Buy buy buy!

USA good job data, Greek debt will reach agreement, short term strong buy on equities.

US and European Total Writedowns - 2

BANK             2007     2008     2009      TOTAL

Citigroup        29.1     63.4     30.7     $123.2
Wachovia Corp     4.0     73.4               $77.4
Bank of America  12.1     29.2     35.5      $76.8 HSBC             19.3     30.3     26.4      $76.0
Lloyds            6.8     28.9     36.1      $71.8
Merrill Lynch    25.1     38.6               $63.7
UBS                       50.6      1.8      $52.4
RBS               7.0     23.5     21.3      $51.8
Fannie Mae        4.7     26.9     15.4      $47.0
JPMorgan Chase    4.5     10.2     29.5      $44.2
Freddie Mac       5.2     24.4     12.8      $42.4
Washington Mutual 5.1     36.7               $41.8
Barclays          7.0     16.5     12.7      $36.2
Wells Fargo       3.5      8.7     18.2      $30.4
Lehman Brothers  12.5     14.0               $26.5
Santander         4.8      8.3     13.2      $26.3
Morgan Stanley   10.3     10.1      2.4      $22.8
Commerzbank       3.9     13.3      4.5      $22.3
BNP Paribas       2.4      8.0     11.4      $21.8
Deutsche Bank     4.0     11.2      4.9      $20.1
UniCredit         3.5      5.1     11.3      $19.9
IKB                                          $14.7
Credit Suisse     3.5     11.9      0.5      $14.6
BBVA              2.7      4.2      7.7      $14.6
National City                                $14.0
C.Agricole        2.7      4.4      6.3      $13.4
Societe Gen       1.3      3.7      7.9      $12.9
Intesa Sanpaolo   1.6      4.5      4.9      $11.0
ING                        7.1      2.4       $9.5
Bayern LB                  1.1      8.0       $9.1
Goldman Sachs     1.7      4.9      1.9       $8.5
Natixis           2.0      2.5      2.0       $6.5
Canadian Imp                                  $6.5
Stan Chartered    0.8      1.8      2.0       $4.6
Erste Bank        0.8      2.5      1.3       $4.6
Bear Stearns               3.0      0.6       $3.6
Fortis                                        $3.1
WestLB                                        $3.0
Rabobank                  0.8       1.7       $2.5
 ===================================================

Total                                      $1,151.5

 (Sources: Reuters/annual reports/company filings)

Buy Financials on this Dip!

Most, if not all economy indicators are pointing to a recovery. Even a shocking event like Dubai World defaulting on their loans, is not strong enough to jolt the market from their uptrend. This proves the strength of the market. The lingering unemployment issue in the US is also seen to be stabilizing and employment rate will be ticking up gradually.

Most US banks have returned their TARP loans, except for a minor glitch recently by Citibank, that pull the financial stocks down yesterday due to the cold response to its new stocks, but this is Citibank, the worst hit bank by the financial crisis, and a bank that is still majority held by the US government, and with the fact that the government is looking to sell all their current holdings, the market will not be big enough to absorb all of this, and Citibank stock price will remain under pressure for a long time to come.

I do not see anything wrong with the other US banks, and with the recovery, financials will be the first to ride the bull. Include some financials into your portfolio, and I believe this few weeks will be a good time to do so.

Buy on dips!

The market seems to be running out of steam, and with a mixture of good and bad signals, traders seem to have chosen to take some profits off the table.

US markets lost 2-4% last night, and Asian markets are currently on the downtrend. As reasoned in my previous article, I believe there are more downside, however there are several stocks which have reached reasonable prices, and you may want to nibble a little.

One particular stock that I like is Toyota Motor (TSE). I have especially waited for its Sep sales results to be announced (and I expected it to be poor, or at least a drop from Aug), after the US cash for clunkers program in Aug. It has dropped from around 4100 to 3380 within 2 months, and historical prices have been an average of 5000-8000 plus. Its tangible book value is around 3208, which means it is pretty near its book value. March lows is around 2500.

