Blog Capsule 5: Bought ICAP @ $1.22-$1.23

Not the best price.

ICAP actually closed lower at $1.20, after touching a low $1.18 intra-day. :-(

Nevertheless, was extremely relieved this morning, since just saw US markets closed hugely positive , with the Dow posting +10.88% overnight gain, S&P500 posting +10.8% overnight gain and Nasdaq posting +9.53% overnight gain. I had expected US markets to be green this morning, but never expected it this strong. *phew*

Why yesterday, why ICAP?

To be honest, good luck probably played a bigger part than I would have liked to admit.

Most of you will know that I will be away for nearly 2 weeks on a holiday starting this weekend.

I am especially sensitive on this absence because as I have stated this before in the chatbox, even though I was not yet buying for investing since my outlook was still long-term bearish (e.g. see here - http://fusioninvestor.blogspot.com/2008/10/huaan-some-rumblings.html), one of the risks in staying in cash for too long is that when the markets rise, history has taught us that they tend to rise very fast. Worse, sometimes, we don't catch the upswing timely enough. Such points was also repeated by "V" in this article here - http://fusioninvestor.blogspot.com/2008/10/dont-dig-bigger-hole-2.html.

So, even though I have stayed largely in cash (except the small intra-day trades recently and also the occasional contra and short term-trades), I've also been thinking about positioning my stocks since the KLCI have broken below 850 and nearly touching 800 yesterday. Make no mistake, the markets have become deeply oversold when it fell more than 30% in less than 3 months. Another technical reason to consider buying around the 800 level is that I have been advising the chatbox my technical expectation that the market will test 800 (and not 850) last week, when the KLCI was trading near 900 last week and others were predicting 850 to be breached. The strong recovery intra-day yesterday after hitting a low of 801 prompted me to take position, and also prompted me to take profits in one other stock (TENAGA).

Furthermore, there is the saying "Sell in May, buy back in November", and we are now near the start of November. In a sense, the timing of my holidays is poor because it coincides with this November period where stock markets traditionally rise. Even though I personally attach less weight to this saying, at the back of my mind, the idea stuck. So, it's a matter of buying something during this timely period, certainly before the end of this week.

So, amongst the stocks that I thought might be good ideas to hold during this 2-3 week period would be ICAP. Actually, the attraction of ICAP is that it is "managed", as opposed to buying a stock like TENAGA (where it is not managed). Also, blogger "turtle" recently indicated in his blog that he purchased ICAP at $1.49 recently. Fellow blogger bullbear of course is a staunch supporter of ICAP, when the price fell from its peak of $2.81, down to $1.7x before his sabatical last couple of months. Fellow blogger Moolah is of course instrumental in alerting me the inconsistent behaviour of ICAP fund manager earlier this year. Of course, ICAP is a stock that I have invested before, as well as a stock that is followed by the chatbox from time to time. To me, ICAP is a stock to buy when the price becomes compellingly low. The only problem is when to buy, because what appears cheap almost always become cheaper during bear markets, if not next week, then, next month or next few months.

Ok, but why ICAP?

The "cheapness" struck me quite strongly yesterday. According to its latest weekly NAV report, on 23 Oct, ICAP NAV was $1.54. At the time when I saw the price, it had touched a low of $1.18, and $1.22 and $1.23 were available for sale.

I did some quick maths in my head. On 23 Oct, the KLCI closed 891.3. At the time when I bought it, the KLCI has recovered off its low of 801, and was around 820-825 iirc. A quick estimate suggests that I don't expect its latest NAV to drop below $1.42 since 23 Oct, by simple pro-ratio.

So, $1.22-$1.23 is equivalent to nearly 14%-15% discount from NAV. Historically, ICAP trades at a premium, and occasionally at a discount (say 3%), although I have never seen such a large discount before. Hence, it was very tempting strategically, and the only issue is always a tactical one, i.e. when to buy.

At the time, I felt this seems enough safety margin (even though what is cheap can get cheaper), hence, I took everything that Mr Market had to offer at $1.22 and $1.23 then, and left it there since this is a long-term investment.

This morning, I took a closer look, and realized that ICAP have approximately $57 million in cash as at 31/8/08, which translates to approximately 41 sen. So, its NAV of $1.54 on 23/10/08 comprised of say $0.41 cash and $1.13 equities. I expect this equity portion to fall since 23/10/08, and not the entire NAV. A revised estimate suggest that the NAV could well be higher than $1.42, say $1.46. A prudent estimate of the revised NAV may be say $1.40 to $1.45 say. In other words, the discount should still be around 15% say, when I bought at $1.22-$1.23.

I should sound a cautionary statement that buying on a discount is not necessarily always wise. Why? Simply because the discount can dissappear eventually if markets keep heading lower. However, if one manage to buy at close to the bottom and at a discount, then, this is ideal, because if the bottom is indeed reached and if it does bounce back up, then, this discount is a wonderful buffer and price to buy. So, whilst I'm generally to buy stocks at discounted prices (than at a premium), I would very much prefer to buy when the price has reached bottom, and is on its way up.

