Market Corrections Are Not Unusual

Did not have time to post today because of work commitments and am down with a little flu. But I read this article and thought it would be good to share with all of you. So enjoy. Will try to post something this week.

Market Corrections are not unusual.

A bull market is defined as one that achieves a return greater than 20%, conversely a bear market is one that declines over 20%. Market corrections are ones where the decline is greater than 10%, but does not exceed 20%. The market's recent decline from its April high was -12.3%, thus qualifying it as a correction. Corrections do not necessarily lead to bear markets though.



It’s been about 14 months since the current bull market began on March 9, 2009, which is in the neighborhood of the average length of time that has passed from the start of prior bull markets to a first correction (17 months, see above table, click on it to see the full table).

The stock market gained 80% before the recent correction. Historically, the first correction in a new bull market has come after average gains of 57%, implying the current bull market was overdue for a correction on a price appreciation basis.

The main factor that has differentiated this recent correction is that it has taken place at a fairly swift pace compared to history. It took 27 days for the market to surpass the 10% decline threshold, which is half the time it’s historically taken on average for a correction to occur (54 days).

Since 1926, there have been 20 stock market corrections during bull markets, meaning 20 times the market declined 10% but did not subsequently fall into bear market territory. Whether the market recovers again from here and avoids a bear market remains to be seen, but at the very least the more surprising development based on historical patterns would have been a continued bull market rally without a 10% pause.

In the short term, the S&P 500 index has bounced 2% off the May 26 low of 1,067. A number of equities are now trading at attractive valuations; maybe giving investors an opportunity to pick up some decent companies at attractive prices/valuations.

Source: Fidelity Investments Research.

It is something to keep our spirits positive. Haha.

Best,

SVI

The market today is like a pitch dark room. Do you dare to move forward?

First and foremost, I would like to state that I am writing this post while I am half drunk in a foreign country and my readers may not understand how this will link to investing principles. I just felt that I should write this post down as a way to remind myself about what I have learnt today and to never forget the important lesson which I attended today.

Today, I attended a session called "dialogue in the dark" in the wonderful and interesting country called Hong Kong. I have to admit that I was really skeptical about the whole activity because I thought to myself, what the hell can one learn about going into a pitch dark room and doing team activities in the dark. But I feel compelled to share the lesson which I learnt during the session with all of you. We spent the better part of 3 hours in a pitch dark room led by a guide who tried to lead us through the journey of sensory awakening. It was an interesting experience to go through darkness to try to enhance your senses and try to do group activities at the same time.

Why am I sharing it with all of you? Its because I feel its exactly what we are going through in this month's market. Fact of the matter is, none of us know for sure why the market is falling at this rate and why the sudden upshot of volatility. The volatility index on the CBOE is the VIX and it has not been this high since March 2009. Imagine yourself walking in a big open space with nothing but a blind man's walking stick in a place so dark that you cannot see your hand in front of you. It is exactly the same situation as you are in now with regards the market.

It is true! No matter how smart you are, it means nothing because there is no damn way you will know how the market is going to go. Not even the smartest people in the world can be sure. On last Thurday, the Dow Jones fell by 370 odd points, but do you know what was the real reason? Was there anything that happened that could have caused such a steep fall? Hell no! That is why I am likening what is happening now to what I experienced today in the dark room. You do not know what is going to happen to the market over the next few months. It could rebound quickly, or it could continue falling.

If you were the only one in the dark room, there are lots of reasons to why you should fear. Some people would freeze on the spot and not move, they will end up being safe but will never get anywhere because they are not moving, the thing is, they will never be out of the dark being cowardly. Or they could use the stick and try to feel for the way forward and be brave about it. The best way to describe the situation today is to acknowledge that no one in the world knows what is the main reason. Thus its the same as having the whole world being stuck in a place that is pitch dark and not knowing where they are and what awaits in front of them.

If you do not continue to walk forward, there is a chance that you would miss a big chance and end up with nothing, if you do walk forward, two things may happen. You may get fall, hit something but eventually you will find a way into the light. What I am trying to convey here is, fortune favors the brave.

Oh on a final closing note, did I mention that the guides that led us through the pitch dark room are blind? Amazing? It was. Why did I point that out? Because the analysts of this world are the blind guides. So they are no better than you but they dare to put their feet forward and try moving. Some of them may be right, some may be wrong. But their guess is as good as yours, so why don't you do your own work and make decisions on your own. I am doing just that. Are you?

Best,

SVI

Hong Leong Asia $3.48....Looking more and more attractive every day.

