Better safe than sorry

My anticipation of a Chinese New Year rally is proving to be displaced, as the Dow Jones dropped 166 points last night, in my view, starting a correctional phase. Actually, I should have known this would happen, but I was carried away by the Chinese New Year effect. The good thing is, I have been cutting losses before the fall in the Dow as I sense a fake rally. On one occassion (Capland), I even cut the same day I bought the stock.

Stocks I have bought in the past few days and am now out:
Capland: Bought 3.69 Sold 3.66 Lost 0.8%
Wilmar: Bought 5.40 Sold 5.35 Lost 0.9%

Stocks I have bought in the past few days but have not managed to get out:
NOL. I will try to get out, but if not, will just hold it as it is a good stock.

Stocks I have bought in the past few days but planning to hold a little longer:
Zhaojin Gold Mining as I believe its prices could actually move upwards on the back of a reversal in gold prices.

I have also added more gold to my portfolio in the past few days as it nears the $1300 support, despite my initial reluctance. This is because, longer term, I expect gold price to continue higher, after its recent correction.

I see this correction as a routine "fire sale" and will be using it as an opportunity to increase my positions in the stock market.

I think .. the market is going to see a Chinese New Year rally

According to the CLSA fengshui guide, investors will not see a rally this year. February will be a month of decline. Besides, I am of the opinion that a bottom will only be formed some time towards the middle of February, completing a correction. But, the US stock market has continued with its rally, and the local market today has rallied by 40 points, with key counters reversing from many days of declines and bouncing off important supports. So, to my disappointment, a correction will not happen, yet again.

Last year, the STI quickly rebounded more than 100 points, or over 4% from sub 2,700 levels to just six points short of the 2,800 levels in six days, ahead of CNY. In 2009, the market also saw a 3.6% rebound in three days during the CNY period. A check on the charts show that the STI is very close to oversold, and is now rebounding from it. Counters which are oversold and rebounding include Capitaland (bullish engulfing), SPDR Gold, Global Log (bullish engulfing) and Wilmar. Counters which are rebounding from important supports include Noble and STX OSV (bullish engulfing). Foreign counters displaying similar behaviour are Zhaojin, Sands China, Petrochina and Air China (bullish engulfing).

What will I buy? Noble is confirmed. Yesterday, palm oil giant Wilmar International tumbled another 1.8% to reach another new low. Its closing price of $5.34 is the lowest in almost one and a half years. The last time it closed at this level was in July 2009. Wilmar was also the second worst index performer both last year 2010 with its – 12.4% return and this year thus far (–5.7%). I am keen to take this counter back to my portfolio, despite its ugly technicals and the fact that I lost money on it the last time. I am also fundamentally and technically attracted to Capitaland even though it is not viewed favourably. Lastly, I am interested in Gold and Zhaojin(gold mining), which is bouncing off from its oversold level. Nevertheless, my time frame for holding these stocks could be very short.

Is bullish investor sentiment a sign that stocks will fall soon?

The American Association of Individual Investors (AAII) Investor Sentiment Survey for the week ending January 12 showed that 52.3% of investors are bullish. Only 23.4%are bearish. The rest are neutral.

Remember in October 2007, bullishness hit 62%, just as the S&P 500 was peaking at its all-time high.

But... the reason that this indicator isn’t all it’s cracked up to be is that historically, investor sentiment is right most of the time, not wrong. What the bears fail to understand is that average investors are trend followers. And trends tend to last a long time. They’re right the majority of the time, but wrong at both extremes. They get caught buying at the top and selling at the bottom. That’s why this indicator is of some value when it hits extraordinary levels.

But we’re not there yet…

(Adapted from Alexandra Green, Investment U)

A second fengshui viewpoint by CLSA

Separately, renowned Feng Shui Master Lee Shing-chak provided his fengshui views on the stock markets to a sell-out luncheon audience at CLSA. According to him, this will be a bouncy year for the market with no large rally or moneymaking
opportunities. Market will be weak in 1H, bottoming between May and August
and should rally thereafter. The best element this year is water which means movement. Thus, transport, logistic, and tourism sector will do well. The western direction is auspicious which means that entertainment, including
Macau gaming should also do well. He is also positive on gold which will go
up to USD 1,600 - 1,800 oz by the end of the year. The best entry point would
be mid-year. This is the year of metal which means that it is bad for the
wood element. Property and construction will not do well.

