Small is beautiful

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Small is beautiful, yes you heard that right, small is beautiful. I have been curious how small cap stocks have been performing over a period of time especially during this period of very testing time. To my surprise, quite well.

I'm just picking three funds since I don't have any access to Bloomberg terminal data and etc. The three funds are from Public Mutual, Prudential and OSK. I like Public Mutual and Prudential holding better than OSK. OSK's names are more momentum driven while Public Mutual and Prudential holdings have more of mid cap qualities. If you happened to pick around the bottom and hold it for about 10 years or if you are smart enough to get out during bull run, you should be able to get 10-15% annual compound return. It has outperformed KLCI even HSI or DJIA over a long period of time, just something for you to think about.

The funds are sitting on relatively high level of cash right now, Public Small cap has about 30% cash as of 31 October 2008. Prudential's fund is sitting on 18% cash as of 28 November 2008. OSK has the highest level of cash, almost 56% cash as of 28 November 2008. High level of cash will eliminate these funds to sell at the wrong time to meet redemption but I smell opportunity. They can generate better return when the market start to move up.





I have been thinking of deploying some cash into one of these funds for Turtle portfolio as part of diversification to work with the limited capital. You may argue that is not fair because there is no stock picking skills here, that's the beauty as a private investor - I have the freedom to let other to grow wealth or I do it myself depending on the situation. Pooling resources is a better idea for now.

Portfolio Update - February 2009

As usual, I received $ 888 saving for the month of February 2009. I'm sitting on about $ 3,700++ cash which is about 30% of the portfolio. As I mentioned in my earlier entry, I am waiting for the right timing to deploy cash.

In a volatile environment, I would think that we need to stay diversified and never be fully invested no matter how bullish I am on equities. One also must not take large positions. My timing on Mui and Parkson was certainly wrong as I dipped into the market too early. Fortunately, I realized that I was wrong, I began to pay a lot more attention to market psychology compared to the past. I also began to pay attentions to a group of people that use technical analysis - when valuation group defeated, most people will turn to chart which nothing but looking at floor and resistance based on past prices. It has been working well when market lost its sanity, as soon as sanity returns, valuation group will overpower this group, I begin to see people says not all stock is created equal. Stocks with high dividend yield is recovering very strongly.

I made a wrong call last month, I thought January was going to fly but Dow ended up about flat but stays above 8,000. The market threaten to go below 8,000 at least 4 times(including yesterday), this is a very testing time - the market is searching for a big negative catalyst. US Q4 GDP has been bad but still did not manage to push it down to below 8,000, I am not sure what will be the big negative catalyst to push it down. Or simply less bad news will do the job to let the market crawl up slowly.

On gold, I was qualifying a technical buy if brakeout above $ 850, buy on pull back was OK, now that it has broke out above 900++ and retail investors start to pour in money(gold invested in ETF is pilling up), upward momentum is there. The heat is turning up but it has not turned into euphoria yet. Searching the word gold bubble on Google simply does not exist so no bubble so far. But I think it is overbought, there is a good chance that people will chase to US $ 93 - 95 before correction set it to retrace back to US $ 87 - US $ 88. Then it should move towards challenging the previous peak at around US $ 100. Breakout from US $ 100 will be really interesting, I can almost bet for a parabolic rise. I seldom chase up things at all time high if there are better alternatives. For example: USO ETF( United States Oil) is selling for US $ 29 and there is a potential that it can rebound by 20% to US $ 35 vs chasing GLD ETF at US $ 91 to bet it will rise 20% to US $ 110 in six month time, which alternative has better return on risk adjusted basis? Nothing wrong with either bet but just a matter of personal choice and risk temperament.

I remember one thing that Warren Buffett said last year when he put his money to work in Goldman Sachs, all bets are off if there is no government bailout. I am still holding on to this premise, all my investment bets are off if I see the bailout fails - this is the only single negative catalyst that I think will bring the market to its knees.

