Tariff Tantrums and the SPX Bear Run

This post is also on substack.

Thanks to Trump, April 2025 might go down in history as the first President-inflicted bear market of the 21st Century. Veteran market participants (like this blogger) would remember the past bear markets well. There was the dotcom bust which lasted almost three years. There was the March 2020 pandemic scare which was a 29% drop in just one month. More recently, in 2022, the market dropped more gradually and the whole ordeal lasted 9 months. 

Then there was the mother of all bear markets, the GFC, which was a whopping 55% drop over 17 months back in 2007-2009. Scary, would be an under-statement. The global financial system as we knew it could collapse. We were days from the Second Great Depression. It was hard to believe, and still is, but both God of Fortune and Lady Luck smiled on us all. So we can just talk about it rather than experience it.

S&P Bear Runs since the 1950s

For the story today, the S&P500 peaked in Feb 2025 slightly above 6,000 and then things fell apart, as they do when markets peaked. Only this time, we shot ourselves in the foot. Or rather Trump did. We are now almost 20% below the peak, which by definition, means we are entering bear market territory. In the last two weeks, the drop was drastic enough that Trump himself got nervous and backtracked his tariffs by postponing it for 90 days. 

The markets heaved a sigh of relief, stock prices stabilized and some hoped that the good old days will come back. By that, I mean Nvidia leading the Magnificent Seven to higher highs. Bitcoin and A.I. names rallying again. S&P500 revisiting 6,000 and surpass that, with major global indices (except China) following behind. And more euphorias, kumbayas and what not. Alas, the probability of that happening seemed pretty low now.

Change in world order

What we are seeing could be a generational change in the world order which started when Trump became President back in 2016. That coincided with Xi's rise in China amongst many global events (Brexit etc) which culminated to Russia's invasion of Ukraine. The world, led by US to cooperate, globalize, trade and prosper since WWII changed to one that is about self-interest. We are talking about protectionism. De-globalization. Every country for herself. Friend-shoring, onshoring, you know the rest. 

The markets ignored these seismic geo-political shifts because there were exciting stories. It started with the FAANGs (Facebook, Amazon, Apple, Netflix and Google) which then morphed into the Magnificent Seven (Tesla, Nvidia, Microsoft, Meta, Amazon, Alphabet and Apple). There was the whole Bitcoin mania and then the A.I. mania. If we dig deeper, there were also other sub-plots like shareholder activism, Novo Nordisk and some big pharma with their gamechanging obesity drugs. There was also Japan, with Nikkei breaking its 1989 high after 34 years. Even in Singapore, we had DBS having its market cap exceeding USD100bn and taking over Singtel as Singapore's proxy stock. 

https://companiesmarketcap.com/sgd/banks/largest-banks-by-market-cap/

Today, DBS' market cap exceeded SMFG's (Japan's second largest bank) market cap and also UBS' momentarily when it had to rescue Credit Suisse. This is quite unthinkable. Japan has a population twenty times bigger than ours. And UBS is the pre-eminent wealth manager and now Switzerland's only big bank. What did we do so right? If you scrutinize the table above (courtesy of companiesmarketcap.com), we are on our way to surpass more G7 banks like BNP and Citigroup. Citigroup! The Citi that never sleeps!

Anyways, back to the story, so, the markets were busy. Who cares if Russia and Ukraine started a war. Or if China threatened to invade Taiwan. Market participants were enjoying the bull market and making money left, right, centre. But Trump slapped the markets in the face and everyone woke up. So the question now is would he double down or would he backtrack? Extrapolating from these two simple actions, there are two possible scenarios:

Slight return to normalcy

This is the bull scenario that everyone hopes for. Trump, worried about his own finances, or simply focuses to whip China differently, backs down. The markets think its business-as-usual and we avert that 50% drop we saw with the GFC and the dotcom bust. But still, it is hard to imagine that we go back to the previous world order of global cooperation, more trade, less bitching. Even if this scenario pans out, it will not be Mag7 leading the markets. It is hard to say who are the new leaders, I would focus on what I have preached - strong FCF companies which are now featured on substack.

All hell breaks loose

This is the doomsday scenario where Trump loses it (which is highly possible) and we have full-blown trade wars, not just with China but with allies, neutral countries. Basically, total collapse of the world order since WWII. This bear market could become a combination of the dotcom bust and GFC, lasting into years and dropping 50% at the end. The only safe assets to hold would be cash and gold. Ironically, property as well. The end game here is WWIII.

This is not impossible. And if WWIII happens, cash is worthless. Only gold can preserve wealth.

Of course, predicting the future is never so simple. The future is a set of probabilities and the two scenarios above probably lies on a spectrum with normalcy at one end and hell at the other. So we might avert WWIII like how we averted the Second Great Depression back in 2009. Regardless, it would be a very uncertain 12-18 months ahead. Hold more cash and be less courageous.

Market review: 2024-2025

2023 came and past. There was no recession, the Russian-Ukraine war continued and more conflict happened in other parts of the world. Israel-Hamas. We may have Trump as the most powerful man on the planet facing off three dictators: Putin, Xi and Kim. How fun.

Meanwhile stock markets continue to make new highs (except China). The Nikkei broke past its peak of 39,000, last achieved in 1989. This was the year Taylor Swift, the first billionaire singer who helped Singapore gain more hatred from our neighbours, was born. At 35, her age is also slightly higher than the median and average age of all the humans on planet Earth. 

My point, is that it's been a while since Japan was on investors' mind and just when Nikkei tried to come back, India took centre-stage limelight again with Modi promising more and the India stock market hit all time high as well. Yeah, the world is crazy.

So what should we expect for the rest of 2024 and 2025?

I believe what goes up must come down. Valuations are stretched but not crazy. The last time Nikkei hit 39,000, it was trading at 60x PE. Today it's 16x. The PE for the US market is expensive but not at its most expensive when we look at its history, as exemplified by the famous Case-Shiller PE ratio chart below.

Case Shiller PE 50 Year Chart

The last bubble was with the Nasdaq and it is worth examining at that as well. The Nasdaq was trading at >100x PE back in 2000. While it has way surpassed that peak of c.5,000 at >17,000 today, the PE ratio is c.30x. So, just looking at PE valuations, we can always argue, things are not super crazy. But every bubble is different. It can go way higher and break the previous PE record high. 

