Thursday, February 14, 2019

Charts #19: Global Alcohol Consumption

Courtesy from Our World In Data

Global Alcohol Consumption Peaked in 1980s!

Happy Valentines' Day!

Monday, February 04, 2019

Happy CNY 2019! Huat Ah! Bcos We Are Singaporeans!

Is it because I'm Chinese? No, sweetie, we are Singaporeans :)

The Year of the Dog is coming to an end. Tomorrow, we usher in the Earth Pig. Yes, while the media always reports that this year is the Year of the Golden Animal, it seldom is. The last real Gold animal was in 2011 - called Gojek, the Golden Jackass. Just kidding, it's the Golden Rabbit and before that the Golden Tiger in 2010.  The next one is in 2020 - the Golden Rat. As there are five elements (Earth, Fire, Water, Wood and Gold) and each element gets two years in a row, we only get to Gold every 8 years.

Meanwhile, as markets move in advance as they always do, gold prices are the move! No autolock here.

Gold prices rushed through SGD 1,680!

The recent rally might be more USD related rather than gold supply and demand. Since the Fed decided to stop tightening, gold prices shot pass SGD1,680 and moved real quick to SGD1,776 (USD1,315). The obvious reason being that the USD should weaken since the Fed is no longer raising interest rates. So all else being equal, gold prices should break loose.

In fact, since 1971, gold has only gone one way - up, up and away. It hit USD60 in 1972, almost doubling and then hit USD200 in 1975. By 1980, it was USD650 (almost 20x return in 10 years) and then ran all the way close to USD2,000 during the GFC. It then briefly collapsed to USD1,000 and we are now back to USD1,200-1,300. If one bought $10,000 worth of gold in 1971, it would be $380,000 today, enough to pay for a lifetime of ERP charges. 

Converting from USD to SGD, it's also roughly about SGD1,680. In Chinese, 168 sounds like one way street to Huat Ah! Translation: one straight way to making lots of money. Hence Chinese really like this number: 168 (一六八 Yi1 Liu4 Ba1 sounds like 一路发 Yi1 Lu4 Fa1). Well, if you are not Chinese, a big Huat to you and your family too! There is no autolock to Huat and gold prices!

All this happened because of the historic event on 15 August 1971. The Bretton Wood system which linked all monetary currencies to gold prices collapsed. Before 1971, gold prices were fixed at USD35 per ounce and all other currencies were also pegged to the USD in tight ranges. This proved to be too onerous because the central banks needed to defend their currencies to maintain the exchange rates whenever their economies come under pressure. 

As with kingdoms issuing gold coins centuries before and the German Mark before WWII and the British pound after WWII, powers that be find it too difficult not to devalue when times are stressed. Governments always devalued their currencies. Put it in another way, the central banks cannot defend their currencies when the world's speculators come together. In fact, the Bank of England lost infamously against George Soros and the British Pound got devalued the second time in 1992. Soros became famous overnight and was since known as the man who broke the Bank of England. This was why UK doesn't use the Euro today and might have to exit the European Union with no deal this March.

So, looking back at the long history with the collapse of Bretton Woods, gold prices can only go up not because gold is a good investment. Gold doesn't have a business model or produce any cashflow. But it will Gojek up because fiat currencies will continue to depreciate. It's like releasing the autolock and letting a hostage run free. Okok, let's be serious. It's because when the link between gold and USD broke in 1971, fiat currencies can move as far as human creativity allows and there is no limit to the human brain and its creativity - see below.

In all seriousness, unpegging gold and fiat currencies allowed businesses to price their products and services without any regard to any base systems and hence by extension, economies and countries would also be free to price anything as they deemed fit. With the passage of time, we lose our sensitivities to the intrinsic value of money itself. Meals go into thousands and tens of thousand of dollars - something unthinkable for our parents and grandparents. Houses in Singapore today are in the millions or tens of millions. Houses in China are 20 to 30x annual incomes. Chinese newly weds cannot afford homes without parent support, Is it because I'm Chinese? Maybe, you know... better come to Singapore.

