16 Nov 2021

Dear Fellow Investor,

Today I reviewed the indexes in the KLSE. Two sectors stand out: Technology and transportation/ logistics.  The consumer products and services index is also showing signs of support as the Malaysian economy  recovers.   Investing in these sectors has the wind in our back. The financial services index is up over 25 % from its January 2020 lows which is positive. For Malaysia to have a robust recovery banks and financial services companies must lead the way.

In the Edge today was an insightful article by Dr Sivapalin about the hits and misses in the budget. The hits included funds and support for the technology sector including RM 200 million for the SME digitalization grant scheme. This could explain the strength in the KLSE technology index. The miss could be that not enough funds were allocated to technology.  

The article by Mr Tong in today’s Edge was also insightful. It explained how to value technology companies and why some are spectacularly successful while others fail.   His case studies included Microsoft and Apple. How these companies are so profitable is a model for choosing technology investments. Our holdings in Inari an Apple supplier  is an example of these dynamics.

As I read the financial news, the inflation topic is a major concern.  It is not so bad in Malaysia/ Singapore averaging less than 2 % while in the US the latest Producer Price Index  was up 6.2 % a 30 year high.  After the PPI was announced last week gold took a 6 % jump. Silver and Bitcoin also advanced.  

The reasons for accelerating inflation in the developed markets and the US are simple. Massive increases in money supply and Biden’s policy of shutting down the fossil fuel industry to favour alternative energy. It has driven up the price of gasoline over 50 % in the last year.

American multinational investment bank Goldman Sachs has issued a warning that soaring inflation in Democrat Joe Biden's economy is the greatest threat facing the United States and the global economy.

According to a new analysis from the bank, inflation will eclipse anything else, such as pandemic-induced lockdowns, as the primary threat to economic growth.

Americans are being hit hard by inflation in Joe Biden's economy

The report from Goldman Sachs states that the Federal Reserve will soon start hiking up interest rates as inflation continues to throttle America.

The below cartoon sums up the problem.

Biden wishes to shutdown a major oil pipeline between Canada and Michigan which will cost thousands of high paying jobs and drive up energy prices and inflation even more.  He is doing so in the name of climate change which is bizarre as they still have to ship the fuel by road which leaves a bigger carbon footprint.

Take care

Bill

Sentiment dampened due to the uncertainty.

6 Nov 2021

Dear Fellow Investor,

Last week  the local technology index tested an all time high as technology shares diverged from the broad market as uncertainty caused by the prosperity tax and raising of stamp duty dampened sentiment.  Our holdings in Inari, Penta  and Frontkin were up. KGB, Dialog, Genting Malaysia and United Plantation consolidated in narrow ranges and were not much affected. 

Foreign funds according to CIMB research have been net buyers for the 3 months up to October buying a net RM 1.6 billion of Malaysian equities in October.  There were no major foreign fund outflows after the budget announcement as these funds buy value when the market is depressed and sentiment is negative.

Moving forward what will drive the market are earnings. The companies we hold all show positive earnings growth. They also have pricing power and are able to raise prices with inflation. Heim and Carlsburg are examples as they benefit from strong brands.

They will also benefit from year end demand and economic and pandemic recovery. Pubs are open again.   Regional peers are more expensive . Thailand,  Philippines and Indonesia are at an average PE of 16.1 while Malaysia is 14.7.  We are undervalued and this attracts professional buyers.

Weekly CRB Index representing a basket of important commodities.

For the last year commodities have been up trending. Malaysia is benefitting from the rise of CPO, crude oil and natural gas and with the massive money printing by most central banks the trend is likely to continue. Joe Biden just got his USD 1.2 Trillion infrastructure bill passed through congress and this will add more inflation fuel to the fire. His build back better bill is still uncertain as the opposition is objecting to the high tax increases necessary to cover the costs.  The build back better  and infrastructure bills include USD 500 billion for clean energy and that will support solar and wind power companies as well as a broad cross section of commodities including copper, aluminium, steel and uranium.   Silver and gold may catch a bid.

Take care
Bill

The bigger pig is the Build Back Better bill Biden is trying to pass. That is why it is prudent to prepare for inflation.

One-off 33% prosperity tax

 Dear Fellow Investor,

One-off 33% prosperity tax

 he highlight of the budget 2022 is the one- off 33% prosperity tax on companies with chargeable income over RM 100 million for the year of assessment 2022.  The blanket tax rate is previously  24 % levied on chargeable income and not net profit.  Based on Bloomberg data there were 145 companies out of 900 who earned over RM 100 million in financial year 2019 while in 2020 there were only 125 such companies.

