One night, while I was sifting through the numerous earnings reports for 4Q10, I found a company that has long been forgotten by most investors I believe. I remember the stock clearly as it was listed when I first came back to Singapore after my studies.
Before going more into the company specifics, I would like to state a new theory of mine, its called the momentum critical mass stage of companies. What is this new theory about? In technical trading terms, momentum strategy is when a trader identifies a trend and rides it for what its worth. Now this new theory I have is based a lot on the technical trading concept. I believe every company has humble beginnings and for it to grow, it needs to gain critical mass for its products. Saying that, without gaining critical mass in investor following, the stock will flounder. What does the stock need to do? It must have positive catalysts in terms of earnings and dividend growth, positive announcements like yield accretive acquisitions, divestments etc to create shareholder value. Positive newsflow is crucial! I believe good news will not be a one-off but it will come in close succession like within a couple of months within each other. This is what I mean by momentum. A strong momentum in positive newsflow will create interest in the company and when the there are enough investors on the bandwagon, it reaches critical mass and the stock will move towards an accelerated growth stage in terms of stock price and earnings. One stock that is in this stage is Hong Leong Asia. The other I believe is the stock I am going to share with all of you today.
Ok more on the stock that I have found. This time, its a Chinese pharma stock called Luye Pharmaceutical. I know this name may not sound familiar to any of you but I believe many of my mates and fellow stock punters would be familiar with the name, Asiapharm. After a change of name, its now called Luye pharma. I remember how the company started from a small pharma company selling over the counter drugs to becoming a major player in the drug market.
Luye Pharma is a leading specialty pharmaceutical group in the People’s Republic of China (“PRC”) focusing on the research and development, production and sale of natural drugs , drugs with new delivery system and new drugs with other specific features .
Today their products have an established presence in the PRC and are widely used in the fields of oncology, orthopaedics, neurology, gastroenterology, cardio vascular and hepatology.
Their products have access to over 3000 hospitals across the country, and leveraging on our extensive distribution network in the PRC, we are entering new markets, including Singapore , Malaysia , Pakistan , Vietnam , Crodia , Norway and South Korea .
The growth of this company has been phenomenal. Since 2007, they have grown their revenue from RMB 508 mil to RMB 954 mil. Earnings grew from RMB 58 mil to RMB 129 mil. Considering there was a financial crisis over the past 2 years, the company has managed to grow considerably both its top and bottom line.
The issue that puzzles me most is why the company is still listed. In 2008, there was a general offer by MBK partners, a private equity firm to take the company private at S$0.725 per share. This was basically a leveraged buyout deal with the major shareholders and management. When they made the offer, the stock was trading at $0.635 and its earnings were less than half of what it is today. The total level of acceptances were 39%, adding the 44% that was already held before the offer, the open float for the company is now 17% only. I believe that MBK will be looking at the stock with great interest, if they want to take it private, they will have to offer a lot more this time. I do believe they will do so.
Another interesting fact on the company, is the historical p/e over the past 3 years have been 30 times or more. But currently, it is trading at only 14 times. So its far from its historical mean. With earnings growth, growing so strongly, this is not a demanding p/e level at all. Earnings have grown mainly because the drugs on the company's suite have seen strong demand, this is a good sign that the drugs may be gaining a critical mass following.
Cashflow wise, the company has managed to generate good operating cashflow over the past 3 years. Everyone knows that SVI loves healthy cashflows. They currently are net cash with little gearing. Their cash is level is more than sufficient to cover all its liabilities.
A close investment advisor to me asked, why do I like to look at stocks that lack liquidity? My answer was, I love companies that no one else looks at, that is when the stock has the most potential and the upside will be a lot more than a well researched stock.
Two posts in a day!!! I must be the hardest working investment blogger in Singapore.
Best,
SVI
Sunday, February 28, 2010
Saturday, February 27, 2010
Progression thesis, a personal breakthrough
While I was on my way back to Singapore from a tiring trip, I was fingering through the weekend Financial Times and Wall Street Journal, courtesy of the very nice people from Singapore Airlines, one article caught my eye. It stated that Germany was looking to bail out Greek banks. Interestingly, it made me think back to the beginning of this crisis.
I remember very clearly, when I was leaving my previous company, I sent out an email in September 2007, warning of a recession coming within 6 months. Many people thought I was nuts to predict it and the market went on to reach new all time highs, making me look like an idiot over the short run. In the end, I was proven right and the worst recession since the Great Depression occured. When I took up my new post, I came out with a thesis, this thesis was my take on how the crisis would unfold. I named it my "Progression Thesis".
When the crisis first showed it ugly head in February 2007, there were rumors that some hedge funds were facing liquidity problems due to subprime debt market collapsing. Those hedge funds were backed by investment banks or prime brokerages in the US, I am deliberately not naming names. Naturally, when the hedge funds got into trouble, the 'parents' who were the investment banks and prime brokerages pumped money into the funds and bailed them out. The next card to drop was the special investment vehicles of banks blowing up as the subprime debt they were holding became worthless. The banks bailed them out and took the debt onto their balance sheet, in the hopes that this would bring confidence to the market and investors will continue to buy subprime or mortgage backed securities.
