Greetings from Lisbon Portugal. It is really nice to be here, especially knowing that we just kissed and avoided the blizzard in New York. Hope we will have no problem on our way back! Lisbon is really a beautiful city although one can sense the underdevelopment for years due to poor economy here. Weather-wise it is more beautiful this time of the year compared with what we have in the NY area. Cannot complain! It would be a bit difficult to communicate with local people if you don't know Portuguese. Fortunately my son is very good at Portuguese and we are spoiled by just being following him.
Back to my topic. I cannot help but made some trades today. I think the market is really very close to the tipping point for a significant correction if not a total collapse. I have read some guru's analysis, which indicates that 4 or 5 major momentum indicators have reached the point only seen twice before: both were just before the major market collapse, one prior to Oct 1987 and the other in 1999-2000. I know it is very unlikely this collapse will occur in the final days of 2010 since everyone is so bullish. However, when this occurs, it will be fast and brutal without any notice. I don't want to miss this incredible opportunity. So I traded VXX again and heavily today! Simply buying VXX at the current price will be profitable in the next few months, I believe. For myself, I used more sophisticated option methods so that I can still make money even if it drops another 10-20%.
Looking forward to the prosperous 2011!!
Monday, December 27, 2010
Wednesday, December 22, 2010
Even if you don't have Euros.........
If you have any Euros, sell them right away. It is guaranteed you will lose money if you hold them. The situation is just too dire to have any hope for a real return! The stock market is wildly bullish with almost all the technical indicators pointing to a bearish trend. This is the most dangerous time to trade for either direction as you never know which way it will go in the short time period. While I know it will be one heck of bloodshed correction at some point, I just don't know exactly when. The market has reached the point of stupidity with the hyperactive euphoria, which can push it further to more extreme for some time. I always have the impulse to short more but rationality tells me: do not fight with the market. The market can be irrational for longer than you can stay solvent. Having said that, one thing I'm almost 100% sure about is the outcome of the Euro. And even if you don't have any Euros, I think it is a very safe bet to short it if you want to make some money in the current irrational market.
They have just gone through Greece and Ireland, right? Now comes Spain and you may have heard that Moody's has downgraded the Spain's credit ratings. This is a big deal, friends. It means on top of the already very dire financial situation Spain is facing, it is more costly and difficult for them to borrow money. Spain is much bigger than Greece and Ireland in terms of its economy and I'm not sure there is any possibility to bail it out without a deadly consequence for the Euro. More terrible things are that many countries including Germany and US have huge exposures to the Spanish debts. See the Spanish "Ghost Towns" here and details about its crisis. In the line the next crisis may come with Portugal, Italy, Belgium, and even France. So what can you do from the trading perspective?
Well, the easiest thing to short Euro is to buy EUO. Buying EUO is just like buying a stock with no time limit. You can hold it for as long as you like if it goes the direction as you are hoping for. Currently it costs about $21 per share ($2100/100 shares). However, if you would like to have a bit more juice with some leverage, you may think about its options. You pay less for the same number of shares you'd like to control and the potential gain is much bigger if you are right. Of course, if you are wrong, you may lose all the money you put in but just limited to the amount you bet with. You also have to think about the time limitation with options. Personally I like the long-term options as I think Euro has a long way to go down. E.g. EUO $17 call option expired in Jan 2013 (EUO130119C00017000). You may buy this call option (to bet it to go up) likely around $5 or so per share (one contract = $500/100 share) for about 2 years time period. If EUO dose increase during the next year, ie. Euro further depreciates in 2011, the percentage increase for the call option will be much bigger than if you simply buy EUO.
We are heading to Portugal for the Christmas time. Likely this is my last blog for this year. Wish you all the best for the holiday season. Hope my blogs have given you at least some food for thoughts and wish prosperity will come more with you in the new year.
MERRY CHRISTMAS AND HAPPY NEW YEAR!
They have just gone through Greece and Ireland, right? Now comes Spain and you may have heard that Moody's has downgraded the Spain's credit ratings. This is a big deal, friends. It means on top of the already very dire financial situation Spain is facing, it is more costly and difficult for them to borrow money. Spain is much bigger than Greece and Ireland in terms of its economy and I'm not sure there is any possibility to bail it out without a deadly consequence for the Euro. More terrible things are that many countries including Germany and US have huge exposures to the Spanish debts. See the Spanish "Ghost Towns" here and details about its crisis. In the line the next crisis may come with Portugal, Italy, Belgium, and even France. So what can you do from the trading perspective?
Well, the easiest thing to short Euro is to buy EUO. Buying EUO is just like buying a stock with no time limit. You can hold it for as long as you like if it goes the direction as you are hoping for. Currently it costs about $21 per share ($2100/100 shares). However, if you would like to have a bit more juice with some leverage, you may think about its options. You pay less for the same number of shares you'd like to control and the potential gain is much bigger if you are right. Of course, if you are wrong, you may lose all the money you put in but just limited to the amount you bet with. You also have to think about the time limitation with options. Personally I like the long-term options as I think Euro has a long way to go down. E.g. EUO $17 call option expired in Jan 2013 (EUO130119C00017000). You may buy this call option (to bet it to go up) likely around $5 or so per share (one contract = $500/100 share) for about 2 years time period. If EUO dose increase during the next year, ie. Euro further depreciates in 2011, the percentage increase for the call option will be much bigger than if you simply buy EUO.
We are heading to Portugal for the Christmas time. Likely this is my last blog for this year. Wish you all the best for the holiday season. Hope my blogs have given you at least some food for thoughts and wish prosperity will come more with you in the new year.
MERRY CHRISTMAS AND HAPPY NEW YEAR!
Sunday, December 12, 2010
Successful Investing (2): Be Inactive
I think there are 4 features which are most important in successful investing. I call them LIVE. Last time I detailed about "Lonely". Today I will talk about "Inactive".
Not sure if you have the same experience. At least I had and I think most of amateur investors will have the same behavior. In the past, I just could not have cash in my hands. I wanted to invest them as much as possible. Otherwise, I just felt I missed some big opportunities and wasted my money. So I frequently traded, in and out all the time. Of course I won some trades but most of the time, I lost. I always ran into such a situation that when I did see some really great opportunity, I had no money to work for me. So why is active trading not a good investment behavior?
If you study the characteristics of most successful investors in history, you will find they have a very common nature: be very inactive. One of the greatest living investors in the world, Jim Rogers, once said something like: I don't move often and just wait until the time when the money is lying at the corner. I then simply go there to pick it up. So what's the magic of being inactive? There are four things you will achieve by being very active in trading: first, you are among the 80-90% of those so-called investors in the market. Statistics have shown that 80-90% of people who invest in the stock market will ultimately lose money. So in essence you have put yourself in the pool with a 80-90% probability of failure for your trading positions. Honestly ask yourself if you are a frequent trading person: have you made good money over time? Secondly, you simply give money to your broker as they are the most happy persons to collect trading fees with zero risk! Thirdly, you will most likely significantly increase your tax bill. Capital gain, if held for over a year, enjoys a lower tax rate. Frequent trading may give up much of that low tax rate. Lastly but not the least, you will not have the cash reserve to invest when a real great opportunity comes.
However, don't get me wrong. Being inactive does not mean you are really doing nothing. Actually you should be very active as well. What I really mean is to be inactive physically but very active mentally! While you should refrain from trading frequently, you should actively do your home work to read, digest, and analyze to identify what are the best investment opportunities you need to focus on and put your hard-earned money in. When such opportunities are identified, you should also determine when is the best time to get in. Even you put money with the best company in the world, you may still lose all your money if you invest at a wrong time, period!
