Investing in commodities? Who are you trying to fool Sunday Times?

I felt rather outraged by the article on Investment section in Sunday Times yesterday. Please be careful not to be persuaded by amatuer-ish writing on investments in the papers. To them its all about how many publications they have and how much money they are collecting. 

Referring to my previous article:
http://hiddeninvestor.blogspot.sg/2013/04/gold-in-not-investment.html

This time, I am going to take an example which i read on SeekingAlpha and adapt it to our Singapore style. lets see their comparison for Coca Cola vs. GOLD:

Lets say you have $15,000 to invest now and you have two choices and keep it invested over a period of 10 years. Lets assume Coca Cola continues its earnings and dividends growing at 9% annually. Annual dividends are still low, around 2.6%.For $15,000 now you can purchase 360 shares at $41.67

Scenario 1: Coca Cola

In 2013, he receives $403 in dividends
In 2014, he will receive $440 in dividends
In 2015, he will receive $482 in dividends

In 2016, he will receive $527 in dividends.

In 2017, he will receive $576 in dividends.

In 2018, he will receive $630 in dividends.

In 2019, he will receive $690 in dividends.

In 2020, he will receive $755 in dividends.

In 2021, he will receive $826 in dividends.

In 2022, he will receive $903 in dividends.

And in 2023, he will receive $987 in dividends.

By 2023, the investor has collected $7,219 in cash dividends. Even if Stock A trades at the same valuation in 2023 that it trades today, those shares will be worth $37,223. That same $15,000 worth of shares in 2013 is actually representing $1,676 in annual earnings that is generating $987 in dividends by 2023. In short, the investor would have turned $15,000 investment today into $44,442 in 2023. That is what an excellent productive business can do for you.

Scenario 2: GOLD

What if the investor believes what SundayTimes told him, that gold is the best investment to guard yourself against inflation. So the investor buys $15,000 worth of Gold like 10oz. credit suisse gold bar for $15,046 from a licensed seller. You bought the physical gold and kept it in your safe box for 10 years.

In 2013, the investor doesnt get any dividends, but pay rental for his safety deposit box.

In 2014, he still gets nothing

In 2015, nothingggg

In 2016, Walaueh! Gold dropped?!!?!

In 2017, C'mon leh, where's the money going?

In 2018, Shit, this safety deposit box is getting expensive

In 2019, Ahhh, better check gold price It may go higher

In 2020, Nope there's nothing

In 2021, Gold price is all time high again?! but for how long?

In 2022, Where are my dividends!??? I thought Gold is safe

In 2023, Why did i listen to SundayTimes? Haiya Sell sell...

By 2023, i predict the investor would be so anxious to sell his piece of gold. While the coca-cola investor keeps getting his dividend checks and keeps on rising. The gold investor receives nothing to accompany the passage of time. Hopefully Gold grew into some ultra-rare commodity. When he looks at his little bar of gold in 2023, he sees the exact same gold bar that went in there 10 years ago. Of course minus all the rental fees for the safety box. 

I like how the original author of the article expressed it: Gold is "non-productive asset" where there is no business growth, no profit, no dividends and no interest, only hope that someone is willing to pay more money for that chunk of metal that you paid in 2013. 

It is entirely speculation that Gold will continue to increase at the rate greater than inflation. I call that GAMBLING. After all, gold has no fundamentals; the only hope is that you sell during a time of particularly high inflation or extreme pessimism (which we have been seeing for the past 12 years). If a company like coca-cola keeps doing what it has been doing, investors will be receiving dividend increases of 8-10%. If we have inflation at 3-4%, thats good news for coca-cola investors, price of their soft drinks will also rise, earning them higher profits and passing it onto investors.

I dont want to sound like i am advocating for coca-cola here, you may wish to invest in other companies which have a great history of annual raises in dividends. For example, Kelloggs, Procter and Gamble, Pepsico, Mondelez, Kraft Foods, Colgate-Palmolive, Darlie. You get what i mean, those brands and household products you need single day till you die, those sort of companies.

Again i am not saying Gold is not a good place to park your money during bad times. Gold is great to trade on, just make sure your timing is fairly accurate. See chart below:

Impact of Quantitave Easing till 2014

If we want to stay ahead of market cycle, very important to keep up to date with latest news. I was just reading this morning that US Federal Reserve might slow the pace of debt purchases designed to boost economic growth before 4th quarter. It seems that FED won't start to reduce their $85 Billion monthly bond buying until the last 3 months of 2013, they might end it in mid 2014 or later. 

