Inflation hits.

 22 Jan 2022

Dear Fellow Investor,

Growth versus value

 

This chart is from the Fleet St Letter, a stock advisory I subscribe to. It shows a shift from growth shares to value shares. As inflation increases and bond yields advance, money flows into sectors such as old economy businesses which have established revenue streams. These could be consumer related such as healthcare, oil and gas, and commodity businesses including plantations.  Gold and precious metals have been well supported as they are inflation hedges.

Berkshire/B, Warren Buffet’s fund traded on the NYSE is a holding for some of our PGWA accounts and is a component of the Fleet St Letter portfolio . 

It is a classic value fund and holds quality old line companies. Notice during the on going correction, Berkshire is holding above major support and its 200 day moving average and continues to advance. Many high flying  technology/ growth shares have lost upwards of 50 % in the on going correction. More than 50 % of Nasdaq shares are currently trading below their 200 day moving average.

The technology shares in the US that have been stable are those with solid revenue streams such as Microsoft, Apple and Google. The same is true in Malaysia, Hong Kong and Singapore.

The worldwide trend is for higher interest rates and more inflation so our focus should be on value shares. This should protect us from the current environment.  I do not think there will be dramatic interest rate rises as this would push the world into recession. Rises will be gradual and behind the curve.  Once we have the first rise expect markets to rally as the uncertainty is removed. Our Singapore shares which are heavily weighted towards value have been performing well especially the banks.   

Take care
Bill

The inflation monster

Malaysian Technology Shares Corrected

15 Jan 2022

Dear Fellow Investor,

Last week Malaysian technology shares corrected but the underlying reasons we hold these shares has not changed.  Foreign funds were taking profits however buying dips of quality companies is still a viable strategy. By quality I mean low or no debts, increasing revenues and consistent positive return on equity.

The technology focused Nasdaq had a large drop in the last few days but quality technology shares such as Microsoft, Apple and Ali Baba were well supported.  The technology shares we hold supply to companies such as these and meet my quality standards.   The majority of underperforming Nasdaq technology shares have extremely high valuations, huge debts and declining return on equity.

These are mostly dream and hope stocks promising great wealth in the future.  I want to see the cash now.  

Below are 2 charts which support why buying dips in quality shares is a profitable strategy. Money printing and inflation are tailwinds for shares.

Since 1980 the purchasing power of the US Dollar has dropped over 60 %  according to the US Bureau of Labor statistics. It is the result of massive money printing.

This chart shows in more graphic form the effect of inflation and loss of purchasing power . It is a worldwide trend and shows that the mandate of central banks is to inflate and suppress interest rates.

This is why I am not so convinced that central banks will dramatically raise interest rates. There will be token raises which will cause volatility but stock markets will continue to go up. A dramatic raising of rates will cause a severe recession and stock market collapse. Joe Biden has politicized the Federal Reserve and appointed some ultra- loose  governors  to keep his power and print more money. The game will continue and the trend of fiat currencies will continue to fall.

To protect ourselves, commodity related shares and trusts, income producing value and growth shares, precious metals  and banks and energy related shares should allow us to grow and protect our wealth.

The new Covid variant does not appear to be as dangerous as the previous ones. According to my client a doctor it attacks the upper respiratory tract rather than the lungs so there are less deaths, hospitalizations and faster recoveries.    Vaccinations, boosters and  medical advances  should gradually ease the fear and hysteria advanced by the media.  That will give us a run way for the shares we hold.

Take care, Bill

Taking a bite out of dollar.

A positive close

 8 Jan 2022

Dear Fellow Investor,

We had a positive close last week and our managed account stocks were well supported both in Malaysia, US and Singapore.  Our focus has been on economic recovery and a gradual re opening . We have over weighted shares in technology  which has been the best performing Malaysian sector in 2021. As they are manufactures they benefit with increasing exports and demand for semiconductors. Our bank stocks such as OCBC, Public Bank and Maybank are supported by reopening and the possibility of higher interest rates. Well run banks are the foundation of economic recovery. While we wait they all pay handsome dividends.  

