Macro: The Bottom Line (12/31/2013)

As the year draws to a close, the markets have been largely quiet and devoid of liquidity. Rather than trying to read too much into what has happened over the past week, this is a good opportunity to reflect on the key themes to focus on in 2014. Here's our list of the top macro themes to look out for in the new year:

The Yellen Fed - No End to Easy Money: After the initial mayhem in the summer of 2013 (when bond yields were surging and most foreign currencies were in free fall vs. the dollar), markets have largely digested the reality of Fed tapering. The general consensus now is that the Fed will continue to reduce its monthly asset purchases (aka money printing) by increments of $10 billion, phasing out these purchases entirely by the summer of 2014. But as we've continued to stress, the Fed's determination to pursue tapering is not a result of a change of heart. No, it's merely a recognition that outright money printing is no longer an effective tool to boost growth and employment. Instead, the new term that you'll hear thrown around is "forward guidance," essentially the Fed committing itself to low rates for years to come. So in other words, the era of easy money will likely continue through 2014 and beyond, especially under the chairmanship of the uber-dovish Janet Yellen. Don't go rushing into the dollar, and don't give up gold for dead just yet. 

EUR and JPY - Fight the Central Banks at Your Own Peril: For a few months now, we've been warning about further weakness in the euro (EUR) and Japanese yen (JPY) going forward. As a reminder, our bearishness stems from our view that neither the European Central Bank nor the Bank of Japan would be able to resist the temptation to dabble in more activist monetary policy. Both the euro area and Japan face structural economic issues that have yet to be addressed by policymakers, and the mid-year momentum that we saw in both economies could sputter (in fact, it already has in Europe, where growth slowed to a mere 0.1% in 3Q 2013). With fiscal policy constrained (including a doubling of the sales tax in Japan), and reform efforts lacking at best, the most user-friendly option for both countries would be money printing.

Emerging Markets - The Good, the Bad, and the Ugly: Since the early 2000s, markets have in many ways treated the term "emerging markets" as though it was a monolithic concept. China, Brazil, Hungary, South Africa ... all these mid-income economies became investor darlings, one way or another, especially after the Fed turned on the money-printing tap in 2009. However, starting in late 2013, we've seen that this is no longer true - the days when investors piled into everything with an "EM" label on its are over. Instead, you'll see greater scrutiny of individual emerging economies, and greater differentiation between the good, the bad, and the ugly. On the "good" side, you have countries that are actively reforming their economic structures for the better. Mexico, with its oil-sector liberalization (as we've written about previously), is a prime example. China, thanks to its recent land-rights reforms, would arguably also belong under the "goods" as well (even though its opaque financial system looks prone to risks). The "bads" feature Mexico's main rival in Latin America, Brazil. After serving as an investor magnet for years, Brazil's structural problems (ranging from stifling bureaucracy and poor infrastructure to labyrinthine tax and labor laws) are now condemning the country to a shameful 1-3% growth rate. The "uglies" consists of Turkey, Indonesia, and South Africa - among many others - all suffering from a combination of structural distortions and heavy dependence on foreign capital. In 2014, expect these differences to play out even more, and the term "emerging market" to take on a new meaning.  

Geopolitical Hotspots: Aside from the much-reported tensions in Egypt, Ukraine, and Thailand (all of which have captured global headlines but have had a rather contained effect on markets), there are two main hotspots to look out for. The first is the East China Sea, where the escalating tensions between China and Japan (the world's 2nd and 3rd largest economies, with $300 billion in annual bilateral trade) risk having ripple effect far beyond the region. The second is Iran, where 2014 will be crucial in determining whether the initial signs of detente will pave the way for a lasting deal on the country's nuclear ambitions. Either way, the ramifications on oil prices could be significant.

We from the Macro team at Red Bull wish you a Happy New Year and all the best in 2014!

