Market Observations - Jul 2022 - Turning Tide

 The past 6 months could have been a fiction book if we didn't live through it: 

• Crypto currency Luna levitated to godlike levels and crashed to almost 0 (less than 1 cent). At its peak on 5 Apr, it was $119, and newfound wealth led to newly crowned "crypto investors".

• Russia's invasion into Ukraine led to trade sanctions, which led to a supply crunch of almost everything you can name on earth, resulting in prices spiking and then crashing down. It didn't help that it happened at the same time when Luna went to the moon.

• Interest rates doubled in a matter of months. In Jan, Singapore floating mortgage interest rates were still below 1%, and in Jun, it's just under 2%. It's similar in other countries too, as the Federal reserve increased interest rates.

The construction sector resumed work last year, and it caused a worldwide shortage of building materials such as steel, sand, and even small items such as screws, and it was just supply crunch in 1 industry. What we saw with Russia was disruption at a wide scale, not as serious as when China went into lockdown mode, because everyone had started to diversify their supply chains and stockpile critical materials, but it comes in at a close second -- fuel, food, shipping, labour, all increased one after another in a chain reaction. Even nickel prices went to the moon. The only thing that probably won't reach the moon is my income *cold joke*. 

Nickel prices in the past 1 year

Why I believe that the tides have turned?

• I don't hear man-on-the-street talking about buying crypto. Earlier this year, I get to hear such conversations in MRTs, buses, restaurants, hawker centres. I haven't heard anything in the last 1 month.
• I don't see as many advertisements about investing in REITs for retirement. I believe that marketing money is smart, when the baits work, there will be a lot of them laid. So the hype is over.
• I don't see as many advertisements about buying property for investment. I believe this is a sign of increasing market activity -- agents don't have to try so hard to attract buyers.
• It does not feel like we had reached a "blood on the streets" phase after a market wipeout, and we may not even see one because job support has been the #1 priority in the pandemic support budget.

What data points do I look at?

• Pandemic support budget -- All the schemes have tapered off.
• Non Performing Loans -- Local banks financial reports report steady NPL rate of about 1.5%. As new loans are also growing the loan portfolio, proportionally, the increases in NPL (which are past loans) are not obvious. Banks also can be selective with their customers and don't need to fight to increase market share (and get lower credit quality loans as trade off).
• Retail rental and occupancy rates -- Although the pandemic caused many businesses to close, it didn't lead to widespread vacancy. Shopping malls that hit the right notes with location, footfall, amenities, are still commanding high rental and occupancy rates (see Mapletree Commercial, SPH REIT). As long as people are still spending money, the economy is good.
• Debt -- Debt is ever increasing in China and personally I don't have a good feeling about it. The good thing is USA has even bigger debt and they are still alive. The bad thing is no one knows the impact of unwinding debt at a China scale, but when that happens, I definitely want to be holding on to tangible cash flow producing assets.

Valuations

• As the risk free Singapore Saving Bond (SSB) rate is 3% p.a. for 10 years, I am using that as a benchmark to compare the risk premium. Mapletree Commercial REIT's (MCT) current price of $1.80 has a 5.2% dividend yield. for 2.2% more, will you take the risk? Historically, MCT's yields are around 4.5% when risk free rates are 1.5%, so if we apply the same risk premium of 3%, MCT's dividend needs to be 6% to make sense. If we look at DBS/UOB dividend yield, it's 4.6%, and it makes you wonder if buying a bank stock makes more sense than say MCT?
• Price Earning ratios of Singapore companies are not too expensive, and not at bargain ranges either. The STI ETF is at $3.15, which is about 10% below its Apr highs. Historically, there is a higher chance of maintaining at this level, than either moving up or down. Usually bank stocks trade at < 3% yields.

What I will buy

• At current prices, I see the most value in bank stocks, for reasons stated above.
• If I have to make a second choice, I will choose food manufacturing businesses because they have more control over supply side costs.
• All other sectors have their fair share of risks. Air travel hasn't gone back to even 25% of pre-pandemic levels. Tourism and hotel REITs will also have to expect bumpy restarts. Transport companies have have to cope with erratic oil prices with the ongoing "fight" between US and Russia. Energy companies have to cope with high cost of operations and they don't have much pricing power to begin with (personally I feel that another energy crisis will result in energy companies being nationalised again). Telcos still are handicapped without their data roaming and business travel income stream which traditionally forms 20% of their telco revenue. F&B and basically any service industry that is highly dependent on human capital will have to struggle with high rental and manpower costs.