As investors continued to shun MBS and subprime debt, the banks had to start writing down their debt and take impairment charges, as things started looking bad for the banks. investment banks and prime brokerages, their 'parents' the Federal Reserve stepped in by providing financing through the discount window and lowered the Fed funds rate, when that failed, they decided to come out with a myriad of aid schemes like the TALF etc. Then came the Lehman bankruptcy and the Fed had to absorb the potential losses of Merrill to entice Bank of America to takeover Merrill. AIG did not make things any better with their Credit Default Swap exposure. As the Fed's balance sheet blew up, their 'parents' the Treasury stepped in with the TARP to help out the Fed and take the private debt burdens and converted them to public debt. Throw in quantitative easing, the Fed and Treasury has helped to ease the confidence crisis, but what happens when market loses confidence in the Fed and Treasury, in short, the US government or any government as a matter of fact?
Look around us now, the market seems to have woken up and started to question the credibility of the sovereigns. The "PIGS" countries, Portugal, Italy, Greece and Spain have all suffered in the face of the loss of confidence.
Why did I go through the chain of events? To explain my progression thesis. As all of us know, when we get into any sort of trouble, we can always look to our parents to bail us out. Our parents feel the same way with theirs, and so and so forth. I think you get the idea. The problem is, what happens when the chain is broken? What happens if we run into trouble and our parents are no longer there to save us?
After witnessing the chain of events, the parents of the respective parties that screwed up has always been there to bail them out. So what happens when the govt's get into trouble? Who is going to bail them out? The world bank? The IMF? The IMF is selling 200 tons of gold in the market in their efforts to raise money, but trust me, its not going to be anywhere close to being enough to bail out sovereigns that make up a bulk of global GDP. So far, my progression thesis has predicted everything that has happened. But I keep hitting a wall on what happens next, after all the parental bailout cards are used up. After flying for 3 hours, I believe that I have found the missing piece of the puzzle. Who is the next party we look to for help, after the parents? Friends of course! Friends that are influential or have the ability to help us. Thats what is happening with Germany and Greece. This is just the beginning.
Eventually, when more and more fiscally deficient countries get into trouble, their "better off" counterparts will have to step in and help out by guaranteeing their debt. So we will see a transference of poor quality sovereigns into good quality sovereigns. The stronger countries' balance sheets will weaken and ratings will be threatened. When that happens, it will be the climax of this global financial crisis. The burning question is, will there be enough friends to bail out the rest of the world? No one can tell. All I know is, it will be the tell tail sign that will lead to chaos in the market. If the US gets into trouble, forget about friends bailing them out, no one will be big enough, just expect a total reset in the markets, i.e. how God reset the world with the great flood.
What do I mean by reset? Before I explain, let me just say that I spoke to a very smart investor in Singapore, he said to me, how will the US ever default when they have the ability to keep printing money to pay their debt. He has a strong point there. So here is my expectation on how the market is going to reset. The US will flood the world with USD, devaluation will be broadbased and there will be competitive devaluated across all countries that are fiscally deficient. Inflation will go mad, in excess of 20% or more. The fiat money system will collapse and the monetary system that we have grown accustomed to will change and new stored value assets will be used. A new currency system will be formed and I have to admit that I am not intelligent enough to see how the system is going to look like.
In conclusion, the market still has some legs to go as long as the double dip recession does not occur. The progression thesis will take some time to play out and as and when the news of a country like Germany comes in to bail another country in distress, the market will love the news, so try to profit from this, however this will not go on forever. So make hay while the the sun shines.
Its good to be back!
Best,
SVI
I remember very clearly, when I was leaving my previous company, I sent out an email in September 2007, warning of a recession coming within 6 months. Many people thought I was nuts to predict it and the market went on to reach new all time highs, making me look like an idiot over the short run. In the end, I was proven right and the worst recession since the Great Depression occured. When I took up my new post, I came out with a thesis, this thesis was my take on how the crisis would unfold. I named it my "Progression Thesis".
When the crisis first showed it ugly head in February 2007, there were rumors that some hedge funds were facing liquidity problems due to subprime debt market collapsing. Those hedge funds were backed by investment banks or prime brokerages in the US, I am deliberately not naming names. Naturally, when the hedge funds got into trouble, the 'parents' who were the investment banks and prime brokerages pumped money into the funds and bailed them out. The next card to drop was the special investment vehicles of banks blowing up as the subprime debt they were holding became worthless. The banks bailed them out and took the debt onto their balance sheet, in the hopes that this would bring confidence to the market and investors will continue to buy subprime or mortgage backed securities.
As investors continued to shun MBS and subprime debt, the banks had to start writing down their debt and take impairment charges, as things started looking bad for the banks. investment banks and prime brokerages, their 'parents' the Federal Reserve stepped in by providing financing through the discount window and lowered the Fed funds rate, when that failed, they decided to come out with a myriad of aid schemes like the TALF etc. Then came the Lehman bankruptcy and the Fed had to absorb the potential losses of Merrill to entice Bank of America to takeover Merrill. AIG did not make things any better with their Credit Default Swap exposure. As the Fed's balance sheet blew up, their 'parents' the Treasury stepped in with the TARP to help out the Fed and take the private debt burdens and converted them to public debt. Throw in quantitative easing, the Fed and Treasury has helped to ease the confidence crisis, but what happens when market loses confidence in the Fed and Treasury, in short, the US government or any government as a matter of fact?
Look around us now, the market seems to have woken up and started to question the credibility of the sovereigns. The "PIGS" countries, Portugal, Italy, Greece and Spain have all suffered in the face of the loss of confidence.