My 2014 Predictions - Sectors

It is a Christmas time and actually my company is closed for all the week and 3 more days till Jan 1, 2014. Lucky for us, isn't? Not so for me. Actually I'm working all the days, even more including the weekends. Why so? Well, the product I'm responsible for is undergoing a submission with a very tight timeline. I have to capture up with all the newly available data to digest and summarize. I'm kind of overloaded at the moment. Anyway, back to investment. As I indicated last time, I'd like to make some predictions for 2014 but just put the idea out there without much details. I may delineate more later when I have more time. These are the big trends I'm seeing, which may help you make some money if you also believe so.

Muni bonds - Municipal bonds are those issued by towns or cities, which are historically very safe and reliable as a high yield income source. Even better they are tax free. Right now, you can buy Muni at a huge discount and this is the best time to buy Muni. I like a Muni ETF,  NEA, which is at about 10% discount and paying 6.6%. This yield, since it is tax-free, is equivalent to about a 10% yield if taxable. I bet Muni will be doing fine moving forward and when it does, you you also enjoy a nice capital gain, when it comes back to its normal valuation,  in addition to the high income yield. NEA is trading at $12.11/share at the moment and is paying its interest on a monthly basis, another good feature if you let it compounded.

Coal - Coal has been beaten down terrible in the past 2 years but I think it has likely bottomed and now is a good time to buy coal. Like steel that I have talked about in the past couple of months and my AKS call options have shown me 500% gain, I bet coal may follow a similar path. The easiest way to invest in coal will be its ETF, KOL, which is traded at $19.43 per share.

Copper - Similarly, copper has likely bottomed and I think it will capture up with the recovering economy, especially in the emerging market. I like FCX, the biggest copper mining company in the world. This is a company with a lot of discounted great assets and is also paying a very nice dividend over 3%. FCX is currently traded at $37.5 per share.

Technology - Not like those mentioned above that have been beaten down badly till now, the technology sector is actually doing very well in the past 2 years. But I bet it will continue doing fine in 2014. I like the leveraged ETF, ROM, which is trading hands at $108.84. If it ever comes down in the near future, that will be a great buying opportunity to get in.

Merry Christmas and Happy New Year

It is Christmas eve again and I wish my friends a very Merry Christmas and a great Happy New Year!

So what could be a great Christmas and New Year gift in terms of investment? There are many but I think Apple is definitely one of the best. I have talked about Apple quite a lot in the past 1-2 years. Most recently I predicted that Apple was poised for an explosive move. I also figured that Apple should retest the level around $450 where it would be another great buy. Well, all turned out to be very true. Since then, Apple has performed strongly and likely it will go way up from here. I think the Christmas shopping season will be a great time for Apple and its earnings will likely be boosted by the Apple fans shopping during this period. The deal with the Chinese biggest mobile phone company to sell iPhones in China is a huge catalyst, which will push Apple to a height not seen for years. I'm very bullish for Apple and I think $1000 per share is not far from here for Apple!

By the way, since the year end is very close, I'm thinking to make some predictions for 2014. There are several big trends developing which I think are good areas for trading or investment in the new year. I will be writing them in the next 2 blogs to close the year of 2013.

Macro: The Bottom Line (12/23/2013)

• Fed starts tapering
• Mexico opens its energy industry 

Fed starts tapering: The "big event" for US markets last week was the final FOMC meeting of the year. Following the meeting, Fed policymakers decided to "taper" their bond-buying QE program by $10B (from $85B to $75B). This decision caps a 2013 marked by market volatility (at times extreme) over the question of when the Fed would pull the trigger on tapering. Notably, however, the post-announcement market reaction was largely muted, with both Treasury yields and the dollar trading largely flat on the day. There are two possible explanations for what would seem like a surprising lack of alarm from the markets. First, aside from the tapering itself, the Fed added some language reinforcing its commitment to keeping interest rates low (for example, committing to leave rates untouched as long as inflation is projected to be below 2% and unless unemployment falls well below 6.5%). The second factor has to do with what we on Red Bull have been pounding the table on for weeks now: tapering does not equal a shrinking of the Fed's balance sheet. Tapering still means that the Fed will keep pumping tens of billions of dollars of liquidity into the markets well into 2014, albeit at a slower pace. And even once it ends QE altogether, the Fed will likely still reinvest proceeds from its bond- and mortgage holdings. So for all the headlines (and headache) that tapering has caused through 2013, the mantra still holds: easy money is here to stay, with all its longer-term consequences for the dollar.

