Bidenflation

17 July 2021

Dear Fellow Investor,

Bidenflation

US markets were hit Friday by a combination of factors. The catalyst for the fall were comments by   Treasury  secretary Janet Yellen who said expect inflation to rise over the next few months before falling. Other Federal Reserve officials even suggested that tapering would be scaled back and interest rates might go up. This spooked the markets and the Dow which had been up over 100 points dropped to close down 299 points while the tech heavy Nasdaq dropped 115 points.    

What is the reality ? According to the latest CPI numbers:

Here are the items really driving up inflation: Car rental 87.7% (y/y change) Used cars 45.2% Gas 45.1% Laundry machines 29.4% Airfare 24.6% Moving 17.3% Hotels 16.9% Furniture 8.6% Bacon 8.4% TVs 7.6% Fruit 7.3% Shoes 6.5% Fresh fish 6.4% New cars 5.3% Milk 5.6% Rent (OER) 2.3%

Below is the US Federal Reserve balance sheet as of 15 June 2021.

The trend of money creation is up despite what the authorities are saying about transitory inflation. If the fiscal stimulus programs of 3.4 trillion USD are passed by the US congress the money creation trend will accelerate.  The odds favour it will be passed as politicians love to spend.  Other central banks will join the party . To give a maximum economic boost interest rates will be suppressed . This will benefit stocks . We must remain fully invested.  Buy the dip.  

As pandemic conditions normalize with lockdowns and increased vaccinations  expect Malaysia to recover. Infection rates are up but testing  rates are also up which explains this anomaly.  

There was a very interesting letter to the editor  in last week’s Star. It responded to a Bloomberg article by some UK critics saying Malaysia was a failed state  due to the slow  response to the pandemic.  The truth is that Malaysia has the 2^nd highest vaccination rate in Asia . The critics also said Malaysia is facing financial difficulties. The truth is S & P sovereign credit ratings  rates Malaysia as A- long term and A2 short term. In contrast the sovereign credit ratings of failed state Somalia is D according to the Economist intelligence unit.   In terms of FDI, foreign direct investment of RM 86 billion in the manufacturing services industries   were approved compared to  RM 41.2 billion in the 1st quarter last year. Rising crude oil and high commodity prices will also support our economy and balance of trade.  

Our focus on technology stocks should bear fruit and also our recovery stocks which have pricing power.  Inflation will help.

Stay the course

Bill

Political disputes are settled in the failed state Haiti by shooting the president. Despite the infighting and political bickering  Malaysians would not resort to such extremes  and another reason we are not a failed state.  

 

Key to Recovery

 10 July 2021

Dear Fellow Investor,

Key to Recovery

A few days ago I sent a message to one of my clients, a doctor, an ENT specialist who works  at a government hospital. I asked him for an update to the current pandemic and why vaccination roll outs are increasing while infection rates are increasing.

His objective analysis

From what we know:

1 The virus affects everyone and the susceptible ones may end up in ICU with respiratory illness.

2 Hence why vaccines are prioritized for susceptible individuals ie the elderly and those with co-morbid illness etc.

3 Vaccines in general protect us from getting severe illness (respiratory illness)  requiring ICU admission.

4 That is to say vaccination prevents covid infection  from becoming severely harmful to us.

5 But the vaccine doesn’t prevent someone from transmission or viral shedding.

6 Which means the vaccinated individual would still be a probable vector of transmission.

7 Hence why social isolation is still practiced to protect the unvaccinated.

8 Today we have the number of vaccinated increasing by percentage

9 But the percentage as compared to the countries population is still minimal.

10 Large numbers of unvaccinated are still at risk.

11 Mass vaccination will tilt the equation the other side. Where a big percentage of population would be vaccinated and a small percentage of non susceptible health individual will remain unvaccinated. (The unvaccinated and the anti-vaxer  and those with allergies to vaccines)

12 When we reach this stage the number of serious injuries will drop.

13 Then we can consider opening borders.

Point 11 is the key to market recovery- mass vaccinations-  and that is happening.  It was reported in the Star last week that on the first 3 days of the week that over 1 million citizens were vaccinated, some with their first shot and the other with their second shot.   Momentum is building and that is what will turn the KLSE and attract bargain hunters.  The SGX is performing well as vaccination rates have increased and infection rates have dropped.  With the backdrop of low interest rates, massive liquidity and stimulus odds favour Asian market recovery. If the local politicians could get on the same recovery page that could be the catalyst for Malaysia to join the world stock market party.  