So, has the price reached bottom yet? No one knows for sure. Technically, it is still a long-term bear from the charts, although charts only shows the past clearly and the future is still uncertain. Fundamentally, the outlook is still bearish, even though in bear markets, we will have bear market rallies which can sometimes be quite strong and fast on the upside during these volatile periods - fortunes change hands very quickly too. My buy at $1.22-$1.23 is not the entire long term strategic position, but just say 1/5th of what I intended to accumulate by the time this bear market is over, which may well last until mid to end of next year (I could be wrong here very easily). So, think of this as just the first out of a few possible long term instalments, although I reserve the right to trade without informing anyone until after-the-fact.

Should long term investors buy now?

Again, traders should always follow their own timing rules, but what about investors? Well, at 800, the KLCI appears "cheap", although, as I have mentioned here and elsewhere many times, what we mustn't forget at the back of our minds is that what appears fundamentally cheap can always become cheaper later if/when markets eventually become more depressed.

So, since long term investors generally don't try to time the markets, a program of slowly accumulating at successively low prices would make sense. As I indicated above, I have spent 1/5th of what I intend to accumulate yesterday on ICAP. It is a bit bigger than what I would have liked for a long term investment, so, I may take some profits later if Mr Market is too bullish for my liking.

Has this changed my views of Mr Tan the fund manager?

No. I still think his track record and past results as a fund manager is still good, even in this current bear market. For example, when he started ICAP at end 2005, KLCI was above 900 and despite the market now being at least a good 10% below today, the NAV has grown from $1 to $1.4x. In other words, even though market is say 10% below, the NAV has grown at least 40%, suggesting an outperformance of at least 50% during the last 3 years. This would certainly beat - as a rough guess - 90%-99% of professionally managed monies in my humble opinion, so, there is no doubt in my mind that Mr Tan Teng Boo certainly has a superior investment track record. His integrity on the other hand remains the same to me, whether I own ICAP or not. As always, it is critical to always apply one's own independent and critical mind and not blindly believing in what anyone says, otherwise, you just simply expose yourself to possible manipulation by others.

Disclaimer: At the time of writing this, I now own ICAP. Do be aware that I can dispose ICAP at any time in future, without telling you so.

Blog Capsule 3 Update : This Week's KLCI High

Blog Capsule 3 has ended. Background here - http://fusioninvestor.blogspot.com/2008/10/blog-capsule-3-this-weeks-klci-high.html

The KLCI high of this week is 972.92, registered on Tuesday, Oct 14, 2008.

Noone predicted this figure to the nearest integer. The 2 nearest predictions are:
- win = 967 (Difference = 5.92)
- pk = 980 (Difference = 7.08)

Since "win" has the nearest prediction, I officially declare him the winner!

So, for next week, let's all address "win" as "xifu" in the chatbox. *grin*

Incidentally, fellow blogger "nexttrade" also blogged on the KLCI high for this week here - http://nexttrade.blogspot.com/2008/10/market-outlook-as-at-october-13-2008.html. He mentioned this on Tuesday, Oct 14: "In the current rebound, the KLCI will face resistance at the psychological 1000 level and at the 1030 level (posted by the immediate downtrend line). " So, not only did "win" out-predict everyone in this chatbox, he also outpredict Alex from nexttrade!

So, please join me in congratulating chatter "win" for his well deserved "win" for Blog Capsule 3!

(and don't forget to pester him for some "sure win" tips next week! *just joking*)

Blog Capsule 3: This week's KLCI High

In a light hearted mood this afternoon, someone suggested we take a small bet predicting KLCI high for this week.

The winner gets to be called xifu for a week the next week.

As the nature of the bets are playful, do not take these predictions seriously.

For example, I am speculating that Moolah's prediction is deliberately highest, to prove the point that his call does not have an impact on the market. Similarly, my prediction of 984 was simply because mydreamgetrich thought I would call 948, and I simply reversed the 2 figure to 984.

So, don't take these predictions seriously!

Anyway, for blog capsule purposes only.

The predictions are:
- Ocean = 955
- sleeppy = 958
- ckkuan = 962
- WM = 965
- win = 967
- pk = 980
- elton = 981.15
- Seng = 984
- mydreamgetrich = 990
- naruto = 1001,
- Moolah = 1025 (!)

Blog Capsule 2: FUPO vs FCPO

I suppose the market today has been pretty boring, so, not surprisingly, this afternoon in my chatbox, there was a passionate discussion between chatter "Dreamy" (or mydreamgetrich) and "Dali" (author of Malaysia Finance blog) about the upcoming FUPO vs the current FCPO contract liquidity in 2 months time. For the record, I came into the picture late, and so, might not have captured the salient points.

Anyway, the debate boiled down to this single question: By November 5, 2008 (Wednesday), which of the 2 contracts (FUPO or FCPO) will have the higher daily volume in their most popular contract months?

Since this involves a specific prediction about the future, someone asked whether I can "blog capsule" this for future reference, and I am glad to do so, since this is an interesting question and discussion, and the answer does not appear obvious when there are several conflicting factors.

