Friday, January 29, 2010

Indicators?

Someone asked me today why I have a pariah dog pic on my blog. I have to admit, I am a self confessed dog lover and there is just something in me that makes me love every dog I see, big or small. So that is why a pic of a dog is here for all my readers to enjoy while they are reading my posts. I do hope that you enjoy them as much as I do.

One of the readers posted a comment on my last posting asking what indicators should we look for to determine when to re-enter the market. That is a very good question and also the million dollar question. Actually, I did not intend to reply it so quickly, but once again my head is acting up and here I am, at home, feeling like a sorry loser on a friday night.

Now let me try to make sense of things for you, hope my head holds up for this. Lets do this point by point.

1) The market has had a great run and since last March, it has not experienced a meaningful correction till now.

So is this the correction that will bring prices to a more sensible level? Only time will tell. However with global markets trading at the upper band of their historical price earnings ratio, a correction of this magnitude is not at all unexpected.

In the case of a bull market, all news flow will be interpreted as good news while optimism flows through the veins of the market. It is easy to get carried away. Vice versa, in the bear market, all news flow will be interpreted as bad news and it can sometimes be a self fulfilling prophecy.

To be a great investor, it takes a lot more than just ability to interpret financial statements, there is also an element of keeping your rationality and sensibility to try to make sense of the news and information that is made available to you. As the great Warren Buffett said "the daily gyrations of the market is just noise" and it is important for us to keep ourselves focused on our principles.

Also the influential asset manager Mohd El Erian said in his book "when markets collide", when there is a change in the market or any change that is affecting it, one has to assess whether this is a fundamental change or is it a temporary setback to the market. For those who have not read this book, I highly recommend it because it has been one of the major influences in my development as an investor.

2) The bad news are piling up.

Obama with his tax and bank reforms, Greece closing in on a possible default, with Spain and Portugal coming in closely. Quantitative easing is ending in February 2010. USD carry trade suffering as the dollar index rising in the face of the weakness in the Euro. The irony of it all, the sovereign default candidates are appearing in the Middle East and Europe, while the largest debtor nation is gaining strength. The Chinese pulling back their lending spree leading to a slowdown in demand in China.

So which are the ones that are possible fundamental game changers? In my view, defaults come and go, Greece, Spain and Portugal are all rather small influences in the global markets and would not make such a big dent and definitely no contagion will result from this. Thus no fundamental issues there.

Quantitative easing ending in February will definitely bring some short term pain to the market, investors will be worrying about the draining of liquidity from the system. So that will lead to a self fulfilling cycle of draining liquidity in the system for the short term. But.............Focus....Focus....The housing sector is no where near recovering. Prices are stabilising but still on thin ice and could fall through if too much liquidity is drained and mortgage rates start to rise. The Fed is definitely aware of this, that is why I am fully expecting new measures to be proposed on how to prop up the housing market and target helping homeowners stay in their homes. This will lead to more confidence in the market. So definitely no fundamental effect on the market.

Tax and banking reforms. I am not in the least worried about the tax on banks. I fully support this as the government should make sure that the banks are punished for their role in causing this crisis in the first place. Now comes the wild card and the one that makes me hesitate in brushing it off.

In my earlier post, I mentioned that if the depository institutions are barred from having proprietary trading desks, private equity and hedge fund arms, could cause the asset markets to re-rate. What does this mean? It means that valuations of assets have to be rated downwards as the major trading players are taken out of the game. This could have a longer term effect on the market and the weakness may be quite pronounced, but I have to quote my favourite book by the late Michael Crichton, Jurassic Park; "Nature will find a way". It is almost as sure as taxes that the geniuses in the banking system will find a loop hole and get back into the market. Also the bank reform bill may just end up like the health care bill, cut up and compromised.

China pulling back loans growth should be viewed as a good development because it has to rein things in before they get out of control. If they continue to allow loans to grow so quickly, there will be a heavy price to pay over the long term in terms of rising NPLs on the Chinese banks books. That would lead to massive hits on the Shanghai and HK markets as the Chinese banks make up a large part of their blue chip indices. This is a good thing!!!!

Thus I conclude that the current retreat in the markets is just a long overdue correction. So how do you decide when to get back into the market? Valuation and comfort. When the valuation is reasonable and you are comfortable with the price. No one can time the market to perfection, so do not put too much hope into it.

Oh yes, when I pick stocks, I am recommending them on the basis of their valuation. So buy it now, buy it later, just as long the price is not too far for the price I have listed down, it should be a good investment in the longer term.