Take care
Bill

MITEC convention hall are vaccinating over 8000 per day. I had my 2^nd Pfizer shot here and it took less than 1 hour for the process. Is there light at the end of the tunnel ? 

2021 - KLSE Outlook

 3 July 2021

Dear Fellow Investor,

This morning I attended a zoom presentation by Shareinvestor.com for the rest of the year outlook for the KLSE. The main speaker was Kong She Siang who heads CGS- CIMB retail research.  

His focus was both the technical and fundamental forces driving the market. The technical trend of the KLSE is down effected by the EMCO and political uncertainty. Most sectors are under a cloud including property, construction, health care, and hospitality . Bright spots include electronics, technology, logistics and export related stocks.  His recommendations included Inari, Wellcall, Public Bank and Uchitech which we hold.

He also presented fundamental reasons why KLSE valuations are at multi year lows for certain blue chip stocks while the trade statistics for Malaysia are positive.  Ratings agencies have not downgraded Malaysia but  fear and Covid hysteria are effecting the KLSE and keeping buyers on the side lines.  

He showed charts of Malaysian Covid infections, deaths, recoveries and vaccination rollouts. Vaccination rollouts are increasing nationwide, deaths are decreasing, recoveries increasing while infection rates are increasing.  As more people are vaccinated hopefully infection rates should drop.

as they have in Singapore, Taiwan, Japan, Australia, Europe and the US.

Last week, I mentioned I would review SATS which I personally hold and also hold for some of our PGWA accounts.  This research is from Smart Investor who is run by David Kuo formerly of Motley Fool.  Analysis is by Royston Yang, a long experienced analyst. SATS is not just a turnaround stock but is a leading indicator for Covid 19 recovery which should benefit our portfolios.

Bloomberg daily chart of SATS with green arrows signaling insider buying. There are many reasons for insider selling but insiders only buy for one reason and that is they believe prices will go up. The last green arrow on the right side of the chart was a 300,000 share buy order by an insider.   Who ever bought believes Singapore/ Asia/ Malaysia will recover and Covid will be a bad memory. Money talks.

SATS is Still Acquiring for Growth: Why I Believe the Company Can Turnaround

The ground handler and food caterer is pushing on with acquisitions as it gears up for the eventual recovery.

By Royston YangJune 17, 2021

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2020 was one of the toughest periods faced by the aviation industry.

SATS Ltd (SGX: S58) did not escape unscathed.

As Asia’s leading provider of food solutions and gateway solutions for airlines, the group reported a massive hit to its top and bottom lines as the pandemic swept across the world.

Revenue for its fiscal year 2021 ended 31 March 2021 (FY2021) fell sharply by 50% year on year to S$970 million, along with an operating loss of S$10.1 million.

For FY2021, SATS registered a core net loss of S$23.9 million.

Despite the weak results, SATS continues to push on by announcing the acquisition of an 85% stake in Food City, a Thai frozen food producer, for S$21 million in early June.

Investors may be surprised to learn that the group is still on an acquisition trail.

This purchase comes even as peers Singapore Airlines Limited (SGX: C6L), or SIA, reported a massive net loss and cash burn.

SIA’s engineering arm, SIA Engineering Company Ltd (SGX: S59), also announced Phase 2 of its transformation program.

Here’s why I believe SATS is in a good position to engineer a turnaround.

Steadily improving financials

SATS has reported steadily improving core net profit since the outbreak of the pandemic.

During the quarter ended 30 June 2020 (1Q2021), when country borders started closing, the group’s core net loss was S$43.7 million, despite receiving government reliefs.

By 4Q2021, SATS was able to turn in a core net profit of S$13.2 million.