Starting first with the reasons to support FUPO popularity, we have Dali with his persuasive arguments, which he has blogged here - http://malaysiafinance.blogspot.com/2008/09/fupos-significance.html - and so, I won't repeat them here.

And on the other hand, the reasons to support FCPO continuing popularity are led by Dreamy & others, which I'll try to summarize here for future reference:

1. In the physical market, it is believed that Malaysian CPO companies prefer to hedge in RM than USD since most of their shareholders are local with RM profitabilities. (although Dali raised the interesting issue about local planters with US$ bonds who might prefer to hedge their US$ exposure).

2. FUPO introduced another complexity and variability (you need to also form a view on future USD/RM currency movements to trade successfully) making it more difficult to trade than FCPO, which is volatile enough already.

3. FUPO doesn't appear to have been well marketed locally by Bursa. Past attempts several years ago to introduce the USD palm kernel futures was apparently appalling.

4. More than one person thinks even if FUPO eventually overtakes FCPO, it might not do so in the first 2 months of implementation, due to the lack of marketing push by Bursa. Also, some of the new products introduced by Bursa failed miserably in the past.

5. Traders currently are used to trading FCPO, so, FUPO with extra currency variability will take some time to get used to (although 2 months might be more than enough time for some to get used to it, other things equal).

6. According to Dreamy, Singapore also trades FCPO in US$ but not very successfully.

7. FCPO most popular month contracts tend to be bunched and skewed hugely in just one month, which is usually the 3rd month and it is very visible compared to the other contract months. On the other hand, it is unclear whether the coming FUPO volume will have similar shape, or flatter across contract months.

8. Dreamy thinks that if local producers with physical oil don't participate in FUPO, then, it might not be as attractive as FCPO, although traders in general would tend to dominate futures volume than true hedgers.

In short, many reasons to support both sides of the fence.

For some reason, testosterone levels must have been high during that discussion, because we ended up with some rather "playful" bets and ended up forming teams! Dali's supporters included Moolah, naruto and ckkuan, and Dreamy's supporters included juicy and ivtac. And to balance the numbers, I lended my support to Dreamy - All in the name of good fun between the boys!

And the prize for the winner? Well, I'm personally not clear exactly now, but between Dali and Dreamy, one of them will apologize to the other every single day for a week for something like that (I'll leave this between Dali and Dreamy to sort out the details). And as for the supporters, well, apparently, the losers will address the winners as "xifu" also everyday for a week! LOL! The things we do in good fun!

So, I hope I've documented this blog capsule accurately. If not, do drop a short comment to correct me here.

Cheers, and good luck to both teams come Wednesday, November 5, 2008!

Blog Capsule: bullbear vs Moolah on PBBANK

The background is we were discussing a rather passionate topic close to our hearts which is Selling.

The primary participants are bullbear vs Moolah. Related participants are myself, dorraidd, and a few others.

bullbear is of the position that for a stock like PBBANK, one would only need to buy and hold forever. He does have a qualification that provided the fundmentals don't deteriorate, and his timing appears to be to wait until there is confirmed deterioration.

In fact, from past discussions, bullbear indicated that he is inspired by his friends who has successfully held stocks for many, many years (the impression given is that it is decades). He also doesn't believe that he can market time successfully. For example, when asked why he didn't sell now, he says he thinks that we are already 2/3rd through the bear market and there is only 1/3rd left to go. He qualifies that he doesn't really know from memory.

bullbear naturally and strongly believe in this Buy and Hold view, and thinks it applies to many other stocks as well, that may range in 100 (?), so long as it meets his requirement. Unfortunately, I don't know exactly his requirement, but I welcome him to comment on it if he wants to elaborate further.

On the other hand, we have Moolah who looks at the situation from a different angle.

From his perspective, there are at least 2 reasons to sell PBBANK today, or as soon as possible.

The reference price is $10.1.

His reasons are: 1. When viewed over the last decade, we are smacked right in the middle of a GLOBAL Bear market. The belief is that bull markets rarely comes to Malaysia (about once every few years or decades), and when the bear starts, they will not immediately stop. The implication is that things will get worse, and PBBANK will be dragged down with the rest of the stocks. 2. The stock suffers a potential risk that it is highly dependent on certain large shareowner and founder still around. Since he is not getting younger even though everyone wants him to live forever, the risks of him leaving gets increasingly higher as he ages.

Hence, this experiment.

Treat this like a Blog Capsule.

Let's open this email again in 2 years time from now to see who is right.

Will it be bullbear - the advocate of Buy and Hold i.e. in 2 years time, PBBANK will be higher than $10.1?

Or will it be Moolah - the advocate that there is a time to sell, and the time around now would seem close. (I think he prefers higher, but he believes deep in his heart that even now, the time is to sell). I.e. in 2 years time, PBBANK will not be significantly higher than $10.1, and more likely to be lower than $10.1?

I guess, in this case, only time will tell, although I of course do have my own opinion ... :-)

Take care.