You may notice that I haven't talked about investing in specific stocks in the past months. It is true that while I'm sitting in a substantial pile of cash right now, I haven't made any long trades for many months now. On the contrary, I have made several trades to short, as you should know, for Euro (EUO), the whole market via volatility index (VXX), gold (NEM), and rare earth (MCP). It dose not mean I don't have any long positions. Actually I have a lot of long positions, which I placed them 1-2 years ago. While I'm also enjoying the ongoing market rally for my long positions with quite hefty paper gains, I have become increasingly nervous of the extreme complacence of the market. I think we are very close to the tipping point for some very severe market correction, against which I only want to hedge myself with short positions. So personally I'm very inactive at the moment and mostly observe and sit at sidelines. However, I'm very active in thinking and researching to be prepared to get in with all the force when the moment is right. I advise you to do the same.
Not sure if you have the same experience. At least I had and I think most of amateur investors will have the same behavior. In the past, I just could not have cash in my hands. I wanted to invest them as much as possible. Otherwise, I just felt I missed some big opportunities and wasted my money. So I frequently traded, in and out all the time. Of course I won some trades but most of the time, I lost. I always ran into such a situation that when I did see some really great opportunity, I had no money to work for me. So why is active trading not a good investment behavior?
If you study the characteristics of most successful investors in history, you will find they have a very common nature: be very inactive. One of the greatest living investors in the world, Jim Rogers, once said something like: I don't move often and just wait until the time when the money is lying at the corner. I then simply go there to pick it up. So what's the magic of being inactive? There are four things you will achieve by being very active in trading: first, you are among the 80-90% of those so-called investors in the market. Statistics have shown that 80-90% of people who invest in the stock market will ultimately lose money. So in essence you have put yourself in the pool with a 80-90% probability of failure for your trading positions. Honestly ask yourself if you are a frequent trading person: have you made good money over time? Secondly, you simply give money to your broker as they are the most happy persons to collect trading fees with zero risk! Thirdly, you will most likely significantly increase your tax bill. Capital gain, if held for over a year, enjoys a lower tax rate. Frequent trading may give up much of that low tax rate. Lastly but not the least, you will not have the cash reserve to invest when a real great opportunity comes.
However, don't get me wrong. Being inactive does not mean you are really doing nothing. Actually you should be very active as well. What I really mean is to be inactive physically but very active mentally! While you should refrain from trading frequently, you should actively do your home work to read, digest, and analyze to identify what are the best investment opportunities you need to focus on and put your hard-earned money in. When such opportunities are identified, you should also determine when is the best time to get in. Even you put money with the best company in the world, you may still lose all your money if you invest at a wrong time, period!
You may notice that I haven't talked about investing in specific stocks in the past months. It is true that while I'm sitting in a substantial pile of cash right now, I haven't made any long trades for many months now. On the contrary, I have made several trades to short, as you should know, for Euro (EUO), the whole market via volatility index (VXX), gold (NEM), and rare earth (MCP). It dose not mean I don't have any long positions. Actually I have a lot of long positions, which I placed them 1-2 years ago. While I'm also enjoying the ongoing market rally for my long positions with quite hefty paper gains, I have become increasingly nervous of the extreme complacence of the market. I think we are very close to the tipping point for some very severe market correction, against which I only want to hedge myself with short positions. So personally I'm very inactive at the moment and mostly observe and sit at sidelines. However, I'm very active in thinking and researching to be prepared to get in with all the force when the moment is right. I advise you to do the same.
Wednesday, December 8, 2010
Follow up regarding Orexigen
Obviously I was on the wrong side betting. However, I'm not sure this is the end of the game, at least from my perspective. While more experts voted positively for the drug, Contrave, the discussions and comments even from those voted for it were actually quite negative. I believed 2 or 3 experts used the word "technically meeting the criteria" when discussing about the results and were questioning about the clinical significance. Safety including cardiovascular effect as well as seizure was definitely a huge concern.
So what I'd do? I would simply take the loss and walk away if I were not aware of the discussions. However, given the information as well as the fact that the final decision is in the hands of the FDA, I still doubt highly that the FDA will give a straightforward approval. More likely it may be either a very restrictive indication which will mean much less commercial value for the company or an approvable letter requesting more data or even studies before final approval. If that happens, it will be a huge blow to the stock price, which is currently priced in a full approval outright. If the hype for the stock is maintained in the next few weeks till end of Jan when the FDA decision is due, I may bet again for a negative decision from the FDA.
So what I'd do? I would simply take the loss and walk away if I were not aware of the discussions. However, given the information as well as the fact that the final decision is in the hands of the FDA, I still doubt highly that the FDA will give a straightforward approval. More likely it may be either a very restrictive indication which will mean much less commercial value for the company or an approvable letter requesting more data or even studies before final approval. If that happens, it will be a huge blow to the stock price, which is currently priced in a full approval outright. If the hype for the stock is maintained in the next few weeks till end of Jan when the FDA decision is due, I may bet again for a negative decision from the FDA.
Thursday, December 2, 2010
A Quick Money Opportunity
I just noticed that the call options for Orexigen (OREX) is skyrocketing right now. This company has a weight-loss drug, Contrave, which is scheduled for the FDA advisory committee meeting on Tue, Dec 7. People are betting that this drug will get a positive recommendation from this meeting and the stock is jumping 14.5% higher today. I'm not arguing it is not possible that the drug may succeed. However, I think the chance of failure is equally high. To me, it is a 50-50 bet. Given such an euphoria expected for its success, I see a potentially high rewarding trading for a quick profit within days to bet for its failure.
Two weight-loss drugs have failed this year due to concerns of potential cardiac side effects with such drugs. The FDA now has a very high risk-aversion for potential cardiac side effects for this population. People with obesity, although very bad from the public health perspective, are actually considered "healthy" physically and therefore there is a very low tolerability for any side effects, especially cardiac effects. Contrave contains naltrexone and bupropion. I used to work on bupropion and I know it has been associated with quite significant side effects. It was used for smoking cessation with the drug name called Zyban and it had got a huge public fuss due to its potential cardiac problems. My gut feeling is that Contrave won't go well at the FDA advisory meeting. Of course, this is purely a speculation and I'm ready for a 100% loss.
So here is what I'm doing. Given a high risk of this speculation, I won't bet with too much money, just a few thousands. I bought CREX $3 put options expired Dec 18, which is traded at $0.3-0.35 per contract at the moment. If I'm right, I will easily pocket in a few thousand dollars within days. If I'm wrong, I will lose all the money on the table. This is the beauty of options, with which you can define the overall loss if you are wrong for a trade but with a potentially unlimited upside gain if you are right.
Two weight-loss drugs have failed this year due to concerns of potential cardiac side effects with such drugs. The FDA now has a very high risk-aversion for potential cardiac side effects for this population. People with obesity, although very bad from the public health perspective, are actually considered "healthy" physically and therefore there is a very low tolerability for any side effects, especially cardiac effects. Contrave contains naltrexone and bupropion. I used to work on bupropion and I know it has been associated with quite significant side effects. It was used for smoking cessation with the drug name called Zyban and it had got a huge public fuss due to its potential cardiac problems. My gut feeling is that Contrave won't go well at the FDA advisory meeting. Of course, this is purely a speculation and I'm ready for a 100% loss.
So here is what I'm doing. Given a high risk of this speculation, I won't bet with too much money, just a few thousands. I bought CREX $3 put options expired Dec 18, which is traded at $0.3-0.35 per contract at the moment. If I'm right, I will easily pocket in a few thousand dollars within days. If I'm wrong, I will lose all the money on the table. This is the beauty of options, with which you can define the overall loss if you are wrong for a trade but with a potentially unlimited upside gain if you are right.