'Buy American'

NEW YORK (CNNMoney.com) -- A debate is brewing at home and abroad over an economic stimulus measure that would require materials used in the program's infrastructure projects to be purchased from American companies.

In the $819 billion House bill passed Wednesday, the so-called "Buy American" provision would, with some notable exceptions, ensure that only U.S.-produced iron and steel be used for construction. It expands on a 76-year-old federal law. The Senate, which is likely to take up stimulus next week, would go even further, effectively requiring that any products and equipment be American-made.

"The Buy American provision will help stimulate our own economy," Sen. Byron Dorgan, D-N.D., who wrote the provision, told CNNMoney. "When taxpayer dollars are used, we should urge that money to support the things produced here at home."

(click here to read the whole article)

There is a counter argument in every argument. Most people would have taken a side before they start arguing. I can make a frightening case that we all got to be very frighten about this development(trade war ? protectionism?) or I can argue that this is nothing new especially under Democrat ruling. If we go back to history, US-Japan has similar problem under Reagan leadership. In 1987(is that year familiar to you ? - market crash, Japanese conquered the world, record US deficit?, multi-year weak US $ index?), US slapped 100% import tariff on Japanese electronic goods like television, computer, air conditioners and etc. At one time(mid 90s to early 2000), when the US automotive makers could not compete with the Japanese, they accused Japanese government manipulated Yen helping Toyota-san, Nissan-san, etc against McGM, McFord or Mc......



Today, the American has not been making much noises towards Japanese, do you know why? Despite of long period of love-hate relationship, Japanese is still one of the largest US Treasury holders, do you know why? Just some questions to ponder before you are jumping the gun, if this news is disturbing you.

Beauty is in the eye of the beholder.....so is value

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I got this interesting chart from EWI. He has been saying the Dow will go below 7,200before this bear market is over. How cheap is the US market? Price/Book basis has not entered screaming buy but bond yield/stock yield basis, you can find a lot of screaming buys. If you can find good cash generator businesses, with the bond yield(risk free rate) at record low, stocks look very compelling based on discounted cash flow model. I believe this is one of the reasons why Buffett pulling out his personal money out of bonds and buys stocks. This also lead me to believe risk free rate is going to stay low for a while. He has ben right about inflation/commodity boom about to peak out when he sold PetroChina and bought into Kraft last year.

While I have been setting bullish tone on stocks and the market seems to confirm this temporarily, you may ask me why my Turtle Portfolio has not been buying anything yet. The answer lies in money management, I will maintain strategy of holding at least 30-40% at any one time in case great buying opportunity shows up. This also implies that I believe the market is going be very volatile despite of good buying opportunity.

Show me the money - earnings !

I was at first thinking of not publishing today but changed my mind - judging from last two days responses that readers are still coming back. I suppose many of you must be die hard investors that will never give up no matter what circumstances. I'm confident that we will outlast this bear market, depression or whatever the mainstream media wants to call it. Enough of small talk, let's get down to business. The earning releases from the US corporations have not been very encouraging as you can see on the front page of WSJ. Funnily, the DJIA seems to be able to hold above 8,000 despite of many companies reported earning down by 70%, 80%, 90%, etc. A bulk of them are related to restructuring and etc which could be one-off(I hope) and yield long term saving.

(WSJ)Operating earnings for companies in the Standard & Poor's 500-stock index probably slid by 28% compared with fourth-quarter 2007 results. And the start of 2009 doesn't look much better. Analysts think earnings will decline by 20% in the first quarter and by 18% in the second, according to forecasts collected by Thomson Reuters.

If those estimates prove to be accurate, the total drop would be 35% since profits peaked in mid-2007. Since 1950, the only other decline approaching such magnitude has been the 32% falloff from September 2000 through December 2001 (a stretch that included the terrorist attacks of 9/11). The average peak-to-trough earnings decline during downturns in the same period was 18%, according to Strategas Research Partners.

