Sunday, August 14, 2005

Travel into Time

In a classic bear market, investors go through three stages. "The earlier stage is characterised by denial, increased anxiety, and fear. The second stage is panic. People suddenly say, 'I've got to sell.' The third phase is despair." Richard Russell.

For the last 100 years, bull markets of 15-20 years long have alternated with bear markets of similar length. It is clear that the last bull market ran from 1982 - 2000, one surmises that we are now in the secular bear market and it still has further to run. Within every secular bear market are sharp rallies that appear to signal a brand new bull, but they are really "sucker" rallies.

For a new bull market to re-establish itself, there will be a need for a new discovery/trend that appears to defy convention. Eg, electronics, internet dotcom. It also needs a new generation of people untainted/burnt by a fall in the market to abandon all caution and lead the charge into stocks again and there must be easy availability of credit (junk bonds financing for LBOs, credit derivatives).

Are the foregoing "conditions" available today? Probably not as we have just experienced one of the longest and strongest bull run in the market with the internet dotcom rush.

Some wise man said that when one sector is thriving, it means that some other sector somewhere is down-throdden as money has flown out into the hot sector. Whilst hot money was chasing stocks in 2000, hell froze over for commodities as their prices plunged into an all time low, not seen since 1930. Another interesting point to note is that commodities cycle and stock market cycles exhibit a negative correlation.

"In truth, a knowledge of history is an investor's best defence against error. Despite all the financial engineering that attempts to eliminate risk, cycles appear to be inevitable as the seasons. Investors who understand these cycles are more likely to survive the winter of a bear market and to avoid its final phase - despair. They know that eventually, summer always returns, and more than that, they know that somewhere on the planet it is always summer," Maggie Mahar.

Market Cycles, S&P 500 Average Annual total real return [Gail Dudack, Sungard]
Period (Years) ----- Total Return
1882 - 1897 (15) ----- 3.4%
1898 - 1902 (04) ----- 15.6%
1903 - 1921 (18)----- 0.6%
1922 - 1929 (7) ----- 25.4%
1930 - 1949 (19) ----- 3.2%
1950 - 1966 (16) ----- 14.1%
1967 - 1982 (15) ----- 0.2%
1983 - 1999 (16) ----- 15.7%

Commodity Market Cycles [Di Tomasso Group]
Period (Years) ----- Return
1939 - 1954 (15) ---- 99%
1954 - 1970 (16) ---- -41%
1970 - 1981 (11) ---- 106%
1981 - 1999 (18) ---- -68%

"History tells us that when you buy stocks with average PE on the S&P 500 under 10, then over the coming 10 years, you will receive a median return of 16.9%. When you buy stocks when PEs are 16 to 17, over the coming 10 years, your median returns will be 10.7%. When you buy stocks when PEs are 18 to 20, then over the coming 10 years, your median return will b 7.5%. When you buy stocks when PEs are 22, then over the coming 10 years, your median return will be 5%. With the S&P fetching more than 30x trailing earnings [in 2003], over the coming 10 years, you'll probably show a loss," Richard Russell, Dow Theory, Summer 2003.


Saturday, August 13, 2005

Feeling Raw - Is the commodities boom sustainable?

Oil has hit US$65 per barrel thanks to fears of terror attacks and leadership transition [I think: overplayed] in Saudi Arabia, imasse over Iran's nuclear programme, and problems in American's refineries. Inherent demand supply problem? Oil in easy to find places may be depleting fast. Jim Rogers says that Alaska, North Sea spots are in decline and there is no great oil discovery in last 35 years.
In America, not enough new refineries have been built to meet growing demand. Refiners have coped by improving technology but tight capacity leaves it vulnerable.
China's demand for oil is apparent as its state owned firm attempted to take over UNOCO. Buffett's purchase of Petrochina years ago reveals his acumen too.
Winter months ahead - classic time for oil prices to increase.

Other commodities bottleneck:
  • Last lead melt opened in 1969,
  • Last lead mine in world opened 25 years ago.
Does this translate to a long sustainable bull run in commodities? Or will run up in past few years fizzle out? Jim Rogers certainly thinks so. Steve Leuthold has been hording up real metals...

Other than oil, many worrisome signs for stock market in months ahead:
  • US interest rates on uptrend.US trade deficit, consumer debt remains high.
  • Asian markets hitting highs - Nikkel 225 at 5 year high, Mumbai too.
Time to go high in cash? I am inclined to do so. Reading to understand market cycles better currently and must banish the notion that "Buy and hold" will work forever.


Virtual Portfolio -[Red Star] - Update

{Current return is about -4%. }

What went well so far:

CH SP rocketed up along with the good sentiment towards shipping plays. Shipping is one of the cyclical sectors available for play on SGX. Most counters are fully valued or fairly valued currently. Have to take note to CH SP and buddies to position for the next cycle.
ZPI SG also holding up due to fairly low entry price of $0.22. Sentiment towards it has dampened after recent results were hit due to slippage due to factory move as well as harsh weather conditions in China. However, will still continue to hold on to it with a view to adding up if price slides further.

What remains unsure?

WFG SP A boutique lead manager for IPOs. Whilst running IPOs does not contribute to all its revenue, they are doing noticably less this year. Note that their head honcho has been on a purchasing spree.

What didn't go according to plan?

CFLX SP, FAPX SP assaulted by escalation in crude oil prices [appx US$65 per barrel for Brent]. I expect oil prices to remain high and thus hurting the businesses as they rely on an petroleum by product as inputs. Decent companies but monitor with a view to cut-loss. Lesson learnt: Must monitor prices of inputs.

MEGH SP recent results were not to expectations. Will look to dispose. Lesson learnt: Don't jump into IPOs. Do allow for a year of operating record first.

UFH SP sank after news of pig flu in China. Poor sentiment towards coy with related business - PFOOD not helping. Added on the basis that China's pork consumption is high despite apparent weakness of results over time. A candidate for disposal. Lesson learnt: Insufficient research.

LFBZ SP has stuck its fingers in "branding" the Cannery, a new development headlined by the iconic Ministry of Sound club. Also tied up with other big names like Dashing Divas etc. Can LFBZ SP succeed? Don't intend to stay around to find out. Shortlist for axe. Lesson: Don't be suckled by flashy fads. Slimming pills did sell as a hot cakes but where's the sustainability in business model? Had branded it as a classic Lynch pick initially as one could sell its products flying off the shelves. On hindsight, I am not doing Peter justice as I didn't see the drop in demand subsequently. Also expensive to hire TV stars for its advertisements. Was LFBZ SP one of the candidates that was primed for IPO?

Missing the boat:

Not acting on Osim. First mentioned in column when price was S$0.965. Has acquired Global Active and intends to wrap up acquisition of Brookstone to get foothold into USA. Price has run up quite a bit recently. Has not done valuations but doubt it is attractive today.
SRAY SP was outlined too. Failed to understand the attractiveness of its cervical cancer dianogistic instrument.

KIV Substitutions:

FEH SP [$0.365, yield in last FY: 4%] A food and beverage company with a big footprint in Russia, Eastern Bloc countries like Ukraine, Vietnam. Strongest product is MacCoffee. Reportedly even sold in Australia but reigns supreme even ahead of Nescafe in Russia and its former republics. Good financials. I'm positive about RTD MacCoffee sales.

  • Affected by raw material prices - coffee, sugar, etc.
  • May lack pricing power as it positions itself as affordable in less developed markets.
  • Had failed to watch advertising costs once.
  • Was embroiled in legal suit once with MacDonalds over MacCoffee names (outcome was in its favor).