My Positions

Not much changed.  My shorts are still slightly in the red while waiting for the big bear market.  Dunno weather it'll be a crash like March 2020 or continue to be a long one like 2001-02.

The only position changes have been:

• Bought gold in Feb.  As we move into the second half of the bear market and rate expectations drop, gold should do well.  Unless we get a crash like March 2020.
• Interactive Brokers forced me out of my short Italy (EWI) position at the worst time, I replaced it with XLB, BITO, XOP, INDA.
• Still regularly adding cash, the salary from my day-job as a garbage man.  Added around 3% cash this year.

The percentage changes:

• Oil dropped, and my oil/gas producers/pipelines with it.  Oil price is the biggest factor affecting my portfolio.  Wiped off around 4-5% of the portfolio.  My bet on oil rising due to Chiana reopening failed.  Still holding these positions.  Tempted to buy more Equinor now.  Or Tidewater.  Dunno....they'll drop if we get a crash, but could go up if its a long-drawn-out bear market.
• Delfi rose 30% on good results to become my largest position.  Not selling, its still cheap-and-growing, will buy a little more if the market crashes.

 Overall, still treading water.  Its a tough market, for longs or shorts.

My Shopping List

Long term I think we're in a decade of inflation.  After a 6-12 month downturn, commodities should continue their bull market.  I'm holding my opex commodity producers (energy, palm oil) and want to load up on capex commodity producers in the downturn.  I think the next bubble won't be the last (tech & crypto), it'll be commodities.

Short term I believe we are in for a market crash and a recession in the first half of this year. Don't know when.  After I cover my shorts, I need to buy.  Real money is made being long.  This is my watchlist.  Top of the list are dividend-paying blue chips that your grandfather would approve of, the bottom is the most speculative shit that can fly:

• Delfi (SGX): Largest Indonesian chocolate maker, net cash, paying out half its profits at just under a 4% yield.  Can be re-rated as a growth stock if it can grow for a few years.  Potential multibagger: 3 to 5X over 5-10 years.  I can only buy a little, since I've already loaded up.
• Singapore banks: Dividend paying cyclicals, too expensive now, wait for a recession.  No point doing a deep dive since they are all the same.  OCBC is the most conservative, DBS has the highest beta (with historically the highest write offs in a recession).  UOB has the least exposure to China.  Probably 30-40% upside in a cycle if I play it right.
• Maybank (KLSE): Another conservative, high dividend payer.  Low beta banking stock, ~6% (peakish) dividend at 80% payout ratio. Maybe 20% upside in a cycle.
• Boustead (SGX): A strange mix of businesses consisting of Asian ESRI software licensing, industrial real-estate and oilfield equipment providers.  Financially conservative: Net cash, pays out half its profits as dividends.  Could double in the next few years as oil E&P picks up, 5% yield at 50% payout ratio while you wait.  Asian Centure Stock's paid report.
• S&P 500: For my retirement account.  Won't do great with high energy prices and inflation, but there's some beta to be earned if I buy in a crash.  Sell when the recession's over.  Maybe 20-30% upside next cycle after a crash.
• Gold: goes up when real rates go down.  I am holding GLD now, into a recession/crash as interest rate expectations start to fall.  Want to hold Gold Miners (GDX or GDXJ) coming out of it, as interest rates fall and inflation expectations rise.  Lets see.
• Aluminium: Norsk Hydro.  One third of the aluminium price is from energy.  European smelters have been closing down.  Pays a giant dividend based on massive 2021 (peak) profits.  But its a capex commodity, so wait for the downturn.  Norsk Hydro is a low-cost producer, Alcoa is further out on the risk/reward curve.
• Rockwell Automation: As the US re-industrialises and wages stay high due to retiring boomers, we should see a secular increase in automation.  This stock is too expensive now, needs to halve to ~160 for me to catch falling knife.  Its cyclical - trades closely with the Nasdaq - so I might get a chance.
• Copper: Theres always been a story about an impending copper shortage for electrification/EVs.  I prefer to treat it as a cyclical.  Just buy COPX in a downturn.
• Largan Precision looks interesting.  Small bet due to their industry risks (biggest customer is wary of them), but it is reasonably priced.  50-70% upside now, more if the market crashes like I expect. (Asian Century Stock's paid report).
• Tin: A cross between a capex and opex commodity, half of it is used for electronics.  Again wait for the downturn.  MLX:ASX and MSC:KLSE could go up 3-5 times from the next cycle's bottom. 
• Lithium: Another capex metal.  If EV demand explodes, it may be a decade long bull market, like iron ore from 2001 to 2010.  Demand and supply are impossible to project, as they just exponential increasing curves.  Still too expensive now, wait for a pullback.
• Bitcoin.  The world's first decentralised digital currency.  Trades like a risk-on commodity, so wait for the downturn.  After which its probably got 2-3X upside in the next cycle.  
• MercadoLibre: South American Amazon, with a growth runway, may benefit from Sea Limited's decline.  Although its a real business, its a growth stock, so don't bother to value or model it.  Latam benefits from high commodity prices, and Mexico from NAFTA.  Its really just a high beta play - buy after a downturn, hopefully sell one or two years later when everyone's happy.  Make it a small bet so I don't get shaken out by high volatility.  3 or 4X upside in the next cycle.
• ChainLink: A cryptocurrency, I see it as a venture capital fund or company trying to establish a monopoly on all off-chain operations for defi....remember defi?  If defi takes off, its like buying Microsoft in 1995 or Amazon in 2001.  Just a small bet: theres plenty of ways this goes to zero.  20X upside.