On the commodity side we hold United Plantation, Kim Loong ,  Dialog and Wellcall. Plantations will benefit from inflation and rising food prices worldwide. Dialog will  benefit with the Pengeran Phase 3 expansion in downstream activities and Wellcall as a supplier of rubber hoses to the oil companies. As crude oil advances with inflation, rising demand and economic recovery  should benefit our holdings.

From a macro perspective there should be more easy money- looser for longer . Central banks will raise interest rates but  only gradually and in tiny amounts. Rising interest rates will hurt high flying expensive shares with high debts.

and low revenues.  Some of these shares do not even pay dividends . We hold none of these.   

One positive news last week was the announcement of Charlie Munger partner of Warren Buffet buying a large holding in Ali Baba for his fund. This is an example of buying a quality value stock trading at a huge discount .  Sentiment for Hong Kong and China shares is at a historical low point and his purchase shows confidence in these beaten down markets. Despite the negative news and media propaganda, China will recover. I would bet on Buffet and Munger rather than CNBC or Bloomberg,

As mentioned last week the merger between Mapletree Commercial Trust and Mapletree North Asia Trust is a vote of confidence in Hong Kong, Asia and China. The synergy between these 2 reits should definitely benefit shareholders both in capital gain and rising income.

For us to prosper in 2022, we need to focus on dividend income and growth to overcome inflation. Bonds and cash are both losing investments. Our companies must have pricing power and deal in must have products that are necessities.  Reits such as Mapletree NA Trust fit this profile, They have the ability to raise rents with recovery, inflation and continue to generate increasing cash flow.  

With the November election in the US expect more easy money as Biden and his crew will do all to support stock markets.  Yes there will be volatility and fierce corrections but stand your ground and continue to hold your quality shares.

Take care, Bill

This dog an Alaskan Malamute saved its injured master and kept him from freezing on a mountain in Croatia. He laid on the body of his injured master and kept him warm for 18 hours before rescue.

Happy New Year!

 1 Jan 2022

Dear Fellow Investor,

On Friday 2 major uncertainties were removed from the market when the cap on stamp duty although at a higher level was reinstated and tax on income from overseas was suspended until 2026.  These policies benefit our PGWA account holders who earn dividends in overseas markets. The policy also benefits active stock traders as it lowers trading costs.

Market reaction was positive as the KLSE rose 23.92 points to 1567.53 decisively rising from the 1500 support formed in November 2020.

This could be a catalyst for foreign funds and local institutions to pick up quality beaten down shares which are at attractive valuations.

Some of us are holding Mapletree North Asia Trust which holds Festival Walk Property in Hong Kong. We bought it  during panic selling when the protestors burned down the Christmas tree in the Festival shopping mall.  It has languished due to the Covid and negative sentiment towards China and Hong Kong but has since been slowly recovering. They announced a merger with Mapletree Commercial Trust  one of the largest commercial property Reits in Asia.  Unit holders will receive a premium of 7.6 % to the 1.11 price on 27 Dec 2021. DPU will also increase.    

Mapletree is one of the strongest and well known Reit sponsers with quality properties in most Asian markets. Despite the negative Covid and business sentiment they have performed well.  They are making a bet on Hong Kong/Asia/ China recovery by their North Asia Trust merger.

Based on my research the Covid hysteria is lessening with new treatments/ vaccinations/ booster shots and a return to normal. Parking lots are full. Traffic is approaching pre pandemic levels and borders are opening. The Mapletree merger is a vote of confidence in this scenario. They have teams of analysts to access the probability of the success of this venture so we ride with them.   