Though Toyota is bleeding now, but one thing to note is Toyota is the number 1 automobile company in terms of global sales, it has the highest sales in US (exceeded GM), and it owns the most popular electric hybrid car, Prius.

Automobile industry is subjected to cycles, and though I do not expect Toyota to bounce back very soon, it will be back eventually. Being also a dividend stock (around 2-4%), my view is this is a stock to hold for long-term, for both dividend and capital gains.

Thus I have issued a buy call for Toyota Motor, at a buy price of 3380 yen. Good luck!

Where is the market going from here?

The market has risen more than 50% from its March low, and recent market indicators seem to imply improving economy, but with some mixed signals. So is it a good time to go into the markets, for those who have not taken the courage to do so earlier and have missed the cash boat?

Let us take a look at what has happen since last year.

The main cause of this crisis is mortgage default, mainly in the US, and with this, causes many related subprime products to collapse. As a result, banks could not collect back their mortgage loans, and are stuck with lots of foreclosed empty houses. Losses on subprime products also accelerated the depletion of their cash. People starts withdrawing their investment with the banks, and the collapse of Lehman results in more default loans to most major banks.

While bank’s loan are insured, their insurers, like AIG, collapse under the influx of loan defaults. As a result, banks which can usually do loan from other banks, could not do so anymore as banks tighten their credit to ensure their liquidity to cover their losses.

Thus government has to intervene to do “free” loan to these banks, so that they can tide over the cash drain. And fortunately, this has indeed help to stabilize the banks, and prevent more from falling on their knees.

Market falls steeply, and the main fear is more banks will collapse, however what many people has forgotten is, this has pull down the entire market – consumer spending has declined steeply, job are lost, companies in other industry have collapsed, including retailers, and thus this has result in a different kind of loan defaults, like credit card and corporate loans.

Stocks start to rise from its March low, when it becomes clearer that the banks will no longer collapse, under the government support, and it starts to increase further when 2nd quarter results of most companies beat analysts’ expectations. Analyst Expectations? who are these analysts? Are they fortune tellers? Yes they are, and they are normal human beings like everyone of us, and the key thing is, they have the same objective as everyone of us, they want to make money out of the stock market, as their performance is not based on how accurate you write the report, but how much returns you have brought back for the company. Take a deeper look into the actual results and balance sheet of these companies and do a year-on-year comparison, you will see how badly hit these companies are. In normal circumstances, the stocks of these companies will be sold off steeply, instead of rising just because they beat expectations.

One thing to remember is, most government has pumped money into stimulate the economy, somewhere around the 1st quarter, and the most straightforward way to do this, like China, is to increase storage of commodities, make more loans to more companies. Companies also start to replenish their inventory after stopping for 3-6 months.

Who is going to buy the products made by these companies? Who is going to buy the houses built by the developers? One answer: End consumer, and one thing that many people has forgotten is US consumer spending accounts for two-third of its GDP, and US will still be the leading economy at least for the next 20 years.What do the banks do with those foreclosed houses that they are holding on?

Let us take a look at the latest indicators: US jobless rate at 9.7% – a 26 year high, and an increase from 9.4% from the last month, and people cheers that the number of job losses are less than expected. Consumer savings are increasing, and latest consumer confidence has dropped as well. These are dark figures in terms of consumer spending.

One can only fix an issue when the source is fixed. The source of the entire crisis is housing loans. What is happening now is the banks are trying their best to work with people to prevent more foreclosure and help them to continue with their loans, to the extent when interest rates are lowered or loan periods are extended. They are doing this as it makes no sense for them to force closure, as what are they going to do with the stocks of foreclosed empty houses?

Let’s look at the housing data. One thing to cheer though, is that housing indicators are improving in the US, but a dark spot is that the percentage of mortgage defaults are still increasing. This is another indicator of poor consumer spending power.

The economy is stabilizing, and is not as bad as before, and is definitely deteriorating at a slower pace – note that is not growing. My point is, though unemployment rate is a lagging indicator, but this rate at a 26 year high is no joke, and without consumer sucking up all those stock-up inventory, the economy will not move and will not grow.