Opportunities that I will look for

• Maximise SSB deposits if rates really continue to increase beyond this month's 3% p.a. to the mystical 4%. 
• If that happens, we almost certainly will have a stock market correction of another -20%.
• Personally, I believe if everybody expects a 4% p.a. FD rates in dec, will it ever happen? If only market timing is this easy... 

Disclaimer: The writer owns shares in DBS, UOB, STI ETF, SPH REIT. 

How much have I earned and lost in 2021?

"Objective for 2021 will be to buy more good stocks. I can't predict what the future will be, I can't control the dividend income, but I think that there will be more opportunities to buy good stocks at discounted prices because of market volatility. I will be targeting companies with property and/or high cash flow."

I will say I met the objective as I bought property counters. More of that below.

I tried really hard to find good stocks and it was really really tough because asset inflation has set in unfortunately. Monetary policies remain loose, hence cheap money is still reigning. I didn't write any detailed financial analysis of any stocks, mostly because prices just didn't meet my screening criteria. There are signs of bubbles everywhere, but we will never know when it will pop, so if you see advertisements touting to be able to "help you" be prepared for a market crash or continuous inflation or even hyper-inflation (hyper-inflation is very far-fetched but marketing is all about playing on fear), do yourself a favour and apply some common sense.

Here's how to prepare yourself:

1. Check your cash flow. MAS has a really good ratio which everyone should follow 55%, which means your monthly debt repayment amount should not exceed 55% of your gross income.
2. Check your debt level. Ensure that your assets > debt. Assets = property, investments, bonds, cash.
3. Check your emergency cash level. Many people tell you to have 3 or 6 or 12 months of your monthly income. Personally I suggest you calculate your monthly cash flow surplus (i.e. the amount after debt repayment and monthly expenses) as well. If your surplus is > 75%, probably 3 months income will tend you through. If your surplus is <25%, you may want to have 12 months income because it means you are living on a rather tight budget.
4. Plug any leaks. Terminate any non-income producing business ventures or assets. Review any recurring monthly expenditure, and switch to more cost effective alternatives where possible.
5. Don't quit your job. Continue to work for as long as you can.

Stocks I bought for the year:

VICOM (Jun)

Daiwa House Log Trust (Nov)

Capitaland Integrated Commercial Trust (Dec)

Stocks I sold:

Wilmar (Feb)

Singapore O&G (Sep)

Hongkong Land (Nov)

Full year dividend income for my SG portfolio was lower at $13k (3.5% yield), mainly because of dividend cuts. I also sold some shares and received $4k profit.

This year I also calculated how much interest I get from my CPF accounts, and it's 3.2% across all the fancy account names and bonuses. Although it's a can-see-cannot-touch-until-55 account, I think it's a good mental exercise to condition yourself with a risk-reward threshold. If you can't beat 3.2%, you really should max out your CPF accounts first or hire someone to do the job, while you buy time to improve your competency.

I also diversified to managed investment services with Autowealth (30k) and a Manulife Financial Advisor (12k/year commitment) mainly to buy into US and China markets. While I could buy the unit trusts myself, I decided to pay for services while I learn the ropes. The financial analysis aspect is really too much work, or rather, the level of detail I expect of myself cannot materialise with the amount of spare time I have now.

Objective for 2022: Stay the course and trim down the non-performers. I really need to analyse whether I should hold or cut loss on the lagtards.

This year I decided to also plot cumulative passive income to give myself a moral boost. It's almost 100k after all these years!

What did I buy and sell between Jan to Jun 2021?

The stock market rallied for a good 7 months from Oct 2020 until Apr 2021. Usually when the market rallies, I will look at selling stocks which I feel have reached prices that exceed their market value.