Earnings estimates may continue to come down for 2009. "Bottom-up" analysts -- those who cover individual companies -- are expecting members of the S&P 500 to post combined earnings of $70.73 a share this year. "Top-down" analysts, who look at broad economic forces, see just $63.78.

Assuming finacials, information technology, industrial, materials and energy contributes about 60-70% to S & P 500 and other defensive sectors like health care, consumer staples, etc contribute the rest. A conservative estimate of 50% down from 2008 non-defensive companies earning while defensive companies hold up their earning, S & P 500 earning will have to decline by 30-35%. In this case 2009 S & P 500 earning should be around $45 - $ 50. This has been the basis of many of perma bears to call for S & P for 500 - 600 ( PE 10 to 15 X). If we go back to 1974 level of pessimism, at 6 times PE, S & P worths only 270 - 300, I think I'm really scaring you now.

For those who are more optimistic, I think they are looking for recovery in 2H 2009, earning to rebound by 30-50%. Or some sectors will have to expand by that much from Obma stimulus plan. [Don't ask me how I derrive every $ 1 stimulus spending to translate into corporate profits. My tool is simply too primitive to do this at the moment]. In that case, S & P earning could be around $ 85, this will give them a basis of arriving S & P target at 850 - 1,275, which many will find it a more sensible number to believe.

A bit of historical pespective, prior to 1987 crash, the peak of DJIA was around 2,700 and bottomed out around 1,766. When the market improved by about 200 plus points or so to around 1,900++ in December 1987, the bearish camp kept calling for DJIA 1,000 but the market rallied a bit by bit climbing wall of worries until level of 2,700 level was taken out around September 1989. By the time Dow 1,000 dissapeared from investors minds, more people convinced the worst market crash in human civilization will have ZERO chance of returning and they started pouring in their money in the stock market. The usual familiar plot ended, the market peaked around 2,900 plus and crashed to 2,300++. History does not repeat itself, but it does ryhm. I find that this time, most of the old folks that lived through many cycles are a lot more calmer and optimistic than young guys. I expect Dow 6,000 or S & P 500 target of 500-600 to be around for a while until Dow 14,000 - 15,000 is taken out. I also expect people to argue super cycle bear market yet to be here.

Enough of history, back to 2009. The judgement day will be Q3 2009 - failure to show any recovery by at least 30%, equity market will be thrashed. Just as simple as that.

Fish gotta swim, birds gotta fly, bulls gotta run???

(WSJ-Jason Zweigh)Fish gotta swim, birds gotta fly and analysts and market strategists gotta try predicting what stocks will do every year. But you don't gotta act on those predictions -- at least not before you ask how likely they are to hit the bullseye.

In December, Barron's asked a dozen experts to forecast the level of the Standard & Poor's 500-stock index at the end of 2009. Not one called for the market to go down; they all predicted gains between 5% and 38%, with a median of 13%.

Given how wide off the mark their predictions usually land, you may already be skeptical of the forecasts of Wall Street's finest Pollyannas. But their inaccuracy doesn't make your own forecasts more likely to hit the target. You should be as skeptical of your predictions as of theirs.

Nearly all of us try forecasting the market as if each of the past returns of every year in history had been written on a separate slip of paper and tossed into a hat. Before we reach into the hat, we imagine which return we are most likely to pluck out. Because the long-term average annual gain is about 10%, we "anchor" on that number, then adjust it up or down a bit for our own bullishness or bearishness.

But the future isn't a hat full of little shredded pieces of the past. It is, instead, a whirlpool of uncertainty populated by what the trader and philosopher Nassim Nicholas Taleb calls "black swans" -- events that are hugely important, rare and unpredictable, and explicable only after the fact.

History shows that the vast majority of the time, the stock market does next to nothing. Then, when no one expects it, the market delivers a giant gain or loss -- and promptly lapses back into its usual stupor. Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900. I asked him to extend his research through the end of 2008. Prof. Estrada found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market's 10 worst days, you would have tripled the actual return of the Dow.