The "wise" Fed chairman Ben Bernanke supposedly an expert in Great Depression, has pumped more than $2.5 trillion into the economy for two main reasons: Employment & Price Stability. Maybe i am a critic, i do not think pumping money has created more jobs. In fact, it is delaying the inevitable recession, creating asset price bubbles along the way. What is the benefit of this stimulus anyway? The US has a sluggish economy, unemployment in March was @ 7.6%. 

I am convinced this easing policy creates serious risks to the financial system over the long term, it is kind of putting me off because my previous estimation of when a recession is coming might be delayed further. However i do understand (to certain extent) why Bernanke has taken such actions, the US economy would have been in much worse shape if the Fed did not interfere (thats a fact), but many things have been standing in the way, limiting the impact of the monetary easing going forward.

What are the implications? What to look for?
Whether we like it or not, Singapore and the rest of the world is tied to what happens in the US. The economy is very interest-rate sensitive, so if the Fed cuts support too early, the market will over-react and we would see a spike in yields and we're back to slower growth. Majority of Fed officials anticipate raising interest rate until after 2015 as unemployment dives below 6.5% (thats is their prediction).

Number to look at: Interest rate will rise as soon as unemployment is below 6.5%, inflation is 2.5% average or less. General consensus is this will only happen mid 2014 to early 2015...!

What does it mean for our investment strategy? 
Those of us owning a home: Stick to your Sibor-pegged home loan till interest rates start going up, then refinance to fixed-rate to lock in a lower interest rate.
Those holding onto securities: prepare for short term pull-back, followed by another massive bull-run till Feds pull out of easing policy.  

Disclaimer: Please seek proper advice as to your investment strategy, perform your own due dilligence before investing. The above mentioned in article are just my take on the economy, others may differ in their opinion.
 

Gold in NOT an Investment

2 years ago, I was not persuaded by those analyst who kept saying GOLD is an inflation hedge hence we should invest in Gold. Many people i know did "invest" in Gold and lost quite a bit in the recent pullback. I cannot stress this enough, Gold and other commodities are not investments, you can however take advantage of the situation and trade it. An investment should give you capital gains and/or dividends.

I treat all commodities as a tool for trading and so should you. Do not be under the impression that you can hold onto Gold forever, if you do, be prepared to face huge price swings in the future. This does not mean i believe Gold will collapse, it might keep on rising as some hardcore fanatics predict Gold might even hit $5,000 or $10,000. Please be reminded that along the way, Gold price might go below $1000. 

In earlier posts, i have talked about Market Cycle. We are in the middle of another cycle, the commodities cycle where inflation is higher than usual, commodity prices keep rising. In fact Jim Rogers is correct in saying that there will be a shortage in commodities in the near future. If and unless we stop innovating new methods of food production, mineral mining, ore extraction and purification, commodities will rise non-stop. History has taught us that is not the case, look at the chart below:

We have been riding one of the steepest commodities BOOM in history. From the chart is seems we are nearing the end, i.e if technicals are followed (trades within the widening aplitude channel). Its not far away now, 2014-2015 is going to be recorded in history to be the worst fall in commodities ever.(just watch and see) 

Again my opinion here is that commodities should be traded, it shoud not be treated the same as a business which you can invest in, with the intention of "buy and hold".

Disclaimer: I am not here to discourage you from investing in commodities neither am i encouraging you to do it. Please be cautious about investing your hard earned money.
 

Coca-Cola Growth

Recently invested in Coca-Cola (KO) and I am happy with how it is growing recently. KO is the world's largest non-alcoholic beverage company, with the widest moats in the consumer beverage industry holding diversified brands and most importantly an EXTENSIVE distribution network. KO was trading at 52-week highs of $42.70 yesterday after reporting better than expected Q1, 2013 profits on 16th April. A net income of $1.75 Billion or $0.39/share. 

Worldwide sales volume grew at 4%, led by Coca-Cola brand (3%), Fanta (6%), Sprite (5%). Eurasia and Africa saw almost 15% growth while Latin America grew a solid 4%. I am convinced that we will see the most growth in these regions.

The management continues to set the five core strategic priorities as follows:

1. To grow sustainably and provide meaningful solutions that enhance the health and well-being of the communities they proudly serve
2. To win with Coca-Cola while actively promoting the brand and the category
3. To keep winning and executing with excellence at the point-of-sale
4. To keep maximizing the value of our global beverage portfolio
5. To encourage and inspire their system and associates to deliver on their mission

 I continue to like Coca-cola for its aggressive marketing and brand recognition, although i must say that it has been a while since i personally bought their products (switched to healthier options like green tea). Highly doubt they will stay away from non-carbonated/non-sugary drinks in the near future, perhaps they should acquire F&N. 