This could be generative A.I. sucking in even more money which means the Magnificent Seven (Nvidia, Alphabet/Google, Meta / Facebook, Tesla, Amazon, Microsoft and Apple), the GRANOLAS in Europe (GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, Loreal, LVMH, AstraZeneca, SAP and Sanofi) and the Seven Samurais (Tokyo Electron, Mitsubishi Corp, Toyota, Nintendo, Fast Retailing, Sony and MUFG) continue to go up. While the rest of the market stagnates.

Or things can just collapse should the weakest link break. It could be another Silicon Valley Bank, it could be China, or Tesla. The risks are not being highlighted today but with interest rates this high, by right, investors should be favoring stocks with lower PE or higher earnings yield. Yet, we are seeing the opposite.

As fundamental investors, we always have to be mindful of valuations. I would advocate we look at the specific companies closely and make sure valuations are cheap. We should also keep comparing earnings yield to T bills. If we can get 3-5% on T bills, we must think hard about buying stocks at less than 3% earnings yield or 33x PE. Singapore 6 month T bills are still giving 3.7% and US ones are even higher at 4-5%.

US T bills from Google

As to fundamental analysis, I believe A.I. will change the game. It is still unclear how. One scenario might be that retail investors might be better served, since we can simply ask chatGPT to do the analysis in the near future. Or it might also be the case that no one beats the market anymore. So we just buy the index which is generating return by A.I. investing for us.

Before that future happens though, we have Substack today (mine is 8percentpa.substack.com). I believe Substack is becoming an important growing eco-system for independent writers who could write as well as professional analysts perhaps with the help of chatGPT. Their analysis are in-depth, informative and much better than Youtube videos (e.g. Roaring Kitty). The following would be a list of posts on both new names and names that I follow.

Just a few posts from other Substacks:

https://eaglepointcapital.substack.com/p/verisign-a-capital-light-compounder

https://buybackcapital.substack.com/p/the-issue-no-4-vrsn

https://hightechinvesting.substack.com/p/warner-bros-discovery-stock-catching

https://pricepoint.substack.com/p/price-point-040-lets-take-a-look

https://theartofhittingbombs.substack.com/p/company-deep-dive-no-5-adobe

https://cloud.substack.com/p/the-5-ways-ai-will-transform-creativity

Huat Ah!

When Money in the Bank is Not Safe Anymore

This post first appeared on 8percentpa.substack.com. We also provide for monthly investment ideas for paid subscribers.

The last few months saw the spectacular collapses of financial institutions across different sectors and geographies starting with FTX, the crypto-exchange that was a fraud. Sooner than we know, Silicon Valley Bank went into trouble and Credit Suisse needed to be bailed out by its arch-rival UBS. These crises are still unfolding as the repercussions are being felt worldwide. In this post, we hope to highlight the dangers involved and hopefully provide some differentiated advice for investors at the end of the post as we walk through how global financial system came to the current dire situation today based my understanding.

1. In Government We Trust

The modern global financial system today is built on trust. Before that, we used gold. Trust is not easily earned. Bank runs used to be a thing even in Singapore and my grandparents and parents did not put monies in banks until recent times but kept them under their pillows and cookie tins in their homes. My mum still do this today.

From the end of WWII to the 1970s, the financial system was pegged to gold in what was called the Bretton Woods system. The system dictated that all currencies were pegged to the USD and the USD was pegged to gold at USD35 per ounce. This was supposedly sacrosanct and built on centuries of human’s adoration for gold but it came to an end when the US government overspent on the Vietnam War and governments around the world abandoned the pegs which subsequently cumulated in Bretton Woods’ collapse in 1976.

Since then, our currencies are backed by nothing except the promises from governments of the world that the currencies they issued are worth something. Technology then connected the global financial systems via computers and later the internet in the 1980s and the 1990s. This allowed for global transactions to take pace with major banks in their respective countries as the gatekeepers. To summarize, the global financial system today stands on:

i) the trust in our governments and financial institutions

ii) the global interconnected financial web with banks as key intermediaries

2. Financial Web & Contagion

The interconnectedness of this global financial web brings about problems because the whole network is only as strong as the weakest link. Trust is easily broken (which is usually the case) and banks as well as other financial institutions can fail. In the late 1990s, it was believed that a hedge fund called LTCM would cause the collapse of the global financial system if it went bust. The Fed engineered a rescue to prevent that doomsday scenario from playing out. Then in 2008-09, the Global Financial Crisis (GFC) saw how the fall of Lehman Brothers almost brought the whole system down.

Lehman's bankruptcy in September 2008 triggered the acceleration of the GFC which led to AIG, the insurer going under, forcing the Fed to take over the firm. A few days later, money markets and credit funds saw unprecedented withdrawals which again forced the Fed to underwrite everything that people wanted to sell. US Congress authorising a USD700bn fund to buy toxic assets finally stabilized the ship. It was believed that if the Fed and the US government did not use the fund to backstop, the global financial system would collapse. Thousands of banks would fail, just like they did during the Great Depression and unemployment could hit 30%. Millions could be homeless and starve.

It was Armageddon avoided.

But the negative impact still reverberated into Europe causing the economic crisis in Greece, Italy and Iceland. Icelandic banks did go down and required IMF’s intervention. China responded by creating a CNY4trn economic stimulus package which subsequently led to other issues. Lehman’s collapse also hit Asia with the now infamous Lehman mini-bonds hurting retail investors in Hong Kong and Singapore. Retirees invested their life savings with banks that they opened their first and lifetime accounts into these financial products thinking that their monies were safe!

Breaking the weakest link can create contagion across the global system that could bring about the end of modern finance as some believed. Today, we have different pockets of failure that is threatening the system yet again.

Armed with experiences above, powers at be today know that they have to stop contagion because the whole system is built on trust and the system can collapse when the weakest link breaks and brings everything down with it. This is why the US will insure all deposits in all banks big and small and why the Swiss National Bank forced UBS to buy Credit Suisse. There can be no contagion.

3. Unintended Consequences

Despite the best of intentions, we may not be able to prevent all unintended consequences. The Fed chose to save Merrill Lynch and not Lehman Brothers back in 2008 because they believed they could handle the aftermath of Lehman going down as it was smaller. Today, we face similar issues. Credit Suisse chose to gave up on AT1 bondholders which could be disastrous (we will come back to this). FTX’s debacle indirectly led to the issues at Silicon Valley Bank which then impacted Signature and First Republic Bank. Both are in trouble now.