Every paragraph above - except gold - says "buy in a downturn".

Its all the same trade.

Sold my last S-REIT

Sold my last holdings of Frasers Centerpoint Trust.  Small capital loss of less than 1K, offset by 12K dividends.

They announced they are buying a 25% stake in Serangoon Nex (85 years remaining lease), funded by debt.

Its not a bad deal, not like MapleTree Commercial Trust's disastrous merger a year ago.  But its not a great deal either.  Their pro-forma calculations show a negligible 0.5% increase in DPU if the transaction had been performed Oct 2021.  Leverageis expected to rise from 33% to 38.8% (Section 6.4).  

The negatives:

• Serangoon Nex is already crowded with 99.9% occupancy, so I don't see how they can extract more value from it.
• The company announced they are taking on a 410m revolving loan - they did not give the interest rate; revolving loans are usually variable.
• Increasing Leverage from 33 to 38.5% for a mere 0.5% increase in DPU doesn't make sense.
• Sibor has risen from 0.5% to 4% in the last year.  This has to affect Singapore property values, increasing FCT's leverage.  eg: A 10% decrease in property values would lead to Leverage increasing from 38.5% to 42%.  Now we are moving a bit close to MAS' 50% gearing limit.
• How are they going to make future acquisitions, like Northpoint South Wing?  They're gonna have to fund it entirely by issuing new shares.

The positives:

• Serangoon Nex is a good long-term asset.  Its a hub with 2 MRT lines and a bus interchange.  The mall is always crowded.
• On OCBC report stated (p2) that the new debt is taken at an "interest cost of less than 4.3% locked in for three years."  I think they are talking about the pro-forma calculations, which would mean these calculations already take into account high interest rates, and the results may be better if the Fed pivots soon.

Overall, the numbers just aren't great.  Buying a property yielding high 4's percentage points (gross), while taking on debt in the low 4's percent is barely a win.  Increasing leverage raises their risk and reduces their ability to bargain hunt when opportunities arise.  Since they are paying all their distributable income as dividends, they'll never decrease their debt and future growth is limited.  Their dividend yield is sub-5%.  I won't get rich holding a stock like this.

Need to find another way to get rich, holding SGX Reits won't cut it.  They have too much interest rate risk, and too little growth potential since they payout all profits as dividends.  I think theres better risk/reward in holding dividend companies that have fixed their debt 10-30 years out (eg: WMB, KMI), or cash rich companies that are paying out some of their profits as dividends (eg: Delfi:SGX or United Plantations:KLSE).

I still think we are in a multi-year inflationary bear market, and there will be a chance for me to buy more later.  I would rather own a company yielding 3-4% with a 50-60% payout ratio, than one paying out everything while yielding 5-6%.

I've now finished spring cleaning my portfolio.

The stocks that I have left are ones I'm comfortable holding through the cycle.

Gotten shorter

Got a lot shorter yesterday.  I think the market falls this quarter.  This is the max short I'm willing to go.

I moved a pile of cash into my IB account, so I have some leeway in case the market moves against me (ie: my longs go down and my shorts go up).  Risk Management means "try not to die".

Edit: Jan 13th: Went another 2% short, couldn't resist.

SEGRO REIT: exposure to rising interest rates

Quick look at a promising company, its a fast growing UK/EU industrial REIT whose share price is now tumbling.

For debt heavy REITS, one of the first things we look at is interest rate sensitivity.

As of end 2021, they had 3406m pounds of debt vs 15bn pounds of property.  Thats reasonable.

Their debt was well spread out:

Source: 2021 Full Year Results Presentation, slide 44.

And its all fixed rate too.  Looks really good:

Source: 2021 AR, p197

Wait, whats this?  After applying derivative instruments, they had a 1.5bn of variable rate debt:

Thats around 45% of their 3406bn debt being variable.  How can this be?