Disclaimer: I hold long position on Coca-cola (KO) and have no plans to execute any order within the next 72hrs. Would advise anyone to perform their own due diligence before investing at current prices, be patient for a decent pull-back before making a long-term investment decision.  

Current Investment Strategy

Referring to my previous post, the market is due for short-term correction worldwide. I feel that the bull market is not over yet, this is only a temporary correction. I am going to liquidate 50% of my holdings and prepare to load up on stocks with higher growth potential. I say 50% (in my case) because some of my holdings have actually surpassed their target price, being greedy, I did not sell them too early. For example Cache Logistics Industrial REIT, this one is way over my valuation, it seems trading houses keep upgrading it to BUY and raising their TP. I can understand why, they also cannot determine how much higher this stock might go. If you are happy with a decent 30% profit, lock in your profits before it starts to fall. 

The other 50% of my holdings are value stocks which i will accumulate for as long as i can.(e.g. Singtel, Starhub, HPH Trust, Ascott REIT). I also hold Hyflux for the long run, not because i love it too much to let go but because i got in at a higher buy price and have been dollar-cost-averaging it down to $1.50 since 2011. (One of my biggest error in judgement, but we learn from our mistakes don't we?) Remember Warren's rule number 1: Never lose Money. 

Disclaimer: I just wanted to put down my thoughts in this post, It should NOT be taken as a basis for making any specific investment decisions.

Worrying Market Update 16 April

It seems we are heading into a short-term bear market around the world. Last night S&P 500 had its biggest drop in 2013 of 2.3% to 1552. Energy and raw-material companies took the biggest hit. It painful to hold onto energy stocks (like ExxonMobil, Chevron, Total etc.) but hang in there.

China also reported a slowdown in its economic growth earlier yesterday, GDP growth fell short of analyst's estimate, 7.7% vs 8%. I personally do not feel it is something to worry about because Chinese stocks are still undervalued and slow growth is better than no growth at all.

In Europe, ECB president is now saying that monetary policy is insufficient to resolve the root causes of the debt crisis and will require government reforms. (Duh!) If you think the economy can be artificially stimulated to grow without each government actively controlling their spending, you are mistaken.

Anyway so what happens now? Is it time to take profit? I am not so worried about the 'emotional' market situation but more so because i might not be able to hit my target prices on some counters and get out in time. Ultimately market direction is determined by emotional traders. Remember Warren's rule number 1: Never Lose Money. If you are unable to get out of some trades this round, its still ok, you'll get another chance to buy at cheaper price, build up, and sell in the near future.

*Last note on Gold/Silver or the ETF GLD/SLV, looks like Gold and Silver prices are breaking down. GLD has broken the support @ $150 last friday and last night traded even lower near $130 region. This is a critical support level for GLD, if it closes below $130 today, there is high possibility we will see further correction to mid-2010 levels in the region of $120. Similarly for SLV, made an error picking it up @ $29. It is now trading at $22.09, it this continues, we will see it reaching pre-2011 levels around the region of $15-$20. Its good for those vested in SLV, you can pick up equal portions at almost 1/2 price.

Coca Cola April Update - Changing Trends

According to Coca-cola's vision 2020, they will double their servings to 3 billion per day which is huge! This is only for its gold standard coca-cola brand and 2020 is not far away my friends. However they also own other revenue generating brands. Coca-cola is undergoing a transformation in this decade, they realise that a bigger portion of their revenue will derive from healthier drinks. The hard truth is people are increasingly health conscious, and the common Asian trend leans towards non-carbonated "healthier" sugar free drinks. Even in America, soft drink business has been declining. 

Their earnings grew by 15% last year with revenue growth slightly below expectations at $11.04 Billion. Thats why estimates for 2013 has been moved lower too (same case for many companies). Recently, it seems more people are switching to bottled water, teas and other non-alcoholic beverages recently. Throughout the 1990s soft drinks grew continuously but sales have been declining since 2005. Sales have dropped 1.2% for 3 years in a row (See Stats here) While soft drinks sales have been declining, healthy alternatives have been growing steadily. Coca-cola owns DASANI water, which saw an increase by 11% in 2012. Even in Singapore, i can safely say that quite alot of people prefer to drink water, ready to drink teas (ice Lemon/Green tea), coffee or sports drinks. Coke recognizes the potential for healthier beverages, thats why they are working on marketing several of their brands such as 'simply orange', 'Honest Tea', and 'Powerade'. In the midst of epidemic obesity due to sugary drinks, the global beverage giant is taking steps to increase its line of non-sugary drinks. (not because its the right thing to do but because it makes more economic sense, catering for public's change in preference)