Hence, as strongly advocated before, it makes sense to have a bit of gold in all portfolios. Gold is the origin of the global financial system built on centuries of human's collective adoration for this metal. Gold has no meaning to a monkey. But to humans, it represents wealth and the most ancient verification as the ultimate store of wealth. It has been so since the beginning of human civilization. It was used by the Egyptians, the Greeks, the Romans, the Aztecs and needless to say, the Chinese.

So buy Gold in 2019! Huat Ah!

For the uninitiated, the various allegories in this post are wrt to this incident that happened a few days ago about a cab driver and a Chinese lady passenger who felt she was cheated by the cab driver.

Monday, January 21, 2019

Charts #18: Gaming

Spotted a good chart on FT detailing the rise and rise of gaming.

Pretty amazing how the gaming console had been around for almost 50 years!

Saturday, January 12, 2019

Thoughts #12: Is the World a Better Place?

WSJ published an interesting article titled "The World is Getting Quietly, Relentlessly Better" sometime back arguing that the number of people living under extreme poverty conditions had decreased. The global middle income group is now nearly 50% and many diseases no longer posed threats to lives.

On many counts that is true, but living in Singapore we tend to feel that life didn't get better, don't we? Maybe we started out in Middle Class (defined as earning $10-100 per day) and not enough of us are in the Rich category (only 2.7% of world's population). But even if we are in Rich, we not are necessarily happier.

Singapore passed the generation when children would do better than their parents and progress brought about happiness. This is a developed world problem. Now that we have enough food, good shelter, basic education, healthcare and most of us have some money, what is that makes life fulfilling? It's a tough question.

One possible answer could be sharing and giving. might be a good place to start. When we huat, we should also help others huat too! Huat Ah!

Thursday, January 03, 2019

Goodbye 2018! Hello 2019!

Yesterday was the first trading day of calendar 2019 and we witnessed how the markets "lao sai" (had a diarrhoea) all the way on its first trading day (slightly better today though). It is believed that the first trading day of the year determines the direction for the year. So if that's the case, we can only go south in 2019...

Of course, all these old traders' tales aren't necessarily all true as with most things that concern the markets. The markets are forever unpredictable and no rules of thumb or any other finger ever works. It's different every time although sometimes we can see how it rhymes. 

Let's take a look at what transpired in 2018 and hopefully we can learn some lessons for 2019.

1. Trade war

This was the biggest thing in 2018 that brought the decade long bull market to its end. US decided to impose tariffs on USD200bn worth of goods traded and China retaliated with tariffs on USD60bn worth of goods. But since China exported much more to the US, she was the natural loser here. Her stock market collapsed 25% and the US markets declined in sympathy, so they decided to patch up. The two countries set a truce until 1 March 2019 when hopefully some good news would be announced.

China's PMI

Meanwhile, China's economy continue to slow as the PMI above showed how things had really rolled over. The US is not doing that great as well with Fed's tightening impact reverberating across the system. Global bank stocks fell a good 15-20%. So with the two largest economies in the world slowing down, how can we expect a good 2019? Well, we better get ready for a roller coaster downride!  

2. Tech melting down

Last year this time we talked about a tech melt-up. It didn't melt-up, it melted down. FAANG and BAT * collapsed after their stellar performances from 2015-2017. Apple cracked another 9% last night after iPhone sales disappointed. Google collapsed 30% over the last few months and now looks really interesting as it generates USD33bn in Free Cashflow (FCF) on an Enterprise Value of c.USD600bn. In China, Alibaba and Tencent also underperformed massively. But I am not a big fan as valuations are still not cheap despite falling 30-40%. 

Not forgetting the mega-proxy for new gen tech - Bitcoin. It peaked at USD19,650 around Dec 2017 and fell all the way to USD3,875 as of yesterday. 95% of all initial coin offerings went underwater and many investors lost their shirts. While blockchain technology will change the future, it's decades before we see things coming to fruition. This is very analogous to how Google and Amazon came about in the early 2000s only to make an impact today. Who knows, maybe at some stage, we should own some Bitcoin. It might become the new gold standard.  