Most of the time, danger lurks in places no one is looking at. No one heard about Silicon Valley Bank until a few weeks ago. Who knows what can go wrong next? Back to Credit Suisse’s AT1 bonds, this is a special type of bonds that is a hybrid between equity and debt. They came about after the GFC to allow banks to issue this special type of instrument to beef up their balance sheet. They were known as co-co bonds back then. Co-co comes from contingency convertible bonds. They provide investors with higher interest (at c.6-9%) but will convert to equity when things go rough.

AT1 or coco-bonds ranked higher than equity but ranked junior to all other debt (see above). But still, they are debt. All finance students know that equity goes to zero first before debt is impacted. But in Credit Suisse’s case, the Swiss decided to write down AT1 to zero but a lifeline is provide to equity holders, turning finance rules on their heads. As such, the USD260bn global AT1 market is going down globally. AT1 is mainly held by Asian investors and banks from Stanchart, HSBC to Japanese banks are seeing their share prices collapsing.

4. How to Navigate from here?

With market valuations still high (see previous post in Dec 2022) and the current woes still ongoing, we are definitely not out of the woods, in fact, we are deep in the forest with no exit path in sight. It is not the time to buy anything. I would sell before buying. Investment ideas should be very well studied which reminds me of my mother’s nagging during school days. The best ideas should then be bought with prudence at a 2-3% or max 5% position of the portfolio each, making sure everything is diversified. But the more important diversification is about putting investments with different intermediaries (or different cookie tins if you like) i.e. different brokers and banks because you do not know if they might go down some day. No one thought Credit Suisse would fail last year.

I think this could be the important takeaway for today. It is a simple rule that has been forgotten over time as the global financial system evolved and we put so much trust into old and new entities without doubt. Back in the days when money in the bank isn’t as safe, my mum (yup her again) would diversify and split her savings into various banks and simply hold fixed deposits and no other types of financial investments. As mentioned, she would also keep some cash at home and buy gold and tangible assets of value.

Today we mindlessly buy structured products thinking they are safe (like Lehman’s mini-bonds) and invest in Bitcoin via exchanges with no proven track record. Maybe moms do know best even in investing and finance!

To end this post, here’s mom’s list of advice: 

i) Study your ideas well 

ii) Diversify your funds across banks and brokers

iii) Don’t buy structured products, just go for the simplest stuff like T-bills, stocks and fixed deposits

iv) Buy gold and tangible assets of value 

v) Cash on hand is king!

Huat Ah!

Taking Stock of the Stock Market and the World

Time files. We are coming to the end of 2022 and it is always good to take stock at such timing. How was the year? Did we have anything to celebrate? What are the lessons learnt? As of this writing, there is nothing much to celebrate. We are still not out of the COVID-19 pandemic. We have a war in Ukraine and the global stock market has corrected on average 17% since the start of the year. Nasdaq is down almost 30%. 

NASDAQ -28% 

HKSE -25% 

DAX -21% 

SPX -17% 

Nikkei -10% 

STI -1%

Source: Tigerbrokers

Surprisingly, STI is flat while most markets are down double digits.

Valuations remain high despite interest rates going up. More importantly – the risk-free rates are going up! As you may recall from those textbook studying days, risk free rate forms the basis of all valuation. If I can earn 4% risk free, which is what the Singapore government Treasury bills give today, very broadly speaking, there is no reason to buy any stock with PER > 25x i.e. earnings yield < 4%. Why should I take risk to earn 4% or less when I can buy T-bills which are risk free and giving me 4%? 

But global stock markets have not caught up with this logic. The following are the PER and EV/EBITDA ratios for the same markets:

NASDAQ PE 26x EV 15x (vs low at PE 21 EV 10x in 2012) 

SPX PE 18x EV 12x (vs low at PE 13x EV 8x in 2011) 

Nikkei PE 15x EV 9x (vs low at PE 14x in 2018 and EV 7x in 2011) 

HKSE PE 11x EV 9x (vs low at PE 9x EV 7x in 2011) 

DAX PE 11x EV 7x (vs low at PE 11x EV 5x in 2011) -> DAX looks cheap! 

STI PE 11x EV 12x (vs low at PE 9x and EV 10x in 2011) 

Source: Bloomberg

Long term investors who had looked at a few cycles may recall that T-bills was not 4% when these valuations hit their lows in 2011-12. Japan has a different story back then and today and at PER 15x, it is not screamingly cheap, even though the yen is and everyone and his dog is in Tokyo buying luxury products. Germany, Hong Kong and Singapore look like of cheap, but clearly the US markets look expensive when compared against the current interest rate environment and with other markets. It is also expensive when compared against its own history. The SPX needs to be closer to Mar 2020 bottom of 2500 for valuation to make sense, assuming earnings hold up.

The old story goes as such, if US is not cheap and US falls, then the other markets will not be spared. Remember the old adage - when US market sneezes, the world catches a cold. Hence a lot of investors are bearish. Some are saying there will be a big, big crash e.g. GMO.

https://www.gmo.com/americas/research-library/waiting-for-the-last-dance/

According to GMO, the markets should have collapsed pre-pandemic. We glimpsed that in Mar 2020 but then the huge rescue package from the various governments drove markets to new highs! At the end of 2021, the S&P hit its all-time high at c.4800 (see chart below).

Source: Google

This marked the backdrop of this crazy year. Since then, we had a war, inflation going through the roof, the shortest tenure UK prime minister and the meltdown of the GBP, the UK bond and stock markets, the assassination of a former Japanese prime minister and Donald Trump having a second go to be the world’s most powerful man after he messed it up big time last time!

Just when we think the world cannot be crazier, Koreans squeezed into a small alley to watch K-pop stars and got stuck, resulting in a stampede that killed more than 100 girls, an unthinkable accident in a developed country (my heart goes out to the families, pls pray for them). At the same time, we also realized China has become a prison and is forcing their rich and powerful (with the ways and means) to flee the country, pushing up home prices and rentals in Singapore!

So, how do you feel about 2023?