The market warrants an increase from its March lows, but definitely not an increase of 50-80%. Few good indicators of market bubble are the volatility of the stock markets recently, especially China, the pulling back of loans in China as advised by the government to avoid bubble, and the high volume trading of cheap and poor quality stocks – in the US: Citibank, AIG, Freddie, Fannie and BOA, in Singapore: penny stocks which has poor historical results in the top 10 active list and this has been happening for some time. Another indicator is the never-seen in tandem rise of bonds, gold and equity, one of this has to break off its relationship, and my take is equity.

The 3rd quarter results are especially important on determining the market directions from here, but meanwhile, i do not see anything boosting a further increase from here. My take is a fall of at least 10-15% from here, especially during the Sep/Oct period.

As a long term investor, do buy on this dip, as my feel is this is going to be the last few dips, and the market is going to rise slowly from here. My last note: I am also a fortune teller, like all those analysts. Thus you may not want to take my word too seriously and do make this a leisure read.

US and European Banks Writedowns

BANK 2007 2008 2009 YTD TOTAL Citigroup 29.1 63.4 11.9 $104.4 Wachovia Corp* 4.0 73.4 $77.4 Merrill Lynch* 25.1 38.6 $63.7 HSBC 19.3 30.3 4.8 $54.4 UBS 50.6 3.6 $54.2 Bank of America 12.1 29.2 6.9 $48.2 Washington Mutual* 5.1 36.7 $41.8 Fannie Mae 4.7 26.9 7.2 $38.8 RBS 7.0 23.5 8.0 $38.5 Freddie Mac 5.2 24.4 7.1 $36.7 Lloyd 6.8 28.9 $35.7 Barclays 7.0 16.5 7.2 $30.7 Lehman Brothers* 12.5 14.0 $26.5 Morgan Stanley 10.3 10.1 0.8 $21.2 Commerzbank 3.9 13.3 2.8 $20.0 JPMorgan Chase 4.5 10.2 4.4 $19.1 Deutsche Bank 4.0 11.2 2.8 $18.0 Credit Suisse 3.5 11.9 1.5 $16.9 Santander 4.8 8.3 3.1 $16.2 IKB $14.7 National City* $14.0 BNP Paribas 2.4 8.0 2.5 $12.9 Wells Fargo 3.5 8.7 0.5 $12.7 Unicredit 3.5 5.1 2.4 $11.0 ING 7.1 2.4 $9.5 Bayern LB 1.1 8.0 $9.1 C.Agricole 2.7 4.4 1.5 $8.6 BBVA 2.7 4.2 1.3 $8.1 Intesa Sanpaulo 1.6 4.5 1.0 $7.1 Societe Gen 1.3 3.7 1.9 $6.9 Goldman Sachs 1.7 4.9 $6.6 Canadian Imp Bk $6.5 Natixis 2.0 2.5 1.3 $5.8 Erste Bank 0.8 2.5 0.7 $4.0 Bear Stearns* 3.0 0.6 $3.6 Fortis $3.1 WestLB $3.0 Standard Chart 0.8 1.8 $2.6 Rabobank 0.8 1.7 $2.5

Time to accumulate some stocks!

Stimulus packages announcement seems never ending, from Barack Obama's recent $789 billion stimulus package, to the European nations and Asian Nations, every country is announcing stimulus packages to stop the economy from slipping further into recession.

There are 2 things that I would like to bring up here:

1. Before there are any signs of the economy recovering, the economy will already been in the recovery process for around 6 months. Thus there will be a point where more stimulus packages are pumped into the economy than needed.
2. The world is never fair, there are bound to be some industries that will benefit from these stimulus packages more than others.