Tuesday, November 30, 2010
When The Dollar Dies
While you may think this is simply a fiction, it is becoming more and more real that we have stepped onto the journey which is leading towards the end of dollar. Even though I'm not saying that this will be happening overnight, I highly suggest that you should be prepared for the unavoidable outcome. Given that, I recommend that you spend a few minutes to watch this video to experience in advance the day when the US dollar dies.
Similar to my very dim attitude toward the Euro, I think the US dollar will end very badly and hyperinflation is inevitable. Of course this is a long-term trend. In a very short term, the US dollar may rise significantly, which is already starting. The Euro is in a much worse shape and that's why I'm shorting Euro with EUO. If you want to take a ride for the rising dollar, you may buy UUP, an USD index bullish ETF. To bet against the US dollar for the long term trend, there are quite a few strategies. The most direct way is to buy USD bearish ETFs such as UDN. The better way is to take the opportunity of any gold and/or sliver correction to long gold/sliver. Shorting long-term US treasury bonds is another very good way to bet against the coming hyperinflation.
Consider you have been warned!
Similar to my very dim attitude toward the Euro, I think the US dollar will end very badly and hyperinflation is inevitable. Of course this is a long-term trend. In a very short term, the US dollar may rise significantly, which is already starting. The Euro is in a much worse shape and that's why I'm shorting Euro with EUO. If you want to take a ride for the rising dollar, you may buy UUP, an USD index bullish ETF. To bet against the US dollar for the long term trend, there are quite a few strategies. The most direct way is to buy USD bearish ETFs such as UDN. The better way is to take the opportunity of any gold and/or sliver correction to long gold/sliver. Shorting long-term US treasury bonds is another very good way to bet against the coming hyperinflation.
Consider you have been warned!
Wednesday, November 24, 2010
The reality of EU and its implication on the Euro
First of all, HAPPY THANKSGIVING to all of you. We are eager to flying to CA to visit our son for the next few days. So no long blog today. However, I really think you should read this report regarding the EU very depressing situation. As I said before in my blog, I doubt the Euro will even survive for another 10 years and I'm more negative now when seeing what is going on. I just hope Portugal will not deteriorate so fast to impact on our planned visit to Lisbon in the coming Christmas time.
I hope you have bought EUO, an ETF to bet against the Euro strengthening, which I have told you several times. This is a big trend trade, for which you should not be so much caring about the day to day fluctuations of its price. Even though my timing was not perfect, my positions are definitely profitable now and will be more over time, since I'm ridding correctly with a big trend. Coincidentally I also shorted an index fund (EWP) for Spain stocks as I have got a very negative opinion on Spain about its economy for some time. It was again against me initially as I was also a bit early. But now herd investors have suddenly awaken and realized it was not a good idea to long Spain stocks. So about 40% gain so far for me to short Spain. This is the beauty of identifying a trend and stick to it.
Wish all of you a very peaceful and happy long holiday weekend!
I hope you have bought EUO, an ETF to bet against the Euro strengthening, which I have told you several times. This is a big trend trade, for which you should not be so much caring about the day to day fluctuations of its price. Even though my timing was not perfect, my positions are definitely profitable now and will be more over time, since I'm ridding correctly with a big trend. Coincidentally I also shorted an index fund (EWP) for Spain stocks as I have got a very negative opinion on Spain about its economy for some time. It was again against me initially as I was also a bit early. But now herd investors have suddenly awaken and realized it was not a good idea to long Spain stocks. So about 40% gain so far for me to short Spain. This is the beauty of identifying a trend and stick to it.
Wish all of you a very peaceful and happy long holiday weekend!
Monday, November 15, 2010
Successful Investing (1): Be Lonely
As an old saying goes: Personality determines one's fate. I'm often asked what stock(s) I can recommend. Actually successful investing is not too much determined by what stocks one has traded; rather it is more importantly determined by how one has traded. In other words, one's investing behaviors (personality) will ultimately determine his/her success (fate). Therefore I will share some thoughts about successful investing based on what I have learnt over years from my mistakes and successes.
Please honestly ask yourself: when do you feel most comfortable to buy stocks? Most people will likely answer: when the stock market keeps going up and a lot people are buying. This is called herd behavior. I can understand. After all, human beings are social animals. People feel safer when being with other people and feel scared when being left alone. However, if you really want to be successful in investment, you have to be used to being lonely, very lonely. Actually the greatest investment opportunities arise at the time when everyone is crazy about a stock and you want to short/sell, or when everyone is extremely depressed and you want to long/buy. The reason is actually very simple. The stock market is simply a gigantic money game. The stock market itself will not generate any money; it simply moves money from one pocket to another. Now let me ask you: do you think most people in the stock market will win or lose. If your answer is win, I will ask you to sell all your stocks immediately, run from the market and never touch any stocks, because you are too stupid to even play with any stocks. You are doomed to lose. The answer is for sure that most people will lose money in the stock market. If you understand this, then the logic becomes really obvious: if you follow most of the people in the market (the herd), you will most likely lose money. You have to stay lonely and do the opposite of what most of other "investors" will do.
This is of course easy said then done. It took me years to finally understand this and more importantly to be able to truly practice like that. In my earlier years of investing life, it was just like a vicious cycle: I felt good to buy stocks when everyone was buying but the market usually tipped over quickly. I then became depressed along with others and sold my stocks at loss eventually. Over times, I could never really make money. I was determined to change my fate by first changing my behaviors. My most proud experience of truly acting lonely was at the extremely depressed abyss of the most recent crisis. As you know, this has been the most severe bear market no any active investors have ever experienced since the Great Depression. I'd be a liar if I told you that I felt very good and not scared when going through this period but I knew it was the best time to invest if I really wanted to make money. I held my breath, pinched my nose, and closed my eyes when I put through my orders. Everything has been a history by now but I'm really happy when looking back to see what I did: I bought MO (Atria) at $14.99 on Dec 29, 08, MCD (McDonald) at $54.86 on Feb 20, 09, MSFT at $18.96 on Dec 29, 08, and EPD at $16.92 on Mar 6, 09. Based on the current prices, they have risen 65%, 44%, 38% and 156%, respectively in less than 2 years. I made another lonely bet recently to short MCP (Molycorp) less than 10 days ago. This is a stock of rare earth which has become extremely popular recently due to the fact that China is said to be controlling the export of rare earth. After studying its fundamentals as well as with the technical analysis, I think this stock has too much froth in it and such euphoria cannot last long. So I shorted the stock. The stock reached its peak at around $40 end of Oct and has come down to around $33 at the moment. Since I used options to trade, my paper profit has been around 25% in about 10 days or so.
If you are not comfortable to be lonely in investing, think it in another way. Do you want to buy at lower prices when you go shopping or you want to pay higher prices. Unless you are stupid, I guess you would want to buy stuff at lower prices. Do the same thing when buying your stocks when they are low in prices, which is often at the time no one else wants to buy it. Of course, do your home work and only buy the good ones at low prices!
Please honestly ask yourself: when do you feel most comfortable to buy stocks? Most people will likely answer: when the stock market keeps going up and a lot people are buying. This is called herd behavior. I can understand. After all, human beings are social animals. People feel safer when being with other people and feel scared when being left alone. However, if you really want to be successful in investment, you have to be used to being lonely, very lonely. Actually the greatest investment opportunities arise at the time when everyone is crazy about a stock and you want to short/sell, or when everyone is extremely depressed and you want to long/buy. The reason is actually very simple. The stock market is simply a gigantic money game. The stock market itself will not generate any money; it simply moves money from one pocket to another. Now let me ask you: do you think most people in the stock market will win or lose. If your answer is win, I will ask you to sell all your stocks immediately, run from the market and never touch any stocks, because you are too stupid to even play with any stocks. You are doomed to lose. The answer is for sure that most people will lose money in the stock market. If you understand this, then the logic becomes really obvious: if you follow most of the people in the market (the herd), you will most likely lose money. You have to stay lonely and do the opposite of what most of other "investors" will do.