I would say this. We are not at the bottom. The war in Ukraine is escalating and inflation is here to stay. This means that global interest rates will stay high and the stock markets need to correct to lower valuations before we can say we are near the bottom.

Inflation will be a big topic in 2023. The following chart shows Singapore’s inflation for the past 25 years and we are at historical high. While the chart may seem to have peak out, anecdotal evidence tells us this is not the case. Rental cost in Singapore continues to rise, we are still seeing restaurant raising prices and importantly, as long as global issues causing inflation are not tamed, we will continue to import it due to the nature of our open economy.

Source: tradingeconomics.com

This brings us back to the STI. Recall that it corrected 1% while the rest of world has corrected double digits. Yes, we trade at lower PER (11x) but that is because of the constituents are mostly in the financial sectors which command lower multiples. Moreover, against our own history, we are not super cheap.

The only cheap market seems to be the DAX, but with the Russia-Ukraine war still looming large and the energy crisis unfolding, it is hard to bet on Europe. There might be individual stocks that might be interesting. Screening tools could come in handy. For the courageous, there is the option to buy some short ETFs but we need to be careful about the decay which can be 6-10% per year. Caveat: this is definitely not value investing and only seasoned investors should try this!

In conclusion, 2023 might be the year to just hold on tight. We shall wait for interesting names getting to interesting valuations as alluded in our first ever real investment idea on 8percentpa.substack.com. But mostly, stay vigilant and stay liquid.

Huat ah!

The Stock Market and the World in 2022-2023

2022 has become one of the most extraordinary year ever. The stock market reached all-time highs as we tallied 6m deaths (condolences to all the bereaved families) and Russia decided to start a war. A further 10m people were forced out of their homes as refugees, while people in sunny Singapore happily go for overseas tours. Some even decide to visit Ukraine to proselytize! (Dear Singaporeans, please don't do that...) It is a sad year and I am sorry to say, I actually only have more bad news.

Courtesy of kuanyewism.com and Google Image search

There are three key topics in 2022-2023 which we will discuss today and they are all bad:

1. Inflation

2. Bear market and valuations

3. Regime change

We have seen inflation in recent months and we are going to see more inflation like we have never seen before. This is a new experience for most of us and it is not pleasant. Essentially, our money in the bank is losing value but it is not visible. $100,000 doesn't actually become $90,0000 but effectively, it does because prices of things we want to buy are going up. The geo-political landscape is making things worse.

Wars are inflationary because everything that is used in the war does not create value add but takes away useful resources that can propel the economy. The Russian-Ukraine war in particular is causing commodities prices to skyrocket and disrupting global manufacturing supply chain especially in autos and semiconductors. But the repercussions can go far and wide. For example, prices of eggs in Singapore also skyrocketed (for reasons unclear to me now). All this happened while the West was trying tame 7-8% inflation, which has not happened for a long time. 

This is a big deal and this is bad. We have never experienced 7-8% inflation for more than 40 years. 2-3% inflation, yes and it is manageable. Our wage growth usually beats that and everyone is happy but when inflation is that high, lower income families may not see income growth covering cost inflation. For middle and upper income households, people are also seeing their luxury comfort slipping away. Some cannot change iPhone every year now because it's literally causing a kidney for a donor (see below).

Kidney donors are paid $2,000

Air ticket prices are rising, so that means less overseas travel even as we open up. Car and COE prices are also going up. In general, it will be just more expensive to live. Corporates are also not doing great. Wage inflation is all the rage now, banks and prominent startups in the US are forking out $100,000 to get fresh grads (It's also a talent war out there). Manufacturing companies see raw material cost increasing and those who can afford to pass it on do so, further exacerbating inflation, those who cannot take a hit to the margins. That is not good for share prices which brings us to the stock market discussion.

S&P500 as of May 2022

We are probably at the start of the bear market. The S&P500 peaked at 4,766 and has dropped 15% since then. The headwinds are so strong that it is hard to see how the market can still go up. We have valuations still at very high levels but topline growth is slowing. The biggest worry though, is not that. It is the US interest rate. For those who studied this either on this infosite or in school or in finance theory, you might remember that valuations are, by and large, determined by interest rates. In textbook language, this is the risk-free rate, which usually meant the 10 year government bond yield. 

The reason why 50x PER was ok for a while was that risk free rate was below 1%. So when that happened, equity risk premium was also compressed and investors were ok with 50x PER which is roughly 2% earnings yield. The alternative was to buy US Treasury bonds at 1%, or some boring companies' bonds at 3%, which wasn't that palatable. The cherry on the cake was, of course, 50x internet companies always put in some spectacular growth story, so investors just piled up to buy.

But now, the story has changed. If the 10 year US Treasury bond yield is going to 2.5%, you can no longer justify 50x PER, cherry or not. Calculating the earnings yield again, say the equity risk premium is also 2.5%, we are talking about 5% earnings yield for the market which translates to 20x PER. So in this new regime, a sexy growth stock could trade at 25-30x but 50x is definitely, a stretch. That is one key reason why Netflix and some of the hot stocks of past 5 years collapsed.

In the stock market, every 10-20 years, we see a regime change. We all heard about the Nifty Fifties and the bear market in the late 60s of the era past. In recent times, the late 1990s were led by the internet stocks. Then they collapsed and new leaders from Asia emerged. This was the boom of China that also drove the commodities supercycle. It collapsed with the GFC and we entered the current regime around 2011-2012. The first half was driven by recovery and false starts - remember Brexit and Grexit and the shadow banks in China? The second half was driven by the FANGs. We are now at the bloody ending in this horror movie (maybe The Shining and it's not going to end well). The FANGs have all declined and Netflix, the N here, fell 80% from its peak. This is a watershed moment.

Some of the other FANGs might do well, some might not, it is hard to say. It is probably prudent to trim some holdings if you have and wait for a better entry. In the broader sense, we are in another era now(改朝换代了), we are now in a bear market and cheap valuations, which has long been forgotten as the true compass for investors will now be ever more important. 2022-23 will be turbulent and we just have to wait and see how far this decline can take us before things get settled down.

So meanwhile, keep calm, keep liquidity, stay vigilant and stay safe!