A few industries that I would like to highlight here are:

1. The "new oil" = Fresh Water; The human race can survive without crude oil, but not without water. We can’t live more than a week without it. The main problem with oil is finding more of it. With water, it’s the distribution system that’s the issue, as it primarily flows through pipes. In developed countries, there is always a need to repair and maintain the existing pipes, in developing and undeveloped countries, there is a strong need to build new pipes and supply of clean and fresh water is inadequate. In China alone, roughly 300 million of its 1.3 billion people don’t have access to clean drinking water out of the tap. While the recession has consumers hunkering down - and cutting back their purchases of computers, cell phones, toys and other discretionary items - it hasn’t decreased their demand for clean, fresh water. And the biggest company in the world that is able to provide the infrastructure is Veolia Enviroment (US:VE).

   It provides bumper-to-bumper environmental management services for both water and wastewater. Whether it’s supplying clean water, recycling wastewater, or developing waste conservation systems, Veolia has a solution. In China, it’s operating freshwater plants, wastewater decontamination and recycling plants and sewerage treatment facilities.

   And now you can add some shares to your portfolio at more than a 75% discount to what they were trading a year ago. Veolia currently trades with a P/E of 8.8 and sports an 8.1% dividend yield.

2. Power - Similar to Water, there can only be an increasing hunger for power in this world. The largest producer of power generators in the world - General Electric is bound to benefit from those stimulus packages. General Electric, one of the most diverse corporation in this world, will be affected by the recession, but will not be forced to kneel down in front of the recession. The only affected division is GE Capital, which I believe is not as serious as Citibank, and they have already raised the needed capital earlier. The stock price is the lowest since 1995, and with a dividend yield of 13%, it is time to accumulate this stock. Do bear in mind that there is a risk of their AAA rating being cut by Moody, and there is a risk of them cutting their dividend, though they insisted that they will not.

Thus I have issued a buy call for GE and Veolia.

In addition, though prosperity may not be just around the corner, but statistical evidence is mounting to suggest that the worst of this recession may soon be past. Some evidences:

The Conference Board's index of leading economic indicators has risen for two months in a row.

Producer prices have increased for two straight months.

Consumer prices rose in January -- the first monthly gain in six months.

The Baltic Dry Index, which measures the cost of shipping key raw materials like copper, steel and iron, has more than doubled from its recent lows.

The ISM index of manufacturing went up last month.

The ISM index of services rose last month for the second month in a row.

The money supply is soaring, a sign that there's plenty of liquidity in the economy.

The 3-month London interbank offered rate, a measure of banks' willingness to lend to each other, has dropped to 1.2% from close to 5% a number of weeks ago.

All this said, the economy is still a long way from a pink-cheeked state of health. But remember, you've got to crawl before you can walk. And it looks like the economy is about to do just that.

Review of Celestial Nutrifoods

With the demise of a popular growth China stock -FerroChina, think it is time that we take a good look at some other good China stock.

I have decided on Celestial, as it is a stock that I personally own, its valuation extremely cheap at current price, and it involves convertible bonds which is a popular method to raise cash by listed companies recently, but which also causes their prices to tumble after.

Let's take a good look at the convertible bonds of Celestial. It works this way:

1. Issued 12 June 2006 and up for redemption in 5 years on 12 June 2011.
2. A total of S$235,000,000 loaned.
3. Bond-holders can either convert the bonds to shares at the conversion price of $2.47, or redeem full on the maturity date (12 June 2011) at 129.263% of principal amount, or they have an option to redeem full on 12 June 2009 at 116.65%. Both provide same yield of 5.2%
4. The bonds do not bear any interest during the 5 years.
5. If fully converted, it will result in 91,439,689 additional shares, which is about 15.3% of the total current shares.

From the above, it clearly shows that it is in Celestial's best interest that all bond-holders will convert their bonds to shares, so that they will not have to cough up a large sum of money to repay the bond-holders. With Celestial currently trading at a price of around $0.30, I doubt that will happen, as investors will only convert when trading price is higher than their conversion price.

