The US Market is Looking Shaky...

But I'm getting Excited ;)

I’ve always found the idea of a reverse indicator interesting…

Is there somehow a way to make money by inversing someone’s actions? I guess it remains to be seen (despite the archives of snapshots on Jim Cramer and his calls). A more comprehensive study must be made because even the Inverse Jim Cramer ETF (SJIM) is liquidated less than a year after its launch.

That said, I toyed with this reverse indicator idea because newfound fears have been spread into the US market recently – entertaining the idea of a recession + AI spending not being justified (especially after Visa/Tesla/Google’s earnings).

And of course, this came right after creating genres of content, that seem to purport a certain idea, of investors looking like “geniuses” in a bull market – and it decided to humble us (once again).

Anywho, Anyhow – Hopefully by now, you would know me a little better. Weakness and Falling Knives are where I favor – and just 1.5 weeks after my first cover on LULU… The market has gracefully allowed me to keep my Falling Knife Title.

LULU has fallen roughly ~15% from the date of that video, and as the title suggests, I’m getting excited. And full disclosure, I did add to my position. Right now, LULU sits right under 3% of my portfolio exposure.

I won’t be sharing much in this specific newsletter – because I’ll be writing a full video about my thoughts on the current market, the impending recession, the small-cap rotation play, the premium space being squeezed, etc.

Do watch out for that video.

With regards to LULU, I’ve had the honor and opportunity to hop on a call with someone working in the company – and he has generously shared his insights and analysis of the company (which will be dropping soon too).

From an investment/portfolio standpoint – I do intend to add to my position on LULU if Mr. Market gives me that opportunity. For context – I do have quite a lump sum sitting in my brokerage account right now (after my China bank sales) – and I’m looking to add to LULU 2 more times. (3, if it corrects significantly enough)

So the second part of this piece would be a follow-up to my theory on why I sold China banks – as outlined in the previous newsletter update.

There were primarily 3 main reasons.

-          Raise Cash

-          My China Dividend Theory

-          Right Outcome, Wrong Process

The first point is self-explanatory. All things considered; I think the timing was ok. I was hoping/half-expecting the market to present some opportunities in the short term, and I wanted to hold some cash on the side.

Onto the second point. Here’s an interesting observation.

When we think of companies issuing dividends. Investors tend to treat it as a non-event. You’re moving money from the left pocket to the right. Basically, from the company’s balance sheet to your balance sheet. In theory, for example, a stock is trading at $10 – and they announced that they’re going to issue a $1 dividend. Right after the ex-dividend date, the stock price should correct down by $1, and trade at $9 instead.

Sounds good in theory, but it’s not what I’ve experienced so far, with my encounter with Chinese banks.

Let’s take the recent ex-dividend episode for example.

I’ve collated the list of Chinese banks pre and post-exDividend, and below are the results.

Overall, their current share price is all below the “theoretical” level it should be, even after accounting for the dividends issued (except for CCB).

Of course, many reasons would account for this discrepancy – and because all of them had a different ex-D date, so this might not be a fair comparison (considering the time frame is different, even though it might just be a few days). Furthermore, there might be other exogenous factors that will affect their share price during this period (and not necessarily attributable to this dividend-paying event).

I acknowledge all plausible arguments/reasons, but here’s the interesting thing. If you were to go back in time, over the past 5 dividend-paying events for let’s say ICBC, BOC, or even ABC – you can observe that right after that episode, the stock will create a new low (in the preceding 3 to 9 months) with varying degree, before getting bided up again.

Here’s my theory.  For many of these big-dividend payers, investors are just looking forward to that once-a-year event. After ExD, the stock will be punished for a while, as funds are being rotated elsewhere. Therefore, to “combat” this, I’ve decided to pre-sell my shares before the exD date, to save on the withholding tax + this slight depreciation in interest amongst investors, leading to a lower share price.

Please take this with a whole bag of salt, because I don’t have much to prove my theory – but rather just my simple observations.

This then begs the question, even if I’m right on this theory – how you would know when to buy back to exploit this phenomenon?

My answer would then be the third point. I don’t intend to buy back.

My experience with Chinese banks has been positive thus far, because of the ~+40% returns in 19 months. But as I’ve shared previously, it was a complete speculation on my part.

It might have ultimately made me some money, which was the right outcome – but I don’t have great insights as to why this process works. Sure, I have some backing in terms of numbers and I can argue that they’re extremely undervalued based on any existing metric – but truth be told, I went in with the mindset that I was ready to lose the money.

I know nothing about the state of the property recovery, their loan books, how valid/credible is their NPL, etc. It was really kind of like blind faith – and there has always been this part at the back of my mind tickling.

I would rather focus on things that I have greater conviction/understanding in, which would make the process repeatable (if it works).

It was fun while it lasted.

Love,

Chi Keng.