Even if we remove the effects of government reliefs, the numbers look promising.

From an initial net loss of S$106.5 million in 1Q2021, SATS has narrowed its net loss to just S$33 million.

Another positive point is that the group has continued to generate a healthy free cash flow of S$56.2 million for FY2021. 

Cargo is a bright spot

The global economic rebound is triggering higher demand for air cargo.

Seasonally-adjusted air cargo volumes for March 2021 rose 4.4% above the pre-crisis levels logged in March 2019.

The International Air Transport Association (IATA) projects that air cargo volume will rise by 13% year on year for 2021, exceeding the level achieved in 2019.

SATS has associates in Hong Kong, India and Vietnam that handle air cargo, and these associates were profitable in 4Q2021.

With volumes expected to grow further, the growing profits from these associates can offset some of the losses from SATS’ core business.

Less reliance on the aviation sector

The pandemic also had the unintended effect of decreasing SATS’ reliance on the aviation sector.

Back in May 2020, an interview by CNBC with Alex Hungate, CEO of SATS, revealed that the group had already started diversifying into non-aviation catering over the last few years.

SATS also does catering for sectors such as defence, hospitals and schools.

The group runs central kitchens to produce food for restaurant chains such as Haidilao International (SEHK: 6862), RE&S Holdings’ (SGX: 1G1) chain of Japanese restaurants, and Disney (NYSE: DIS).

For FY2021, revenue from non-aviation industries accounted for 44% of total group revenue and chalked up year on year growth of 27.3%.

This proportion was a massive jump from the previous year when non-aviation revenue made up less than one-fifth of total revenue.

Increasing its food catering capabilities

The acquisition of Food City in June is just the latest in SATS’ acquisition trail to boost its food catering capabilities.

The new addition to SATS will provide the group with access to 32 meal production facilities across countries such as China, India, Japan, Singapore and Thailand, to name a few.

The move follows SATS’s purchase of food innovator Monty’s Bakehouse in May last year. 

This commitment to growing its food solutions business to diversify away from aviation-related revenue should be lauded.

Get Smart: Positioning itself for the eventual recovery

To be sure, FY2022 is still going to be a tough year for SATS.

The bulk of its revenue is still aviation-based and its pivot to non-aviation food solutions will take time to build and grow.

Still, the group seems to be headed in the right direction.

Over time and with the possibility of further opportunistic acquisitions, I believe the caterer and ground handler should see better days ahead.

Take care

Bill

A tasty meal by SATS. We look forward to recovery so we can enjoy traveling and good food again. 

The Power of Positive Thinking

 26 June 2021

Dear Fellow Investor,

Our technology shares listed on the KLSE are well supported despite the MCO, Covid fears and pervasive negative sentiment.  Exports have been increasing as demand for semiconductors and technology related products are increasing worldwide.  Well managed and financially solid Malaysian tech shares will leverage on these trends and expect new highs on these counters. Other sectors such as consumer and banking are lagging but as sentiment improves expect recovery.

Fears of higher interest rates by the US Federal Reserve receded and the Nasdaq broke a 6 months resistance last week making an all time high.

Weekly Nasdaq

I suspect foreign funds will see how undervalued some of the Malaysian technology shares are compared to US counterparts and come in to take advantage.

Dr. Mahathir made some positive and realistic comments in his Edge column today. He said vaccination is effective in reducing cases but more needs to be done for the rural areas. Management of the pandemic is not very good but it is improving. The government is listening and doing something but more needs to be done.

Based on statistics it was reported in the Edge that Malaysia has the 2^nd lowest Covid death rate in Asia at 0.65% or 4637 deaths out of 33 million while Singapore leads with 0.05 % or 35 deaths out of a population of 5.9 million.  In contrast the UK, US, and Australia had much higher death rates as a percentage of population.    

One of our core holdings is Nidec and Free Malaysia today reported on the company.