Ukrainian War and Peace

A few hours ago, Russia decided to do the unthinkable which is to invade Ukraine when the world is still nursing itself from the disruption caused by the pandemic. It was reported that Russian forces poured into Ukraine from multiple locations and lives had already been lost on the battlefields. Global markets collapsed with major European markets falling 5-6% as we speak. Russia's own stock market fell 30%!

Oil prices which went negative $40 last year at the height of the pandemic is now at a multi year high of $105. This is the crazy world that we now live in. Imagine if we had bought oil at -$40 last year and now we can sell at +$100! How does the return calculation even work?

Meanwhile, individual stocks are badly hit. In Singapore, index names like banks fell as global investors take risks off their portfolios. Air travel related names got their second punch in the face (the first being the pandemic) and fell a good 4-5%. Food Empire, with its core business in Russia fell close to 6%. Only oil related names did well given the rally in crude.

It is unclear what is Putin's play here. Does he want to leave a legacy, be remembered as the Russian leader who united Ukraine and the ex-USSR nations? Or he simply wants to use this opportunity to stir shit, play geo-politics and stay in office for as long as possible? Or is it really pre-emptive because if Ukraine joins NATO, then Russia will see dark days with NATO at its doorstep and surely he doesn't want to be judge by history as doing nothing when that happened. 

However, it is said that this war will cause at least 50,000 lives. Already, hundreds of soldiers and a few civilians have died. So what is the math here? 50,000 lives and thousands of Ukrainians and Russians suffering and all the sanctions that will come with the invasion (which will cause even more suffering for the rest of Russia) is worth Ukraine not joining NATO and Putin's legacy not getting tarnished?

Well, let's leave the moral questions aside for now. What can investors do about the current situation?

As with most crises, this would turn out to be a buying opportunity if we have the stomach for the volatility ahead. We have gone too far down the QE addiction that any decline will be supported by governments to devalue fiat currencies, thereby inflating the values of stocks, investments and other assets. However, if war breaks out in the same magnitude of WWI, then we are in a different regime. We shall revisit this doomsday scenario later.

STI's stock reaction today

It is worth noting that quality stocks are not falling as much as the high beta names. For example, amongst the European stocks that I track, weak names like Bayer and Rolls Royce are collapsing while stronger names like Diageo and Adidas are holding up much better. In Singapore, similarly stronger names like Singtel and SGX did not fall as much as Venture and the Jardine names (see table above). It also seemed that we are not seeing real capitulation yet, so the bottom may come only next week or the week after. 

This is a good reminder that we should always stick with strength and quality. These stocks are boring but precisely in times like this that we don't lose sleep agonizing over why they are falling like rocks. Although I must emphasize that the heydays of Singtel could be over. It is on its way to become a dumbpipe. Also, I did recommend Jardine Cycle and Carriage as a holding but it's not in the same league as SGX and Diageo, for sure. So, sometimes we just have to stomach the volatility that comes with some of these higher beta plays.

Of course, if this escalates to full blown war, then no amount of buying on dips can help. I have held the view that we always face a remote possibility that all that we know about modern finance and money can be gone one day. During the GFC, we came close to that. I am talking about the breakdown of the global financial system, all our savings in the banks gone and fiat currencies no longer hold any meaning. If this war escalates to something like WWI, then that nightmare scenario comes back.

When fiat money loses meaning like Venezula's Bolivar 

- being folded into swans to be sold in USD

Therefore, I have always advocated that we should hold some tangible assets like gold, luxury watches, jewellery and things that are outside today's financial system that can retain value. Hence I also have changing thoughts on Bitcoin which I hope to blog about as well. However, Bitcoin bought at crypto exchanges are still part of the system so you do need to get the Bitcoin into a cold wallet and keep it safe. The other important asset is real estate. But you need to have at least two. One to stay in and the other to sell when savings run out in a protracted war.

Let's hope we don't get there and let's pray for the people in Ukraine now. I am sure Putin is not thinking of escalating the situation to a world war and let's hope the world can find some resolution and avert this nightmare and we can look back in a year's time and feel smart that we bought into the market courageously next week, or even this week.

Huat Ah!

COVID-19 to Omicron: Three Years On

When the pandemic broke out in 2019, we had no idea how crazy this could get. I have always been a fairly optimistic person and I thought we should be done in 12 months, if not 18 months. The world will quickly revert to normal because humans are creatures of habit and we like to go back to our old ways of lives as soon as we can. This is why losing weight is so difficult and why we cannot really change and become something we are not. 

We are entering the third year into the pandemic now and things are not looking optimistic. New habits are now being formed which may replace old ones permanently. For instance, we may not need to meet everyone face-to-face going forward. Zoom or virtual meetings can easily become say 60% of all our meetings and old style phonecalls may still make up 20%. So the last 20% of face-to-face meetings will be saved for the most important, most precious counterparties.

The big question is whether we will still fly as we used to. When the pandemic first broke, the airline industry quickly made a prediction: we will only get back to 2019's level of passenger volume by 2025. This was based on the experience from the 9-11 attack back in 2001. At first, I didn't want to believe that. We are so used to flying, how can that be true? Three years on, it now seemed likely, or perhaps, it could take even longer, since we are still only at 40-50% of 2019's levels.

Flight traffic comparison - courtesy of Flightrader24

This does not mean we will not travel anymore. It's the same as zoom or webex. We will save up for the best. We will still travel for leisure for sure. That's the first thing Singaporeans did! We are all not in Singapore now having not being able to travel for the last two years. Business travel should revert to some kind of new normal. For some, it could one less trip per year i.e. dropping for 4 to 3. For frequent flyers, it could be 10 to 8. But I believe, over time, we will surpass the previous peak. It is just whether it's 2025 or 2030. 

It may be just numbers (of years) to most of us, but to the airline industry, it's big difference. Our beloved carrier SQ or Singapore Airlines (SIA), continues to burn around S$300m every quarter and if it is going to drag on, they will need money again (it raised S$8 billion last year). Similarly, aviation related plays will continue to be affected. It is amazing how SIA is now S$5 after a massive 50% dilution. At one point it was even close to S$6 which was just a tad away from the share price (S$6.4) before the dilution! How can the stock be diluted half revert to its old price in a matter of months, when the pandemic that caused the whole situation is still with us? Sometimes the market just doesn't make sense.