Why did I go through the chain of events? To explain my progression thesis. As all of us know, when we get into any sort of trouble, we can always look to our parents to bail us out. Our parents feel the same way with theirs, and so and so forth. I think you get the idea. The problem is, what happens when the chain is broken? What happens if we run into trouble and our parents are no longer there to save us?
After witnessing the chain of events, the parents of the respective parties that screwed up has always been there to bail them out. So what happens when the govt's get into trouble? Who is going to bail them out? The world bank? The IMF? The IMF is selling 200 tons of gold in the market in their efforts to raise money, but trust me, its not going to be anywhere close to being enough to bail out sovereigns that make up a bulk of global GDP. So far, my progression thesis has predicted everything that has happened. But I keep hitting a wall on what happens next, after all the parental bailout cards are used up. After flying for 3 hours, I believe that I have found the missing piece of the puzzle. Who is the next party we look to for help, after the parents? Friends of course! Friends that are influential or have the ability to help us. Thats what is happening with Germany and Greece. This is just the beginning.
Eventually, when more and more fiscally deficient countries get into trouble, their "better off" counterparts will have to step in and help out by guaranteeing their debt. So we will see a transference of poor quality sovereigns into good quality sovereigns. The stronger countries' balance sheets will weaken and ratings will be threatened. When that happens, it will be the climax of this global financial crisis. The burning question is, will there be enough friends to bail out the rest of the world? No one can tell. All I know is, it will be the tell tail sign that will lead to chaos in the market. If the US gets into trouble, forget about friends bailing them out, no one will be big enough, just expect a total reset in the markets, i.e. how God reset the world with the great flood.
What do I mean by reset? Before I explain, let me just say that I spoke to a very smart investor in Singapore, he said to me, how will the US ever default when they have the ability to keep printing money to pay their debt. He has a strong point there. So here is my expectation on how the market is going to reset. The US will flood the world with USD, devaluation will be broadbased and there will be competitive devaluated across all countries that are fiscally deficient. Inflation will go mad, in excess of 20% or more. The fiat money system will collapse and the monetary system that we have grown accustomed to will change and new stored value assets will be used. A new currency system will be formed and I have to admit that I am not intelligent enough to see how the system is going to look like.
In conclusion, the market still has some legs to go as long as the double dip recession does not occur. The progression thesis will take some time to play out and as and when the news of a country like Germany comes in to bail another country in distress, the market will love the news, so try to profit from this, however this will not go on forever. So make hay while the the sun shines.
Its good to be back!
Best,
SVI
Wednesday, February 17, 2010
Challenger Wine Trust, Challenging Times Calls for Some Fine Wine! A$0.30
Fear...What do you fear most in life? Death? I fear that, but that is something that will not happen for a long time for me...and for all of us. But there is a constant fear that I have in my heart which I must share. That is when I look at my bank balance. I have a close friend who knows this, she says I always shake my head when I look at my receipt right after I withdraw money from the ATM. This cannot be more true. As I once again face my cashflow problem head on for another month, I asked myself, how did I get myself into this hole? Here I am, with no car, no kids, no mistresses, how am I without cash? Addiction....That is the answer. Addiction to smoking, drinking, womanizing or gambling? I admit, besides smoking, I am only human to be susceptible to the rest of the vices, however, trust me when I say, none of these vices are the source of my addiction.
My name is ______ and I am an investment ADDICT.
This is me, overinvesting again, running down my cash holdings to buy the next stock I find. Why do I deprive myself of the pleasures in life and invest for the future? Some of my closest buddies ask me this question and I just smile and act cool. In fact, I do not know why I cannot bring myself to buy a nice car, or even buy the most expensive bottle of wine or whisky. It is just a second nature of mine to look for opportunities to grow my money for the long term. My mum was still reasoning with me on my insomnia problems, stating the main reason for my inability to sleep as "thinking of ways to make money". Now that is food for thought isn't it?
Lets move on to the stock pick for the week. Something interesting, something I believe you have never thought about investing in. This stock was discovered by chance, during my brainstorming session in the hopes of designing a product that will provide extraodinary returns for investors.
What is the stock you may ask? It is in fact a trust listed in the Australian stock exchange. Challenger Wine Trust. This is the only wine trust listed in Asia and perhaps the World. I cannot be sure but I tried to find others, all I could get were wineries rather than a wine trust. What is a wine trust? It is basically like a Reit, investing in vineyards rather than properties. Challenger Wine Trust currently holds 22 vineyards in Australia, 95% has been leased out with an average lease renewal at 4.6 years.
Why do I like it? Because it is selling at distressed levels. This is what we call deep value investing. The trust has been able to generate strong cashflows since its inception and the distribution per unit for 2010 is guided at A$0.07. Yes, your eyes are not lying to you, it has a yield of 23% for this year while last year it was 18%. Distributions are paid out semi annually. While the yield is looking really attractive, of course there is a catch....The debt to equity is 54% and it is sitting on A$149 million debt at 8% interest rate. During the good times, the market will not discount the stock on this leverage, afterall it is secured with the vineyards. However debt and leverage is frowned upon at this day and age due to worries about the difficulties in refinancing. The trust has been paring down on its debt for the past 2 quarters through sales of vineyards.