I sold Wilmar in Feb 2021, which was a stock I bought in Feb 2018 when the market was sluggish. The thing about Wilmar that I liked back then was that it had very very good cash flow and it wasn't pricey, near historical mean. The thing I dislike about Wilmar now is that it's debt laden and pricey, way above the historical mean. Although fundamentally they are a lot bigger, they IPO-ed some parts of the company, but as a whole, they took on a lot more debt and I wasn't convinced that they were yield accretive acquisitions. It was a good run with 80% capital gain and 11% total dividends, so overall it was up 91%.

I bought Vicom in Jun 2021, few days ago. I didn't have to buy anything, but I thought I should buy something since I haven't bought anything for a long time (since Sep 2020). REITs are fairly/overvalued, so I decided to look at other stocks and settled with Vicom, which is a stock that I had been looking at but had never initiated a position. What I like about Vicom is that it is a boring and transparent business with high cash flow. It's also like a monopoly business because vehicle inspection and certification services are highly regulated and you won't have new players enter the market so easily. It also has low float, low volume, so it's unlikely to be in the radar of big fund houses -- I like such stocks, because prices are relatively stable.

Autowealth bought some ETFs for me in Feb 2021, mainly US ETFs, under their portfolio that charges performance-based fees instead of the standard yearly management fees. I generally don't know how to choose funds, although some people tell me that funds are not meant to be individually analysed like stocks. So for now, I am paying others to choose funds and manage them for me, while I continue to pay myself to choose and manage stocks. Only time will tell if this is a good arrangement.

My friends had asked me if it's a good time to buy stocks. I would say that if you are just starting out, you probably can just get into any stock at any time, but don't go all out, because historically, prices take a breather in Aug and Sep and sometimes through Nov. If you already have stocks on hand, then you probably can afford to wait a bit because usually stocks go on sale 1 or 2 times a year (about 10% correction from peak for the year, which could mean STI at about 2920) and this year, it had not happened yet, so if you think you will be lucky, then wait for it. It may not happen too, like in 2009, where prices only went up, up and away.

Personally, I am expecting the "pandemic effects" to set in this year, i.e. government hand-outs will be less generous, savings dry up, lenient loan policies will be tightened, interests will slowly rise, income will be squeezed. I also feel that some sort of "balance sheet recession" effects will hit the mass market non-essential retail businesses, where people opt for cheaper alternatives or totally cut back on spending. Although the economic forecast is positive growth, I believe that the growth will be rather invisible, in the form of bio medical or electronics production and property asset inflation, and will not translate to salary growth.

How much have I earned and lost in 2020?

Objective for 2020: Maintaining the current level of passive income works -- Income was $16,200 ($1,350/month). I thought it was a simple objective but I didn't meet it. In fact, income was $0 because I had to write-off some of my capital.

After so many years of setting objectives, not one was remotely close too achieving target, which shows how unpredictable the markets are.

Average stock dividend yield in

2017 = 4.56%

2018 = 4.73%

2019 = 4.55%

2020 = 3.83%

This year, the verdict for Hyflux was out, and I wrote off my Hyflux CPS investments. I can imagine how painful it is for the rest of the creditors who have to write off >$3.3b investments. I was fortunate that I sized it small (3000 units during IPO), although I made the mistake to buy more CPS (added 10000 units) just 2 months before they were due to redeem the CPS. I learnt an expensive lesson.

I sold off my loss-making stock - Silverlake Axis, because they haven't been able to grow their profits, and they have a lot more competitors today as compared with 5 years ago.

I reduced position in Keppel Corp, mainly to not have more than 10% of my stocks in 1 company. I still like Keppel Corp because of their property.

I profited 20% from Dairy Farm and Comfort Delgro trades. They just happened to present good value, and they just happened to increase 20% after I bought, so I decided it was better to take profit because I couldn't convince myself that their business had fundamentally improved to warrant the higher prices.

I bought SPH REIT, AIMS REIT, STI ETF, Haw Par, Hongkong Land, mainly because I am bullish on property. Liquidity will definitely lead to inflated property prices in a matter of time.

I only managed to use a fraction of my warchest because the market corrected only for a few weeks. Sometimes when I read about people who criticise people (like me) who only buy on dips (actually I buy when prices are discounted and present good value), I wonder why they are so eager to preach their strategy. In any case, the more important thing is to stick with one strategy because switching between these two strategies is a certain wealth destruction strategy. Eventually, both sides will win, just that somehow one side makes a lot more noise than the other.