This is of course easy said then done. It took me years to finally understand this and more importantly to be able to truly practice like that. In my earlier years of investing life, it was just like a vicious cycle: I felt good to buy stocks when everyone was buying but the market usually tipped over quickly. I then became depressed along with others and sold my stocks at loss eventually. Over times, I could never really make money. I was determined to change my fate by first changing my behaviors. My most proud experience of truly acting lonely was at the extremely depressed abyss of the most recent crisis. As you know, this has been the most severe bear market no any active investors have ever experienced since the Great Depression. I'd be a liar if I told you that I felt very good and not scared when going through this period but I knew it was the best time to invest if I really wanted to make money. I held my breath, pinched my nose, and closed my eyes when I put through my orders. Everything has been a history by now but I'm really happy when looking back to see what I did: I bought MO (Atria) at $14.99 on Dec 29, 08, MCD (McDonald) at $54.86 on Feb 20, 09, MSFT at $18.96 on Dec 29, 08, and EPD at $16.92 on Mar 6, 09. Based on the current prices, they have risen 65%, 44%, 38% and 156%, respectively in less than 2 years. I made another lonely bet recently to short MCP (Molycorp) less than 10 days ago. This is a stock of rare earth which has become extremely popular recently due to the fact that China is said to be controlling the export of rare earth. After studying its fundamentals as well as with the technical analysis, I think this stock has too much froth in it and such euphoria cannot last long. So I shorted the stock. The stock reached its peak at around $40 end of Oct and has come down to around $33 at the moment. Since I used options to trade, my paper profit has been around 25% in about 10 days or so.
If you are not comfortable to be lonely in investing, think it in another way. Do you want to buy at lower prices when you go shopping or you want to pay higher prices. Unless you are stupid, I guess you would want to buy stuff at lower prices. Do the same thing when buying your stocks when they are low in prices, which is often at the time no one else wants to buy it. Of course, do your home work and only buy the good ones at low prices!
Monday, November 8, 2010
'Dumb Money' Returns to Stocks
While I'm washing my face off eggs for not being able to pick the exact top of the market (was I really trying to do so?), I come across this article ( see here). Instead of letting you be tired of me bugging you again and again about how risky this market is at the moment, this article may provide you one perspective that you should be very cautious if you are itching of getting long and buying stocks now. Of course it is your money and your decision what to do. Don't complain you are not warned!
Sunday, November 7, 2010
The biggest bubble is bursting?
If someone asks you to lend some money for 30 years and you will be paid by about 4% or so per year, will you be happy and lend the money? You may guffaw for such a stupid request. I agree and I won't, period. But wait, there are many, or probably say a huge amount of people indeed willing to do so. Who has such a magic power to lure people into such an obvious trap? The US government! Since the financial crisis, the yield of the long-term government bonds has been coming down relentlessly to the laughable 4% or so for a 30 years commitment and the bond price has increased substantially (the bond yield and the price have an inverse relationship). I honestly don't understand there will be anyone with a right mind to buy such bonds at such a low yield but of course there are so many things out there beyond my understanding. People think it is safer to park their money in the US government bonds, although to me this is a guarantee to lose money if you factor in the potential inflation over the 30 years period. I have heard many market gurus calling it the biggest bubble in brewing. I'm not sure if it is THE biggest but I agree it is at least a huge bubble. Check TLT, which tracks the long-term bond prices.
It looks like the tide is changing its direction. While many people were expecting further reduction of the long-term bond yield (meaning increasing prices of the bonds) following the Fed's initiative of a huge money printing, the result has actually been just the opposite. Since the Fed's purchase of the bonds are mainly those up to the 10 year period, there is not enough money left to push further down the yield of the 30 year bonds. Investors started to realize that there would be a huge risk of inflation down the road with the Fed's reckless money policy, which will certainly cause the collapse of the long-term bonds. So it may be a good timing to start bet against the long-term US government bonds. The easiest way to do so is to buy TBT, which corresponds to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond index. Certainly there will be up and down, especially if the market corrects when many people will run to the treasury bonds again for safety. However, I firmly believe the long term trend is clear that the US treasury bonds will lose its value, and big time! Again, the best way to safely establish your position is to use the dollar averaging technique. Make up your own mind!
It looks like the tide is changing its direction. While many people were expecting further reduction of the long-term bond yield (meaning increasing prices of the bonds) following the Fed's initiative of a huge money printing, the result has actually been just the opposite. Since the Fed's purchase of the bonds are mainly those up to the 10 year period, there is not enough money left to push further down the yield of the 30 year bonds. Investors started to realize that there would be a huge risk of inflation down the road with the Fed's reckless money policy, which will certainly cause the collapse of the long-term bonds. So it may be a good timing to start bet against the long-term US government bonds. The easiest way to do so is to buy TBT, which corresponds to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond index. Certainly there will be up and down, especially if the market corrects when many people will run to the treasury bonds again for safety. However, I firmly believe the long term trend is clear that the US treasury bonds will lose its value, and big time! Again, the best way to safely establish your position is to use the dollar averaging technique. Make up your own mind!
Monday, November 1, 2010
A huge warning sign
I'm pretty busy lately and don't have much time to write. But I cannot believe what I saw today and cannot help but write this short note as there is a huge warning sign for the current stock market. If you know any history and understand the dynamic of the stock market, you should know whenever a major public media announces something for a market, it almost certainly just means the opposite. The public media, reflecting the popular sentiment for the stock market, is notorious and worst regarding its timing. If it claims it is the bull market, it actually means the top is reached. We just saw this today. Barrons, the well-known investment journal, announced "Bye, Bye, Bear" today on its cover. See yourself here: http://www.businessinsider.com/barrons-bye-bye-bear-2010-11
You know by now where I'm standing. I have kept adding VXX positions in the past several weeks. I don't think I need to wait long before telling you how I have been doing with this trading idea. In addition, there are many ETF funds to short the market:
It is very easy to trade them by simply buying them just as usual stocks. Of course, be aware of the risk associated with any trading and make your own decision what to do.
You know by now where I'm standing. I have kept adding VXX positions in the past several weeks. I don't think I need to wait long before telling you how I have been doing with this trading idea. In addition, there are many ETF funds to short the market:
| ETF Name | Ticker | Benchmark Index |
|---|---|---|
| Short QQQ | PSQ | Nasdaq-100 |
| Short Dow 30 | DOG | DJIA |
| Short S&P 500 | SH | S&P 500 |
| UltraShort QQQ | QID | Nasdaq-100 |
| UltraShort Dow 30 | DXD | DJIA |
| UltraShort S&P 500 | SDS | S&P 500 |
It is very easy to trade them by simply buying them just as usual stocks. Of course, be aware of the risk associated with any trading and make your own decision what to do.
Monday, October 25, 2010
Is Credit Suisse reading my blog?
What a coincidence! It is almost like Credit Suisse is reading my blog regarding the looming rally of the US dollars. See here: http://pragcap.com/is-the-dollar-rally-about-to-kill-risk-assets.
You may recall, a couple of weeks ago, I started to short Euro as I think there was too much bearish call for the US dollar and too much bullish call for Euro. I was a bit earlier but I still stick to it. I'm adding more positions to the EUO trade. Now Credit Suisse said that there is a 100% chance that the US$ will rally in such an extremely bearish mood. They of course have unlimited sources of information and sophisticated analysis technique to come to this conclusion. Let's see how this will pan out.
You may recall, a couple of weeks ago, I started to short Euro as I think there was too much bearish call for the US dollar and too much bullish call for Euro. I was a bit earlier but I still stick to it. I'm adding more positions to the EUO trade. Now Credit Suisse said that there is a 100% chance that the US$ will rally in such an extremely bearish mood. They of course have unlimited sources of information and sophisticated analysis technique to come to this conclusion. Let's see how this will pan out.