Today during my check up for a certain body limb of mine, my orthopaedic specialist asked me whether there was anything to worry about this current market weakness. My god, this is not the first time I have been asked a question on the market by a medical professional. My neighbourhood doctor spends more time asking me about the market than questioning why my blood pressure keeps rising consistently. Talking about blood pressure, if the market was mirroring my blood pressure, it would not be dropping like a rock right now.

Why am I making another post so early in the week? Thats because I got a question from my good friend on what stocks to buy currently and the fact that I will be away for a business trip later in the week, I doubt I will have the time to write.

Today, I am going to write about a personal favorite of mine. This stock and I come a long way. This is the first stock I bought with my CPF investment more than 8 years ago. The company is no other than Hong Leong Asia. My protege will know that I simply adore this stock but the reason to why I never wrote about it is because I felt it was a little too pricey in absolute terms. Valuation wise, I would have liked it lower and the current market correction has made it attractive once again.

Hong Leong Asia is China related play at heart with a Singaporean and Malaysian management connection. It has a very diversified business with its main revenue generators being diesel engines made by China Yuchai, refrigerators made by Henan Xinfei, cement production with Tasek cement and building materials with HL building materials. There are other smaller peripheral subsidiaries but I do not feel the need to go into the specifics.

Looking at HLA, it has been one of the best performing stocks in Singapore, rising a whopping 800 percent over 1 year from $0.60 to $4.90 in a year. Currently trading at $3.48, it has fallen very steeply during the past 2 weeks and it is creating some fear amongst investors, wondering whether the stock has been overpriced.

Now let me tell you why I think that it is a compelling buy. First of all, at current market capitalization of $1.3 billion, it is very cheap in terms of its price to sales ratio. The company is expected to generate sales revenues of $4.5 billion in 2010, so that is more than 3 times it market capitalization. The company made approximately $103 million in 1Q2010 and I expect this momentum to carry on through the whole of 2010. So we can safely say $350-$400 million in profits is reasonable and realistic. This translates to a price earnings of less than 4 times.

Of course earnings are not enough for us to call for a strong buy on this stock, so how about we look at other possible catalysts for the company. Recently, the company has engaged an investment bank to look into the possible spin off or sale of their subsidiary, Henan Xinfei. Now lets focus on Xinfei's valuation. The company registered revenues of almost $1 billion while making $67 million in 2009. Last year alone, it sold 3.1 million refrigerators, that is a lot of refrigerators! Profits rose by 3 fold from the year before. Lets just assume that profits remain flat for the year (very very conservative), pricing it at 10 times p/e, that would mean that Xinfei could be worth $670 million. Divided by 374 million shares, Xinfei is worth almost $1.80 per share. If it is spun off and sold, HLA will be cash rich and investors can expect the share price to either shoot up due to expectations of a special dividend or a dividend in specie in the form of shares given back to the investors.

That is just Xinfei, Yuchai has seen record profits too. And believe me when I say, do not write off Tasek Cement. The company is listed in Malaysia and its fundamentals are really very sound. No debt, plenty of cash and solid dividends.

Management wise, it is run by Kwek Leng Beng, CEO of City Developments Limited. Hong Leong group is well known to be run by very capable people and the Kweks are well respected for their business acumen and shrewdness. They have buit a strong empire that has been proven and tested over time.

I would like to let you know that this is a very volatile stock. Before the 2007-2008 crash, it was trading close to $4. At the trough of the selldown it was $0.58. I guess you get the drift. So be patient with it and it will reward you.

It will probably drop a little more tomorrow. I would be a buyer at $3.20 or a little higher. Value stock? I think so. An opportunity? Definitely.

Best,

SVI

Rational opportunities in a crazy silly world.

Miss me? Thought I went missing because the market fell so much? Actually for the first time in my life, I appreciate my job for making me so busy that I was unable to trade much. Who would have thought a job can prevent me from incurring losses? To be honest, it has been tough for me to juggle my job and my life for the past 3 months. Every weekend working like a slave and yet the job just does not get done. I must be the most inefficient worker in the world. But I believe that discipline is important for all investors and that is exactly what I have been trying to do with this blog. The discipline of writing at least once a week is not easy to adhere to, especially when there is still so much more work to be done.

I am sure many of you are wondering, what is happening to the market. The Euro is getting cheaper by the day and my protege was telling me, he should have gone to Europe this year instead of last year. Does the Euro look attractive? Lets just put it this way, if I were a forex trader, I would be so heavily stacked on the Euro, maybe my house would be used as a mortgage.