Mexico opens energy industry: At a time when the US Congress continues to be the epitome of dysfunction, Mexico's lawmakers have accomplishment something truly revolutionary: they, working closely with the administration, have successfully pushed through a comprehensive constitutional amendment that allows private investors to actively share in Mexico's oil wealth. As a background: back in 1938, Mexico's government enshrined the State's primacy over natural resources in the Constitution, and allowed the state-owned oil monopoly (Pemex) the exclusive rights to exploit those resources. It's as if the US Constitution banned oil/natural gas exploration and production to all but a Dept of Energy-controlled federal entity - there would very likely be no fracking boom! Thankfully, Mexico's politicians have recognized that for the country to become a 21st-century player in global energy markets, such archaic laws do more harm than good. This is one of the few major structural reform initiatives being taken in emerging market, and the investment implications are hard to underestimate. Mexican assets, from the peso currency to the country's equity markets, could see an extended boost going forward. Not to mention the benefits to be reaped by US energy firms, which now find themselves with new untapped opportunities available to them just south of the border. 

Another trade on techincals

First of all, I must say I was a bit disdaining Bernanake and did not expect that he dare to initiate the tapering of QE3, although technically he indeed did not start the tapering immediately this year as the Fed will start it in Jan. Honestly I still think the tapering won't last long as the Fed would be stunned how high the Treasury yield will go that they cannot stand anymore eventually. Likely they will return to the same level of QE3 or even higher before long. We will see.

You may notice that the crude oil has returned back to be close to $100 again. Usually, when oil turns high, the oil service sector should also be doing fine. But a divergence is occurring lately that the oil service is declining instead. However, if you study the price action chart more carefully for the oil service sector ETF (OIH), you will find an interesting pattern: right now OIH is just sitting at its long-term support line. Even more phenomenally, there are 4-5 times in the past year that OIH came down to kiss its support line and each time it turned around to shoot up. I think the chance is high that OIH will behavior in the same way again this time. I'm bullish for OIH and think it will go up pretty soon to catch up the oil price.

A biotech royalty company

If you understand what I have talked about royalty mining company, you should know why this is one of the best business models out there. The best gold royalty company is Royalty Gold (RDLD) and Silver Wheaton (SLW). Now I find another royalty company but in the biotech industry.

Ligand (LGND) is just such an company operating with a business model by developing or acquiring royalty revenue generating assets. Ligand has assembled one of the largest and most diversified portfolios of current and future royalty-generating assets in the industry. These therapies address the unmet medical needs of patients for a broad spectrum of diseases including thrombocytopenia, multiple myeloma, diabetes, hepatitis, muscle wasting, dyslipidemia, anemia and osteoporosis. Ligand has established multiple alliances with the world's leading pharmaceutical companies including GlaxoSmithKline, Onyx Pharmaceuticals (a subsidiary of Amgen Inc.), Merck, Pfizer, Baxter International, Bristol-Myers Squibb, Lundbeck Inc., Eli Lilly & Co. and Spectrum Pharmaceuticals. It has 10 products in the market and over 90 fully-funded partnered programs. It is profitable and cash-flow positive. With a portfolio of this rich, it has only 21 employees. That's the beauty of a royalty company, very lean and efficient.

While I really like Ligand, I don't think it is a good buy at the moment. Its share price is a bit expensive and more troublesome is its price curve. It is showing a clear double top shape, which is typically bearish. I will put it on my radar screen and will get in if it indeed plunges in the next few months. In the long run, Ligand will be very profitable. Don't ignore it!