As the hurdle savings accounts all cut their interest rates this year, I decided to make housing refund to CPF. I bet many people did that too because it made the most sense. For those who say that CPF money cannot be touched if you were to do a refund, it's true, but you still can use it to buy stocks and funds and property with it. So I will treat it as my warchest too, just more restricted. I still hold cash, but not as much as before.

I am still holding my money in Autowealth. I like Vanguard funds, diversified and low-cost.

I bought into a few funds via Manulife ILP when prices were lower in Jun. It was a case of wanting to buy in Mar, but because of some admin issues, I didn't end up buying. Trying a new financial advisor for this case. Friends told me that I have too much money to experiment.

For all my effort, I barely broke even this year. Considering how many businesses had to close down this year, I think I am just lucky to be not affected (yet).

Objective for 2021 will be to buy more good stocks. I can't predict what the future will be, I can't control the dividend income, but I think that there will be more opportunities to buy good stocks at discounted prices because of market volatility. I will be targeting companies with property and/or high cash flow. Volatility is likely going to run through the whole year because 

1. industries are undergoing structural changes due to changes in demand, changes in consumer behaviour, caused by travel restrictions, this will translate to many jobs lost, and new jobs created. The new jobs will likely have talent shortage, which drives up manpower costs, and hinders the progress; 

2. markets have prices in hopes in the vaccine, and that economic recovery is certain in the next 1 year. However, if another pandemic hits, or if the vaccine faces an issue and need to be recalled or halted, or if the virus mutates and the vaccine is deemed useless, or if the vaccination takes longer than expected to be effective, or if travel restrictions need to remain longer, etc.; 

3. many governments will start to run out of pandemic budgets and have to tighten their spending on many keep-the-lights-on stuff, which will cause a government-induced demand contraction. The services required will likely remain the same, but the government will pay a lower price, consequently, down the food chain, margins are squashed because the government sets the prices. 

It's been a memorable year.

Book Review: American Default by Sebastian Edwards

 American Default: The Untold Story of FDR, the Supreme Court, and the Battle Over Gold.

This is a history book about the Great Depression, and it's controversial and it's a long read. What I like about this book is that it explains the opposite argument of quantitative easing, which is something we don't get to read in mainstream media, i.e. why printing money to bail out companies and markets lengthens the recession.

The rhetoric is always central banks acted quickly to release money to prevent a market crash. Hail central banks! However, where does all that money come from and where does it go?

The anti-QE argument is that the government will need to eventually cut back on spending or increase taxes to recoup the amount of money it printed. The businesses that would have otherwise failed, are artificially propped up, much like putting businesses on expensive and no-yield life-support machines. If the unprofitable businesses were not put on life-support, the impact would have been faster and greater, and the survivors would be able to grow their business because they are able to increase their market share (the share that was previously held by the unprofitable businesses). This will allow the market reset to happen faster, and end the recession faster too. 

The pro-QE argument is that when there is a demand or supply shock, or in the case of covid19, demand AND supply shock, we must save all businesses, regardless if they are profitable, because if the profitable businesses shut, the impact to the economy will be greater, i.e. profitable businesses take a very long time to develop. The idea is also that when the economy recovers, the government will be able to earn back the money, so the priority is to reduce shock and spread out the impact, by flooding the markets with money to support businesses, support jobs, etc, much like the damping graph in physics.

In1930, they printed so much money that the government had to unpeg the dollar from the gold. It was also a difficult choice because there were bank runs one after another as there were thousands of banks and many were collapsing. The government had to print money to bail out the banks. The unprofitable ones were made to shut or consolidate. All the while, the government maintained a ratio, reduced the ratio when they needed to print more money, and eventually they printed so much money that all the gold in the world was insufficient to back the dollar, so they unpegged from gold. That was the road to stocks prosperity for those who like to analyse stock markets from 1929 when the great depression started. However, behind that rosy stock market growth, was the supposedly untold stories of government forcing farmers to destroy crops so that prices can rise, and help farmers earn more, and also ensure the president get re-elected because farmers form a big majority of voters. The government also confiscated all gold from every citizen, reduced all asset values by 40%, banned export of gold, banned import of commodities, so that prices of goods could be controlled and be increased by the government.