Stock suggestions (CLSA) for the sectors he likes:

Transport – Air China(753.HK), ChinaMerchants (144.HK), CathayPacific
Tourism – Ctrip, Homes Inn
Entertainment – Sands China(1928.HK), Wynn (1128.HK), SJM
Gold – Zhaojin (1818.HK)

Lucky number 7 & 1 stocks – Stocks above and: Yanzhou Coal (1171.HK), New
World Development (17.HK), Tencent (700.HK), Cheung Kong (1 HK), Want Want
(151.HK), PetroChina (857.HK), China Telecom (728.HK)

Master Lee’s track record last year was good. Last year, he predicted the
Korean crisis. He liked gold, oil, internet, and technology sectors which
all performed well.

CLSA 2011 Fengshui predictions

The CLSA fengshui guide was pretty accurate in predicting the market directions in 2010, so I read with greater interest its fengshui guide for 2011. In the Year of the Metal Rabbit, it is predicting another up year for stocks. Sectors which will do great are financials (except for a big correction in June-July), gaming, gold, resources (particularly coal) and transport (BDI to rise substantially in Sep). Avoid property, according to the fengshui guide.

What are the luckiest (sell stocks?) and unluckiest months (buy stocks)?

Feb: Bumpy(Buy?)
Apr: Great(Sell?)
Jun: Bumpy (Buy?)
Jul/ Aug: Great (Sell?)
Sep: Bumpy (Buy?)
Oct/ Nov: Great (Sell?)
Dec: Bumpy (Buy?)
Jan: Great (Sell?)

So, if this guide is to be believed, 2011 will be very volatile, with upside bias. That means I will have to hop in and out four times to maximise my "hopportunities".

Gold can go higher

Even though gold prices have softened, analysts still believe gold prices will go higher this year. The most accurate forecasters of gold prices last year were Philip Aubertin (average price) of UBS, and Tom Kendall (highest price) of Credit Suisse. Philip is expecting gold to average $1,550 and peak at $1,700 this year. Tom expects the metal to hit as high as $1,630. Why should gold trade higher, as optimism is now returning? According to Edel Tully of UBS, the ongoing Euro crisis and growing inflation should be positive gold drivers this year.

Will I sell my gold then? I may be tempted.

Big US stocks are poised to move upwards

The prevailing view on Wall Street is that large-caps finally will shine in 2011 because a prolonged slump has left stocks like Microsoft, Cisco Systems, Wal-Mart tores, PepsiCo, JPMorgan Chase, Johnson & Johnson and much of the drug, technology and financial-services industries at modest price/earnings ratios. In addition, large-caps give investors more exposure to high-growth markets overseas, given the global reach of multinationals like Coca-Cola and Intel.

Investors such as Bill Miller of Legg Mason and Jeremy Grantham of GMO now favor larger stocks. This could be because even after the bull run of the past two years, the Standard & Poor's 500 (which comprised the big cap stocks) still would have to advance 23% from its current level around 1265 to reach its peak of 1565, set in October 2007. I am invested in Bank of America (BAC), definitely a big US stock. I am hopeful that BAC would trend higher in the months ahead, and am even prepared to collect more should its price retrace.

Jim Walker is wary on QE2, Asia and inflation

Veteran Jim Walker is wary. Amongst the reasons he cited, he felt Asian markets have not fully discounted the impact of rising interest rates. He thinks Asian currencies could actually weaken this year. He also thinks QE2 is continuing to fool equity markets into thinking that there are perpetual guarantees. Uf QE1 didn't work, QE2 will not too, he argued. He is also sceptical on the job recovery in the US. And lastly, he is bearish on China. He feels that China does not have the monetary policy in place to tackle rising prices. Overall, he feels that the world is in for a long-haul slump, with almost zero growth in the developed world.

Just how credible is he? A check on my blog on 13 Jun 2009 revealed that even then, Jim Walker was not hopeful. He claimed, "The rally doesn't seem to be based on any fundamentals, because there is no real economic recovery behind it, no strong corporate earnings growth that is fuelling it. His main worry is China. People are underestimating the seriousness of the problems in China. The stock market is rallying now only because the world is pumping so much money at a time when there is little economic activity. The money has to go somewhere. It's going into Asian stock markets. Indicators are telling this outspoken economist that the world may still be a long way from the awaited recovery."

But markets have climbed far higher since. So if we believed in him then, we would have missed out on one of the greatest investment opportunities of a lifetime.

Average bull run in Shanghai has been 600%

According to Aaron Boesky, the average bull run in China has hovered around 600%

1990 - 1992 +1,465%
1992 - 1993 +330%
1994 - 2001 +608%
2005 - 2007 +504%
2008 - 2011 +65% so far. That means lots of room to run right? To Boesky, "this is a buying opportunity". Personally, I am salivating at this prospect.