 

Technically Speaking

The stock has done well since its split last year. It is presently trading at 40.65 - a return of about 14 5% if you were able to pick it up at $35.50 back in mid-Nov. Since its last big dip in mid March, the stock has been using the middle Bollinger bands as support and this shows how strong the move has been. Recently, RSI and MACD indicators have peaked signalling overbought status. Usually these are signs that the stock needs to consolidate before moving up again or we might see some kind of reversal pattern. What happens now may be influenced by market sentiments and not the company by itself. I have spoken about market cycles in previous posts, consumer non-cyclicals are better to hold during late bull to early bear markets. Analysts do predict that consumer spending is slowing down and that could affect the sale of beverages for Coke. However i have firm belief that Coke will continue to stay innovative, expanding their brands in emerging markets around the globe. If the trend continues, soft drinks will slowly decline in market share and unless Coke spends more money on offering non-sugary drinks, there will be other competitors to take its place, which i am sure they know. I expect the company to continue its focus on offering alternatives to soft drink market and we should see its revenue pick up over the years.

Disclaimer: I hold long position on Coca-cola (KO) and have no plans to execute any order within the next 72hrs. Would advise anyone to perform their own due diligence before investing.

Short-Term Uncertainty

I believe we are now entering uncertain territory. Last night, S&P broke to higher levels by taking out its prior all-time intraday high. Same goes for NASDAQ Composite and S&P Financial Sector which made new bull market highs. (these were the two areas underperforming recently). All this means that previous highs are theoretically now act as support. (Resistance turn support). 

From here onwards, its uncertain how long the bull market will last. When will major counters start getting haircuts. I will DEFINITELY anticipate a reversal soon enough, so it is time to "Sell In May, and Go Away".

Review of Vietnam

I just came back from a trip to Vietnam, Hanoi' such an amazing place. A thriving city in the midst of chaos. The food was amazing, especially 'Pho Bo' which is probably their national dish because you can find it literally everywhere. It will cost roughly 35,000 VND (Vietnamese Dong) for a bowl in the streets. 

As i was chatting with my vietnamese friend, she informed me that current interest rates in Vietnam is around 9% and the exchange rate has remained costant for the past few years. I found it quite fascinating and decided to dig a little deeper on Vietnamese monetary devaluation. Find out if its safe to invest your money in Vietnam.
Vietnam actually devalued their currency to about 21,000 VND to the USD and 16,800 VND to the SGD. By the end of 2008, the exchange rate was around 17,000 to USD- thats almost 24% rise in the last 2 years. However the demand for USD is greater in the 'free markets', you could pay over 22,000 VND sell rate for USD. The rate makes it nearly 30% depreciation. Therefore its not a good idea to exchange VND to foreign currencies in Vietnam. The interest rates on Dong deposits are only about 15%, so it would seem safer to keep USD/SGD under your pillow than Dongs in the bank.

While most Asian countries are worried about excessive capital inflows and their currencies getting too strong to support exports, Vietnam is in an unenviable position of having almost run out of foreign exchange reserves. Inflation in 2011 was officially 1% per month and probably like 15-20% in 2010. But wait, isnt Vietnam a nation growing rapidly with a bright future?? Why all the disappointing numbers?

The ruling party in Vietnam has a policy of state enterprises having a leading role in development, which means they have monopoly power, cheap land, credits and government contracts. Nearly half of all enterprise capital increases since 2004 has gone to state enterprises but they only accounted for quarter of output growth. There is such a waste of capital flowing into dubious infrastructure projects: Unfinished bridges, vertically challenged buildings etc. Uncle Ho (Ho Chi Minh) would be most disappointed.

Recently, cost of apartments in city centre, Hanoi is around 40Million VND per sqm, which is pretty expensive if you ask me, even more expensive than some places in Singapore. Land is the preferred investment vehicle for 'black money' too, as it is not taxed after it is purchased and not centrally listed. It seems safer for Vietnamese people to buy land then keep their hard earned money in bank or a stock market that is extremely volatile and does not necessarily follow fundamentals. If you are interested in Vietnamese stocks, do look at Vinamilk (VNM), PetroLimex (largest petroleum products importer) or the biggest listed company by market value: Petro-Vietnam Gas Joint Stock Co.