With vineyard valuations coming down, I doubt they will be able to get good prices going forward, therefore they will probably be raising money through equity issuance. Current book value of the trust is A$0.61, which is expected to come down more as more units are issued for cash. This will be dilutive for the trust earnings in the short run, but I believe in the long run, there will be value as good vineyards will only become scarcer in the long run with soil erosion and urbanization. Also the water rights in the trust are booked in their financial statements based on historical purchase price and not the actual value. Water rights are strategic and hard to come by in Australia and this is worth a ton.
I do expect this trust to continue falling in the short run but I do not expect it to go much lower unless they do a 1 for 1 equity issue. As the Australian economy continues to grow steadily, the trust will start to get stronger rental income and the vineyard valuations will rise again. The trust's vineyards are leased by strong wineries like Australian Vintage Ltd and Pernod Ricard, both of which rents almost 50% of the leasable land. Thus they act like anchor tenants to the trust.
I would like to write more but really, I am getting tired due to the lack of sleep over the past few days. Expecting more days like this, especially as pay day continues to be ever elusive and the bank balance continues to run low...
Ha!
Best,
SVI
My name is ______ and I am an investment ADDICT.
This is me, overinvesting again, running down my cash holdings to buy the next stock I find. Why do I deprive myself of the pleasures in life and invest for the future? Some of my closest buddies ask me this question and I just smile and act cool. In fact, I do not know why I cannot bring myself to buy a nice car, or even buy the most expensive bottle of wine or whisky. It is just a second nature of mine to look for opportunities to grow my money for the long term. My mum was still reasoning with me on my insomnia problems, stating the main reason for my inability to sleep as "thinking of ways to make money". Now that is food for thought isn't it?
Lets move on to the stock pick for the week. Something interesting, something I believe you have never thought about investing in. This stock was discovered by chance, during my brainstorming session in the hopes of designing a product that will provide extraodinary returns for investors.
What is the stock you may ask? It is in fact a trust listed in the Australian stock exchange. Challenger Wine Trust. This is the only wine trust listed in Asia and perhaps the World. I cannot be sure but I tried to find others, all I could get were wineries rather than a wine trust. What is a wine trust? It is basically like a Reit, investing in vineyards rather than properties. Challenger Wine Trust currently holds 22 vineyards in Australia, 95% has been leased out with an average lease renewal at 4.6 years.
Why do I like it? Because it is selling at distressed levels. This is what we call deep value investing. The trust has been able to generate strong cashflows since its inception and the distribution per unit for 2010 is guided at A$0.07. Yes, your eyes are not lying to you, it has a yield of 23% for this year while last year it was 18%. Distributions are paid out semi annually. While the yield is looking really attractive, of course there is a catch....The debt to equity is 54% and it is sitting on A$149 million debt at 8% interest rate. During the good times, the market will not discount the stock on this leverage, afterall it is secured with the vineyards. However debt and leverage is frowned upon at this day and age due to worries about the difficulties in refinancing. The trust has been paring down on its debt for the past 2 quarters through sales of vineyards.
With vineyard valuations coming down, I doubt they will be able to get good prices going forward, therefore they will probably be raising money through equity issuance. Current book value of the trust is A$0.61, which is expected to come down more as more units are issued for cash. This will be dilutive for the trust earnings in the short run, but I believe in the long run, there will be value as good vineyards will only become scarcer in the long run with soil erosion and urbanization. Also the water rights in the trust are booked in their financial statements based on historical purchase price and not the actual value. Water rights are strategic and hard to come by in Australia and this is worth a ton.
I do expect this trust to continue falling in the short run but I do not expect it to go much lower unless they do a 1 for 1 equity issue. As the Australian economy continues to grow steadily, the trust will start to get stronger rental income and the vineyard valuations will rise again. The trust's vineyards are leased by strong wineries like Australian Vintage Ltd and Pernod Ricard, both of which rents almost 50% of the leasable land. Thus they act like anchor tenants to the trust.
I would like to write more but really, I am getting tired due to the lack of sleep over the past few days. Expecting more days like this, especially as pay day continues to be ever elusive and the bank balance continues to run low...
Ha!
Best,
SVI
Friday, February 12, 2010
Recovery? Jobs, Jobs and ....Jobs
Chinese New Year's Eve is here and this year I am sure the red packets are going to be a lot more generous compared to last year. In January - Feb 2009, financial markets globally were going through the largest gyrations since the Great Depression. I bet people packing their red packets cut their quantum by at least 50%. I know I did. This year, the picture will be different as markets have rebounded significantly since then. As Singapore braces itself for the most anticipated opening of Resort Worlds Singapore, plenty of closet and open gamblers rubbing their hands gleefully, all ready to wager all their new year monies and bonuses, the future looks bright for Singaporeans.
Why am I making another post before CNY? I just thought I should share a titbit with all of you, just something I read in the Wall Street Journal this morning. This is with regards to the jobs situation in the US. First let me lay it out for you.