SQ continues to burn money

 

As such, my belief is that SQ is overvalued now, even if we actually start to recover now from COVID-19, we may not have enough margin of safety for this name. But for other SG stocks, there could be. One name that comes to mind is Jardine Cycle and Carriage, which I have also discussed previously. It has been badly hit by the pandemic and has not rebounded. Partially because it is operating in Indonesia, an emerging country will limited bargaining power for vaccines, medicines and with its domestic consumption still weak, with no recovery in sight.

Similarly, there are many recovery plays that could be interesting: restaurants, cinemas, domestic tourism names in other countries (not so much Singapore) and we should think hard to find these names. On the flipside of the coin, we should be worried about pandemic positive stocks, like zoom and other SAAS names, that had done really well. Some of them have already collapsed, but we may not see it bottoming yet because valuations are still sky high. Just look at Peleton (below), the Netflix + stationary bike manufacturer.

Peleton's share price

At the height of the pandemic, everyone wanted a Peleton bike. The market cap was a crazy US$50 billion. It has fallen 80% but still it's US$12 billion market cap, which is bigger than SQ! This is a company with no earnings, no track record, no cashflow. Just the idea that you can watch motivation exercise videos and cycle to lose weight, which was the best thing ever when everyone was stuck at home. But what happens when we can go out again?

We live in the most unusual times. The GFC created the new paradigm shift to zero interest rates which caused asset prices to inflate through the roof. Some of this huge monetary expansion finds its way to fund startups and created giants (Gojek, Tiktok etc) in the span of a few years. Then the pandemic hit and we saw how it accelerated the growth of some of these co.s but decimated segments of the old economy.

In the midst of all this, we now have real world inflation, a possible bubble of everything and potential recovery in some covid-hit names. But we have to exercise caution because all this is not going to end well. We can only diversify (not so much into cash but different holdings, perhaps even crypto - topic for another day) and hope for the best!

Happy 2022, huat ah!

Covid Destroys Crude!

The world was never meant to stop functioning for months on end. But this is the reality now with COVID-19 disrupting normal lives for most of humanity. For one, international air travel has grind to a halt. Singaporeans used to taking flights at least once every couple of months will find this new normal uneasy. Cinemas have stopped operating as we cannot practice social distancing sitting together in front of the big screen. Again, in entertainment deprived Singapore, we cannot wait for them to reopen. But who knows when that can happen.

Restaurants, bars, night clubs, live concerts and many other businesses which inherently cannot adhere to social distancing rules will find it difficult to operate as COVID-19 rages on. Many of these businesses may not survive. With businesses closing, we are talking about job losses. The US has seen over 20 million jobs lost. This is becoming a crisis that is be bigger than the GFC. In Singapore, we are lucky to still have our jobs.

Yet for most of us working from home, we have other worries. Family time is now on overdrive and we are restraining ourselves from committing domestic violence. Si Gin Na* Stop watching Youtube and do your homework! This is mental resilience training, so much so that we miss the office. There is no need for physical resilience, we practically just eat and sleep. So our bodies are transforming from the pic on the left below to the one on the right.

*Si Gin Na means obnoxious brats in Hokkien

Michelangelo's Covid

Actually, it's not a laughing matter. With economies collapsing, livelihoods are at stake. Nobody knows how long this will last. It could be many more months. We have to be mentally prepared. In a blue sky scenario, the number of infections continue to decline (as it has started to do so over the last two weeks), summer comes and we can reopen the economies. But this is now becoming less and less probable. Even if the virus goes away, we are faced with harsh realities with huge number of bankruptcies and millions of jobless people.

We may find ourselves in a very different world after COVID-19 subsides. 

A central scenario could be a slow, gradual semi-reopening of the economies in summer, hopefully the virus does not come back in fall and winter. The vaccines and cures are successful and we see a gradual normalization thereafter. International air travel may come back 2021 and summer Olympics in Tokyo next year could mark the turning point. We may have to accept the new reality - we live with WFH, HBL, social distancing and lockdowns for the rest of the year.

In a worst case scenario, COVID-19 hits us waves after waves. We see a Spanish flu situation. The number of infections goes beyond tens of millions and deaths spike. Efforts in finding vaccines and cures fail and we only defeat the virus after achieving herd immunity. This means months and months of lockdowns, failed reopenings and more lockdowns. Normalization might take years and we look back from the future recognizing today as one of the darkest period of modern society.

Last week, crude oil sort of gave a premonition of this armageddon. A barrel of crude which cost $20-160 over the last 80 years and average $40-60 over the last 10 years fell below zero. In fact, it went to -$40. This meant sellers paid buyers almost $40 to sell them a barrel of oil. Imagine, I make a bowl of bak chor mee and sells it to you for -$4. So you get $4 and get to eat the bak chor mee. Things went absolutely crazy. 

Long term oil price chart thanks to macrotrends

Why did this happen?

We do not have the full picture yet but as the days go by, more and more pieces of the puzzle are coming together. First, while the world stopped functioning, oil producers did not react fast enough to stop oil production. The drastic drop in air, land and sea travel caused demand for fuel to collapse. As such, the oil that is pumped out is not used and needed to be stored. But global storage facilities was never built to store months and months of oil. 

In the US, the main capacity to store crude oil in Cushing, Oklahoma was on the verge of running out. It was speculated that some novice market participants holding the expiring May contract of crude find themselves stuck because if they cannot find storage, they would need to take physical delivery and that was not an option. So in the last minutes of frenzy trading, crude fell below zero for the first time in history. 

This is a reminder that the finance world and markets are actually very complex. Don't anyhow play pay!

But things did not look good afterwards. Now the benchmark has rolled over to the June contract but prices did not recover. It traded at $1 the day after and both WTI and Brent are only at teens a week later. Still 40-50% below what was quoted just weeks ago. The same situation will come in a few weeks and traders might find themselves out of storage, this time not just in the US but globally! So we may see prices going negative again.

In a sense, we are witnessing a historic moment, how a virus - COVID-19 takes on the world's most traded commodity - crude oil and decimates its whole eco-system built over the last 80 years. We saw one US producer Whiting Petroleum going bankrupt and our own oil trader Hin Leong in huge trouble even before crude prices going negative. There will be more casualties along the way. Even Keppel Corp and Sembmarine could face their own issues. The saving grace for Keppel is that its property and telco / data businesses could help offset the weakness in its energy segment somewhat. But I would not be surprised if the stock retests its 2008 low of $3.41. 