The market is going through a rather big correction and as long as the world continues to look the wrong way and keeps looking for Europe to be the cause of the problem, we are not going to get to the bottom of this problem. Volatility has been rife across global markets, registering losses of more than 2% per day. Today alone, Shanghai composite fell by more than 5% and is officially in a bear market after the index fell by more than 20% from its peak earlier this year. Is this a sign of things to come? I think so.

I have emphasized over and over again that the media is looking to wrong way for the problems in the market. Why? Because China is the first to be in a bear market. If the problem lies in Europe, shouldn't the European indices be in bear market too? Why is China leading the way? Only time will tell. The Chinese property stocks listed in China, Singapore and Hong Kong are the worse performing ones in the market, is this coincidence? As seasoned investors always say, equities are always forward looking and from the retracement of property stocks in China, it is preempting a steep fall in property prices in China over the next 6-8 months.

Over the 2nd half of 2010, I totally expect housing prices to fall in China or at least show a slowdown. A slowdown is fine because it would be a healthy correction for a property market that has not slowed down for 5 years. Remember, property market cycles normally lasts 8-10 years. A correction can range between 6 months to 2 years. So it does not mean that the property bubble has burst. Contrary to what experts say, there is no bubble in the overall Chinese property market, but more on the coastal and urban cities.

Good and bad news. Good news is, there will be no global fallout should the Chinese property market crash because their mortgages were not securitized like the that of the US. Bad news is, the Chinese banks were as reckless if not more reckless than those in the US. What does that mean for all of us? It means, steer clear of all the Chinese banks, no matter how well capitalized they are. I believe as the property market starts to fall, non performing loans will rise at a relatively quick rate. The Chinese Banks will all be scrambling to raise cash through equity or bond issues to shore up their reserves. By then, the markets will take another hit as investors will flee out of the market as fears of share overhang and liquidity drain will overwhelm them.

Is it happening now? It is not. This is just a preview for the world to see. Over the next 6 - 12 months, a lot of money will be made and lost. Remember, pessimism is the friend of the value investor while optimism is his biggest enemy. From my experience, fear presents the best opportunities for investors. The question is...are you going to let fear get to you or are you going to be brave and see it as an opportunity. 10 percent of the world controls more than 70 percent of the world's wealth. The top 10 percent did not get to where they are by following the crowd.

Unless you believe the world is going to end tomorrow, then do nothing and be fearful. But if you believe that humans will always find a way to survive, then make sure you profit from it. There are stocks that are looking irrationally priced (yes thats right!), so take advantage of others' mistakes and turn them into glorious victories for yourselves.

As I am writing this post, the Dow is suffering from another sell off and it does look like it is headed for the 12th triple digit move in 14 days. Opportunity? I think so. If you are a value investor, you will see what I see. Opportunities....they are here, are you going to grab it or let it slip by? The choice is yours.

Best,

SVI

Sell in May and go away? The Great Singapore Sale is here early.

Years ago, an industry veteran said to me, he was going on holiday to Europe. I asked him how he could take the time to go off and not even bother about the market. His answer was "Sell in May and go away". Wise words indeed, as May tends to be a bad month for equities and over the years that has been the case. It would be easy for me to just brush everything that is happening aside and just take it on the face value of May being a bad month every year. But I am not the sort of person that takes things on the face value, maybe that is why I tend to think too much over lots of things.

I think all of you may be feeling the heat over the past week as global markets tumbled, bringing back "not so fond" memories of the 2008 crash. As the media spend time arguing over the true cause of the current sell down, no one can be sure of what is the real reason behind it. The Dow has fallen more than 7 percent over the past week. Some European markets actually fell more than 10%, while Asia fared no better.

Is it getting worrying for all of you? I have to apologise before hand that I really cannot be sure what is the reason. But remember, I have said before that we may be suffering from complacency and there seemed to be no stopping the market from its advance. This is a long overdue correction although the steepness of the fall is quite concerning.

There are many possible reasons to why the the global markets are falling like a brick.

1) China raising reserve requirements. But this is the 3rd time this year, so it is highly unlikely.

2) Greece...Unlikely as the plan has been inked out and passed. But of course the media as usual tries to sell this story which is just ridiculous. Spain's recent bond auction did quite well, so it does not seem like they have any problems refinancing its bonds.

3) Volcker rule: The resurgence of the rule over the past week could be making the market a little jittery. If it passes through, the banks are not going to look good in the short run.

4) Uncertainty over the German and UK elections. Well its not going to be a problem as everything seems to be going according to the poll forecasts.