November 1973-March 1975 - 16 months - 1.45 million jobs lost
Jan-July 1980 - 7 months - 0.97 million jobs lost
July 1981-November 1982 - 16 months - 2.84 million jobs lost
July 1990-March 1991 - 8 months - 1.58 million jobs lost
March 2001-Nov 2001 - 8 months - 2.68 million jobs lost
Dec 2007-June 2009 - 19 months - 8.42 million jobs lost
Why did I give these stats? Let me give you my 2 cents worth on these statistics. From 1980 till now we have had 6 recessions, 2 every decade. There seems to be a trend of recessions happening at the beginning of every decade. Do not worry, it is not going to happen this year as we are still having a lot of liquidity sloshing around in the system with much of the stimulus budget still not utilized. However, 2011 will be a challenge as inflation and interest rates will start to rise. This will be consistent with the past 2 decades when the recession happens in the the 2nd year of the decade. I do believe that we have come out from the last recession as it probably ended in June 2009, but I believe we have only found temporary reprieve through large stimulus spending. But I believe that the first signs of public spending coming to an end are starting to show, with the likes of Spain, Portugal and Greece looking to cut their fiscal spending to boost their sovereign balance sheets. Italy looks like a very likely candidate in the near future too. Cutting fiscal spending during a time when the economy is still on the recovery stage will lead to demand and confidence to fall and possibly push these economies back into a recession. That is why I believe that the countries like US and UK will face this problem in 2011.
Another observation from this statistic, was the number job losses in during this past recession. It is no doubt the longest recession in the last 3 decades, some historians have pointed out that this is probably the longest recession since the post war era. But never have we seen a recession that has led to a job loss number that has come even close to the 8.42 million jobs lost during 2007-2009. It is more than 3 times more than any other recession. So far the recovery has not led to any positive jobs growth and to add salt to the wound, many people have fallen out of the job market and given up on finding jobs. It is hard to fathom how long it will take before all these jobs are replaced. Many of which I believe have disappeared for good.
This number is equivalent to 6.1% of the total workforce, which is the highest since the great depression. Consumer spending accounts for 2/3 of the US economy and trust me, when 10% of your workforce is out of job, you are not going to see large spending and if you are expecting the government to make up for the slack, think again. The US government cannot afford to continue spending like this because they still have to worry about their social security and healthcare problems. The US economy will have to take a lower growth trajectory going forward, that is why PIMCO has called it "The New Normal". Without the consumer, the recovery will never be robust. The US government has to really focus on creating new jobs, I believe it will have to come from new industries like green initiatives and other innovative high value added services. This will take a long long time, that is why I believe the US has a long road to recovery and it will not be a V recovery for the US.
Funny thing is, if we added all the job losses from the previous 5 recessions, it will roughly be equal the the losses from this one last recession....that gives you a better idea of what we have just gone through and also bring investors' feet back to the ground. Why did I take time to write on this? My purpose is to remind readers and myself that the turnaround may not be as strong as what the media is painting. Sorry, but my tirade against the media continues.
Happy CNY!
SVI
Why am I making another post before CNY? I just thought I should share a titbit with all of you, just something I read in the Wall Street Journal this morning. This is with regards to the jobs situation in the US. First let me lay it out for you.
November 1973-March 1975 - 16 months - 1.45 million jobs lost
Jan-July 1980 - 7 months - 0.97 million jobs lost
July 1981-November 1982 - 16 months - 2.84 million jobs lost
July 1990-March 1991 - 8 months - 1.58 million jobs lost
March 2001-Nov 2001 - 8 months - 2.68 million jobs lost
Dec 2007-June 2009 - 19 months - 8.42 million jobs lost
Why did I give these stats? Let me give you my 2 cents worth on these statistics. From 1980 till now we have had 6 recessions, 2 every decade. There seems to be a trend of recessions happening at the beginning of every decade. Do not worry, it is not going to happen this year as we are still having a lot of liquidity sloshing around in the system with much of the stimulus budget still not utilized. However, 2011 will be a challenge as inflation and interest rates will start to rise. This will be consistent with the past 2 decades when the recession happens in the the 2nd year of the decade. I do believe that we have come out from the last recession as it probably ended in June 2009, but I believe we have only found temporary reprieve through large stimulus spending. But I believe that the first signs of public spending coming to an end are starting to show, with the likes of Spain, Portugal and Greece looking to cut their fiscal spending to boost their sovereign balance sheets. Italy looks like a very likely candidate in the near future too. Cutting fiscal spending during a time when the economy is still on the recovery stage will lead to demand and confidence to fall and possibly push these economies back into a recession. That is why I believe that the countries like US and UK will face this problem in 2011.
Another observation from this statistic, was the number job losses in during this past recession. It is no doubt the longest recession in the last 3 decades, some historians have pointed out that this is probably the longest recession since the post war era. But never have we seen a recession that has led to a job loss number that has come even close to the 8.42 million jobs lost during 2007-2009. It is more than 3 times more than any other recession. So far the recovery has not led to any positive jobs growth and to add salt to the wound, many people have fallen out of the job market and given up on finding jobs. It is hard to fathom how long it will take before all these jobs are replaced. Many of which I believe have disappeared for good.
This number is equivalent to 6.1% of the total workforce, which is the highest since the great depression. Consumer spending accounts for 2/3 of the US economy and trust me, when 10% of your workforce is out of job, you are not going to see large spending and if you are expecting the government to make up for the slack, think again. The US government cannot afford to continue spending like this because they still have to worry about their social security and healthcare problems. The US economy will have to take a lower growth trajectory going forward, that is why PIMCO has called it "The New Normal". Without the consumer, the recovery will never be robust. The US government has to really focus on creating new jobs, I believe it will have to come from new industries like green initiatives and other innovative high value added services. This will take a long long time, that is why I believe the US has a long road to recovery and it will not be a V recovery for the US.