Keppel Corp's share price

The other revelation last week's saga taught me was that commodities prices have no floor. I used to believe that a barrel of oil should have some kind of intrinsic value. People use it to power their cars, make plastic, produce electricity. So it should be worth something. When we look at the long term chart for oil, we could make an assumption that maybe a barrel of oil should be worth at least $20 and as oil get scarcer, perhaps it is worth more, maybe $40. Indeed, as mentioned, oil traded at $40-60 for the last 10 years. 

In the last few days, this thesis is turned on its head. If oil has some intrinsic value, how can price go negative? As such, I come to the realization that a commodity may not have intrinsic value. Crude oil is a commodity. A barrel of oil today is the same as that 30 years ago. It is also the same in US or in the Middle East. As such, there is no floor because when it is not needed, people will sell it at any price. Even negative prices. This is the same for copper, wheat and all other types of commodities. The exception might be gold. So between oil and gold, maybe gold might be the right commodity for the same thesis. 

In retrospect, perhaps crude price bouncing up and down all these years was all just speculation on supply and demand.

The same story actually played out in the different bits of the shipping industry. As astute investors would know, shipping is a commodity business. It does not make too much of a difference if you used NOL or Maersk or Evergreen to ship a container around world. So when there is a huge oversupply of ships, the shippers might pay customers and help ship stuff for them. The vivid example I saw in my investment experience was in the bulk shipping industry. 

When China was booming, there weren't enough large Capesize bulk ships and steel mills around the world paid exorbitant shipping costs to ship iron ore and coal to their mills in China and other parts of the world. Alas, good times came to an end and Capesize daily shipping rates fell below operating costs. So logically, the ships should just stop operating, since every single day in operation meant they bleed money, tens of thousands of dollars. But they have to do it for various reasons, the banks would cut the loans if they stop operations and docking these ships incurred cost as well. So it was a nightmare. They ship and bleed every single day. In fact, they are still in the nightmare today. 

So I guess the lesson learnt is to be very mindful when buying commodities and commodity businesses. In times like this we appreciate the boring businesses like Nestle and F&N that see relatively smaller impact and smaller volatility in share prices. While we are dealing with COVID and Si Gin Na in the house, at least we get to sleep better at night.

Stay safe and huat ah!

2019 Market Review: The Phantom Menace

Eleven years ago this month, Lehman Brothers, one of the largest investment bank in the US, file for bankruptcy protection. It held over USD 600 billion in financial assets. The Fed and the other America banks had already engineered two other bailouts in the prior months: Bear Stearns and Merrill Lynch. Bear Stearns was sold to JPMorgan at $2 per share, along with all its assets and liabilities. This allowed the stronger JPMorgan to slowly clean up Bear Stearns' books which limited impact on the markets. Today, nobody remembers Bear Stearns. 

Phantom of Wall Street

Merrill Lynch got a good deal on the eve of Lehman's collapse, it was sold to Bank of America at a 70% premium to its last traded price. Unfortunately, it was not enough for Temasek, who bought it about a year ago and ended up losing a big chunk of its capital. But most importantly, the dirty laundry was kept out of limelight again and the buyer spent years cleaning things up. Alas, it was not so with Lehman Brothers.

When Lehman went down, its USD 600 billion of assets which was linked to trillions more was exposed. It pulled down the global financial system like a broken spider web and triggered the Global Financial Crisis. It was serious. Many believed that the worst case scenario was the end of our financial system as we knew it if the powers that be did not take the right steps. Fortunately they did.

In the aftermath, AIG, the insurer, was broken up as it insured those who bought sub-prime mortgages, including Merrill, and was on the hook to pay up the losses. The rating agencies were affected. They gave their stamps on approval to sub-prime and misled everyone. The US Treasury was also force to take over Fannie Mae and Freddie Mac, hitherto listed companies.

The GFC indirectly caused the banking crisis in Europe as banks in Greece, Iceland, Italy and UK all held financial assets related sub-prime and were in trouble. Asia was not spared. the Chinese government pumped the now notorious RMB4 trillion into its own economy to mitigate the effect of the global financial meltdown. It would continue to intervene and ultimately added close to USD 1 trillion in economic stimulus which ended up becoming bad debt as the money was inefficiently used, such as building entire cities with nobody living in them.

China's Phantom Cities

Back in the western world, the central banks launched quantitative easing (QE) to try to jumpstart the economies. They flooded the global financial system with money which ended up in the hands of a small segment of the population. These were people on Wall Street, people involved in prime real estate (including Singapore), the private equity folks, bitcoin promoters, people who dealt in art, wine, collectibles and needless to say, stocks and shares - yes all of us reading this. Not forgetting to mention, a few billions also went to Najib and the other corrupted governments around the world. Globally, QE did not benefit the masses. It causes a wider disparity between the haves and have-nots.

In retrospect, the issues today, Brexit, trade war, bitcoin, shadow banking all came about eleven years ago when Lehman collapsed. We are still suffering from the lingering effects of the global financial crisis. 

At the start of 2019, the risk that loomed large was Brexit. In 2016, the gap between the haves and the have-nots played out in the Brexit referendum and the have-nots won with 1.9% more votes (51.9% vs 48.1%). The then Prime Minister David Cameron resigned to take responsibility. But Brexit was a pyrrhic victory. The Brits wanted to leave Europe but did not know how. It was, and still is, a big mess. After two and half Prime Ministers and with one month to go, the probability of UK exiting without deal looked very high. If it happens, UK will go into a recession and millions of Europeans in the country become refugees overnight. It would be a disaster. 

Theresa May, UK's second female Prime Minister

Then, there's Donald Trump. Again he was elected because the have-nots thought he would help level the playing field. He decided that China was the root cause of all the world's issues and waged war against the Middle Kingdom. It started in July 2018 with the US imposing tariffs on USD 34bn worth of goods but soon expanded to more than USD 300bn and China hiked its own tariffs on over USD 100bn on US imports. This caused significant worry in the markets (even though it was actually smaller than Lehman's balance sheet) and global exporters and related stocks in China, Hong Kong, Japan, Germany and many parts of the world were negatively impacted. 

