want.“ 

George Soros trained her to consider first before investing what can go wrong. Soros  focus was on risk. Most investors focus on reward.  His coaching led her to become a successful fund manager handling a multi billion dollar value fund for Arial Investments.

Tomorrow morning at 11 AM will be holding a zoom meeting.  I will review Rupal Bansali’s book and some of the important takeaways which apply now in our local markets.

Below are the details. Please have your questions ready,

Invest well

Bill

This bald eagle brought down a US Government's drone in Michigan. The eagle is a lone hunter just like a non consensus investor.

 

Inflation/Deflation ?

 8  August  2020

Dear Fellow Investor,

Inflation/Deflation ?

Weekly chart of the TIP or Treasury Inflation Protected bond ETF. It is the US treasury bond but is benchmarked to the CPI or consumer price index.

If inflation goes up bondholders are protected as the Federal reserve will raise the TIP interest rate to match inflation. Pension funds and institutions buy TIPs to protect their shareholders from inflation.  Since November 2018, the capital value of the TIPs fund is up over 19 %.

It means that despite the rosy interest rate outlook by the US federal reserve, professionals are betting on  inflation.

Weekly chart of the CRB Index which represents a basket of the world’s leading commodities. It is up over 19 % since the 2019 April lows.

It is a sign that inflation is returning and will  benefit shares with commodity exposure. This includes plantation and metal producers. Energy shares should also benefit.

Of course, we must focus only on those companies that have strong financials, low debt and increasing free cash flow. United Plantations which we hold fits the profile. 

I spoke with a planter last week and asked him about the  locust problem and would it effect the oil palm plantations in Malaysia. He said it would not because the locusts have difficulty eating the palm leaves unlike other oils seeds in India or other countries producing oil seeds. This will benefit oil palm producers.  

    Weekly spot gold chart

                                  

The strongest inflation indicator is gold. Gold has maintained purchasing power and held value for over 2000 years.   No asset can equal the stability and durability of gold. With zero interest rates and massive money printing by all Central Banks worldwide, it seems unstoppable. Bank of America has an 18 month price target of USD 3000 per ounce.

Tomorrow we hold a Zoom Market Watch meeting at 11 am.

Below is the link see you there

https://us02web.zoom.us/j/83011063657?pwd=YjRHS3ZyUTB2NEVRTjBJaDRERDdiZz09

Bill