Sunday, October 24, 2010
Now What?
Apparently the market can be irrational longer than anyone can imagine. This is exactly what is happening now. While fundamentally and technically everything is pointing towards a sharp and significant correction at least for a short period of time, the market just refuses to budge. The market is testing one's will and determination as well as patience. I'm just adding more and more positions to my panic trade, i.e. VXX. I'm pretty sure I will prevail eventually!
If you have a lot of cash, what you should do with it? Saving at the bank? It is almost like a joke to park your money in any saving account given the near zero interest paid now. By the way, if you really want to "save" your money in the bank, I'd highly recommend one of the best online banks, EverBank. It has not been involved in the mortgage mess at all and it is very safe. Relatively it has paid a high interest (over 1%). You can check the safety of any bank at this site (http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx). Just compare your current bank with EverBank to see which one is safer and better. I'm not receiving any commission by recommending EverBank. I just like it.
Will I recommend to invest in stocks? Yes and No, depending on your timeframe and your situation. As I alluded to above, at the moment it is a very dangerous and risky period. I expect a sharp market correction any time. Regardless how good a company is, its stock price may be brought down in a shaky market. Personally I don't want to buy any stocks right now as I expect a better price will come later. On the other hand, if you have a long timeframe and do your home work, there are plenty of solid companies with a great and dominant business and an unbelieveable moat but a very cheap stock price. More importantly, many such companies pay consistently increasing dividends, which are much better than the interests you may get from your saving account. Actually dividend is one of the secrets for successful investment, but it requires a long-term commitment. If you haven't invested much, it may not be a bad idea to start to put some money into work by buying such good stocks. I'd advise to use the dollar averaging technique to gradually establish your positions for better prices. For example, if your final position for a stock is 1000 shares, you may buy 200 shares every several weeks so that in average you may get a much better price than simply buy all the 1000 at one time point. Among many great stocks, I'm really interested in Microsoft (MSFT/dividend yield 2.5%) and Intel (INTC/dividend yield 3.2%). Great business and safest companies but beaten-down share prices. Even in an overall market correction, I think their prices will not drop as much as other stocks. You can sleep very well with such companies. Another company I become more interested in lately is Eli Lily (LLY). It got a big hit in the last several days due to a significant setback in a highly expected diabetes drug Bydureon, which got delayed in approval by the FDA. When a good company got some short-term headwind and its stock price got a hit, it is actually a great time to buy the stock. Eli Lily is also paying a huge dividend at a yield of 5.4% at the current price (around $35). I think it is a very safe company with a great dividend. If you know how to play with options, you may sell its call options (no risk trading) to juice your monthly income safely with such stocks. Suddenly you may be looking at 15-20% income plus any stock price appreciation, if any. So do your homework.
Sunday, October 17, 2010
Mannage your 401K wisely
For many people, 401K is a great way to defer being taxed now and let the retirement money grow faster. This is especially true if your employer also matches some of your contributions. So it would be wise to take care of your nest eggs carefully and not let them drop inadvertently due to your carelessness. Unfortunately it it not an easy job to manage your 401K since the choices of investment are usually very limited for 401K accounts. Even worse, the only investment vehicles within 401K are usually limited to mutual funds. For those who know the investment, maybe over 90% of mutual funds are losing money in the long run. So our hands are significantly tied up in making a wise decision what to invest in our 401K. Having said that, you should still not simply give up and let it unattended. I'm managing my wife's 401K and below I use that as an example regarding what to invest within the limit of her 401K defined by their company. Of course, each 401K is different in terms of fund choices but the principle may be similar.
The first thing is to determine what strategy I want to use. For 401K, I will not actively monitor it as it is not for trading. When I decide what to invest, I will leave it for months or even longer unless the situation significantly changes. So I want to be diversified and follow the big trend as I'm seeing now. Right now, I think the investment world is very risky and we are not out of the woods yet, far from it. While the momentum for a bull market is very strong as everyone is betting the Fed will print more and more money to prop up the stock market, the economic situation may get significantly worse over time and a double dip is not something not possible. If that happens, the stock market may drop astonishingly. So I want my money over 50% in the safe hands. However, I also don't want to miss the momentum of a rallying market totally, especially I think some international exposure may be much less risky than in the US market. Also, I think the big bull of the resources sector including precious metals has a long way to go and I definitely want to be part of that. With this overall strategy decided, the next is to determine what funds to invest. When you choose mutual funds, very importantly you have to look at their long term performance, best for those funds with a 10 year performance track record. For most funds, they may perform very well during a short period of time due to the mercy of the overall market, but their long-term performance is usually very poor. I'd only be interested in those with a very consistent great performance for 10 years. By scanning what is available in my wife's 401K, I decided to put money in the following 3 funds:
(1) PIMCO Total Return A (the best and largest bond fund in the world).
I put most of the money in this fund. In the investment world, Bill Gross is called the Bond King. He is managing an over $200 billion bond fund, which has never lost money in the past 10 years, even in the worse market year of 2008. If you want to be safe with your money, no one else you should go to. Of course, safety is usually associated with low return. But as I said, I don't believe this market yet and I want to be safe with most of my money at the expense of high return. (2) Prudential Jennison Natural Resources A
While the natural resources section could be volatile, I don't want to be out of this great bull market completely. It is possible you may not see a positive return in the short term, I believe you would be happy to be with the trend in the long run.
(3) Fidelity Canada
As I said, I still want to be exposed to the equity market to some extent and I think Canadian market is a much safer bet than the US. The overall Canadian economy is in much better shape with a very sound financial structure and the regulatory environment. The long-term track record of this fund is also super.
I hope the above example would give you some ideas of how to wisely manage your 401K.
Wednesday, October 13, 2010
I'm losing money but I'm very happy
I was too early when I said to buy VXX in my first blog on Sep 28, but I'm really excited when I see the increasing loss on my account with the VXX positions. I must be insane again, you think. No, I'm very sane and know what I'm talking about. Actually the market is insane now. The market's sustained complacency has reached to the extreme rarely seen. I recommend you read the WSJ article regarding VIX, which is the index I'm trading against by using VXX.
http://finance.yahoo.com/banking-budgeting/article/111008/volatility-index-says-investors-are-calmer?mod=bb-budgeting&sec=topStories&pos=2&asset=&ccode=
This is not sustainable. The market volatility will surely come back, and big time. Therefore I have been adding more VXX positions in the past weeks as each day a greater profit opportunity is presenting itself in front of my eyes. I let other people, who bet the market will continue to go up this way for long long time without correction, pay me first so that I can wait till Jan 2012 for the panic to come back. In the layman's language, many people think the market will not fluctuate at all but keep increasing in the next 15 months. They are so sure that they are willing to pay me bigger and bigger money to bet against them. Is it possible that the market will only go up in the next year or so? Anything is possible but to me the probability is close to zero. That's why I'm really happy even though I'm losing money at the moment but "on paper" only.
If you dare enough, buy some VXX now!
http://finance.yahoo.com/banking-budgeting/article/111008/volatility-index-says-investors-are-calmer?mod=bb-budgeting&sec=topStories&pos=2&asset=&ccode=
This is not sustainable. The market volatility will surely come back, and big time. Therefore I have been adding more VXX positions in the past weeks as each day a greater profit opportunity is presenting itself in front of my eyes. I let other people, who bet the market will continue to go up this way for long long time without correction, pay me first so that I can wait till Jan 2012 for the panic to come back. In the layman's language, many people think the market will not fluctuate at all but keep increasing in the next 15 months. They are so sure that they are willing to pay me bigger and bigger money to bet against them. Is it possible that the market will only go up in the next year or so? Anything is possible but to me the probability is close to zero. That's why I'm really happy even though I'm losing money at the moment but "on paper" only.
