Winter is coming

By | October 22, 2018

Winter is coming.

Because it is already late October.

Or because most of the securities in US markets have been richly priced.  We are not a market timer and our strategy has always been relatively independent from “the innings of the market cycles”. However, the key principle is always “to use the expected return as your natural regulator” in what kind of deals you are going to commit into.

When everyone around you are strongly suggesting “US Market and Fundamentals are so strong” or “US Market should be OK but all other markets are already in trouble”. Your antenna should be up: can it really be sustainable to have one market exceptionally strong for much longer while the rest of the world are struggling to find growth in such interrelated world today?

  • Europe and UK are facing uncertainties around Brexit (even more so today than in 2016 when the vote in UK opened the gate of Brexit) and budget issues in Italy.
  • China is facing significant headwinds
    • Structural reform to shift from saving and investment based growth to higher value-add, service oriented, capital light and consumer heavy new economy structure
    • Systematically deleveraging before economy slow down hit
    • Medical and Social safety net reform to lower the burden of majority of the middle class
    • Political “fine-tuning” to make sure existing political regime can fit into new information age where curbing and blocking is less effective than setting up a positive case and convince the majority to follow
  • Other geopolitical risks like tension between Turkey and US, Saudi Arabia and US and US against refugees from central america etc
  • Hawkish Fed that is planning to hike another 1% over 2019 and probably more in 2020, which may eventually bring short term interest rate to 3.5%-4% and break most of the financing structure of commercial real estate investments done today and past decade.

Let me do an account of the area that I saw most bubbles happening today, so my readers can avoid going there. (Remember Charlie Munger’s famous statement:“All I Want To Know Is Where I’m Going To Die So I’ll Never Go There”).

  1. most gateway city (San Francisco, New York, Seattle, Chicago, Boston and LA) highly levered core commercial real estate investments (especially office and some industrial business park and multifamily projects)
  2. Facebook, Amazon, Netflix and Google common stocks and most other technology stocks (Spotify, Tesla etc)
  3. Most index consumer staple and utility stocks: Verizon, Costco and Coca Cola etc
  4. Pot stocks for sure
  5. Bitcoin related stuff
  6. All developed world government bonds maturing in intermediate term and long terms. (Near term bill are considered cash equivalent, which is a good form of way to store you cash position always)
  7. most of the REITs
  8. most of the Blue Chips
  9. Select few banks: JP Morgan, Goldman and MS.
  10. Index ETF and Short Vol derivative products (options, ETFs etc)
  11. China Developer and Real Estate companies
  12. HK Real Estate companies
  13. Chinese economy (highly levered, facing strong trade headwind and geopolitical frictions)

Some area providing potential value but need to be participated in a diversified basis:

  1. Very select few of China A-share (mostly consumer sector) and its counterparts in HK Stock Exchange
  2. Very select few of US retailers
  3. Very select few of European car companies
  4. A couple of major conglomerates that are sold at a very attractive pricing and owner of many brands, ports, wireless towers and infrastructure in US and the World
  5. Top Semiconductor players that are valued very conservatives (today’s semiconductor is essentially a necessity not a high-tech product. It is probably the most consumer staple product you can ever find and the chips to machines are like the brain and muscle to human)

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