For our managed accounts some of our RM 100 million chargeable income holdings include  Public Bank, Maybank, Dialog, F & N, United Plantations and Inari.  

There could be a knee jerk reaction next week to these shares but in my opinion it will be temporary.  Any correction will be bought by institutions and foreign funds as these are high quality blue chip shares with the proven ability to grow sales, revenues and earnings.  From a common sense point of viewpoint  any company that is able to earn  RM 100 million of profit has access to highly skilled auditors, tax experts and accountants   who have the skill to navigate the tax laws to minimize financial exposure.

Weekly  EWM, the ETF of Malaysian blue chips traded on the NYSE

Notice the Budget 2021 reaction reflecting the Friday weekly close. It was down an insignificant 1.13 % for the week capturing reaction to the Friday close in Malaysia after the market close and budget announcement.

The EWM is a very useful indicator to judge the KLSE reaction after a major news event and after the Malaysian markets close.

Overall the budget is expansionary and should help the lower income groups. It should boost consumer spending which is positive for consumer related stocks. There are also measures to boost home ownership which is positive for some construction and property counters.

I think the budget will boost spirits from the negativity of the public mood. Combine this with strong oil prices and the pandemic fading away Malaysia is on the road to recovery.

Take care
Bill

An Indian rhinoceros was born last week in Poland’s Wroclaw Zoo, a hopeful development in efforts to preserve the animals, which are threatened with extinction.

Born January 6, the female baby is the first Indian rhinoceros birth in the zoo’s 155-year history, the zoo said Wednesday. Its mom is 7-year-old Maruska, and its dad is 11-year-old Manas.

“Maruska, a first-time mom, behaves wonderfully,” zoo president Radoslaw Ratajszczak said in a statement on the zoo website. “She looks after her daughter, allows her to nurse, and is very delicate, despite weighing more than 2 tons.

“When she lies down, she’s very careful not to crush the little one, and even gently moves her aside.”

The baby is being cared for out of public view.
The Indian rhinoceros was close to extinction, but thanks to a protection program launched in the 1970s, there are some 3,600 now, including more than 170 living in 66 zoos worldwide.

Indian rhinoceroses can measure 12 feet 5 inches long and weigh up to three tons. They live in the wet, grassy areas of northern India. They mainly feed on grass, leaves and twigs but also on fruit and aquatic vegetation.

Big Picture

23 Oct 2021

Dear Fellow Investor,

The Big Picture

On Friday 3 US Federal Reserve governors and Chairman Powell  publicly announced on Bloomberg that they will not stop asset purchases or raise interest rates any time soon.  

On this news the Dow Jones made an all time high.

 Weekly Dow Jones closing at an all time high.

The Federal Reserve is an inflation creation machine and is creating billions of dollars which it funnels to central banks all over the world to dollarize the world and maintain high stock prices.

This is the real reason inflation in asset prices, energy, food, most commodities  and housing are increasing. Goldman Sachs forecasts inflation in the US will rise to 6 % in the next 3 months. Malaysia and Singapore being part of the world economy will be effected.   Property prices in Singapore are making new highs while CPO last week touched historical highs. Crude oil and natural gas are at 4 year highs which help government finances and indirectly support our and the Singapore economy.

Weekly continuous futures chart of Brent Crude Oil

This morning I attended a CIMB investment briefing by Mark Po on the Hong Kong and China market. He reported that the worst is over for the Evergrande collapse and the China government is bailing out the local property buyers.  while foreign bond holders may lose. There is a slowdown in the economy while crude oil prices and natural gas are steady. There is inflation in food prices as the Central Bank floods liquidity into the market . He forecasts stock market recovery based on low interest rates and the strong Renminbi. Valuations both in Hong Kong and China are at reasonable levels compared to Europe and the US. He recommends semiconductors,  military equipment makers, solar companies and electric cars.   

Locally we are getting back to normal. The banks and finance companies are well supported and they hold the key to recovery. Should Bank Negara raise interest rates this would be positive for banks.  While we wait we collect handsome dividends.  Our recovery shares should also benefit. They include Carlsburg, UP,  Heim, Dialog and Genting Malaysia.  In Singapore our holdings in SATS, OCBC  and Comfort Del Gro  are currently at low risk levels with potentially higher returns.