Funny thing is, if we added all the job losses from the previous 5 recessions, it will roughly be equal the the losses from this one last recession....that gives you a better idea of what we have just gone through and also bring investors' feet back to the ground. Why did I take time to write on this? My purpose is to remind readers and myself that the turnaround may not be as strong as what the media is painting. Sorry, but my tirade against the media continues.
Happy CNY!
SVI
Thursday, February 11, 2010
Holiday time! Just a note before CNY!
What shall we talk about today? It has been almost one week since my last post, once again thanks to my thankless job, I did not have enough time to write much. However, as Chinese New Year draws close, I do feel obligated to post something just as a commemorative note to close off the year of the Ox. Heh heh. Call me a sentimental softie. hahaha.
My past few posts were mainly reflective of my views on the economy and market, less on stock specific issues. It is not because I have not been able to find value, in fact, this correction has thrown up some rather interesting stocks for me to look at. As earnings season kicks into overdrive, do expect me to come out with more stock ideas. Some people will say that I am fickle and do not stick to the same stocks, but I just want to clarify that I am not an analyst and I do not need to do updates on stocks unless I feel there is an extremely important statement to be made about a certain stock. My stock calls are all for the long term and they are what I consider value investments. My purpose for making those calls is to point my readers to the right direction and not to feed them for the rest of their lives. But I would like to open the floor up to all my readers to request for me to review any stock that comes to their mind.
Now refering back to my last post, I did mention that this week would be an interesting one and it has turned out to be. Right as I am writing this post, the European Union is deliberating whether to bail out good ole Greece. Bernanke went ahead and announced his grand plan of exiting the loose monetary policies (quite a lame one if I should say so myself). Jobless claims came in at the lowest level in months at 444k for the week, last week's jobs report showed 9.7% unemployment (come on, who are you trying to kid?) with a negative jobs number (-20k jobs)...Talk about manipulation of data. In my job, I get to read many investment strategists' outlooks and some of them believe that by some other measure, unemployment in the US is currently at 17% or more. So trust me when I say, the Federal Reserve will not be able to execute its exit strategy any time soon. Raising the discount rate will not be an issue for the markets as it just means that the banks will not be able to borrow from the discount window at such a low rate. Its not really that big a deal so do not expect the US dollar to rally significantly in the short term.
For those that remember the Asian Financial Crisis, they will tell you that initially when Asia went into crisis mode, global stocks got hit including that of the Eurozone and US. After the initial crash, developed economies stabilised and their markets showed much more resilience while Asia continued to languish.
Now its our turn to enjoy the show as developed economies struggle with their internal issues, Euro zone with Greece, Spain and Portugal while the US struggles with their municipal states facing bankruptcy i.e. California (poor arnold...the terminator may not be BACK). Asia amongst the rest of the emerging economies look like they are sitting pretty as economic growth seem to have stabilised and getting back on the track we were on in 2007.I fully expect "hot money" from carry trades to flow into Asia as fundamentals continue to improve and Asians get more affluent. It is not going to be a smooth ride, but one thing is for sure, we are right at the centre of all the action. So if you do not invest aggressively in this market, you will probably regret it going forward.
You have to be in it for the long haul. Some people tell me that they are not free to monitor the stock prices, that is why they do not buy stocks. What do I think of that explanation? BULL. One should not be monitoring the price of a stock after he/she buys it. They should only be monitoring the corporate moves and earnings reports. Who the hell cares whether the price of the stock is rising or not. It is the earnings growth that is key. If the earnings grow consistently with a strong balance sheet and positive cashflow, you will be rewarded eventually. Beautiful things cannot be kept under wraps for long without people discovering it. Take it from me, when I buy a stock for its value, I take it off my watchlist and stop monitoring it every day. My closest friends know that it is pointless to ask me about the stock prices of my favourite picks, I DO NOT KNOW. Can you do the same? Ask yourself that question as you are counting down to the holidays.
Happy CNY to all.
I will be giving all a preview into my latest pick soon. Just be patient. Warning...it is not a Singapore counter.
Best,
SVI
My past few posts were mainly reflective of my views on the economy and market, less on stock specific issues. It is not because I have not been able to find value, in fact, this correction has thrown up some rather interesting stocks for me to look at. As earnings season kicks into overdrive, do expect me to come out with more stock ideas. Some people will say that I am fickle and do not stick to the same stocks, but I just want to clarify that I am not an analyst and I do not need to do updates on stocks unless I feel there is an extremely important statement to be made about a certain stock. My stock calls are all for the long term and they are what I consider value investments. My purpose for making those calls is to point my readers to the right direction and not to feed them for the rest of their lives. But I would like to open the floor up to all my readers to request for me to review any stock that comes to their mind.
Now refering back to my last post, I did mention that this week would be an interesting one and it has turned out to be. Right as I am writing this post, the European Union is deliberating whether to bail out good ole Greece. Bernanke went ahead and announced his grand plan of exiting the loose monetary policies (quite a lame one if I should say so myself). Jobless claims came in at the lowest level in months at 444k for the week, last week's jobs report showed 9.7% unemployment (come on, who are you trying to kid?) with a negative jobs number (-20k jobs)...Talk about manipulation of data. In my job, I get to read many investment strategists' outlooks and some of them believe that by some other measure, unemployment in the US is currently at 17% or more. So trust me when I say, the Federal Reserve will not be able to execute its exit strategy any time soon. Raising the discount rate will not be an issue for the markets as it just means that the banks will not be able to borrow from the discount window at such a low rate. Its not really that big a deal so do not expect the US dollar to rally significantly in the short term.