The trade war had also morphed into a strategic war on other fronts with Huawei being the prime example. Huawei is China's lead general in the technology war and must be killed. Cybersecurity warfare had already been fought and real world skirmishes likely occurred via proxies in countries like Syria and Afghanistan. The read should be this: the trade war will not go away, it's a strategic war. Hopefully it would not become another Cold War.

Having said all that, China has not really retaliated with a real damaging blow to the US. It could outright ban all US goods and services. It had already banned Google and Facebook, why not Apple, Hollywood, Microsoft and all other services? Well, China probably has a different thinking altogether. This trade war, while damaging now, is not a big deal in China's own big picture.

At a high level truce meeting held in late August, the delegates on both sides sat at the negotiating table behind a huge wall with a Chinese poem with an interesting allegory. China was a mountain that had been around for thousands of years, while a passing cloud (i.e. US) tried to wage a storm to intimate the mountain. It was a futile effort. In some sense, it's true. Huawei will emerge stronger after this saga. China will continue to gain technological and strategical advantage. Its brands, capabilities will grow stronger and it will have more allies in time. 

Phantom message for the US

So what does this means for the markets?

It just means turbulence will continue. The risk is on the downside rather than the upside. We have to use higher prices as sell opportunities. This situation has not change since our last market update. We are still at the late stages of the bull market. It's hard to spot when things would turn. It could continue to be like this for another 12 months. If the Fed cut rates more aggressively, the market could even rally further. Then we look real stupid selling now. But such is investing. We can never tell. So, we move in incremental steps prudently. 

There are also no signs of weak links could bring us to another financial crisis. Back in 2008, we could see the weak links although it wasn't clear that they would be so devastating. People talked about sub-prime for months before things imploded. Bear Stearns went down first. On hindsight, those were big warning signs before Lehman Brothers' bankruptcy. Today, there's no canary in the coal mine, yet. Or rather, it's still too difficult to spot. One could be Uber and Wework and the likes of startups with their diminishing valuations. The other could be the old shadow banking system in China finally blowing up or a big entity in Europe finally caving in, pulling down things as Lehman did. It's always hard to tell before it happens.

Meanwhile, Lehman's phantom menaces, so we need to stay vigilant and raise cash!

Huat Ah! 

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. 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

Malaysia Boleh!

"Boleh" means "can" or "able to" in Malay.

What a historic day for Malaysia! Dr Mahathir trashed Najib with a snap of his fingers gloved in his infinity gauntlet neatly decorated with the coalition of infinity stones: DAP, PKR, PNA, PPBN and Warisan Sabah. His Alliance of Hope, Pakatan Harapan and its partners convincingly defeated Najib's Barisan Nasional (BN) with 122 seats vs his nemesis' 79 seats. Mahathir's win ended one of the longest reign for a democratic ruling party and renewed hope that Malaysia can one! (i.e. Malaysia can achieve what it wants to achieve.)

Under Najib, Malaysia really suffered with the ringgit falling to a third in value relative to the SGD - one Malaysia ringgit is only worth 33 Singapore cents. The exchange rate was 1:1 in 1965. Also, the market cap of KLCI is at USD 269 billion vs Singapore's STI at USD 440 billion. Given that a lot of its listed stocks are also locked in cross-shareholdings, Khazanah and banks, Malaysia's free float is even smaller at a mere USD 84 billion. This is a tenth of a fruit and smaller than the smallest FAANG which is Netflix at USD 144bn. FAANG stands for Facebook, Amazon, Apple - the abovementioned fruit, Netflix and Google.

The last decade was truly dark for our beloved neighbour.

Ironically, it was partly Mahathir's own doing as he was the one who picked Najib to be the Prime Minister after he sent another of his prodigy, Anwar, to jail. Now he is trying to team up with Anwar by asking the King for a pardon so that Anwar can stand in elections, win a seat and then be Prime Minister. This sounds like a plot from Marvel when your past enemy, who was actually your friend, joins your hero alliance in order to defeat a bigger enemy whom you yourself created. 

Malaysia in a Marvel Plot?

With the country at its brink, real life heroes really assembled to save their Motherland. Teachers, waitresses, workers, drivers in Singapore took leave to rush home to vote. In fact, Malaysians all over the world came to the rescue, dipping their index finger in blood, swearing on their lives to save the country. We hear stories of how everyone beat all odds in order to stop Najib. Strangers car pooling to go home despite vote forms being sent out too late. Vigilantes appeared in front of voting booths to prevent random black boxes with rigged votes getting smuggled in again. It was an epic battle against evil and an amazing race against time. But Malaysians did it!

Malaysia Boleh! 

But Najib is not going down without a fight. It is rumoured that he participated in intense negotiations with other smaller partners in the coalition to coerce them to swing to his side. Candidates are being offered 20 million ringgit each to jump to BN. If he succeeds, he might still hang on to his PM role. After all, his life is at stake - he might get strapped in dynamites and then get blown to bits. Meanwhile, Mahathir declared bank holidays to prevent money being siphoned out of the country. Hopefully, in the end, the democratic process will work, Najib gets justice served and all our Malaysian friends didn't fly, rush, drive back in vain.

Back to the stock market, since Malaysia is closed, nothing much is going on. The ringgit meanwhile weakened after strengthening before the election. With talks of abolishing GST and re-introducing fuel subsidies, investors are also worried about the country's fiscal situation. But never fear, Dr Mahathir is back. Just the face of this legend supposedly made Najib and his cronies squirm like vampires in sunlight. So AirAsia painted all their planes to make sure Najib cannot escape.

A True Malaysian

As to stock ideas, many experts are pitching stocks that benefit from the weakening ringgit while some called upon investors to take advantage of any pullbacks to buy quality Malaysian names. A quick stock list include: YTL, Public Bank, Malaysia Airports, Maxis etc (all Malaysia listed names). Meanwhile, yours truly made a tongue-in-cheek list of stocks below in Singapore with Malaysian stories: 

1. Fraser and Neave: 40% sales in Malaysia
2. Top Glove: World's largest glove maker based in Malaysia
3. IHH: Hospital operator in Singapore and Malaysia
4. OCBC: Teens revenue exposure to Malaysia
5. Silverlake Axis: IT business with Malaysian banks

Malaysia Boleh!

PS: except for F&N discussed in a previous post which is investable (not on Malaysia but on its Vietnam story), the rest are really more for fun, please don't really buy without doing more research.