If you dare enough, buy some VXX now!
Wednesday, October 6, 2010
Gold: Short-term correction looming
I'm a big bull for gold. I started my first investment in gold back in 2004. In the past 6 years or so, I have put money into various gold products including gold mining stocks, paper gold, gold bullion, gold coins.... you name it. So what happens to me, such a gold bug, to call a gold correction, in the middle of a huge gold rally, almost on a daily basis? No, I'm not bearish on gold at all. On the contrary, I'm even more bullish on the gold long-term trend. However, whenever it is too crowded in an investment idea, I become nervous. Nowadays, you will hear all the talking heads to recommend gold investment on CNBC; you will see all kinds of ads on TV to promote sales of gold. More worrisome for me is to see the record-breaking price of gold everyday in the past 2 weeks. While it is great for my gold positions with record gold price, it is not healthy to see any investment to appreciate too fast within a short period of time. It is just not sustainable! My gut feeling tells me a short-term correction in gold, which may even be severe, is coming. So what will I do with this prediction?
Over these years, gold has corrected many times on its way up. It has never been a straight upward line. Even in the last huge gold bull in late 70s and early 80s, gold price corrected almost 50% before moonshotting from $200 to $800. In the last several corrections, I sold some of my positions hoping to get a better chance to go back. But honestly most often than not, gold quickly reversed its course and rallied even higher. Given such lessons, I won't sell my gold positions this time regardless. No way! On the other hands, I do want to protect my paper profits. There is an easy way to do that actually. An ETN, symbol DZZ, will do the work. DZZ seeks to replicate twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return. So it is a leverage tool, which will increase roughly twice against the reduction of gold price (but not exactly against the gold price). I use DZZ as an insurance to offset some of loss from my gold positions if a severe correction indeed comes. Even if you don't have any gold positions at the moment but if you are itching for making some quick money from a gold correction, you may simply buy DZZ. Of course, there is no guarantee for this bet and gold may simply go straight up, although highly unlikely to me. Make your own decision.
Over these years, gold has corrected many times on its way up. It has never been a straight upward line. Even in the last huge gold bull in late 70s and early 80s, gold price corrected almost 50% before moonshotting from $200 to $800. In the last several corrections, I sold some of my positions hoping to get a better chance to go back. But honestly most often than not, gold quickly reversed its course and rallied even higher. Given such lessons, I won't sell my gold positions this time regardless. No way! On the other hands, I do want to protect my paper profits. There is an easy way to do that actually. An ETN, symbol DZZ, will do the work. DZZ seeks to replicate twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return. So it is a leverage tool, which will increase roughly twice against the reduction of gold price (but not exactly against the gold price). I use DZZ as an insurance to offset some of loss from my gold positions if a severe correction indeed comes. Even if you don't have any gold positions at the moment but if you are itching for making some quick money from a gold correction, you may simply buy DZZ. Of course, there is no guarantee for this bet and gold may simply go straight up, although highly unlikely to me. Make your own decision.
Sunday, October 3, 2010
Doomed Euro: Euphoria All Over Again!
I told you it is close but maybe still a bit early for the top of Euro against US$ at the moment. But I cannot help but jumped in when I saw the news about the worsening Irish credit crisis. I'm still thinking it may yet be the top for Euro and it may still be strengthening a bit. However, no one can really pick the exact top for anything. If the Euro trend reverts, it can be swift and violent. And I want to be in the game, even if it means I may see some paper loss initially.
I assume everyone knows what the Euro zone is facing, especially the PIIGS, standing for: Portugal, Italy, Ireland, Greece and Spain. These five countries in the Euro-zone foolishly did what a lot of big-time spenders do, borrow way too much during good times and then run into problems repaying their debt. That, of course, raises the specter of debt defaults, the kind of news that rattles investors and pounds world markets. I urge you to read more about the problems of the PIIGS at http://www.huffingtonpost.com/dan-dorfman/piggs-problems-could-pepp_b_497463.html.
As I told you, I started shorting Euro early this year and made a good profit with it. It was an easy money. But when everyone became so bearish and the trade became so popular by Jun, it was the time to get out and move on. I thought I might not have any good chance to make money again by shorting Euro as it is such a bad currency with so many critical problems involved. But I'm happily wrong! It has not only reverted its course which I did predict, it has done that so powerfully, which is way beyond my expectation. I cannot believe it is all over again with the Euro euphoria and a great money making opportunity presents itself right in front of my eyes AGAIN! Not sure if you have heard Big Mac Index. Long story short: the Economist uses the price of the ubiquitous McDonald's meal to calculate the "Big Mac Index", a guide showing how far from fair value different world currencies are. Currently based on the Big Mac Index, Euro is way too expensive against US$, although it may have not yet reached the point of 50% over-valued, which I hoped for. The great investor, Jim Rogers, once said: I don't move and wait till the time when the money lies in the corner. I simply go there and pick it up. Friends, I really think this is one of the kind moments Rogers has described. Don't miss it.
There is a very easy way to short Euro, using ETF with a symbol EUO. This is an inverse fund with a leverage, i.e. twice the inverse performance of the EUR/USD daily price change. In other words, if Euro increases by 1% against US$, EUO will reduce in price by 2% on that day. Vice versa, if Euro decreases by 1%, EUO will increase by 2%. So it is a perfect way to bet against Euro and we hope EUO will increase to make a profit. As I said, I have got into this trade. Since I may be still a bit early, I'll use a so-called "average down" technique to establish my positions. I stated with a relatively small position to get a foot in. If EUO decreases in the next few days (meaning Euro is strengthening), I will buy more EUO at a reduced price and will do so further down the road. This way, my average cost of the ultimate total position will be substantially reduced. This is a very effective way to establish your positions in trading, so that you won't miss some great opportunities by hopelessly waiting for the lowest price possible. Buying EUO is just as buying any stock, simple and easy. I'm totally convinced that in the next few months, you will be happy to see that you are on the trend to profit. But please be mindful of your position size. Any trade has some risk and don't overkill by betting too much beyond your capacity.
I assume everyone knows what the Euro zone is facing, especially the PIIGS, standing for: Portugal, Italy, Ireland, Greece and Spain. These five countries in the Euro-zone foolishly did what a lot of big-time spenders do, borrow way too much during good times and then run into problems repaying their debt. That, of course, raises the specter of debt defaults, the kind of news that rattles investors and pounds world markets. I urge you to read more about the problems of the PIIGS at http://www.huffingtonpost.com/dan-dorfman/piggs-problems-could-pepp_b_497463.html.
As I told you, I started shorting Euro early this year and made a good profit with it. It was an easy money. But when everyone became so bearish and the trade became so popular by Jun, it was the time to get out and move on. I thought I might not have any good chance to make money again by shorting Euro as it is such a bad currency with so many critical problems involved. But I'm happily wrong! It has not only reverted its course which I did predict, it has done that so powerfully, which is way beyond my expectation. I cannot believe it is all over again with the Euro euphoria and a great money making opportunity presents itself right in front of my eyes AGAIN! Not sure if you have heard Big Mac Index. Long story short: the Economist uses the price of the ubiquitous McDonald's meal to calculate the "Big Mac Index", a guide showing how far from fair value different world currencies are. Currently based on the Big Mac Index, Euro is way too expensive against US$, although it may have not yet reached the point of 50% over-valued, which I hoped for. The great investor, Jim Rogers, once said: I don't move and wait till the time when the money lies in the corner. I simply go there and pick it up. Friends, I really think this is one of the kind moments Rogers has described. Don't miss it.
