Stock Markets Are In Bull Territories 70 - 80% of the Time.

 

It has been a fantastic rally from 23 March onwards. It was partly liquidity driven, partly led by MAGAF or Microsoft, Amazon, Apple, Google, Facebook, and also speculative, disruptive companies like Tesla, Square, Illumina. The stocks that triumphed were either highly disruptive to existing industries, e.g. Amazon killing small time groceries, Lemonade killing insurance companies, Tesla killing GM, or stay-at-home stocks that you will always use even at home (Google, Facebook, Microsoft).

 

In the east, Tencent, 700 HK, BABA 9988 hk, and Meituan 3690 HK were top winners. They are also versions of the MAGAF stocks.

 

These companies are growing at between 30 – 50% per year in revenue, so it is NO surprise and perhaps justified for them to have 30 – 60x PE. They are growth companies, with very little debt, high profit margins. Their economic moat is often VERY wide. Either via:

 

1. Network effect. If you leave FACEBOOK and join something else, where else are you going to get updates of your friends’ and loved ones’ lives?? If you leave Instagram, can you AFFORD to lose your 100,000 followers!!!>???? All your carefully crafted holiday photos, pictures of fine dining, enjoying an idyllic life. How else are you going to TWEET something controversial, like “MASKS off” for Donald Trump and have 20 million rednecks retweet what you tweeted!!
2. Cost of leaving. If you leave Microsoft, what are you going to use? Can you stop using excel, Microsoft calendar, Microsoft word? You can, but you’re just too lazy, aren’t you? And as long as they charge you $30 per month for the licence you’re just going to suffer the indignity of being held to ransom!? Lol
3. Technological superiority. How can a car like Tesla look SOOO so cool, yet save the earth. It is 10x safer to drive. A charge from empty to full takes 30 minutes and goes 350km. 0 to 100km in 3 seconds? You can put on your makeup, eat breakfast in the car while it drives you to work. Drives itself to charge, drives to get servicing. Goes to pick up GRAB passengers and earn you a few hundreds a day. The driverless navigation technology is almost unparalleled and 5 years ahead of the next car. 15 years ago, every laptop was using hard disk drives. Flash drives were few and far between because their memory was just 500MB. Today, every laptop uses flash. The day will come, within 5 years when the cost of driving an electric vehicle is cheaper and MUCH MUCH cooler than a petrol car. Then with battery technology far more advance, it will spell the end for OIL producing countries with undiversified economies. All the better for the environment.
4. Healthcare. The day will come where CRISPR technology corrects genetic defects, prevents cancer, reverses your aging. https://www.livescience.com/58790-crispr-explained.html

 

So we know that the stock market is indeed a casino, yet there’s logic behind why these tech companies flourish in pandemic times. They don’t need debt to grow! They are highly scalable. You will use them regardless of working from home or in office!

 

With the stock markets rallying so much, there should be a pause. I mentioned it will break a new high. It should go higher before falling 10 – 15% towards the 50 days moving average. But the central banks are here to help us. Yes, they will “DO WHATEVER IT TAKES” to boost the economy.

 

Call to action:

 

1. Take some profit now if you have.
2. Keep around 25% cash.
3. If you leverage, keep a 20 – 25% buffer.
4. Be prepared to buy on dips.
5. Look at ETFs like ARK Human Genome and ARK Innovation
6. Look at Polar Technology fund.
7. Look at UBS China A Opportunity now.
8. Buy AAA bonds like HDB, LTA
9. Buy TLT US Equity (20+ years US Treasurys)
10. Buy gold and silver, around 5% proportion of your portfolio.
11. Buy MAGAF and MTB (China version of MAGAF) on dips.
12. LionGLobal Short Duration and UOB SGD Fund are good.
13. Sell PUT options via Equity Linked Notes, Fixed Coupon Notes on MAGAF, MTB stocks, MMM (3M), Johnson & Johnson, gold & silver.

 

Lastly, if you are very worried about the BIG BAD BEAR market, just remind yourself, for the history of Dow Jones index, 70 – 80% of the time it has been in BULL territory. Only 20 – 30% of the time it is in bear territory. The odds are even higher since the last 12 years, when the FED and other central banks intervene with money printing. The odds are like 80 – 90% of the time in BULL territory. So really, there’s little point worrying about that 10 – 30% chance of the sky falling. It pays to be a little more positive! 😊 Short term we can’t really predict day-to-day movement of stocks. Yes it looks OVER-STRETCHED NOW, but longer term, it always goes up.

 

https://www.marketwatch.com/story/the-longest-bull-market-in-history-is-about-to-turn-11-can-it-outrun-the-coronavirus-2020-03-07

 

 

The next question a few of you asked me is: “why are all the old economy stocks floundering. The REITs, the developers, the value stocks in Singapore.”

 

The pandemic has made everything uncertain. Companies that are highly geared, e.g. developers, oil & gas, NOT REITS in Singapore because gearing is capped thank Goodness (REITs are ok to survive), manufacturing companies, may run out of money when demand drops. When you run out of money as listed companies, you either issue bonds or shares. If you have a strong sponsor (major shareholder), you will issue rights (e.g. Sembcorp Marine, Singapore Airlines). If your balance sheet can afford it, you will issue bonds. Either way, investors are scared of defaults, or dilution of shares.

 

I’ve asked many of you NOT to throw good money after bad businesses. I shan’t mention names but you know what they are. A floundering business in a very highly competitive industry, with over supply of planes everywhere and curbs on travel, how to cough up more money? Or an oil and gas company that relies on FPSO conversion (offshore oil & gas exploration when oil price is USD50 / bbl mind you), with the long term threat of Shale Gas and Elon Musks’ Tesla and Electric Vehicles taking over the world, will you still wanna plough money in a fossil fuel company? Once battery technology proves safe, able to store lots of energy, the world will swing to diversified sources like wind, solar, natural gas. It’s internal combustion engines that require good old petrol. In 10 years’ time, ships, planes, cars, trucks will either be driverless, and / or powered by hybrid of internal combustion or full electric.  So what’s the future like for Royal Dutch Shell, Total, offshore exploration companies like Semb Marine, Keppel’s O&M?

 

There will be a HUGE rotation. I repeat HUGE rotation from Tech stocks to old economy stocks, from MAGAF, MTB, to MMM, Boeing, CME Group, HKex, when a vaccine is found, or infection rates fall (herd immunity). The old economy stocks will recover eventually, not too far in the future. When a vaccine is found, the tech stocks will fall 10 – 20% but it will be a HUGE opportunity to buy them at cheaper levels. The old economy stocks will rocket up, boosted by certainty of survival and with the end in sight. Those with low gearing shall survive. Many of the REITs will make it. Yum, YUM China, McDonalds, Coca Cola, Dominos Pizza, Johnson & Johnson, Veeva… They will survive and flourish. The world is just fixated and afraid of share price dilution, rights issue, defaults now….

 

Today we saw Genting HK stop payments to creditors. Hin Leong went bankrupt (old news but nevertheless scary). Those who borrow too much shall perish. Cash is really king.

 

Lastly, there’s reason to be positive. Infection rates appear to have plateaued. Death rates stabilised. Let’s hope it continues and we won’t have another lock down during winter months. A combination of therapeutics and vaccines by end of 2020 or mid 2021 will save the world economy. There are reasons to be hopeful.