But so are funds out there which are betting on China and the H-shares to outperform this year. CLSA is predicting a 25% upside for MSCI China and 24% upside for H-shares this year. Time to research China companies more thoroughly!

What can we invest in?

Some analysts and financial newswriters are calling for an end to the stock market rally soon. Goola Warden has mentioned that "Both long- and medium-term technical indicators are waning in tandem, for the first time since 1Q2009". Does this spell the end of the stock market rally?

Not, if you believe in Bob Doll and Marco Polo's Aaron Boesky. Aaron Boesky's China Fund has averaged annual returns of 30% since its inception since 2004, so he is definitely an authority worth listening too. According to him. we are in a new bull market in China, a cycle that could last up to 6 years. We are currently only in the third year, and halfway through to the next peak. That means investors can make over 100% returns in the Shanghai market over the next three years.

Why is he so optimistic on China? Valuations are cheap at 13 to 14 times earnings compared to 72 times in2007. These are lower than in NYSE and Singapore. He believes corporate earnings growth of 25% this year, and this should drive the re-rating of the Shanghai market.

He does not buy the argument that China is slowing its economy. Instead, he believes that the government is just trying to rein in runaway real estate prices, and at the same time, grow consumption at home. Some key themes to watch out for will thus be: credit cards, insurance, securites, internet stocks and infrastructure(eg. nuclear), transportation (eg. railways, water), PCs, mobile phones, sporting goods, breweries, tourism and hotels. He is however, not very keen on property and banks, as he feels that banks in China are also tools of government policy and not always profit-driven. He did not specify what stocks he is currently invested in/ looking to invest in.

Are there still bargains in Singapore?

It looks like most stocks on the local front have peaked, as the STI nears its all-time high of 3,900. What choices are we left with on the local front? According to the accompanying article, hotel stocks like Orchard Parade Holdings, Hotel Grand Central and Hotel Royal and upscale property developer Ho Bee are trading at significant discounts to their NAV. They may see a re-rating soon. By the way, I held my wedding at Orchard Parade Hotel. A sentimental punt on it? Not yet, as I still am expecting a correction. Even then, I may still find blue chips more attractive.

Undervalued stocks: Seeking discounts in the stock market run-up
Monday, 17 January 2011

© 2011 - The Edge Singapore

Stocks should move higher in 2011

Stocks should move higher in 2011, extending the two-year bull market, according to Bob Doll, chief equity analyst at Blackrock. This is due to gradually declining levels of uncertainty as the US and the world economy are beginning to transition from recovery to outright expansion.

Downside risks remain, however. Two of the issues that caused problems in 2010 — the sovereign debt crises and emerging-markets inflation — are likely to continue to threaten overall levels of global economic growth. Another area that bears watching is the US housing market.

Bob Doll: Stocks to move higher in 2011
Monday, 17 January 2011

© 2011 - The Edge Singapore

Why I am a bargain-hunting investor now

A chasing-momentum, chasing-price strategy in the past few years has reaped me nothing but frustration and monetary loss. Deciding that this is probably not going to work for me, I began to switch my style to one of buying the dips, and selling when everyone else is buying. I have definitely experienced much greater success. My favourite local financial editor, Goh Eng Yeow correctly wrote in the Sunday Times that "One mistake made by most investors is the urge to want to buy stocks which are on the upswing - and sell when the picture looks bleak(me in the past)." He added, "It may be better for them to look out for counters with good businesses which have been unfairly priced down by the market". This art, I am in the process of learning and perfecting. Keynes made his fortune with this art. So did Puggy Pearson, 1973 poker champion who recognised the 60-40 proposition. He makes big bucks whenever he knows he has a 60% chance. And by 60% chance, we mean when stocks are unfairly sold down. I believe Goh has made substantial amount too from this art of investing. Going forward, there will be lots of opportunities to practise this art. The ability to wait patiently for opportuntities to unfold will be the key to master the art of being a successful bargain hunter in the stock market.

US financials are turning the corner

Finally, the long awaited event has happened - US financials (and that includes BAC which just broke its 50-week resistance) are turning the corner. They are the only sector that have not moved up with the market last year. Over the past month, the sector has been demonstrating impressive relative strength against the broad market. Indeed, Jason Goldberg, who heads the bank equity research team at Barclays Capital, notes that favorable GDP growth, a rising stock market, and stable short-term interest rates in 2011 bode well for the performance of financial stocks in the New Year. Since 1949, there have only been eight years where these three factors were present; and in all eight years banks stocks finished higher. And they outperformed the broad market in six of those eight years.

Therefore, what I will do is sit back and reap my just reward on BAC.