Nidec revs up EV motor growth with Chinese R&D centre

 

 

© Provided by Free Malaysia Today Nidec controls 5.5% of China’s EV motor market, the biggest slice for a foreign independent manufacturer. (AFP pic)

DALIAN: At Nidec’s state-of-the-art development centre for electric vehicle motors in Suzhou, near Shanghai, speedy work is crucial to winning and retaining often-impatient Chinese clients.

The development centre opened in September last year to produce prototypes tailored to customer needs. The process usually takes six months to a year, but some customers have asked it to be done in “a month and a half”.

Meeting such tight deadlines requires adequate human resources. The centre hired 170 staffers by June 1 and plans to boost the number to 250 by March next year.

Eager to tap the country’s burgeoning demand for electric vehicles, Nidec also plans to have 2,000 workers at an electric vehicle motor plant launched this spring in Dalian in northeast China.

Along with an existing Dalian plant that also produces other products, the total workforce in the city will swell 40% to 5,000.

Under Nidec’s development method, the base motor model that requires the most advanced technology, known as the “mother”, is developed in the Japanese prefecture of Shiga near the company’s headquarters in Kyoto.

Its design and output are then adjusted to each customer’s specification in a process handled by the new Suzhou centre.

Nidec has managed to fulfil seemingly impossible requests from customers, managing design work down to the hourly basis to meet deadlines. This method has at times enabled Nidec to steal customers away from its competitors.

“We’re tapping into our speedy operations to capture the growth market,” said Akitoshi Kato, who heads the Suzhou centre.

The centre prides itself on maintaining one of the industry’s most extensive testing facilities, where it simulates various conditions to test the motor’s endurance in high temperatures or in mud.

The new plant in Dalian now has just one building. But when combined with a planned second structure, it is expected to become the world’s largest motor factory, churning out the equivalent of 1 million EV motors a year.

“We’re planning to build a ‘supplier town’ around here, or a hub of about 20 related parts factories for EVs and other applications,” said Kazutsugu Igarashi, the head of the Dalian factory.

Nidec controls 5.5% of China’s EV motor market, the biggest slice for a foreign independent manufacturer, according to Mizuho Bank senior research officer Tang Jin.

The Japanese company ranks fourth in the market for drive systems, which include gears and inverters, at 15%.

Nidec showing share buybacks recently. Notice the green arrows in March 2021.

Next week, I plan to report on SATS a core Singapore holding for our PGWA accounts in Singapore which is a  recovery play.

Keep safe.
Bill  

Sentiment now is the glass is half empty but reality is different.

National Recovery Plan

 19 June 2021

Dear Fellow Investor,

National Recovery Plan

Last week the national recovery plan was announced. It appears to be a clear plan that will restore our economy.  The goal is for full recovery by the end of the year. The market as a leading indicator is showing the recovery in recovery opening stocks such as Genting Bhd which is up 13 % this year. Last week the technology index rose to 82.20 up over 10 % since 15 May. This shows that export related technology shares are attracting buyers.  Despite the price volatility in technology shares, technology businesses  are here to stay. The successful technology companies which we hold all have strong balance sheets, innovative management and positive cash flows.    

       Weekly  US 10 year treasury bond

Despite the US and European  stock  market panic on Friday based on inflation fears and threats to raise interest rates by the US Federal Reserve,  the 10 year bond yield went down.  If professionals really believed rates would go up, yields would also rise dramatically. It means the drops in markets Friday were a panic driven event.

Most commodities were also hit as the Chinese are cooling the markets by releasing physical commodities such as copper and iron ore. This is a long term positive for infrastructure plans and may reduce inflationary pressures.   For those who trade commodity relate stocks this could be a buying opportunity once the dust settles. Crude oil diverged from the sell down and was marginally up supporting the world recovery theme.

        

        Weekly Nasdaq with Friday close

Despite the market volatility the Nasdaq only traded down
0.28 % for the week.  Should  the authorities really have decided to raise interest rates the Nasdaq would have collapsed.  The Nasdaq has many growth related shares with stretched balance sheets and loaded with debt so they  get killed with higher rates.

Despite the negativity, uncertainty and fear  stay the course with your quality shares as odds favor recovery and better times ahead.