The similarities with what's happening in the US now is the trade tariffs imposed to help protect the US farmers. The intent is to fix prices to raise prices, so that farmers earn more, and also win the farmers vote. However, if we don't address the real problems, of perhaps quality, costs, and demand, the economy is never real. 

Eventually demand never really improved and the political struggles across the world led to World War II. Unfortunately, it was WWII that helped reset the markets. The post war rebuilding efforts was a big driver for the recovery of economies around the world. The arms race was the growth engine.

Moral of story: markets need to reset, wipe out the unprofitable companies, redistribute market share, to get out of a recession. Somehow, based on those arguments, I feel that we never really got out of the recession from 2008. The big question is how many cycles can such money printing cushion the impact of recessions? To a certain point, it's effect will not be felt. Inflation may be so high that causes the income gap to rise because of uneven asset distribution, and then people fight among themselves again because they feel that they have nothing else to lose. 

Book Review: Outliers by Malcolm Gladwell

It was one of those days where I was reflecting about what I have been doing with my life, and thinking about how some people just have the luck to be at the right place, right time, with the right person, when my friend recommended me this book Outliers. Basically, his message was that the world is unfair and we just have to accept it. It's not that we are not as capable, not as intelligent, we were just not as lucky.

There were three main things that really sunk into me. 

1. The society and institution set the rule books. Rule books can favour certain people over others.

2. The privileged simply have more opportunities, hence chances, to succeed, than others.

3.  The earlier you clock your 10,000 hours of practice to hone your skill, the earlier you can monetise the skill. If you get ahead of the pack, you can win big.

The first half of the book was about a research done on birthdays of junior hockey league players. It was a serendipitous moment where someone noticed that the birthdays of the players were mostly in Jan and Feb. The junior hockey leagues were designed to have many levels, and the grouping is by calendar year, starting from primary 1. The research found that at the 1st year, those born in Jan and Feb had more time practising hockey than those born in Nov and Dec, hence usually made it into the more superior levels in the following year. Year after year, the Jan and Feb players keep moving up the ranks, get better coaches, spend more time training, and eventually have higher chances of becoming national players.

Moral of story: Exams, just like junior hockey leagues, favour the Jan and Feb babies. Banded subject classes, streaming students based on grades, should be thrown out of the window, because it just makes the students who are ahead, much better, than those falling behind. Over time, because the pace of those falling behind will be slower and slower, it's just going to end up worse as the years go by.

The second half of the book was about a few prominent billionaires and their growing up years. Usually one reads that Bill Gates dropped out of Harvard to start Microsoft, or Zuckerberg dropped out of Harvard to start Facebook, but nobody says that prior to dropping out, they had already clocked their 10,000 hours of professional practice and was already working on a business. In fact, they had clocked their 10,000 hours before they finished secondary school. Their parents were also well-to-do, hence gave them the opportunity to clock those programming practice hours. They beat their peers to the programming practice because they had access to computers for longer periods of time, unlimited and free access that came from privilege.

Moral of story: I really should have started a software development business or writing business back when I was in school, instead of wasting my 10,000 hours of programming practice and 10,000 hours of writing practice. I made a sub-optimal decision to start clocking stock analysis practice hours while studying. Now I have all these skills that are not part of a supply chain, hence I can't do a 1+1+1=10 kind of magic. I really should beat myself up for not being a millionaire now.

Market Observations - Aug 2020

The US stock market had been a crazy V-shape roller coaster ride since I last wrote.

1. US Federal Reserve had been creating cash out of nothing to the tune of US$3T to buy junk bonds from financial institutions and stocks from the stock market.
2. US unemployment rate reached 14.7% in Apr, and reduced to 13.3% in May. More companies are expected to file for bankruptcies, which will lead to higher unemployment.
3. US population is still growing, i.e. births > deaths. While the number of covid-19 cases are still increasing, the death rates are fairly constant.

In Singapore,

1. Biggest budget in Singapore's history, S$93B, to primarily support jobs.
2. Increase in business closures, but there is very little information on it, and unemployment rate is not published monthly, unlike the US.
3. ~600k claimed Temporary Relief Fund, which may be a proxy to the extent of unemployment. Assuming 50% are legitimate job loss claims, 300k workers form 300k/3700k = 8% of the 3.7M workforce.