Staying in Hanoi a couple of days gave me the impression that Vietnam has become a middle-income nation, it is getting less super-cheap. Eventhough my fellow travellers kept converting to SGD, making everything sound cheap in comparison to Singapore, i knew we were paying a premium (tourist) price on everything. But seriosly, inflation is very real in Vietnam, with a credit at 130% of GDP, the game is nearly up. Either credit grows only a little faster than real GDP or it creates inflation.

I have mixed feelings when it comes to investing in Vietnam, it is high risk, high reward situation. However i am positive about its stock exchanges, looking forward into 2013, the Vietnamese index (VNINDEX), Hanoi Exchange (HNX) will trade much higher. Either invest in the general index or in a reputable ETF that tracks your favourite stocks. 

Disclaimer: I have plans to initiate several positions within the next 72 hrs but I highly recommend you do your own research to determine your own suitable entry and exit positions for ETFs or individual stocks.

How much higher can S-REITs Go?

Recently I have been paying attention to Singapore REITs because i am invested in some of them for over a year. Having also taken profit too early on Suntec REIT, i wonder if I should have adjusted my exit strategy. 

Fellow blogger KFC1973-Stock wrote an article today: "REIT Sector Still outperform the benchmark"
 
If you read the article, S-REITs have beaten the broader market YTD and i believe it has been outperforming the benchmark for a couple of years now. This makes me worried, because i look at valuations, for me it is starting to get overvalued. One has to remember that during the 2008 crash, almost all REITs got slashed pretty badly (almost 60-80% for some). So definitely REITs are vulnerable to market crashes...no doubt!  

I suppose when looking at REITS, we value it based on dividend returns above price. Isnt that why people are still buying overvalued REITS because it still pays out more than 5% dividends?
REITs start to get unattractive as their dividend rate drops and this is inversely proportional to its market price. I would still HOLD onto several REITs because of their potential but I'll be out as soon as dividend rate drops below 4%. One more thing, very important... As soon as interest rates go up, its game over! Cost of borrowing goes up, dividend yields will drop. REITs will be in trouble.

Of course i regret selling First REIT and Suntec REIT too early. They are trading much higher then my profit taking target. Sigh*
In my portfolio, I consider Hospitality REITs one of the strongest in Singapore and i would hold on to them. Industrial REITs would be the first to go as soon as their dividend rate drops! Remember they were the worst affected during a market crash. Look at graph below from FSM; Pick up REITs when price is low, dividends are high. In 2009 average dividend yield from S REITs was super high!

Disclaimer: I have long positions in Far East Hospitality, Ascott Residence Trust, Cache Logistics, Sabana Shari'ah REIT. Please do your own due diligence before investing.
 

How much is ExxonMobil worth?

Came across this article on Seeking Alpha: How much is Exxon worth?

According to the author's stock analysis, ExxonMobil is now trading close to the lower boundary of its fair value range. His 5-year discounted-earnings-plus-book-value model estimates a fair value for Exxon Mobil between $86.53 to $124.18 per share. Current price of XOM is around $90. This means there is an upside potential of almost 37% to reach its fair value maximum.

Ok if you remember in my previous post on ExxonMobil, i estimated current value of XOM to be around $94. (which is based on technical analysis) I however would agree with the author that the true potential for XOM is $125 but only if the market sentiments remain bullish all year long. If we base it on long-term earnings growth expectations for an energy supplier such as Exxon, the stock is definitely undervalued. We need to have a proper timeframe for this new target to be reached. Remember, ExxonMobil benefits from its exposure to natural gas, even if the prices remain low in the near future.

Lets face the facts; the global economy is still recovering, energy demand will eventually rise, energy sector stocks should grow well over the next 2 years. But wait, we have had uneven, semi-exciting growth in the past 5 years since 2008, ALREADY. Some companies are still have low P/E values. We are nowhere near market tops. How long do you think the market will keep rising?  Thanks to the FED and BOJ, their Quantitative Easing efforts will probably prolong the market rise for a couple more years. Its very hard to say exactly how much higher XOM will keep rising, but based on fundamentals alone, XOM looks attractive even at this price. Look at the chart below, technically XOM is testing current resistance levels of $90.58.

Alot of IFs: If it breaks through 90.58 level, next stop is definitely $94, which also happens to be my target for profit taking. If however, its not able to break through to next level within by end of April, i will not be surprised to see it drop to below $90 and tade between the parallel channel down throughout May-August.   

*Disclaimer: I have a small position in ExxonMobil (XOM) and right now I am adopting a “hold and see” attitude. However I have no plans to initiate any positions within the next 72 hrs and highly recommend you do your own research to determine your own suitable entry and exit positions.