Take care,

Bill

Joe Biden’s hold on power is so weak it looks like he won’t get his corporate tax increases through congress.  This is a reason stocks are moving up .  Biden wants to raise corporate taxes to levels to match European levels which will kill businesses and slow the US economy.  He also wants to increase regulations to stifle innovation.  If it looks like he gets his way the Dow would be a few thousand points lower .

Two Rules by Howard Marks

16 Oct 2021

Dear Fellow Investor,

Howard Marks, a prominent fund manager wrote a book Mastering Market Cycles and below is a quote.

 

He wrote that while investing is inherently highly uncertain, there are two rules he believes hold pretty steadily:

“Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one. 

Bloomberg analyst’s consensus of Genting Malaysia. This is a reversal in their bearish outlook a few months ago when Genting  hit a Covid induced cycle low.

 

Many examples of Howard Marks observation are evident in our market. Some of the recovery shares  being accumulated by professionals and insiders such as Genting Malaysia and  Dialog hit cyclical lows due to the Covid induced market panic. Heim and Carlsburg are also examples of shares hitting cyclical lows and recovering as  Malaysia gets back to normal.

The Hong Kong country fund EWH traded on the NYSE also made a cyclical low and is recovering. This EFF mostly holds property, banks and insurance companies as well as some technology companies. This ETF was hit hard due to the China government crackdown on technology companies. Based on the price action the bad news appears to be absorbed. Even Charlie Munger, Warren Buffet’s partner  took a large position in Ali Baba when price hit the cycle low.   

Our SATS and Comfort del Gro shares are coming back to life as Singapore begins to open up. Both are high quality companies.

Mr Tong a very successful investor who writes the Edge market column has reversed some of his positions by exiting high growth shares in the US and Malaysia while switching into recovery shares. Do check out his  latest Saturday column and read his rational for the switch. 

The caveat I would advise in buying cycle lows is simple. Stick with quality proven companies as they have the best odds of recovery.

The tech boom is over

Source: Bloomberg Non-Profitable Tech Index since 2016

This is an index of tech companies created by Goldman Sachs  who have not shown any profits. They are bought by investors who believe in rosy profits in the future and are willing to wait.  Since the beginning of 2021 he index has dropped over 25 %

Rising interest rates and inflation are the reasons for the under performance.  These put pressure on profit margins.

We are holding some technology shares including Inari and I am keeping a close eye on them.  As they have strong cash flows, earnings, revenues , profits and low debt, I am not overly worried.  I do not think any would qualify for  the Goldman unprofitable company list.

Take care..
Bill

World supply chains have been disrupted and are effecting markets. Much is due to politics and in the US,  Biden’s shutdown of oil pipelines and cancellation of oil drilling permits which has caused dramatic increases in oil prices. Oil is the lifeblood of world economies and rises are massively inflationary.  This will put upward pressure on interest rates and possible stagflation. This is another reason to hold quality shares.

The Volatility

 9 Oct 2021

Dear Fellow Investor,

Volatility in world markets has reached extreme levels.

One months price action in the Dow Jones

Notice several price bars exhibiting ultra high volume and wide price spreads. It shows the battle between the bulls and the bears. This extreme volatility is engineered  by insiders and market makers to spread fear and uncertainty. Negative news is also spread to raise the fear level. After all the US markets by several metrics including Warren Buffets  indicator of capital value of entire market divided by GDP, P/E and price to sales are the most overvalued in history. This scares a lot of people.

The goal is to spread fear to shakeout those who hold quality shares. Ownership is transferred from weak to strong hands.

I have received several calls from clients asking me if this was the beginning of a market crash and should I sell my shares ? After all most world markets key off the Dow Jones in New York. Our shares in Singapore and Malaysia would also be hit should US markets collapse.

To answer this question I discovered an indicator called the MMRI which means the Mannerino Market Risk Indicator.  It was developed by a financial trader named Greg Mannerino who operates a blog. My analyst has backtested this on Bloomberg and discovered it has a statistical advantage. As an investor it will give you confidence to hold your quality shares during a correction or buy more. It will also tell you when it is time to sell and move into cash.

MMRI Indicator

Formula

 

DXY X TNX / 1.61 

 

Low Risk 0-100

Moderate Risk 100-200

High Risk 200-300

Extreme Risk 300+

 

DXY = 94.10 X

TNX= 1.605/ 1,61= 93.8

 

Presently Low risk for a crash so buy the dip  93.8

DXY = Dollar Index

TNX = 10 year US treasury bond 

 

93.8 shows low risk for a market crash so we can hold our shares and is safe to buy the dip of a quality share.  A professional futures trader could buy the S & P futures but of course must manage his risk.  The formula measures the relationship between the value of the US Dollar Index versus the US 10 year Treasury bond and divides by 1.61.  