With current weak market sentiment, and where most bond-holders are institutional investors, in which most will need money in view of credit crunch, I have great reason to believe that most bond-holders will redeem the bonds on 12 June 2009, which means Celestial has 8 months to cough up a sum of S$274 million or RMB 1260.4 million

Let us take a look at Celestial cash flow. As of 2nd quarter 2008, it has about RMB 1651.1 million of cash, of which RMB 603 million has been invested in a new facility in Aug 2008, and left with RMB 1048 million. Based on FY 07 balance sheet, its current liabilities is around RMB 503 million, but that should be well covered by its trade receivables (assuming there is no default) of around 450 million.

Celestial net cash provided by operating activities is ard 450 million based on FY07. Adding together its trade receivables, operating cash and cash will yield RMB 1948 million. Its debt due by June 09 will be RMB 1763.4, inclusive of the payback to bond-holders. With this, I have reason to believe that Celestial has the ability to service its debt even if all the bond-holders choose to redeem on Jun 09.

What if all the bond-holders do a conversion to shares and results in dilution? The converted shares are about 15% of total shares. Celestial Historical PE is 2.2, its NAV per share is around $0.59, and price to NAV is only 0.478. Its price to revenue is 0.513 and current ratio is healthy at 4.325. Thus it can be seen that though it is to current shareholders' disadvantage if the bonds are fully converted, the fear has been overplayed as with the dilution, PE is still below 5 and price is still below NAV.

Thus I believe that there is no reason for Celestial to drop to its current low price.

Actually my only fear is not on the repayment of bonds, but what if melamine is found in Celestial's products as well? This will be disastrous. Let's wait for the tainted milk saga to settle down first....

Fall of US Financial System

First the 5th largest investment bank, Bear Sterns falls, with a bailout by JP Morgan, supported by Fed $29 billion. Then Fannie and Freddie, bailed out by Fed in full, then Lehman, the world 4th largest investment bank, whose bleak future is looking at bankruptcy, as Fed has decided that they cannot afford to continue the bailout and disrupt the self-correcting market and with its intent to tell the market that "you have to solve your own problem!".

Then came Merill Lynch, the 3rd largest investment bank, who knows that they cannot wait for a public fund, and already in talks with BOA for a buyout before they follow the trail of Lehman. In fact, it has already been confirmed:

By Binyamin Appelbaum

Washington Post Staff Writer Sunday, September 14, 2008; 9:59 PM

Bank of America has struck a $44 billion deal to buy Merrill Lynch, according to two people familiar with the negotiations, a merger that will unite the nation's largest consumer bank with one of its most celebrated investment banking firms.

Who knows what will happen to the other banks? However I am pretty confident that JP Morgan and Goldman Sachs will survive, and emerge stronger than before, Thus, it will be 2 great choice for investment if you were to invest in US banks.

With the above episode, no banks in the world will be spared from losses as they deal with one another. European banks will be the next to be greatly affected, followed by Asian banks. For instance, China banks are holding a significant amount of stakes in Fannie and Freddie, and it is only a matter of time when they have to divulge their losses. Also, there has been talks that Singapore DBS bank has strong dealings with Lehman. What will happen if Lehman goes into bankruptcy, which is more or less confirmed.

The banks' stock is going to tumble hard soon, but this also means that we will finally be reaching the bottom of the market. However, do note that this financial crisis will only end when US housing prices stop falling. Once it has stabilized, it is time to start going into the market to make a killing.

I will putting up the US mortgage rate monitor in my blog soon...so Stay Tune!

Stock Market Cycle

The above graph provides a rough guide of the relationship between economic cycle, stock market cycle and the stock sector. Though it may not be 100% correct and reflective of what should happen to each stock sector during bull and bear market (e.g our tech sector has been in the doldrums for a long period and has not really enjoyed the bull market from 04-07), it does give you a good gauge of the sector you should focus on.

I believe we are not at the trough yet, as history always points out, there should always be a sell-off in banking stocks before we reach the trough. Our local banks (DBS, OCBC, UOB) has dropped in price, but has pretty much held up its price. There should be a furious sell-off coming up soon before we reach the trough. My guess is US is in a early-middle recession period, and the rest of the world is trailing US and should be in the early recession period. There should be at least few more months to go before US housing prices bottom out, and at least a year to go before US banks clean up their mortgage and sub-prime problems.