They have converted 1.9bn of their fixed rate debt to floating rate debt using derivatives....WTF?

~1bn of this only expires after 2026.  So they are not getting out of it anytime quickly.  ~600m expires from 2022 to 2026.

This is why their interest rate sensitivity is so high.  A decrease of 17m for a 1% increase in rates (p203) is about a 5% decrease in CFO.  If we expect UK risk free rates to rise to 4.5 to 5.25% by 2023, while they were under 0.5% in all of 2021, thats a 20-25% decrease in CFO.

I'm throwing this into the "too hard" basket.  Their debt has changed since then, and 2022 results will be out on 17th Feb.  But probably not worth looking at yet.  If I buy a REIT I want predictable cashflows, not a bet on interest rates.

Lessons Learned Trading Bear Markets

Trading bear markets is tough.  This post is about me finding a strategy to short bear markets, in a timeframe suitable for me.

My original plan was to simply short and hold into the depths of the bear market.

I had not counted on how sharp the bear market rallies would be:

Source: Wifey

I haven't covered my shorts, and I added to them last week.  But the last vicious bear market rally has given me some sleepless nights.  My shorts moved from a 70K profit to a 20K loss in 2 months!  I learned that prune juice helps constipation.

My timing wasn't great.  The chart below are my shorts (pink arrows) and coverings (blue arrows):

I can't trade day-to-day in the short term.  And its uncomfortable hodling shorts for the long term.  So I need to trade in the medium term - around the bear market rallies.  How can I do this when bear market rallies are unpredictable?

• Simply wait for the BMRs to occur, and as they do, add more.  Add a little at a 5% rally, more at 10%, more at 15% and some at 20%.
• If the BMR doesn't occur, don't short.  Take the attitude that I'll short if the market gives me the opportunity, but I don't have to.  I always have the choice to happily sit in my dividend stocks and cash, waiting for valuations to go low enough or for the macro outlook to change.  We get the worst results when we feel compelled to do something.
• Take some profits when it feels great.  When the market has dropped like a rock for several weeks, your profits are exploding night-by-night, and you are the king of the world...take some profit - maybe 1/3rd or half of my short positions.  I guess everyone learns this instinctively as they trade.
• Don't look at my percentage allocation (eg: shorts vs longs).  Successful short positions shrink, so at the bottom of a crash, they'll be small positions, just when I should be covering (making them even smaller).  Don't have a "target allocation".

We may be halfway through the bear market now.  As we get closer to its end, hodling shorts becomes a really bad idea.   I need to trade around the bear market rallies.  And start taking profits.  Wait for the next leg down...

With the last few days drop, my shorts are now profitable again.

Maybe this bear market rally ended last week:

Source: Keith McCollough

China reopening, oil, and doing nothing

I think China is reopening.  Rising cases occur when you reopen:

But official deaths have not gone up.  A quick google search shows a median of 18 days to die from covid, so we should know the death rate by now.  The latest numbers have 1 covid death yesterday:

Source: Worldometers.com

There's 2 risks to the reopening:

• China numbers are bullshit, so no one knows what the real hospitalisation/death rates are.  Low level officials will make up whatever numbers they think are desired.  And I'm sure no one reports bad news to Xi.
• Everything depends Xi.  He can reinstate zero-covid tomorrow.

We're getting a lot of confusing scenes out of China.  Protests, lockdowns and confusion.  It will be localised cycles of easing and tightening as they try to flatten the curve.  If they don't lock down soon, it will be too late, and they will have to let it spread.  So there's a small chance Xi imposes a harsh lockdown soon, and a bigger chance - growing larger by the day - that they just let it spread and try to slow it down.

My "China reopening play" is oil.  Zero-covid reduced demand by an estimated 0.5 to 1.5m bpd.  Long term I think oil goes up anyway, but China makes me buy it now.  Bought more CNQ and Equinor in the last 2 weeks, now its a 9% position (at buying price).  1% more to go.

Its a very oily portfolio: 10% in oil producers, plus another 35% in things correlated to oil (Gas pipelines, palm oil and LNG).

Also mechanically adding to my shorts as the S&P500 goes higher.  And the existing shorts are also growing bigger as the market gets higher; my shorts are now in the red:

Need to remind myself not to get too short, else the bear market rally will rip my face off.

Can't find anything to buy with the remaining 30% cash.  Despite a year-long bear market, stocks aren't cheap enough yet to catch falling knives.  I wait, either for things to get cheaper, or for the macro tide to turn so I can buy cyclicals like capex commodities.

Its hard, sitting in cash, foregoing dividend income, not going long or short.   I try to imagine myself as a multi-millionaire in the future, after the current bear market, recession and subsequent commodity bull.

Doing nothing is the hardest thing.