Hope you have a better picture of things now.

Best,

SVI still feeling like a loser to be home on friday.

Thursday, January 28, 2010

*Drum Roll* Gem Stock. United Overseas Australia ($0.345)

I know...its about time I revealed the stock I have been speaking of so fondly. I do apologise to all that I have kept this to myself for so long. Trust me, it is really difficult to buy this stock, JUST TRY!! I dare you! To be honest, I have not been able to buy much of it so far and I did buy it at a price that is higher than the current $0.345. No choice, as I had to pay a premium to get a large enough stake. I have not been able to collect as much of it as I would have liked but I am fine at this stage.

So what is so special about this stock? Do not be deceived by the name of the stock, it has absolutely no interest in Australia. The only thing is, it is currently dual listed in Singapore and Australia, with the Aussie listing as the primary one. The company listed in 2007 in the midst of all the fear in the market as investors sold down stocks as if they were stained with leprosy. The ipo offer price at the time was $0.38 and it had a net asset value of $0.33 so it was priced at a modest premium to its NAV. Notice that the currency I am speaking of here is in SGD.

What does the company do? You may ask. Ok it is basically a property developer and a reit manager. It currently manages a very very good reit in Malaysia called UOA Reit. It also owns approximately 46% of the Reit. The company is very specialised, owning mainly prime land in KL which personally, I feel is extremely undervalued compared to other cosmo cities in Asia. I am not going to list out all the land holdings they have but I assure you, they are all very well located in prime locations (Bangsar).

But owning land and managing a Reit does not mean its a good company right? I like the fact that they are managing a Reit, which means they have a ready buyer for their property developments in the commercial and retail sector. Secondly, I like the track record of the company. In their latest profit guidance, the company stated that they will be reporting profits in the region of AUD$110 million. Which means that it is currently trading at 2.3 times current year p/e. Crazy? Hahaha I think not. The company is going to rake in profits of SGD$138 million when their market cap is no more than SGD$320 million.

Some may wonder, why did I start this posting by stating the nav during the ipo period. Ok, now comes the good part. The current nav is $0.59, so that means the company has managed to grow its assets through the past 2 years of financial crisis by almost 80%. That is just taken from the interim report and not the full year report. I fully expect it to rise to $0.63 nav by the time the full year report is released in Feb or March.

The interim dividend was declared at $0.005 cents and there will be a full year dividend which I am going out of my way to say should not be less than $0.015. Which will bring the full year dividend yield to 5.7% at current prices. So if you still need a more convincing story, I really think you should stick keeping your money in the cookie can and stick it under your mattress.

Currently, I am holding almost 50% cash and looking to deploy it. I have sustained some losses during this market but I am still buying this beautiful company. Those people who know me will know that I will always have new stocks to recommend. So as a preview to all, I will say that I am currently looking abroad for opportunities and have identified a possible 4 bagger.

Ok thats enough preview for one day. To reiterate my current top picks, Auric and UOA, buy with confidence, buy with conviction. Trump Dragon has been my favourite for some time, but I have taken my profits off the table for this one, however that does not mean I will not get back into it.

Have to go to bed now, my mum is complaining about my blood pressure....considering my age, that is just a disgrace. But thanks mum!

Best,

SVI

Saturday, January 23, 2010

A whole slew of bad news? Is it the end of the rally or is it just a correction? Let me assess it for you.

No jokes today, no funny ideas, no mood to make too much small talk. On my flight back, I thought about things carefully. The markets have been on a wild ride this week and I have been wanting to think through carefully about the news flow thats been affecting the markets. The time away has not given me much time for anything and if you think the markets were turbulent, my work made this look like a piece of cake.

The market is going through the correction which I have been looking out for, but there is a feeling in my gut that tells me to think even more carefully and reassess the current situation.

As usual lets list down the events that has hogged the limelight over the past week.

1) Obama proposing to impose the bank tax which will lead to banks paying almost US$90 billion over the next 10 years. This to me is a total non event. $90 billion is a drop in the ocean considering the US deficit is already in excess of $12 trillion. Also the banks should not have too much problems in meeting these obligations given status quo, the big question is whether it will remain at status quo.

2) Obama proposing to shrink the banking system, this is something that was already predicted by the geniuses in PIMCO's New Normal outlook. Now Obama has decided that he wants banks to take less risk. Any bank that has depositary services will no longer be able to sponsor private equity, hedge funds and any proprietary desks. What does this mean? At first, I thought this was the key problem for the market, but as things in life go, things are never what they seem.