There is a very easy way to short Euro, using ETF with a symbol EUO. This is an inverse fund with a leverage, i.e. twice the inverse performance of the EUR/USD daily price change. In other words, if Euro increases by 1% against US$, EUO will reduce in price by 2% on that day. Vice versa, if Euro decreases by 1%, EUO will increase by 2%. So it is a perfect way to bet against Euro and we hope EUO will increase to make a profit. As I said, I have got into this trade. Since I may be still a bit early, I'll use a so-called "average down" technique to establish my positions. I stated with a relatively small position to get a foot in. If EUO decreases in the next few days (meaning Euro is strengthening), I will buy more EUO at a reduced price and will do so further down the road. This way, my average cost of the ultimate total position will be substantially reduced. This is a very effective way to establish your positions in trading, so that you won't miss some great opportunities by hopelessly waiting for the lowest price possible. Buying EUO is just as buying any stock, simple and easy. I'm totally convinced that in the next few months, you will be happy to see that you are on the trend to profit. But please be mindful of your position size. Any trade has some risk and don't overkill by betting too much beyond your capacity.
Thursday, September 30, 2010
Get Paid for Agreeing to Buy Discounted Stocks I want
Before jumping to this topic, let me just say that there may a great opportunity around the corner. Euro to me is a doomed currency and I'd like to bet that it may not be alive within 10 years. I made thousands of dollars early this year by shorting Euro (betting devaluation of Euro) and got out of the trade right at the bottom of it in Jun. I'm excited to see Euro is fighting back and appreciating substantially against US$. I think it is still a bit early but very close to its top again. When the time comes, it would be a great opportunity to short it again. Will let you know. Now back to the today's topic.
If I ask you: which price you want to pay for a stock, at $50 or at $40, you may think what a stupid question I'm asking. If I ask again: how about another 12% discount to pay the stock at $35, you would think this guy looks like has lost his mind to even think about such a stupid question. If I ask further: how about you get paid to wait for the chance to buy the above stock with the discounts indicated above, you will certainly think this guy must be insane now without knowing what he is asking! But wait. I'm still mentally sane and it is indeed a legitimate way to invest. Let's see a real example. For my friends working in the pharma industry, many of you must know Genzyme, a Boston biotech company. It is famous for its medications for rare genetic diseases. About 2 years ago Genzyme got a big trouble due to a contamination issue in the manufacturing process. They had to recall some key products which significantly hurt its bottom line. The stock price has since dropped from $80 to around $50 early this year. This has really got my attention. Heck, Genzyme is a fundamentally very sound company with products which have very little competition due to their orphan drug status. Manufacturing problems are not deadly ones, which can be fixed eventually. To me, if the stock drops below $50, it is a good discount and I'd be happy to buy and hold. So I made the following trade. It is called Sell Put, an option trade.
Given that many friends may not be familiar with option, which requires some understanding of the underlying concepts, let me first explain what a put selling means with this real example. I will later post more on the technical details of option trading. For now, simply remember buying "Call" options means betting a stock price will increase (Call up) and buying "Put" options means betting a stock price will decrease (Put down). Therefore in contrast, selling call options means to bet a price decline and selling put options means to bet a price increase. In this case, I sold 10 contracts (1000 shares) of put option of GENZ for a strike price at $40 with a date of Jan 21, 2012. What it means is that, if GENZ price drops below $40 on the date of Jan 21, 2012, I will have the obligation to buy GENZ 1000 shares at $40. For this obligation, I'm immediately getting paid with $5.10 per share (ie $5100 for 10 contracts). If the price is above $40 on 21-Jan-2012, the option expires worthless and I'm off the hook completely and I keep the whole $5100 hard cash in my pocket. Of course, I can also get out of this trade (obligation) at any time before expiry (either with a loss or with a reduced profit depending on the stock market price). The beauty of such trading is that I don't use my cash upfront (but need 20% fund as collateral); rather immediately take in (paid) $5100 deposited in my account. Remember my 3 questions at the beginning? When GENZ was around $50, I wanted to buy it at $40 or below. Since I got paid with $5.1 per share, I would actually just pay about $35 per share ($40-$5.1), a 12% further discount, if I ever have to buy. For me agreeing to wait for the chance to buy at such discounted price within the next 18 months (up to Jan 2012), people are willing to pay me for the chance at $5.1 per share. Do you still think I'm a dummy and insane? A note of the position status. Since Sanofi is trying to buy Genzyme (a happy surprise for me), GENZ is currently traded at around $70, meaning less and less chance that it will drop below $40. Therefore, its put price is around $ 0.5 now. In other words, if I want to totally get out of this trade, I can buy back the put option at $0.5 per share (pay $500 for 10 contracts) to close the position, with a $4500 profit. Not a bad trade for about 6 months without using my own money upfront. I guess you will agree with me now that you probably don't every want to buy any stock outright at its market price, if selling put is possible for the stock. I certainly don't!
I'm telling you this trade now because there may be a great chance in about a month or so for the Merck stock. Merck is currently being sued by J&J and the ruling may be come in about a month. If Merck fails, it may lose its main product, Remicade, a $2-3 billion blockbuster. If this really happens, I think Merck stock may get a hair cut. If it drops around $30, I think it will be a great buy and I will be looking at a trade to get paid for agreeing to buy Merck at a price much less than $30. My fingers-crossed!
If I ask you: which price you want to pay for a stock, at $50 or at $40, you may think what a stupid question I'm asking. If I ask again: how about another 12% discount to pay the stock at $35, you would think this guy looks like has lost his mind to even think about such a stupid question. If I ask further: how about you get paid to wait for the chance to buy the above stock with the discounts indicated above, you will certainly think this guy must be insane now without knowing what he is asking! But wait. I'm still mentally sane and it is indeed a legitimate way to invest. Let's see a real example. For my friends working in the pharma industry, many of you must know Genzyme, a Boston biotech company. It is famous for its medications for rare genetic diseases. About 2 years ago Genzyme got a big trouble due to a contamination issue in the manufacturing process. They had to recall some key products which significantly hurt its bottom line. The stock price has since dropped from $80 to around $50 early this year. This has really got my attention. Heck, Genzyme is a fundamentally very sound company with products which have very little competition due to their orphan drug status. Manufacturing problems are not deadly ones, which can be fixed eventually. To me, if the stock drops below $50, it is a good discount and I'd be happy to buy and hold. So I made the following trade. It is called Sell Put, an option trade.
| $0.50 | -10 | $5.10 | $4,582.33* | 89.54%* |
Given that many friends may not be familiar with option, which requires some understanding of the underlying concepts, let me first explain what a put selling means with this real example. I will later post more on the technical details of option trading. For now, simply remember buying "Call" options means betting a stock price will increase (Call up) and buying "Put" options means betting a stock price will decrease (Put down). Therefore in contrast, selling call options means to bet a price decline and selling put options means to bet a price increase. In this case, I sold 10 contracts (1000 shares) of put option of GENZ for a strike price at $40 with a date of Jan 21, 2012. What it means is that, if GENZ price drops below $40 on the date of Jan 21, 2012, I will have the obligation to buy GENZ 1000 shares at $40. For this obligation, I'm immediately getting paid with $5.10 per share (ie $5100 for 10 contracts). If the price is above $40 on 21-Jan-2012, the option expires worthless and I'm off the hook completely and I keep the whole $5100 hard cash in my pocket. Of course, I can also get out of this trade (obligation) at any time before expiry (either with a loss or with a reduced profit depending on the stock market price). The beauty of such trading is that I don't use my cash upfront (but need 20% fund as collateral); rather immediately take in (paid) $5100 deposited in my account. Remember my 3 questions at the beginning? When GENZ was around $50, I wanted to buy it at $40 or below. Since I got paid with $5.1 per share, I would actually just pay about $35 per share ($40-$5.1), a 12% further discount, if I ever have to buy. For me agreeing to wait for the chance to buy at such discounted price within the next 18 months (up to Jan 2012), people are willing to pay me for the chance at $5.1 per share. Do you still think I'm a dummy and insane? A note of the position status. Since Sanofi is trying to buy Genzyme (a happy surprise for me), GENZ is currently traded at around $70, meaning less and less chance that it will drop below $40. Therefore, its put price is around $ 0.5 now. In other words, if I want to totally get out of this trade, I can buy back the put option at $0.5 per share (pay $500 for 10 contracts) to close the position, with a $4500 profit. Not a bad trade for about 6 months without using my own money upfront. I guess you will agree with me now that you probably don't every want to buy any stock outright at its market price, if selling put is possible for the stock. I certainly don't!
