April Fool's Joke

Summary of the week

As the corona infections reached new heights (>1 million infected) and the stock market continue to hit new lows, a real life Circuit breaker was triggered in Singapore market. As enthusiastic speculators continue to long toilet paper and short stocks, the Federal Reserve tries to calm down the markets by printing USD faster than the toilet paper companies. I originally wanted to post this piece on 1st April as an awful April's Fool joke, but there is nothing humorous about the realities surrounding us.

Portfolio decisions 

I initiated a high conviction position in Ishs CSI 300 ETF after I observed the recovery on the China PMI. Although a part of me is confident that China will be the first to regain industrial momentum as the factory of the world, a nagging worry is the fact that the Chinese has a history of fudging their numbers and economic data. 

As a know nothing investor whom does not understand China GAAP, and has no comparative advantage in analyzing the corporate governance and business practices of China market, I have to be satisfied with a sufficiently diversified approach to capture the increase in demand of equipment and output of the china market. As alternative global production centers are shut down throughout the world and US economy is ravaged by the virus, China ironically is in the best position to gain political influence and economic dominance from this apocalyptic scenario.

War chest

I have uninstalled my broker app on my smartphone after coming to the realization that stock prices are simply going to fall further as the days p lough along. The global economy is not going to recover just because of expansionary monetary and fiscal policy. It is going to recover only when the slowdown of the spread is achieved and sufficiently contained. A FDA approved and tested vaccine will earliest be out next year Q2 and there will be a sustained economic slowdown until the virus dies out. Still, improved treatment methods and possible cures can appear in headlines at any time, and the stock market can move in any direction it wants at any time as it oscillates between fear and greed.

For the US market, I believe the catalyst for virus slowdown will only occur when US activates a partial / full lock-down for more than a month to cordon off the infected. It is only after the quarantine and recovery term of 1 month is achieved before industries can continue operations. I am also pricing in possibly recapitalization / bankruptcies / huge write-offs in prominent companies and leveraged private equity funds throughout the world. 

For the SG market, I am pricing in a rights issue / units dividend / dividend cut scenario for the REITS space, as REITS are legally structured to payout 90% of their profits and retain a non-existent warchest position. This is especially so when the market cap of the REITS shrink and the gearing ratio hits regulatory limits.

A lot of the weaker business will be taken out or consolidated. Certain small caps may even be privatized by deep pocketed investors at a low valuation.

Conclusion 

Fools rush in where angels fear to tread. As we approach sell in May and Go away,  I am certain that the markets will find additional reasons to plunge itself to new depths. As Mr Market continues to provide me with more attractive and unreasonable quotes, I will uninstall my broker app to enforce warchest discipline. The last thing I want is to be priced out of my warchest like the USD1 Citi in the depths of the 2008 GFC. Until then, I will be staying tuned to the developments.