All these shout DEBT.

Warehouse storage needs will increase because businesses will buffer in contingencies, such as stockpiling essential goods, which will increase operating costs. Increase in warehouses may drive automation in warehousing to reduce manpower costs. Warehouse automation is currently a luxury item for businesses with the money, and it's largely purpose-built. A more mobile plug-and-play model will be required for smaller businesses to adopt. Warehouse-as-a-service may appear as the new way to manage the different stocking patterns throughout the year, however, unlikely software that has no physical footprint, warehouses have a physical footprint and for it to work, packaging of products may need to undergo some form of standardisation.

Workers who have been out of a job will likely be in debt longer and pose more risks to the banks, in particular unsecured credit card debt and business loans. With businesses shutting leaving people out of jobs, it's going to be a very difficult process to "restart" economic activity, which is likely why the Singapore government went all out to support businesses during this government-initiated lockdown. It takes 20 years to grow from 1 to 1000 staff, but takes just 1 night to reset to 0. It's unthinkable how much effort it will take to really "resume" normal.

I expect asset inflation to happen. This is because the Fed has been buying US stocks. They commited to do everything they can to support the economy. They are spending US$120B/week. This will prevent the stock market from crashing and cause stock values to become inflated. The money that people earn from the stock market will trickle down to other aspects of the economy. Money will either go into alternative investments (e.g. crypto currencies, gold, art) or property, depending which gives a higher yield at that point in time.

I expect business activity to take a long time to recovery even if a vaccine is available this month (it's not, but I am just thinking this scenario through). Firstly, the vaccine needs time to produce, then we need time to inject it into billions of people. And if there is any allergic or any adverse reaction, it's bound to cause a pause to investigate and refine strategies. By the time we are done, the virus strain could have mutated, so there won't be total control so quickly. Then we will have psychological fear in people because of the try and repeat and try and repeat cycle which will make people feel that maybe it's just safer to stay at home until things get better. The younger ones itching to travel will likely still want to travel, but as long as the country imposes re-entry restrictions, such as having to self-pay $200 for the test, $2000 for a dedicated stay at a hotel and self-pay medical bills, people will think twice.

I expect Singapore property prices to be maintained, with only gradual decreases, as long as unemployment rates don't increase too drastically. This is because the landlords are generally not over-leveraged, thanks to prudent property cooling measures (total debt servicing ratios and loan-to-value ratios) that had been there since 2013. Those who will be selling are likely those who are older, only have 1 property and want to "downgrade to encash" their wealth that is parked in property, because rental yields will not be sufficient to cover living expenses for most people.

I estimate about 300,000 properties to be in the rental market. This is based on a few data points... This article from an MP query: 381,000 Singapore PRs and foreigners owned one private residential property, while 59,000 owned two. 20,000 Singaporeans own three to 10. Fewer than 200 own more than 10 of such properties. Of these private residential property owners, 15 per cent also own HDB flat.

HDB website has about 45,000 rental transactions yearly. If each lease is 2 years, that's 90,000 in the market. Assuming 10% are vacant, it's a total of 100,000 HDB flats available for rent.

Based on URA rental transactions, there are 172,000 condo rental transactions in 2018 and 2019. Assuming 10% are vacant, it's a total of 190,000 condo units.

If we go by some analyst estimates that we will lose 60,000 foreign workers this year, and we assume that on average 2 foreign workers rent 1 unit, it translate to 30,000 units freed up which is 10% of the rental property supply, and vacancy rate will go up to 20%. Rents will definitely fall in the next 2 years at least.

We will only start to see the impact of covid19 when the relief measures gradually expire. These include:
- Travel restrictions lifted (unknown, so that the foreigners who want or need to leave singapore will leave their rented properties and then we will know how many vacant units there will be. Of course, the government will already have all these data but retail investors won't know.)
- Jobs Support Scheme (until end Aug for most businesses except airlines and tourism that will last until end Jan)
- Bankruptcy limit raised by 4 times (until end Oct)
- Property principal and interest repayment waiver (until end Dec)

I will be holding some cash to wait for buying opportunities, for stocks and property (if prices fall).