Noble is another attractive candidate

Noble was among the laggards in the STI last year. However, all these are set to change as commodity-linked counters rally on the back of rising commodity prices and further merger and acquisition. Noble's broad bulk commodities portfolio and its upstream energy assets make it a key beneficiary of any global economic recovery.

Amtek is an attractive proposition for the coming correction

It is the worst feeling to have sold off your shares, and then see them continue to rise up in value. I have been experiencing this pain since the past few days. But, this is all part and parcel of investing/ trading. Nonetheless, I will not be going into the market any time soon, as it is already due for a correction. When the opportunity does come by again, Amtek will be one counter I will be looking at.

DBSV Research is initiating coverage on Amtek Engineering with a BUY call and target price of S$ 1.65, which offers 27% upside plus 5-6% dividend yield. Amtek is a pioneering metal stamper founded in Singapore in 1970. After a private equity
buyout in 2007, management quickly re-organised the business to move it further up the value chain and to improve the cross selling of higher value added products and services to existing and new customers. Amtek offers a faster earnings growth rate
of 59% CAGR from FY10-FY13F and is trading at only 8-9x FY11/12 PE, below the sector average of 10-11x.

Move to cash

Ben Inker, head of asset-allocation group at Boston money manager GMO, favours holding a lot of cash. He says bond yields are too low, and that equities aren't that attractively priced. Only exception is high-quality US stocks, which he feels, have more upside since they have trailed the market for the past 10 years.

He feels it is a good idea to free up some cash now, in order to exploit opportnuities later. He is currently 30% cash.

STX OSV the hidden gem

I invested in STX OSV on a hunch 2 months ago as I felt this company has a lot of potential, especially since it is in the oil and gas sector. Just that it was unlucky to be listed when the markets were weakening. I was proven right when the share price has risen by close to 50% ever since. And, finally a research report to back my decision. Definitely one candidate I will look at during this correction.

DMG's report on 10 Jan:
Undervalued, under-researched leading OSV shipbuilder. STX OSV is one of
the leading global shipbuilder of offshore support vessels (OSV) with nine
shipyards in four countries. High oil prices are driving new orders for
high end offshore support vessels and in our view, STX is in a good
position to capture the returning demand for high-end platform supply
vessels (PSV) and offshore subsea and construction vessels (OSCV) given its
leading edge technology and strong market share in the high-end segments.
The company is set to register +18% core net profit CAGR over FY09-12F,
driven by improvement in project execution and healthy new order intake. We
initiate coverage with a BUY and TP of S$1.56, +30% upside from current
levels.

This should be a correction

Back in Nov, I thought we would have a correction, but we did not. With major indexes sinking again, I feel that the much awaited correction may finally arrive. For this reason, I have exited my various holdings, some even at a loss. This is because I truly feel a correction. The last time we had one was way back in May last year. But, I will be making use of the opportunity to collect shares "on the cheap". However, it is increasingly difficult to do so, as shares are all quite expensive.

But, who knows, this correction may throw up wonderful opportunities. This stance is consistent with an article in today's Straits Times that "traders are viewing any correction in stock prices as an opportunity to buy shares at lower prices. As was evident last year, the key to success in the grind higher is to buy the dips, but not to chase the rallies too hard." The key is to act against all instincts to buy when the everyone else is selling. As Jim Cramer says "When they throw a sale at Macy's, you buy more stuff. You don't panic and run screaming from the mall."

But, just make sure I don't end up buying stuff you do not need. Remember Wilmar.

I have exited
Genting for 7% gain bot 2.03 sold 2.18
Noble for 11% gain bot 2.05 sold 2.28
Olam for 6% gain bot 3.06 sold 3.24
STX OSV for 34% gain (50% exited) bot 0.79 sold 1.06
China Construction Bank for 0 gains bot 7.07 sold 7.13 (nothing left after commissions)
Wilmar for 5% loss. bot 6.01 sold 5.70

The holding period for all of the above is slightly > 1 month.

My existing current portfolio consists of:
BAC
STX OSV
Gold

I have not bought more gold

Although I am seriously thinking of buying more gold, I have not done so. After having done some calculations, my investments in gold did not make me good profits. This is because of the exchange rate loss. I bought gold in Jan 2010 at US$111. It is now US$134. Taking into account exchange rate loss(my home currency is S$), my total gains, based on 40 shares, is just $600, a 10% gain for 1 year of holding. Not exactly exciting returns.

Alexander Green, in his Investment U newsletter, also warned, "If you pile into the barbarous relic at these prices, you may get the same shellacking that Internet investors and real estate speculators got a few years ago." He also advised, "But if you own gold purely for speculative purposes, do yourself a favor. Take profits now."