The graph points out that we should go for utilities, healthcare and non-cyclical consumer stocks, and I would add dividend stock to that list, and that is pretty much in line with my stock investing strategy for now. However, do note that there are always few bright sparks in each industry irregardless of the market, and do keep a look-out for them.

Which stock to invest in current bear market?

1. Dividend Stock
   Go for companies with growing dividend payout and which is fundamentally sound. I personally do not think REIT is a good choice as it is still subjected to property cyclical downturn which will affect its NAV and rental. However some REIT present good values. Suntec REIT is well-positioned to leverage on the booming Marina Bay area, especially with the upcoming casino, and it is well below its NAV. One personal favourite is SPAusNet, which promises growing dividend till 2010 at a good yield 9-10%


2. Offshore and Marine
   The recent steep oil-price correction has brought up concerns over the life cycle of this sector again. However I remain comfortable as: 1) the sector continues to deliver on earnings; and 2) recent export data show that it is about the only sector that is holding up, and I believe crude oil price will stay above $100. SembCorp is one balanced company, which provides exposure to water treatment industry as well. Another good company which has dropped to rather attractive value is Swiber, which has an attractive order book.


3. China Consumer
   Though China growth is more or less affected by the US economy, it is still at double digit growth year on year. I would prefer China Consumer companies which has the bulk of their business in domestic China. I do not think companies like China Fish, Celestial, China Milk and China Sky will be adversely affected by the slower growth, and presented great value at their current price.

China Fish - Is it cheap now?

China Fish has just reported their second quarter results and it seem satisfactory with revenue increasing by 24.1% and gross profit by 20.9% and net profit by 16.6%.

Weaknesses:

1. Increase in Vessel Operation Cost (up 30.2%) and Cost of sales (Up 54.2%). Their result has been affected by increase in fuel price.
2. Increase in Trade Receivables - a problem nagging a number of companies due to credit tightening.
3. Next quarter results may be affected by closures and restrictions due to Olympic.

Strengths:

1. South Pacific fishing operations underway with 2 supertrawlers deployed to the vicinity.
2. New quota system in Peru will enhance the Group’s efficiency and performance.
3. Oil price is on the fall, and consumption is expected to increase.

Considering the bad market sentiment now, for a good safety margin, I will buy this stock at a price of $1.13 pegged to an estimated forward PE of 5 and 3% dividend yield, if you are thinking of buying.

Pacific Andes - Good buy!

1. Pacific Andes Holdings (PAH) has a good track record of posting consistent profits since listing. It is also a fairly defensive play under present uncertain market condition as it is supplying a food item that is growing in terms of consumption patterns.
2. Expect better catch quota for 2008, higher efficiency from its recently expanded Peru operation, still strong demand and high fish prices to be some of the drivers for growth.
3. Good dividend yield of 5.3% at $0.39
4. Undemanding valuation.

SP AusNet - Attractive Buy!

1. Offers high and stable dividend yield of 9.8% at current price of $1.40.
2. SP Ausnet is favoured for its stable and sustainable growth in distribution per stapled security due to its predictable cash flow from the regulated revenue. It’s a relatively “safe haven” stock to consider for its highly assured distribution payout. Notably, it guided for 11.55 Aust cents for FY08F and 11.8 Aust cents for FY09F.
3. Favourable final decision at Gas Access Arrangement Review (GARR) & Transmission Regulatory Reset (TRR) secures and locks in around 90% of the revenue for gas and electricity transmission for the next 5 years till Dec 2012 and Mar 2014 respectively. Hence, in the near term, there is only the gas distribution scheduled for reset in Dec 2010. We can expect minimal surprises from now till 2010.
4. It also refinanced A$1.55 billion debt at margins of between 40 and 50 basis points, representing favourable terms in the current market, no major need for refinancing till 2011.
5. SPN operates in the regulated privatized monopoly of electricity and gas transmission and distribution sectors where its revenue is highly regulated. This eradicates any downside risks, albeit at the expense of upside surprises.