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.

Fear or new Covid mutation.

27 Nov 2021

Dear Fellow Investor,

On Friday markets world wide were hit by the fear of a new Covid mutant originating in South Africa. The mass media fear machine went into overdrive.  Dr. Fauci as well  as other health experts, were paraded out to  spread the fear message of possible lockdowns, border restrictions, and the need for more government restrictions and controls.

Fear spread like a forest fire and virtually all markets went into panic mode.  Commodities,  technology and growth shares were hit. The 10 year US Treasury bond saw panic buying as fearful investors rushed to safety.  Gold caught a bid.

Weekly VIX or volatility index traded on the CBOE

Since March 2020 every time the VIX traded above 148, volatility reverted to the mean and stock markets recovered.  The VIX is a fear gage and measures the amount of put options bought mostly by small traders to protect the downside.  It is a sentiment indicator and reflects those small players are usually wrong at tops and bottoms.  Could there be more selling? Of course, but buying dips and managing risk after these spikes is a good strategy. If you are holding quality shares you could add to your positions.

What could turn the market ? If it was announced that infection, transmission  and death rates  drop buyers would return.

Today, I watched a market outlook by  Kong Seh Siang, head of CIMB retail research. He reviewed the budget and the impact of higher taxes on the market.  Large companies earning over 100 million in profits  will  be impacted and the reduction in earnings will have a negative effect. The same goes for the raising of transaction taxes which will impact the short term traders. For investors there is not much impact.

His view on the election in Melaka   in which the BN gained control  was positive as it removes the uncertainty.  Foreign funds have been net buyers in the last 7 weeks as they anticipated a BN win which is good for business. The KLSE is now trading at 1.5 standard deviations below its mean. PE is at 14.1 while the mean is at 17.4. Foreign funds always try to buy value at a discount and that explains their buying. Malaysian shares are on offer.

Going into 2022, he recommends banks including Public Bank and Maybank  due to the likelihood of higher interest rates. He also likes technology and surprisingly rubber gloves due to low valuations. The economy is getting back to normal so he recommends some selected retail counters. If you have an online  CGS CIMB account you can access his picks on the research page.

Weekly continuous chart of Brent Crude trading above its 50 week moving average. The trend is still up despite near term manipulation.  High oil prices signal recovery.

Take care,

Bill.

Diversify our investments to protect our purchasing power.

 20 Nov 2021

Dear Fellow Investor,

Inflation is rising world wide.  In the US prices of virtually all necessities including petrol, food, rents, travel, and automobiles  are rising and reached last month  6.3 % a 30 year inflation high. Here in Malaysia prices are more subdued. This is in part due to Malaysia being a net exporter of  commodities including oil and gas. Fuel subsidies and price controls on essential goods help mitigate the impact of rising global inflation. As investors we need to be mindful of negative interest rates as nominal interest rates are below inflation.

We have several ways to protect ourselves.  Diversification is the key. Quality shares paying dividends is one asset class you should consider.  If the dividend is 4 % and earnings growth is 6 % that gives a total return of 10 % That will allow you to beat inflation and protect the purchasing power of your capital. You should select companies with a history of regular and rising dividends and a trend of earnings growth.  Quality well located REITS should be considered.   When I select a reit I always look at the sponsor. The sponsor should have a long track record of rising distributions and growing ROE (return on equity) . Growing ROE over time shows good management. One such example is Parkway Life Reit who own a chain of nursing homes in Japan as well as hospitals in Singapore and Malaysia. The sponsor is IHH healthcare who have a long track record of good management as evidenced by growing ROE. Another way to protect ourselves is via geographic and currency diversification. Parkway Life benefits from their revenue streams of Yen and Sing Dollars, both strong and well managed currencies.

Our Phillip Global Wrap account allows us to invest in Singapore, Japan, US, Vietnam and  virtually any country with a free market.   I recently bought for a client the Sprott Uranium Physical Trust  which trades on the Toronto Stock Exchange. It is a play on uranium which fits into the green energy theme. Nuclear power  is clean, reliable and does not produce a carbon footprint such as fossil fuels. China is on course to build 150 nuclear plants and that will fuel the demand for uranium.  Other countries are planning to build nuclear plants.

Next week  I do not think the Malacca elections  will have much impact on our share investments. The KLSE is well supported at the 1525 level on both the daily and weekly charts which signal a positive outcome. The technology index closed on Friday at 100.47, a new high.   

Take care,

Bill

The below cartoon reflects my view that as long as Joe Biden  runs the show in the US, inflation is on the way up world wide and we must diversify our investments to protect our purchasing power.

 

 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.