Therefore, no more adding to my existing holding for now.

Why there may be opportunity to collect more gold

Gold has dropped for a fifth straight day, the longest losing streak since August 2009, as signs that the U.S. economy is recovering strengthened the dollar and curbed demand for a haven. Does this mean the end of gold's bull run?

The following is extracted from Profit Confidential:

Gold Bullion per Ounce
Dec. 31, 2002 $348
Dec. 31, 2003 $416
Dec. 31, 2004 $438
Dec. 31, 2005 $519
Dec. 31, 2006 $638
Dec. 31, 2007 $838
Dec. 31, 2008 $889
Dec. 31, 2009 $1,097
Dec. 31, 2010 $1,421

Well, as we can see, gold has been on a nice uptrend for the past 10 years. We know that it takes a long time for a trend to change. So, the time to buy more gold may be near.

Why we should be cautious on the stock market

Dr YC Chan has proclaimed that the "stock market may be volatile this year, but on the whole should be better than last year." This is due to improving corporate results, blah blah blah... Will this be true? Let's be a little contrarian..

The S&P 500 is up 86% since March 2009. The easy money in the stock market has already been made. Now, the prevailing consensus is that the worst is over for the U.S. economy and that stocks will have a great 2011. But, we know that the stock market always delivers the opposite of what is expected of it. In 2009, everyone was scared stiff of stocks. Yet, stocks gave us its best returns. Currently, too many investors, advisors and analysts have turned bullish on the stock market.

According to Michael Lombardi, "The year 2011 will be treacherous for investors. I don’t expect to see the gains of 2009 and 2010 repeated. I do see the bear’s ugly head returning amid a sea of rising optimism". Michael Lombardi, in his newsletter "Profit Confidential" urged everyone to jump into stocks in 2009, so his credibility is for all to see.

I am not sure if I should share his pessimism, and will continue to trade/ invest using my system until it fails me. Currently, I am still profitting from the upward trend, although I could feel the market tiring. But I do agree with Lombardi that there will come a time when the bears start taking over again. When will this happen? I have absolutely no idea, but should this unavoidable eventuality happen, I want to be prepared for the opportunities that come with it.

China to rebound?

Investor Mark Mobius and Ms Jing Ulrich, chairman of China equities and commodities at JPMorgan Chase, say China's stocks are set to rebound because the government will keep inflation under control. This is in contrast to some opinions that China's stock market could "crash" soon. (see my earlier article "Should we exit China?"). Definitely good news to China investors like me.

A Jan correction?

Just like Jan 2010, the stock market is running up very fast in the first week of Jan 2011. It should correct soon, this month, according to Marc Faber. According to him, however, it should represent another opportunity to buy. Faber prefers energy companies and speculative stocks such as home builders and even AIG. He goes on to say that the third year of a Presidential cycle is very good for speculative stocks versus traditional blue chip value plays.

Specifically, Exxon Mobil (XOM), Hess (HES), and Chesapeake Energy (CHK) are Faber's key picks. Additionally, Peabody Energy Corporation (BTU) on the coal side and Cameco Corporation (CCO) for uranium should outperform over the next few years.

Faber also thinks the S&P 500 will outperform emerging markets in 2011.

My 2010 performance

It is good to keep track of my portfolio at the very start of the new year. For 2010, my performance can be said to be akin to Dr. Jekyl and Mr Hyde. My first half performance was erratic and poor, my second half performance much better, after I changed my mindset to an investing mindset. A breakdown of my performance:

Jan - Jun: -17% loss
Jul - Dec: +54% gain
Overall gain: +37% gain

I am decidedly happier with my performance from the second half onwards. I am finally seeing light at the end of a long tunnel.

Should we exit China?

China is the first country to recover from the global recession. Now, some people are predicting that it will also be the first to run into potential problems. Why? Because things have been good for so long. What kinds of problems would China face? The problems related to trying to grow too much. As Micheal Shulman puts it, "Chinese land developers and industrialists are now engaged in financial musical chairs — they will keep borrowing to grow until they absolutely, positively cannot borrow any more, assuming someone else will get left standing without a chair. Well, the U.S. financial crisis began when Bear Stearns found itself without a chair." The whole story here. Remember, Richard Band also mentioned about getting out of China in my past post. And, so has Martin Lau. I think it is time to sit up and pay attention, at least for the short term.

As of now, I am still vested in China Construction Bank. I am long term bullish on China, and believe that one day, the SSE will break its high of 5522. It is currently at 2808, so a long way to go before bracing for a crash.