For those that remember the Asian Financial Crisis, they will tell you that initially when Asia went into crisis mode, global stocks got hit including that of the Eurozone and US. After the initial crash, developed economies stabilised and their markets showed much more resilience while Asia continued to languish.
Now its our turn to enjoy the show as developed economies struggle with their internal issues, Euro zone with Greece, Spain and Portugal while the US struggles with their municipal states facing bankruptcy i.e. California (poor arnold...the terminator may not be BACK). Asia amongst the rest of the emerging economies look like they are sitting pretty as economic growth seem to have stabilised and getting back on the track we were on in 2007.I fully expect "hot money" from carry trades to flow into Asia as fundamentals continue to improve and Asians get more affluent. It is not going to be a smooth ride, but one thing is for sure, we are right at the centre of all the action. So if you do not invest aggressively in this market, you will probably regret it going forward.
You have to be in it for the long haul. Some people tell me that they are not free to monitor the stock prices, that is why they do not buy stocks. What do I think of that explanation? BULL. One should not be monitoring the price of a stock after he/she buys it. They should only be monitoring the corporate moves and earnings reports. Who the hell cares whether the price of the stock is rising or not. It is the earnings growth that is key. If the earnings grow consistently with a strong balance sheet and positive cashflow, you will be rewarded eventually. Beautiful things cannot be kept under wraps for long without people discovering it. Take it from me, when I buy a stock for its value, I take it off my watchlist and stop monitoring it every day. My closest friends know that it is pointless to ask me about the stock prices of my favourite picks, I DO NOT KNOW. Can you do the same? Ask yourself that question as you are counting down to the holidays.
Happy CNY to all.
I will be giving all a preview into my latest pick soon. Just be patient. Warning...it is not a Singapore counter.
Best,
SVI
Friday, February 5, 2010
Panic! Thats what the media does to you with their ignorance.
Blood on the streets. That I what I would describe the state of the markets over the past week. For the third week in a row, the markets have ended in the red. I cannot say that this was unexpected, considering the run up we have had from March 09 till mid Jan 10.
In my previous posts, I have already reviewed the factors in play and concluded that this was just a correction and not a reversal. Remember, my conclusion was based on whatever available information to us, laymen investors. As usual, I am seeing the usual phenomenon of "when it rains, it pours". During bull markets, the good news never seem to stop flowing in, when the market gets bearish, there seems to be nothing but bad news across the board. Fear builds on more fear, with a whole bunch of bearish analysts and strategists appearing on the media, trying to flame the fears and claim their 5 mins of fame. Sometimes, I do wish that the media can me less bias and be more objective in the news reporting. This I know, is not possible as the media thrives on riding the wave and focusing the latest rave news topics.
Bad news, bad news and more bad news. One would find it hard pressed to find any good news in the papers. This morning, I woke up early to watch my usual weekly NBA game, but I could not help but pick up the whole week's financial papers lying on my sofa. After browsing through a week's worth of Financial Times, Wall Street Journal and Business Times, it was almost impossible to not realise that there were no good news this week. If I were an every day investor, I would seriously be pissing in my pants (pardon my french). The markets do seem to be in panic mode with most asset classes getting hammered and a sudden rush into safe assets like the USD and Treasury bills.
One may ask, what is the main reason for this week's sell off? You want to hear my reason or do you want the media's reason. Before I go into the reasons, I would like to state that I mean no offense to journalists and reporters when I say this....The media knows NOTHING.
What the media says: "Worries over EU nations defaults, lead to flight to safety of the USD and risk free assets."
What I say: "Bull"
Greece, Spain and Portugal hogged the headlines over the past week, especially after Portugal's failure to sell all the debt they put out for sale. Attracting only Eur300m when they were looking for Eur500m. The lack of interest in the Portugal debt issue created a huges stir in the market with default swap yields rising overnight. The US dollar index hit a 7 month high, with the press attributing it to the fears of default in the Euro zone and investors fleeing to the USD. Do you think that these 3 countries are really that vital and crucial to the global financial system? Why don't I illustrate a point, the GDP of Greece is equal to that of Bavaria....get the drift? Who the hell cares about Bavaria or a country the size of Bavaria go bankrupt?
How about my reason for the fall? This is something that the media does not want you to know or should I say, the US government does not want too much coverage on.
On Thursday, Moodys released a statement warning that the US was in danger of losing its AAA sovereign rating as Obama's policies continue to pile on the debt for the US and by some measures, the total debt to GDP of the US will be more than 100% in 5 years. They warned that the US will have start to pare its budget deficits and start to be more prudent in their deficit spending and maybe ease up on the loose monetary policies. The market is starting to anticipate that the US government will start to tighten their stance in the near future. This is a forced move, not one that they want to do on their own free will. Taxes will be raised, quantitative easing to stop by end March, mortgage rates to rise slowly, money printing to slow down, more Tarp money to be repayed etc. What does that mean? The USD may see a rebound, that is why traders are positioning for it to rise, thus unwinding their USD carry trades and selling down their stock holdings to repay their USD loans.
What does this mean? It means that the rebound in USD or the dollar index is going to hurt the market till it stabilises or starts to fall again. The rebound in March 09 till now has been driven by liquidity and the USD carry trade. From my experience, this unwinding of the carry trade is going to be temporary just like what happened with the yen carry trade. The yen carry trade lasted for more than a decade with the zero interest rate policy in place. This is the same for the US. Even if rates are raised in the US, it will not be any where close to the levels seen before the crisis until inflation comes back or another Volcker comes along as Fed chief.