Happy New Year
Bill

 

Festival Walk Hong Kong

The Democrat party headed by Joe Biden has been spreading fear to gain political control. The symbol of the democrats is the donkey. Thank God in Malaysia we are not caught up in this CNN/ CNBC media whipped up hysteria

Massive fear campaign in the US underway

18 Dec 2021

Dear Fellow Investor,

Massive fear campaign in the US underway

The Dow on Friday was down 505 points but yet held weekly support. The Nasdaq was slightly down . 

This is an epic fear campaign from the top man.  Joe Biden announced , “Unvaccinated Americans face  a winter of death and illness.” This was on all the headlines in the mainstream media including CNBC and CNN. To reinforce this message of fear, Covid experts and government officials  were paraded out saying the new variant, Omicron  was spreading uncontrollably and  we must prepare for lockdowns and restrictions on family Christmas gatherings.

Scared money went into the safety of US treasury bonds pushing the 10 year treasury yield down to 1.407 %. The US Dollar strengthened slightly, stocks sold off and gold caught a bid while crude oil dropped fearing supply chain disruptions and Covid travel restrictions.  

This is the classic fear trade and spells opportunity. As revealed in a recent letter the MMRI indicator measures if it is safe to buy a market dip in oil, gold, crypto and stocks. It measures the US 10 year treasury yield times the dollar index divided by 1.61. Presently after last night it was 82.3 which means buying the dip is low risk.    

Lets take out our list of quality local and Singapore shares and take advantage of this opportunity.  

From HL Bank research

...foreign shareholding may have bottomed. Foreign shareholding of Malaysian equities has

been hovering around 20.2% (record low) to 20.4% for the most of 2021 (Nov: 20.3%). We are

inclined to believe this has scrapped the bottom of the barrel as (i) these levels are below the

GFC-low of 20.7% and (ii) foreigners have been net sellers on Bursa in 7 of the past 8 years

(including 2021) with a cumulative net outflow of -RM68bn. Surprisingly, Budget 2022’s “market

unfriendly” measures did not result to foreign net selling in Nov as one would naturally expect

(recorded a slight net buy of +RM167m instead), suggesting their shareholding could have bottomed.

Will they return? Post GFC (i.e. since 2010), the KLCI has displayed a pretty decent correlation

of 69% to foreign shareholding levels; the correlation reading would be even higher at 76% if the

Covid period were excluded (where retailers bought up the market despite foreign exodus). As such, with foreign shareholding showing signs of bottoming out, we reckon this should limit

downside risk to the market. The question of them returning though is a tough one, especially given Malaysia’s country specific headwinds from the Prosperity Tax and higher stamp duty.

Stocks that we like which have low foreign shareholding levels vs their historical averages are

Maybank and Public Bank which we hold for our managed accounts.

The US Federal Reserve reversed course and said inflation is not transitory and is now endemic and persistent. They also announced tapering and raising interest rates which in my opinion is another lie.  This added to the fear. Biden has the lowest popularity of any modern president  and since he controls the treasury and Central Bank it is unlikely monetary policy will be tightened.  If he did his own party might try to get rid of him.  The midterm election is next November and based on current polls Biden’s party will lose control of Congress.

Thank God Malaysia has gotten Covid under control. Booster shots are being rolled out and we are free to travel and enjoy family gatherings .  Unlike in the US, our  prime minister has not embarked on a fear campaign and is supportive of recovery.

Next week is Christmas, so I will not produce a market report.

For our Christian friends and clients we wish you a Merry Christmas and Happy Holiday.

Bill 

Bullish on energy longer term

 11 Dec 2021

Dear Fellow Investor,

I am bullish on energy longer term.