However lets assess this development before moving to the next one. By restricting the depository institutions from taking excessive risks is based on noble intentions but I really doubt that it is a practical move. Over the past 1 year, the banks have done very well in terms of results, exceeding analyst expectations quarter after quarter, mainly driven by trading gains from their proprietary desks. The banks have used the money injected by the Fed to take risks through their proprietary desks rather than lending it out. Cheap money used to derive better returns from trading in treasury bills, commodities. equities etc, has driven profits. Taking away the trading desks, profits are not going to be too explosive. Banks will have to revert back to their traditional models and make money through lending. That may not be a bad thing, however expect the banks to all be re-rated downwards and p/e multiples to shrink.

Without bank related prop desks trading in investment assets, expect markets to fall as assets in general may get re-rated like the financial industry. So in Obama's quest to build a financial system with lower risk, markets can expect to suffer in the short to medium term.

One possible positive that may come out from this change in regulation, is the spinoffs from banks that MAY (key operative word is MAY) be given to their shareholders in the form of shares or special dividends from the sale of their various non core businesses.

Moving on....

3) Ben Bernanke losing support for reappointment as Fed Chairman for a 2nd term. This is something that really bothers me. If Ben is not reappointed for a 2nd term, I believe that we could see a significant correction of up to 15% or even more. Why? Actually, due to some freak of nature coincidence or some people may refer to as fate, the appointment of Ben in 2006 could possibly be the blessing or silver lining to the financial crisis of 2007-2009. One of the leading proponents of the Great Depression, Ben earned the nickname of "Helicopter Ben" from his thesis and comments on the Japanese lost decade. His suggested solution to the Japanese Housing crisis was to print money and drop them from a helicopter to avoid a deflatonary scenario. That explains why he was the right man at the right place to do the right thing. Now we are facing the possibility of taking him off the job when things are just starting to look better. The question is, are they jumping the gun a little early? Remember, in 1929, during the Great Depression, the market crashed and in 1930, the market recovered 73% of its losses, however policy makers jumped the gun early and the market went on to retest the lows. History repeating itself? Thats what I am afraid of.

I know that Ben Bernanke has been the subject of much criticism but the fact of the matter is he was the only that believed in ultra loose monetary policy that helped flood the market with liquidity and profited all of us. Granted that this is a short term measure, but it is my belief that markets are built on confidence and he has brought confidence back into the markets and I am truly concerned about the possible appointment of someone else. Especially, someone who is in the mold of Paul Volcker would spell trouble for the markets.

Over the past 2 decades, Greenspan and Bernanke has given the markets what they wanted, support it, watch over it and created the "Greenspan put" and now the "Bernanke put". During Paul Volcker's reign, he did not care about the markets, he only had one mission, to control inflation and he is the one that managed to do it with no regard for how the market reacted. I do admit that in the longer term, a Fed Chief in his mold will be needed to curb inflation due to the vast amounts of money being printed, but this is not the time. An analogy I can provide to illustrate this situation would be like asking a lung cancer patient that is showing signs of improvement to start smoking and stop chemo before the cancer cells are fully removed.

Why did I mention Volcker? Isn't he too old to be of any influence? Little known to many retail investors, Mr Volcker was the mastermind behind point no 2. The new bank risk regulation was Volcker's baby and he is the one that is orchestrating everything behind the scenes. Now that is cause for concern. If they do appoint someone with Volcker's approval as Fed Chief, the market is in trouble. So the important issue to follow closely will be point no 3.

These are my initial thoughts and I want all my readers to know that I have always been a pessimist and may be a little too doom and gloom in this case. We also need to acknowledge that the new bank restrictions may not even past congress vote. I guess we will just have to wait and see....

I saw from a comment on my last post on the Gem stock I have found. I am sorry, but I have not been able to find time to write on it this week. I promise, it is coming soon. So sorry but the developments of this past week should be given a higher priority.

Best,

SVI

Sunday, January 17, 2010

A note before I go...AURIC

I stared into the crystal ball and realised I will not be having much time to write over the coming week as I will be too far from the market to give insights into it. So I felt it was important to write something before I go.

In recent weeks, there has been a growing trend of people sending me smses to ask if there are stocks that are suitable for trading. This trend is making me feel a little concerned. Does this mean that there is a little too much exuberance in the market? My experience tells me that it could be time to take a little profit off the table and maybe sit by the sidelines. This is exactly what I intend to do with my trading positions and maybe move into cash or my GEM stock find.

