Some random thoughts on the market after a few drinks.

I was having drinks with my friends on friday and one of them kept raving on a stock pick of mine. I guess most of you will remember this one. Its called United Overseas Australia. Remember I said it was a gem, it turned out to be a real gem. For those who bought it, good for you, for those who did not, lets hope for the best for the rest of the picks.

As I am writing this, I have 1 beer and 4 whiskies so bear in mind there is a lot of truth in it. Lets talk about the market first. The Dow Jones is currently up 50 points as this post is being composed and the USD is continuing its fall downwards. Can you imagine it? The USDSGD rate is currently $1.2414. When was the last time that happened? The downward pressure on the USD seems as unstoppable as a runaway train. As the USD continues to move downwards, the carry trade is keeping markets churning away happily. How long can that go on? I personally believe that we are at the last burst of strength in the market before the market starts to kick into correction mode. So enjoy yourself while it lasts. "Sell in May and go away" is going to be a very real scenario this year.

This week we saw a few interesting developments. One which caught my eye was Hyflux's 6% preference share offer. What was the subscription rate again? 7 times? This is a good show of how hungry investors are for yield. The maturity will be 2018 and that is still a good 7 years from now. Only god knows what investors see in this issue. First of all, who knows whether Hyflux will still be around in 7 years time? Do you know how many water companies have disappeared from the face of the earth over the years? Thus investors are taking a lot of credit risk from a company that does not produce positive operating cashflows consistently. Secondly, 6% yield is considered high for now but what do you think interest rates will be over the next few years? Inflation rate is now 5% so what do you think? Basically, investors are getting 1% real return in today's terms while taking 7 years of duration and credit risk. If that is not stupid, I really do not know what is. I have said before, the world is filled with silly people.

Another development was the impressive move up in the hottest IPO of the year, Dynamac Holdings. This stock is definitely not a favourite amongst the local brokerages. All of them are releasing reports on how the stock is so overvalued and how much promise has been priced into the stock. The stock has risen to a high of $0.69 from its IPO price of $0.35 and if you read their prospectus during listing, you would have never guessed that the stock would move to such levels. Personally, I cannot decide whether the market is wrong in pricing this stock. From my observation, whenever Keppel Corp wins a new contract, Dynamac moves as if it was the one winning the contract. Being an associated company of Keppel Corp has rubbed some shine onto the company. If being associated to Keppel really translates to faster contract flows, Dynamac will fly much higher than where it is now. Being a value investor, I really cannot bring myself to buy this stock. So till more clarity comes along, I would say, be careful while trading this stock.

One issue that caught my attention last week was the long drawn out affair of the SGX-ASX merger. Finally, those xenophobic Australians have decided to end the bid once and for all. I am glad this has ended because I really feel that it has depressed the stock for too long. Although I would have liked for the deal to go through but this is not a perfect world. Would you believe if I say that if it were an "ang moh" bourse that was acquiring them, they would have gone through? Well its water under the bridge, so lets move on. I believe SGX is a strong buy because it has become an acquisition target and the dividend yield looks attractive. People who know me will know that it is not in my style to recommend large cap stocks, so this will be one of the rare times.

Earnings season has started in the US. So far, the major results have been disappointing with Google and Alcoa both getting hammered after their result announcements. If you look carefully, its not the problem of profits not rising, but more to do with overly high consensus expectations. In my view, the expectations have been too high that is why so many "intelligent analysis and strategists" are commenting on how cheap valuations are and how undervalued stocks are in the US. I am not saying it is considered expensive, but I am feel that the market is a little complacent so it is about time to pull back. I will be more worried if there was no pull back.

This week there will be no focused stock but one question that was posed to me while having drinks with my protege. He asked whether I liked Lian Beng. Apparently, construction stocks have started to do well. First I need to say why I do not like the construction sector. Margins are never good, highly competitive environment, no competitive advantage amongst the companies, construction companies in Singapore tend to be small players whose bargaining power isn't that great etc. So from a business perspective, it is not a great business to go into. Before I invest in any company, I will ask whether I would start a business like that myself. Trust me, construction is not one of them. Of course, we cannot stereo type everything. There are some companies that have realised that the construction business is not lucrative that is why they branched out to property development. This is a very natural step as they are leveraging on their expertise in construction and it provides a different revenue stream and higher profit margin. Companies like KSH and Koh Brothers are good examples and they have done well in terms of earnings but their stock prices have gone absolutely no where.

I do like Lian Beng, KSH and Koh Brothers but there is absolutely no catalysts to these stocks and unless they get re-rated by the market, they are going to remain as dogs on anyone's portfolio. There will always be worries about the leverage levels of these companies and how they will find cheap land for land banking purposes. In my view, there is only one way for these companies to move forward, that is they should consolidate themselves and become bigger entities. The fact that they are family run companies, that makes it even harder to get all together. Merger and acquisition will lead to the markets looking upon them more fondly. Trust me, that will work, but in an imperfect world filled with game theory payoffs, this will be difficult to achieve. The only one I can think of is a possible merger between KSH, Tee International and Heeton. This will be a merger amongst equals so it should be easier to move forward, and the fact that all three have collaborated before, makes me feel that they also agree with my view that unity is strength.

So if you are a long term investor, I would have stakes in these firms, esp KSH (because they tend to be the majority holders in collaborations)as they could be the big brother amongst the three. But I would not bank my whole life savings on these counters because you may have to wait till kingdom comes. With earthquakes coming at 9.0 magnitudes, kingdom may actually come in the not too distant future. Hahaha.

Anyway, you all have a good week ahead! Its the long weekend!

Best,

SVI