Back testing shows a declining dollar and 10 year treasury yield is bullish for stocks. I do not know the significance of 1.61 and I have emailed the developer on this. So far no answer as this maybe is his secret.

If there is a big slam down and the indicator stays in the low risk range I personally would use volume to confirm my entry. I would like to see ultra high volume which signals exhaustion by the sellers. In VSA this is called stopping volume as described by Richard Wycoff.   

In the major market crashes in 2008, 2000 and 1987 the value was over 300.  In the March 2021 correction the value never went over 150 which means moderate risk and the correction was short lived.  

The KLSE and SGX are congesting with an upside bias. The energy sector and the Malaysia economy is supported by rising crude, CPO and commodities.  Our Dialog shares are coming back to life.    Kim Loong and United Plantation  are recovering due to historical highs in CPO and the government now allowing foreign workers to enter Malaysia. We have held these shares for the last 3 years bought at lower levels to capture the handsome dividends and the added value of being quality companies.  

Malaysia and Singapore are opening up so I am optimistic for the market  but there will be corrections along the way. Genting casino is now open and once the 90 % vaccination rate is achieved visitors outside of Pahang will be free to go.  The threshold of 90 % vaccinated is very close to being met. Yesterday it was 89.7 %

Take care

Bill

New born tiger cubs at Zoo Negara. Crowds are coming back which is another sign of recovery. Best to go during weekdays.   

Jittery markets and extreme volatility

2 Oct 2021

Dear Fellow Investor,

Jittery markets and extreme volatility

I watched an interview of Marc Faber who runs a newsletter, the Boom Doom and Gloom report. His newsletter has a world wide audience and has made a lot of money for his subscribers. His main focus is on strategies to survive the irresponsible money printing of world central banks.  He recommends to underweight over valued US markets while focusing on undervalued Asian markets.  He feels value is offered in Singapore, Hong Kong, Thailand, Indonesia, Japan and Malaysian stock markets .  He likes established companies with pricing power as a hedge against rising inflation. Risks are reasonable if you can purchase at attractive valuations which are presently on offer. He recommends selected Asian reits.

Janet Yellen and a number of high officials testified Thursday to the US congress  about interest rates, inflation, the debt ceiling and the Afghan debacle. Yellen, as treasury secretary  suggested that a law should be passed to eliminate the debt ceiling so that the government can spend on any program it wants without having to consult congress. The US constitution  currently vests congress with the power to  spend so this shift of spending authority to  president Biden would open the flood gates of money printing.  A few seconds after she made this suggestion gold shot up USD 35 an ounce while  bitcoin took a 10 % jump. The Dow dropped 560 points as world markets followed down.

On Friday sanity prevailed as Yellen’s scheme would have no chance of becoming law and the Dow recovered most of Thursday’s losses.  Expect Asian market recovery next week.

We have the budget 2022  to be tabled in parliament on 29 October . Depending upon the market reaction it will give insight into the final quarter performance for 2021. Foreign funds have been slowly buying reversing months of selling. If they increase their buying this could boost the blue chip shares including banks, telcos and heavyweights.  The 4^th quarter is usually positive as window dressing by fund managers boosts the market. In addition,  reopening of businesses and a reduction in Covid infections will boost revenues for a wide cross section of the economy.  Travel restrictions are also being lifted and this will improve sentiment.

Take care

Bill

One of my clients alerted me about a major breakthrough to reduce the risk of Covid deaths/ infections. Shares of drug company Merck jumped 8 % on the news. Hopefully this will be made available in Malaysia if it gets approval by the FDA.

Oct 1 (Reuters) - An experimental antiviral pill developed by Merck & Co (MRK.N) could halve the chances of dying or being hospitalized for those most at risk of contracting severe COVID-19, according to data that experts hailed as a potential breakthrough in how the virus is treated.

If it gets authorization, molnupiravir, which is designed to introduce errors into the genetic code of the virus, would be the first oral antiviral medication for COVID-19.

Merck and partner Ridgeback Biotherapeutics said they plan to seek U.S. emergency use authorization for the pill as soon as possible and to make regulatory applications worldwide.

                        An easy to take pill rather than an injection