I need to apologise for leaving you all in suspense but I really have not had the time to write in detail my newest stock pick. In my last post, I mentioned Auric Pacific at $0.65 now it has reached $0.72, almost 10% in a couple of days. Many analysts viewed Auric as a sell as Parkway sold out on their stake in the wine cum food distributor. But in my view, it could be just the beginning of a turnaround for the drastically undervalued company. The company currently is trading at a good discount to its book value of $1.75. It is more of an investment holding company, holding interests in China Energy, Food Junction etc.

The disposal by Parkway was crucial to the start of the turnaround for this counter. First of all, it was sold to Goldstream capital which in turn in owned by Provatas Investment which is now wholly owned by Oxley capital. Oxley capital is a upcoming boutique private equity company, and Auric makes the most likely candidate for a private equity buyout. It has lots of cash, assets and trading at a steep discount. Nothing makes more sense for a private equity company to look at it. Take my word for it, it is one of the best bets for the year. But please please please, if you make money on this one, please make a kind donation to the SVI fund, which is very very dry at the moment. Hahaha.

Please do not misunderstand, this is not my GEM stock....It is just a solid stock which has been on my screen for a long time.

Well till the next time I post....

Best,

SVI

Tuesday, January 12, 2010

A great start to the new year, lets hope its lasts!

Last week, Pigs (Peoples Food) did fly, Dragons (Trump Dragon) breathed fire, Bullet Proof vests came back into fashion (Ziwo)and Shipping (NOL) became the transportation of choice.

So far this year has been a good year, achieved the 10% return which I targeted and now looking at my new gem stocks with great interest. Let me give you a hint on one of my new targeted stocks. I was born in a fire element year and the stock I have been looking at is somewhat explosive in nature (no pun intended). The other is a property stock, but the properties are not located in our lovely tropical island. I believe I will be a little early on these calls but I have indicated before that safety is my first priority, so I have chosen companies that have little liquidity with strong anchor shareholders and trading below book value. So that they will be strongly supported should there be a correction. Yes Yes, its hard to see it coming but I really think safety first is important.

One thing I have learnt over the years is that dividend yields are not that great for defensiveness and it is severely over-rated. Take REITS for example, they were yielding around 5% before the crash, by the time the crash was over, we had some that yielded 20%, not because of higher divided payouts but due to prices dropping almost 75%. So much for being defensive. Moral of the story, do not listen to analysts or so called market watchers when they tell you that yields are good for defensive plays during corrections.

Take another example. When the market started to fall at the beginning of the crisis, the geniuses working for our beloved sovereign wealth funds came out with the brilliant plan of buying banks that were in the centre of the crisis. They felt the dividend yields would provide the support for the stock prices and they went two feet in after the stocks were down 20% (talk about conviction, or should I say misplaced faith), we all know what happened next. Down another 70-80% from those levels. Defensive huh? I think not!

So some will ask, what is the best way of playing defense. I used the 3 stocks which held up best during the 1.5 years of painful crash. Hsu Fu Chi, Tianjin Zhongxin and
Sihuan pharma. Just look at their charts, none of them fell more than 20%, in fact Tianjin actually went up over the 2 years. What do they have in common? Low liquidity, anchor owners and trading close or below their book value.

Well I have been in the tutoring mood these days, so this is another lesson.

Oh yeah, I wanted to write about Auric Pacific, but did not have time. LOOK AT IT.

Best,

SVI

Sunday, January 10, 2010

A Lesson Worth Learning. Price does not = Value

Here I am sitting in front of the TV and computer, watching my Bobby Auyeung tv series and studying my stocks at the same time. Thing is, the Pioneer dvd player keeps screwing up the tracking and the disc keeps skipping. So that is affecting my tempo and am finding it difficult to concentrate. Moral of the story is never use a branded dvd player. Shinco works just fine!!!!

Why did I tell this story? How does this link to stock picking? As I have mentioned before, this blog is purely to discuss investments so this definitely links into one of my investment beliefs. Let me explain why...

Basically, buying a Pioneer player is like buying a blue chip stock, the buyer thinks that it is always better to pay for something of a certain brand, track record and enough people singing its praises. Obviously, you will have to pay more for the brand, similar to blue chips, a premium has to be paid. So when a blue chip stock becomes a penny stock, it will almost be like a branded dvd player breaking down after a week.