I'm telling you this trade now because there may be a great chance in about a month or so for the Merck stock. Merck is currently being sued by J&J and the ruling may be come in about a month. If Merck fails, it may lose its main product, Remicade, a $2-3 billion blockbuster. If this really happens, I think Merck stock may get a hair cut. If it drops around $30, I think it will be a great buy and I will be looking at a trade to get paid for agreeing to buy Merck at a price much less than $30. My fingers-crossed!
Tuesday, September 28, 2010
Trading Market Panic NOW
Dear Friends,
This is my first blog. So a bit of my self introduction first. I'm a physician by training but I love finance. I started my investment career 15 years ago. Initially in the first few years, my investment results were great as everyone knows what the market looked like before 2000. My portfolio contained a full list of high tech stocks and the value of my portfolio kept increasing almost on a daily basis. Then all of you can guess what was the next: The market came to a full stop and crashed almost overnight around 2000. Same as every amateur investor, I hopelessly held my stock positions, begging the market would come back quickly. Of course it was just a mirage. I lost a fortune and sold my stocks at the bottom of the market. Retrospectively, I could have easily been a millionaire if I simply knew when to get into the market, when to take profits and when to stop loss. Rather I did exactly the opposite. What was the root cause? My ignorance of trading and investment! Understanding of this, I started my intensive and extensive self studies. I've spent all my extra time as far as I can to learn, to absorb, and to practice about investment and trading. After 15 years of accumulation of knowledge and experience, I'm very confident that I'm on my way to prosperity. I have many friends who don't know investment very well but would like to learn. Encouraged by their eagerness to learn, I start this blog to share my knowledge and thoughts about the market and investment ideas. Please note, investment and trading is not science but an art. Not only one needs to be armed with knowledge and experience, one also needs a lot of patience and discipline. With this in mind, here is my first idea.
What am I seeing now about the market? Extreme bullish and complacent! What does that mean? It means almost everyone thinks it is good time to buy stocks and the market will continue to rally. The major stock averages are up about 9-10% since September began. That's a huge rally for such a short period of time.The American Association of Individual Investors (AAII) conducts a market sentiment survey regularly. The extreme bullish level of the sentiment survey is 45% or above. We have stepped into that excessively bullish territory. Over years I have learned that when everyone stands on one side of a boat, it will capsize eventually. It is important to be contrary in investment. Of course my investment/trading decisions are not purely based on sentiment. I also study some technical indicators and charting analysis. Putting everything together, I think the market is at a very dangerous point of crashing, at least a short but severe correction. I'm maybe early but I think it is very close and I'd like to bet on it. So how to trade this market? I'm trading Market Panic. There is an index called VIX, which tracks market volatility. It increases when the market is panic and down and decreases when the market is up and calm. When VIX is at 20 or below, it is at extremely calm territory and almost always snaps back, meaning panic comes back along with the market down. We are at the this level now and VIX is 22.6 today. We can trade VIX with an ETF fund, symbol VXX. It increases with VIX when the market becomes panic and down when the market is up. There are several ways to trade VIX:
(1) Simply buy VXX at current level. It is $16.6 at today's close (Sep 28, 2010)
(2) Buy call option: I like long term options (called LEAP). For tracking purpose, I'd buy Jan 2010 $10 call option, symbol VXX120121C00010000. Today's price is $7.8 per share.
(3) The best way and lowest risk is to sell put option. Again, I would sell Jan 2010 $15 put option at $3.46 (VXX120121P00015000). You will get paid upfront with $3.46 per share.
I know for many of you, option is a mystery and sounds risky. Actually if you know how to trade options, it can be very safe with minimal risk but maximal return. I don't have time to go into details about options, which will be the subjects of my future blogs. I just wanted to get these ideas out first and we can track them over next weeks and months to see if trading panic is a good idea now. Thanks for your patience and interest.
This is my first blog. So a bit of my self introduction first. I'm a physician by training but I love finance. I started my investment career 15 years ago. Initially in the first few years, my investment results were great as everyone knows what the market looked like before 2000. My portfolio contained a full list of high tech stocks and the value of my portfolio kept increasing almost on a daily basis. Then all of you can guess what was the next: The market came to a full stop and crashed almost overnight around 2000. Same as every amateur investor, I hopelessly held my stock positions, begging the market would come back quickly. Of course it was just a mirage. I lost a fortune and sold my stocks at the bottom of the market. Retrospectively, I could have easily been a millionaire if I simply knew when to get into the market, when to take profits and when to stop loss. Rather I did exactly the opposite. What was the root cause? My ignorance of trading and investment! Understanding of this, I started my intensive and extensive self studies. I've spent all my extra time as far as I can to learn, to absorb, and to practice about investment and trading. After 15 years of accumulation of knowledge and experience, I'm very confident that I'm on my way to prosperity. I have many friends who don't know investment very well but would like to learn. Encouraged by their eagerness to learn, I start this blog to share my knowledge and thoughts about the market and investment ideas. Please note, investment and trading is not science but an art. Not only one needs to be armed with knowledge and experience, one also needs a lot of patience and discipline. With this in mind, here is my first idea.
What am I seeing now about the market? Extreme bullish and complacent! What does that mean? It means almost everyone thinks it is good time to buy stocks and the market will continue to rally. The major stock averages are up about 9-10% since September began. That's a huge rally for such a short period of time.The American Association of Individual Investors (AAII) conducts a market sentiment survey regularly. The extreme bullish level of the sentiment survey is 45% or above. We have stepped into that excessively bullish territory. Over years I have learned that when everyone stands on one side of a boat, it will capsize eventually. It is important to be contrary in investment. Of course my investment/trading decisions are not purely based on sentiment. I also study some technical indicators and charting analysis. Putting everything together, I think the market is at a very dangerous point of crashing, at least a short but severe correction. I'm maybe early but I think it is very close and I'd like to bet on it. So how to trade this market? I'm trading Market Panic. There is an index called VIX, which tracks market volatility. It increases when the market is panic and down and decreases when the market is up and calm. When VIX is at 20 or below, it is at extremely calm territory and almost always snaps back, meaning panic comes back along with the market down. We are at the this level now and VIX is 22.6 today. We can trade VIX with an ETF fund, symbol VXX. It increases with VIX when the market becomes panic and down when the market is up. There are several ways to trade VIX:
(1) Simply buy VXX at current level. It is $16.6 at today's close (Sep 28, 2010)
(2) Buy call option: I like long term options (called LEAP). For tracking purpose, I'd buy Jan 2010 $10 call option, symbol VXX120121C00010000. Today's price is $7.8 per share.
(3) The best way and lowest risk is to sell put option. Again, I would sell Jan 2010 $15 put option at $3.46 (VXX120121P00015000). You will get paid upfront with $3.46 per share.
I know for many of you, option is a mystery and sounds risky. Actually if you know how to trade options, it can be very safe with minimal risk but maximal return. I don't have time to go into details about options, which will be the subjects of my future blogs. I just wanted to get these ideas out first and we can track them over next weeks and months to see if trading panic is a good idea now. Thanks for your patience and interest.
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