5) The British Petroleum catastrophe: That oil spill will not only bring about environmental problems, there could be politics involved too. Oil prices are still falling as the USD continues to enjoy some limelight from the flight to quality. Some say 100000 barrels are being leaked out per day. That is a lot of wasted oil. I guess I am going to be laying off seafood for some time.

6) Mining tax in Australia: This is going to hurt the miners and since they are practically an oligopoly, they will try to transfer this liability to their clients.

7) Falling China property prices: Latest statistics show that property sales in China has fallen drastically month on month. This is a worry for me. To be honest, I think if the property market goes down drastically, that could lead to a real contagion. Banks to get hit with loan losses, that would lead to massive call backs on loans across the country. How much have they lent out? 1.6 trillion yuan? Do the maths.

8) Poor turnout for the 2010 World Expo in China. This was a real disappointment. Sentiment will definitely be hurt by this. Its way below even the most conservative estimates. The chinese government will definitely be worried about how the world will deem this asa failure.

So many reasons but really none of them will lead to us going to another crash like 2008.

I read a passage earlier and I thought it made a lot of sense and I would like to share it with all of you. It said "many investors illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore prices increases.".

This passage hit the nail right on its head. All of us are investing for the longer term and shouldn't falling prices be good for us? We should only worry about falling prices during times when we are looking to sell out. I understand there are many investors who look for short term profits, but my question to them is....do you have a way to tell when and to what levels would the prices rise to? If you don't then why do you try to time the market?

Sell in May and go away? I have never really put that as a consideration in my investment thought process. All I know is the "Great Singapore Sale" or should I say "Great Equities Sale" has started in May instead of June this year. Most probably, they are trying to avoid clashing with the World Cup in June. Enjoy the sale because its going to be one that will be throwing up lots of bargains.

Do not worry, just buy quality and everything will be fine.

Best,

SVI

Diamonds last forever...Not according to De Beers. Sarin getting closer to my heart.

Oh what a great monday. A great start the new week. The markets once again sold off, taking its cue from poor performance in the US last friday. Worried or not? I spoke to a seasoned fund manager today and he was telling me that it was just a short term correction and there was nothing to really worry about.

He did however, say that the Euro Zone sovereign risk issue is going to drag on. Interestingly, he shared a fun fact with me on the Greeks. Did you know, that in Greece, you actually get a bonus if you turn up on time for work? Now that is just a great way to work isn't it? Now you know why they have to turn to austerity measures to cut their deficit. Can you imagine, living a life of excesses till this extend? I wish I lived in such an extent, then I would not be here thinking about the next big stock to buy.

Anyway, you might ask yourself why would I bother to find time on a monday to do another post? It must be something pretty urgent that has made me feel the need to post on a day which I was worked till my finger tips burnt from excessive typing. Well contrary to what you believe, I am writing this post to remind myself to keep monitor a particular stock.

Before talking more about the stock, I would like to state my reasons to why I think this is a stock to keep for the next year or so. You will be surprised by this post because for the first time, I am reiterating a buy on a stock I have called before.

When I was fingering through last week's papers (trust me, it was a ton, Wall Street Journal, FT, BT and The Edge), I saw 4 articles writing about the same topic, what was that? Diamonds. So I think there is no need to say anymore and you should be able to guess that the stock I am going to push for once again is Sarin.

Let me cite a few quotes to back up my case:

"De Beers believes the supply of diamonds is running out over the long term, prompting the world's biggest miner of the gems to reduce production in an attempt to extend the life of its mines."

"Assuming the move moderated production, rough diamond prices could rise by at least 5 per cent per year for the next five years, said Des Kilalea, analyst at RBC Capital Markets."

"For 20 years, the industry has found no new diamond deposit to match De Beers' two biggest mines in Africa or the best Russian mines of Alrosa, the other big diamond producer."

"Diamonds are a treasure of nature that should be properly protected, because there will be less to sell. The reality is that supply cannot keep up, and that will become very accentuated over the next 15 years."

"China's affluent urbanites are buying diamonds in droves and the country's share of the diamond jewellery market should double to 16 per cent by 2016."

While the whole world focuses on gold, silver, precious metals, energy etc but they have not looked at diamonds. The fact that diamonds are often considered the rarest of all gems and with every single woman in the world looking for one carat flawless diamond ring to put on their fingers, I would say that it is a way overlooked industry.

Unpolished diamonds have been surging in price over the past year, rising more than 50% while polished diamonds have lagged in price. Currently, an unpolished 1 carat diamond costs US$139 and a polished 1 carat costs US$5333. Why such a big difference? Because only after you polish the diamond, you can be sure about the colour and the clarity of the diamond. Once the uncertainty is taken away, the diamond is worth its true value.