Bill

Genting re opening with new theme park by end of year + Borders open and tourists return  = Share recovery 

 

Inflection point

12 June 2021

Dear Fellow Investor,

Inflection point

Last week I had my 2^nd dose of Phizer and Dolly her 1^st dose of Astrazeneca . Mine was done in the METIC while Dolly’s was at the PWTC. No side effects except slight dizziness . The vaccination process  was  well handled and efficient.    Waiting time was minimal. The venues were well chosen as they are able to handle a large volume of vaccinations and access is user friendly.  Staff are very helpful.

I see this is an inflection point for Malaysia as is the only way out of the pandemic and a move to economic recovery are mass vaccinations. The government has finally woken up to this reality and they have gotten their act together. 

Those countries who have rolled out mass vaccinations are seeing good results with lower infection and death rates and their economies are going back to normal. Australia, Singapore, UK, China, Hong Kong, US and Europe are some examples.  Japan has finally woken up to this reality.

With the pandemic receding oil demand is recovering. Below is a headline from the Fleet St Letter.

Reports of the death of oil are grossly exaggerated.  

The main stream media, International Energy Agency , the Biden administration and most European governments  are pushing for the shut down of fossil fuel. Biden has already stopped oil drilling on government land, shut a major oil pipeline and cancelled off shore oil leases. He also has plans to increase regulations and taxes on oil producers to cut into their profit margins.   Couple this with the pandemic recovery, the result has been sharply higher crude oil prices.
From the Fleet St Letter here is a quote  from Alexander Novak, the Russian deputy prime minister .

 

“If the world were to follow the International Energy Agency’s controversial road map, which said that investment in new fields would have to stop immediately to achieve net-zero carbon emissions by 2050, the price for oil will go to, what, $200 [per barrel]? Gas prices will skyrocket… oil and gas will still be around for decades to come.”

Novak is telling us what we should already know but don’t seem to admit. That is by halting investment in oil production, there will soon be less available oil and prices will rise, potentially dramatically.”

At $71/barrel, Brent Crude has more than doubled in price relative to mid-2020

Everything is effected by energy prices. In the US inflation is rising because of the jump in energy prices. Biden could easily lose his majority in congress in the next mid term elections in less than 1 ½ years because of  misplaced green energy policies, massive tax increases, deficit  and social spending.  To keep power he and other officials in major countries will maintain low interest rates and that will keep stock markets supported.  Malaysia’s export industries and economy will continue to recover as supply chains open up, people go back to work and spending recovers.    The latest lock down is inconvenient but will pass. As oil prices inflate this  benefits  Malaysia’s fiscal position.

Keep safe

Bill

Buyer’s remorse 

Market Review

 5 June 2021

Dear Fellow Investor,

Below is the weekly chart of EWM, an ETF which represents a basket of blue chip KLSE shares traded on the NYSE.

EWM, traded on NYSE  

This shows continued consolidation on relatively low volume since January 2021 holding support at the 50 week moving average. Despite the extreme pessimism and gloom among our local retail investors this ETF reflects foreign investor’s neutral views about Malaysia. Dividend income from quality blue chip Malaysian shares represented by this ETF would show a long term uptrend. Dividends in well managed solid companies are relatively stable and based on long term earnings trends compared to daily price fluctuations which move by  emotions and sentiment.

Sentiment has been negatively effected by MCO 3 and financial problems with Serba Dinamik . Compared to panic selling and big price drops in March with MCO 1, the bad news seems well absorbed. Infection rates are dropping and vaccines are being widely distributed.   Private clinics and hospitals have been given the green light to administer vaccinations. The same is happening in Singapore and this should help our recovery stocks including SATS, OCBC Carlsburg and Comfort del Gro.  

On Friday monthly US employment numbers were released showing less than expected hiring.  Stocks, gold and commodities rose while interest rates and the USD dropped  Despite inflation fears is means business as usual by the federal reserve- more money printing and QE.

 

Weekly US 10 year Treasury bond reflecting interest rate stability.

Take care
Bill

Why I am  bullish the RSX, the Russian ETF heavily weighted to Russian oil companies.