On a separate note, I would like to touch on the possible downgrade of the US sovereign ratings. In my view, the only way the market is going to come back down to the levels seen in March 09 is a downgrade in US or UK sovereigns. That is the biggest threat to the world's economic recovery. Not the Chinese bubbles or the sovereign defaults in the Eurozone. It is sometimes easy to be distracted by the headlines around us and it is really up to us to see beyond the surface and decipher for ourselves. You are going to read a lot of this in my future posts. One of the main reasons for this blog is to give us, laymen investors a chance to be independent and to stop us from being the pawns of institutions, government and the media. Do bear in mind what I have said, the key to doing well in the market is to have independent thought, a mind of our own and training to look beyond what is on the surface.
Thats all I have for now. The coming week is going to be interesting, but we will hit support levels soon. So hang in there.
Best,
SVI
In my previous posts, I have already reviewed the factors in play and concluded that this was just a correction and not a reversal. Remember, my conclusion was based on whatever available information to us, laymen investors. As usual, I am seeing the usual phenomenon of "when it rains, it pours". During bull markets, the good news never seem to stop flowing in, when the market gets bearish, there seems to be nothing but bad news across the board. Fear builds on more fear, with a whole bunch of bearish analysts and strategists appearing on the media, trying to flame the fears and claim their 5 mins of fame. Sometimes, I do wish that the media can me less bias and be more objective in the news reporting. This I know, is not possible as the media thrives on riding the wave and focusing the latest rave news topics.
Bad news, bad news and more bad news. One would find it hard pressed to find any good news in the papers. This morning, I woke up early to watch my usual weekly NBA game, but I could not help but pick up the whole week's financial papers lying on my sofa. After browsing through a week's worth of Financial Times, Wall Street Journal and Business Times, it was almost impossible to not realise that there were no good news this week. If I were an every day investor, I would seriously be pissing in my pants (pardon my french). The markets do seem to be in panic mode with most asset classes getting hammered and a sudden rush into safe assets like the USD and Treasury bills.
One may ask, what is the main reason for this week's sell off? You want to hear my reason or do you want the media's reason. Before I go into the reasons, I would like to state that I mean no offense to journalists and reporters when I say this....The media knows NOTHING.
What the media says: "Worries over EU nations defaults, lead to flight to safety of the USD and risk free assets."
What I say: "Bull"
Greece, Spain and Portugal hogged the headlines over the past week, especially after Portugal's failure to sell all the debt they put out for sale. Attracting only Eur300m when they were looking for Eur500m. The lack of interest in the Portugal debt issue created a huges stir in the market with default swap yields rising overnight. The US dollar index hit a 7 month high, with the press attributing it to the fears of default in the Euro zone and investors fleeing to the USD. Do you think that these 3 countries are really that vital and crucial to the global financial system? Why don't I illustrate a point, the GDP of Greece is equal to that of Bavaria....get the drift? Who the hell cares about Bavaria or a country the size of Bavaria go bankrupt?
How about my reason for the fall? This is something that the media does not want you to know or should I say, the US government does not want too much coverage on.
On Thursday, Moodys released a statement warning that the US was in danger of losing its AAA sovereign rating as Obama's policies continue to pile on the debt for the US and by some measures, the total debt to GDP of the US will be more than 100% in 5 years. They warned that the US will have start to pare its budget deficits and start to be more prudent in their deficit spending and maybe ease up on the loose monetary policies. The market is starting to anticipate that the US government will start to tighten their stance in the near future. This is a forced move, not one that they want to do on their own free will. Taxes will be raised, quantitative easing to stop by end March, mortgage rates to rise slowly, money printing to slow down, more Tarp money to be repayed etc. What does that mean? The USD may see a rebound, that is why traders are positioning for it to rise, thus unwinding their USD carry trades and selling down their stock holdings to repay their USD loans.
What does this mean? It means that the rebound in USD or the dollar index is going to hurt the market till it stabilises or starts to fall again. The rebound in March 09 till now has been driven by liquidity and the USD carry trade. From my experience, this unwinding of the carry trade is going to be temporary just like what happened with the yen carry trade. The yen carry trade lasted for more than a decade with the zero interest rate policy in place. This is the same for the US. Even if rates are raised in the US, it will not be any where close to the levels seen before the crisis until inflation comes back or another Volcker comes along as Fed chief.
On a separate note, I would like to touch on the possible downgrade of the US sovereign ratings. In my view, the only way the market is going to come back down to the levels seen in March 09 is a downgrade in US or UK sovereigns. That is the biggest threat to the world's economic recovery. Not the Chinese bubbles or the sovereign defaults in the Eurozone. It is sometimes easy to be distracted by the headlines around us and it is really up to us to see beyond the surface and decipher for ourselves. You are going to read a lot of this in my future posts. One of the main reasons for this blog is to give us, laymen investors a chance to be independent and to stop us from being the pawns of institutions, government and the media. Do bear in mind what I have said, the key to doing well in the market is to have independent thought, a mind of our own and training to look beyond what is on the surface.
Thats all I have for now. The coming week is going to be interesting, but we will hit support levels soon. So hang in there.
Best,
SVI
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