Sarin's new Galaxy scanner will allow people to gauge the clarity of the diamond before its polished. Imagine how much would the gap of unpolished diamonds would narrow if the clarity of the diamond can be determined before its polished? Of course, the colour of the diamond still needs to be determined, thus the gap will always be there, but at least one of the variables is cleared. Sarin is the outright leader in Diamond grading technologies and what I love is the niche and the leadership position it is in. Thus I continue to call for a strong buy on this stock, especially with the diamond industry picking up quietly.

Thats all I have. If I type another paragraph, I will be peeling skin off my finger tips.

Best,

SVI

Greece or Goldman? Which is the problem? Neither....

To begin, I would like to thank those readers of this blog for giving me words of encouragement over time and it has been a pleasure to write whatever thoughts I have in my mind for the benefit of all of you.

Over the past week, the market has moving sideways with 2 notable sell offs in the US market. The most talked about topic was the downgrading of the problem children of the Euro Zone. I guess my readers will know that I have always said that it was not something to be fooled by. Over and over, I have said that the global financial crisis in 2007 is definitely not the same as what is happening now. It is understandable that investors are worried about the possibility of a contagion effect from the sovereign risks from these countries.

Lets see what can possibly happen. Lets just say that Greece, Spain and Portugal all go into default...that is really the worse possible case scenario (I do not think it will ever be possible), what is going to happen? The Euro Zone banks which are holding these sovereign debts will all be hit and that could cause another confidence crisis in Europe. Will it be global? I seriously doubt it. Why? Because European bonds have never been the "in thing" for Asian investors. For the Americans, they tend to buy into their own treasuries and even if they go for European bonds, they would go for the leaders like Germany, UK and France, rather than Greece or Portugal or even Spain. Thus I believe that it will be confined in Europe.

Eventually, if the Euro Zone leaders feel threatened by these countries running into default risks, they have two options. They will either bail them out with financial packages or they could force them out of the Euro Zone. Which is better? I am not in the position to say because I am not a politician. But personally, I would prefer that they force them out of the Euro Zone because they were not supposed to be there in the first place. These countries fiscally were not up to the mark to be in the Euro Zone but yet they were admitted in. Bailing them out is not a long term solution and it may lead to moral hazard issues in the future.

If they push them out, the Euro Zone will only consist of only the fiscally stronger nations (except Italy, which is my only worry), this would spell a stronger Euro in the future. By expelling them, it will be a serve as a warning to the other Euro members to shape up their fiscal balances to fit into the Euro Zone. Having only one currency under so many different governments is already difficult, can you imagine with differing balance sheet strengths, what kind of risks would that bring to the Euro's well being?

One more reason to why I think that the Greece affair is not a big deal. When Greece got downgraded, their sovereign debt yield rose to 9.9% which is still a far cry to the 20% yield on US high yield bonds in 2008. Does that tell you anything? It just states that the fear is still a long way from what happened in 2007-2008.

I do not want to get too technical and it is not my style. Keeping it as simple as possible is the best way to analyse and understand things. In conclusion to this Euro debacle, I believe strongly that the fears are overblown and once again who should we blame? You got that right.....THE MEDIA.

This week, we did see two major sell offs in the US markets, but I would attribute those sell offs to the Goldman Sachs saga. While they were grilling the Goldman execs for 12 straight hours, the market was tumbling, but on the same day, Greece's sovereign ratings were cut to junk status. So the media got confused and thought it was the Greece issue that created the sell off. Why do I think that media got it wrong? Cos yesterday, the market sold off again, but this time, it was due to Goldman getting downgraded to a sell and falling more than 10%, the market tumbled another 150 plus points. Thus you can see it is the Goldman issue that is hurting the markets.

I do agree, that the Goldman saga could lead to a bigger crisis because of the fact that they are the most influential investment bank in the world. Whatever they touch turns to gold, whatever they short turns to shit. Imagine if they lose their clients and money starts flowing out from their management, that would mean the asset classes they are heavily involved in will drop like a rock from the top of Marina Sands. Now, that would really be hell. So forget about Greece and focus on the real player.....Goldman Sachs.

I would like to state here that in my personal opinion, Goldman Sachs is not going to fail. It is just a momentary glitch. I would buy the stock (US$148) if I had the spare cash now but I am just too heavily invested in everything else.

Ok have a good sunday ahead for all.

Best,

SVI