Weekly chart of Brent Crude continuous futures contract

Note the a 7 week bearish reversal in crude, price held at the 50 week moving average and reversed reaffirming the uptrend closing up 7.14 % for the week. This was in spite of Biden releasing oil from the strategic reserves and pressuring Middle Eastern countries to increase supply. Biden is in trouble politically due to US inflation at a 30 year high of 6.8% and petrol prices up 55 % year on year.   Biden is desperate to keep power   leading into the mid term elections next November and  his cronies in the Federal Reserve will continue to suppress interest rates and flood the economy with stimulus and free money. Inflation is the result. To please the progressive wing of his party he also wishes to get rid of fossil fuels by shutting down oil pipelines, increasing regulations and ending drilling on federal land. He is also pressuring banks to stop financing for oil exploration.  Green energy which Biden supports has a future but it will take time to become cost efficient. In the meantime demand for fossil fuels especially in Asia continues to soar. Asia is not adverse to fossil fuels so increase in demand will not be met by solar and wind expansion alone.  Europe is suffering an energy crises especially now as Winter arrives. There are worries in the UK over electricity and heating during the cold Winter months. While the US, UK, Canada and most European countries do not support nuclear power or fossil fuels,  France, China and  other countries are  expanding their nuclear power plants to create  a reliable and cheap energy source without a carbon footprint.  This should please the progressives and green movement.

I am bullish uranium and the way to play it is the Sprott Uranium Trust which trades on the Toronto Stock Exchange. It deals in physical uranium which is currently trading at less than cost of production. This is a recipe  for large price gains with limited price risk. Call me if you want more info on this.

I am also bullish oil companies which generally pay handsome dividends. Exxon Mobile is one yielding over 5 %. Dialog  also has potential due to Asian exposure.

The KLSE broke 1500 last week amidst the never ending bad news. There does not seem to be a catalyst to reverse the trend but value is emerging. Buying quality shares at these levels is a good bet if you are willing to position yourself  and wait patiently for recovery.  

Take care
Bill

Therapy dog helping with vaccination of reluctant child.

Bull Market

 3 Dec 2021

Dear Fellow Investor,

Fear selling continued this week as the KLSE broke the 1500 support level but closed slightly above on Friday. The fear was amplified by the new Covid strain, Omicron, as well as supply chain disruptions . Our holdings in Inari and Frontken fell. 

A proxy for Inari is Apple which tracks the Inari price. On Thursday, Dec 2 Apple announced that sales of their new I Phone 13 would slow due to inflation, Covid threats and supply chain disruptions . Apple fell initially but closed higher. On Friday Inari dropped 5.16 % but Apple on Friday in New York dropped only 1.17 %. This was on declining volume.  In  my opinion this is a normal correction in an on going  bull market.  The KLSE technology index also fell but is still trading above major support at 90. 

According to my fundamental service Guru Focus, Inari has a financial strength of 9/10 with operating margins expanding and no debt. It has a net cash balance of 0.43 sen per share and a strong LT growth outlook for its RF sector. It is primed and well positioned to capitalize on the industry upcycle. It is also a main supplier to Broadcom in the thriving wireless division.  Inari is highly correlated to Broadcom. 

Inari is a major supplier to Broadcom (AVGO) and went up 1.03 % on Friday despite the negative news on Apple.

The technology story is not going away. To survive and prosper in years ahead businesses must adapt and innovate and the companies we have invested for you fit this profile.  To further put the odds in our favour we will only invest in companies with strong balance sheets and earnings growth potential. There will be setbacks along the way but as long as the underlying reasons for making such investments do not change we stay the course.

In the Edge today, Tong reported on the new Omicron Covid strain. Although much is unknown early reports say the strain is not as deadly or infectious as Covid 19. As we now have over 2 years experience with Covid and health professionals  are trained and experienced in virus treatments and vaccinations, the odds favour recovery, economic openings and a return to normal. 

As long as interest rates do not spike and  governments keep printing money solid equities will beat the inflation rate. Precious metals which in my opinion are undervalued should also perform.

Take care

Bill

Reflects why Biden with his cronies will keep interest rates low and print money. They will pressure other world central banks to do the same. Biden’s popularity is sinking and for him and his party to keep power they have no choice. Another argument to hold precious metals.