"Although we could make a bundle of money if we could accurately predict those good and bad days," says Prof. Estrada, "the sad truth is that we're very, very unlikely to do that." The moments that made all the difference were just 0.03% of history: 10 days out of 29,694.

We also over-extrapolate the recent past. After the five fat years from 2003 through 2007, when stocks shot up by an annual average of 12.8%, who expected 2008 to be a bloodbath? And now, with stocks down 37% last year and another 8% so far this year, the market feels like a runaway boulder crashing downhill through the woods. But the market's path is no more predictable than it was a couple of years ago; black swans, materializing out of thin air, can make stocks go up as well as down.

So is all prediction pointless? Not quite. In an important new study for the National Bureau of Economic Research, finance professors Miguel Ferreira and Pedro Santa-Clara of Universidade Nova in Lisbon, Portugal, have developed a sophisticated method to predict future results.

You can do a roll-your-own version. Take the dividend yield on stocks (3.4%), then add the annual rate of earnings growth over the past 20 years (3.4%). That's 6.8%, what John C. Bogle, founder of the Vanguard funds, calls the "investment return."

Next, factor in the "speculative return." The price/earnings ratio on the S&P 500 is around 15. If investors pay more than 15 times earnings for stocks down the road, the market will rise more than 6.8% a year; if they set lower P/Es, the overall return will be less.

Earnings are likely to keep falling, and investors are unlikely to set higher valuations anytime soon, so 6.8% is probably high. For 2009, Messrs. Ferreira and Santa-Clara forecast a 4.2% return. But over the longer term -- five years and beyond -- I think stocks could gain at least 7% a year. That would be worth sticking around for.

Along the way, the Dow might slump to 6000, or drop 10% or more in a day. But just as huge losses often come out of a clear blue sky, gains can arrive when the world seems darkest. If you forecast the market with your gut feelings alone, you may never hit the target.

Welcome to Ox year. Again, I find Jason Zweigh writing refreshing to keep us in perspective - have a long term view on things. Come to think of it, it is not that people have no patience or no long term view. I realize it is more than that, lack of faith in the future for sure is one of the culprits. I mean we could be wrapped around by fear blanket, the companies that we are invested will longer exist or simply bankrupt. To invest in equities or anything, we must be optimistic about future. Even the Great Depression recurrs, so what, our forefathers have overcome it, the world prospers for the last 50-60 years.

Jeremy Grantham of GMO gives me a real sense of historical perspective.

This is a good time to look at the Japanese crisis of 1989 to present since, along with the Great Depression, it is probably one of the two most relevant examples for today’s problems. The Japanese had an even bigger problem in write-downs of “wealth” than we have now. They had to write down perceived wealth by an amount equal to a
stunning three times GDP! Even in 1929, we had to write off amounts equal to only three quarters of a year’s GDP,as the stock markets then were less developed and housing was decidedly pre-McMansion. This time in the U.S., however, we must write down perceived wealth or capital by almost precisely one and a half times GDP, worse than the Depression but happily much less than Japan.

You see, Japanese had written down almost 4 times of the Great Depression yet they country still survives. Don't get me wrong, I am not under-estimated the problem, I am even leaving to a possibility of S & P can go down to 600, who knows what the rest of people will do. It is not about me, it is about "them" - the market is an aggregate of all players and they determine where they want to go and how far up or down, I simply have no control over them. I'm in Buffett's camp, I am terribly pessimistic in the short term but extremely optimistic about the long term future.

When I look at the DJIA chart, 1929, 1933, 1973, 1974, 1987, 2001 were just some blips of that upward trend. Unless you have no future income streams, the game is not over. Stay positive, don't lose sight on the final destination.

Happy Chinese New Year

............................... Have a safe and happy holiday.