3. Forgotten stocks

As the rage went on and then off in the internet and new gen tech space, a large list of brick-and-mortar forgotten stocks got really cheap. Again this is just like what happened during the first dotcom bubble. Automakers are trading at single digit PE and some over 10% FCF yield. Consumer staples are now back to mid teens, some are even at single digit PE. In Singapore, stocks like Overseas Education (discussed previously in 2016) is trading at 13% FCF and giving out 8% dividend annually. Albeit it's micro-cap and hence there's always inherent idiosyncractic risks.

Audrey Tautou in Amelie (2001)

Forgotten stocks are like forgotten actresses (one of my favourite being Audrey Tautou in Amelie featured above). They continue to do their work but after the limelight shone away, they grow out of sight and out of mind. Some do make spectacular comeback but most find a rich husband and get married much like cheap stocks getting taken out at a premium.

There is money to be made buying forgotten stocks, but it also requires a different approach i.e. having a diversified portfolio capable of capturing some of these gains but also capable of waiting things out (Overseas Education had done nothing over the last three years). Buying some of these forgotten names do require a stringent long term buy-and-hold strategy to make money. 

However, if we scrutinize the 5 year performance of the top 50 names by mkt cap in Singapore (list below courtesy of Business Times), we would come to the conclusion that buy-and-hold didn't work. The largest company in Singapore (Singtel) fell c.18% last year and is now overtaken by two banks and a trading conglomerate. Across the board, most Singapore co.s did badly over 1, 3 and 5 years as our economy matured.

Top 50 largest co.s in Singapore

4. Ride the Wave

In fact, buy-and-hold had not worked for most Asian markets starting with Japan in 1989. So again, we come back to the notion that no one rule ever works all the time. Buy-and-hold might make sense for some stocks, usually in the US or the European markets with very diversified investor base. Even so, as internet businesses grow and economies change, it is increasing difficult to hold many of the same stocks for 10 years expecting them to compound. Some would, but most wouldn't. 

This is also reflective of today's disruptive cycles where new businesses make old ones irrelevant quicker than before. A few decades ago, a successful retail model like Walmart had a good 10, 15, 20 year runway to conquer US and then the world. But today, Whole Foods would be taken out by Amazon, Ford had its lunch eaten by Tesla and Zynga Games and Angry Birds disrupted Electronic Arts only to see itself getting disrupted by Supercell and Fortnite in a short span of a few years. 

Hence, I think the value investors of our age would need to rethink buy-and-hold. If necessary, we have to use valuations to guide us to ride the wave. When we find good businesses at reasonable valuations, we should ride on and exit when valuations are exorbitant. One example that comes to mind is Intuitive Surgical (ISRG) - the company behind the surgical robot now commonly used for prostate removal.

ISRG's Surgical Robot

In 2016, ISRG was trading at a reasonable 4% FCF yield (FCF USD1bn over market cap of USD25bn). It surged to 1.5% FCF in mid 2018 (when buy and hold didn't make sense anymore) and now corrected c.20% from its peak. At some point, it might become interesting again, say FCF USD2bn at market cap of USD45bn or c.16% from today's price. Hopefully that gives a flavour of how value investing would be going forward.

5. Hello 2019!

So, in the new era, buy-and-hold no longer means buying and holding the same stock for 10 years. We constantly have to keep a lookout for disruptions. When valuations doesn't make sense, we also have to trade. As for 2019, the bull run is over and we need to be vigilant. There shouldn't be a 2009 Lehman type of meltdown but things should get uglier before it gets better. Meanwhile, we keep our gunpowder dry and look for those high single digit FCF stocks to buy. Maybe some forgotten stocks and forgotten actresses will come back in vogue. My picks are as discussed: Google, Intuitive Surgical and Overseas Education (which I already owned).

Happy New Year and Huat Ah!

* FAANG and BAT are acronyms for US and China's internet giants
FAANG = Facebook, Amazon, Apple, Netflix and Google
BAT = Baidu, Alibaba and Tencent