Buyers believe branded dvd players should cost more because of the advertisements promoting the brand and the so called experts swearing by the product.

Investors believe blue chip stocks should have higher valuations because of the track record, market capitalization, company branding and so called analysts calling for strong buy for the stock.

See the similarities? Hahaha.

The great Warren Buffett once said, " Price is what you pay, but value is what you get."

So this is exactly what I am trying to convey through this example. Price is something which everyone focuses on, but the key is to find value. Regardless of the name, status, price, analyst recommendations etc, a stock is a poor investment if there is no value. So what is value???? Many people ask me...how do I look for value? If I am to put it all down in words, it will be equivalent to writing a book.

Over time, I will be posting more and more articles and I hope to give you a clearer picture of how I find value.

A good company may not mean it is a good investment if the price is not right, however a good investment means a good company selling at a right price.

Simple right? But can you put it to good use? That is the real test. Sometimes I have problems following it myself, the dvd player I bought is the best example. But rest assured, I will be buying a Shinco dvd player the next time round.

Have a good week ahead!

SVI

Thursday, January 7, 2010

A New Year with Old Problems

Before I start, I would like to share a joke which I found quite funny and witty. Not really a joke but more of a comment. I was listening to the news on CNBC last night and they were commenting on how cold the winter was this year. China, America, Europe etc freezing in the coldest winter in years. One commentator comments " Can you imagine, how much colder if there was no global warming?" Funny isn't it. In one sentence, he summed up exactly what I have been saying all these years. Environmental issues are bull. Basically, climate issues and global warming are just the result of government fear mongering to help greedy corporates rip all of us off. So next time when you are thinking about recycling and using ozone friendly materials, just tell yourself..."I am a sucker"

Ok enough of the light stuff and to the serious matter. What is happening to the market? I was reading a book today and it got me thinking about complacency. It is no surprise that humans being humans will always grow complacent when things get comfortable and the market is currently too....comfortable.

My mentor once told me, when in doubt, lay out your pros and cons and you will clear your head.

Cons

1. Unemployment is still high. US unemployment still at 10%. Still losing jobs every month, 7 million jobs lost so far. Economic growth is back but jobs are still no where to be found.

2. Consumption spending still weak. Holiday sales were ok but still not strong. For the first time in 60 years the world does not have the US consumer to rely on.

3. Fiscal deficits at a high for developed nations and still growing. Sovereign defaults are looking more and more likely.

4. Fed commenting about ending their lending facilities in February 2010. This is definitely not going to help to boost banks' confidence in lending.

5. China banks looking to boost their tier one capital with cash calls. This is going to drain liquidity from the markets.

6. China moving their government yield higher, signaling curtailing of bank credit in the near future.

7. Earning...ah earnings, looking better but not great. Our markets are trading near their upper band of historical P/Es. So its not looking cheap.

8. This is depressing....I find it so much easier to come out with cons. Money losing its value because of the relentless blank cheque writing. Confidence in money has fallen to a low with gold rising to a high.

9. Housing looks like its stabilizing but foreclosures are still at its highest levels.

10. Credit card delinquencies are at a high, more and more defaulting on their credit card debt.

Pros.

1. This is tough..but lets try. Fed indicating interest rates to remain at these levels for extended period of time.

2. US dollar still firmly on the downtrend as interest rate differentials between the US and its trading partners continue to widen. Dollar weakness means higher stock prices as the carry trade continues.

3. Privatisation and share buybacks still strong, reflecting companies continuing to believe their stock prices a depressed.

4. Increasing number of mergers and acquisitions. Alcon and Novartis, Kraft and Cadbury etc.

5. Buffett continuing to buy and run down his cash holdings. Burlington, BYD etc.

6. Emerging markets continuing to look strong, China leading the way. Indonesia looks strong. Australia has not seen a recession in 20 years.

7. I give up.

Review of stock picks...

I hate to boast but so far I have been spot on. From shipping to tourism to hwa hong to ziwo and of course....Trumpy.

I have found another gem but until I have finished with accumulation, I cannot reveal it at this time. This is because the liquidity of the stock is just too thin and if everyone starts buying it, it will move very quickly.

I still feel that the market may be ahead of itself. But remember overshooting is very common, just like human behavior. Over reaction is a human trait. So no one can really predict when the party will end. Like what Chuck Prince ex CEO of Citigroup said, "when the music plays, you will have to continue to dance".

All the best!

SVI