 

Macro: The Bottom Line (12/16/2013)

• Congress reaches two-year funding deal

• Politics trumps economic reason ... also in Germany

Congress reaches two-year funding deal: On Thursday, the House of Representatives passed a deal that extends federal-government funding through Sept 2015. The deal, if approved by the Senate this week as expected, would ostensibly spare the country from another round of budget brinkmanship between Democrats and Republicans, at least for the next two years. That alone would be a positive - it's about time that members of Congress end the stonewalling and short-term dealmaking that has plagued the budget process since 2010, and focus on long-term solutions to long-term problems. But it's precisely in addressing these structural problems that the deal falls far short. First, the deal is projected to reduce the budget deficit by a paltry $20 billion - in comparison, the Congressional Budget Office estimates that the US ran a nearly $700 billion deficit in fiscal year 2013 alone. Not to mention that $20 billion is barely a scratch in the national debt, now at more than $16 trillion. Second, the deal does nothing to address the debt ceiling, which will have to be addressed again in 2014, and will likely involve a much nastier fight between the two parties. So policy risk in the US is not entirely banished. But at least Congress has proven that it still understands the meaning of "compromise," even if it means taking only half-hearted measures. 

Politics trumps economic reason ... also in Germany: If you thought political games were the preserve of the US Congress alone, think again - look no farther than across the Atlantic to Berlin. Over the weekend, Germany's two main opposing parties (the conservative CDU and the center-left SPD) overcame the final hurdles to forming a governing coalition. That's right, as strange as it sounds, the two historical rival parties agreed to bury the hatchet and rule together for the next four years. Think of it as portions of the Democratic and Republican caucuses agreeing to form a joint administration. Sounds merry, doesn't it? Well, not when you consider the costs. You see, German Chancellor Angela Merkel (from the CDU) was so keen on sealing a deal, she was willing to concede large chunks of her agenda to the SPD. The result? A shot in the foot for German competitiveness. First, the deal fixes the nationwide minimum wage to 8.50 euros / hour (that's more than $10 an hour)! I guess that's not too shocking if you live in San Francisco, but in certain regions of Germany - particularly the former communist East, where worker productivity is still comparatively low - it will likely lead to job losses. Second, it lowers the retirement age for certain workers to 63. This sets the wrong precedent at a time when Germany is facing unprecedented demographic headwinds. Overall, the deal seems to suggest that German politicians are taking the country's position as Europe's strongest economy for granted. This may be fine for now, but one must not lose sight of the potential longer-term damage. By the time the consequences are felt, it might be too late. Yet another reason to be cautious on the Eurozone's long-term prospects.

Short Tesla!

Tesla (TSLA), the electronic car company, was the Wall Street darling in the past 1-2 years. There was so much euphoria for it, its stock had gone parabolic all the way up to almost $200 even when it is still losing money as a business. This kind of euphoria for any stock wouldn't end well. NO EXCEPTION! In the past few weeks, Tesla got crashed and dropped to as low as $120 but it has fought back since then. However, technically all the indicators have pointed to a very bearish moment for it: it is hitting a very strong resistance right now. It is kissing its 50 day moving average from below (the green line); it is hitting the downtrend line (the red straight line); and its RSI is approaching the overbought level (80). I think Tesla has to go down in the next few weeks and likely to test its low or next support level around $120, which is its 200 day moving average (the red curve).
Buying Tesla put options could be a good trade for some quick money!

Turn this fiasco into your profit

If you listen to any news, you must have heard what happened to the website for Healthcare.gov, or more popularly called Obamacare. When it was up and running about a month ago for people to sign up the new healthcare insurance under Obamacare, it was a total fiasco. People simply could not logged onto the website. It went so bad that even a hearing was held by the House to investigate what happened. So who was behind this famous website? CGI Federal – a subsidiary of CGI Group (GIB), a Canadian company which got the contract to develop this website for the US government. Believe or not, CGI got $1 billion for the contract but could not make it work appropriately. No surprise, with this kind of debacle, it won't bode well with its stock. Actually Deutsche Bank recently downgraded the stock to "Sell", targeting it down to $24. The thing really makes me interesting is its technical outlook. You see, CGI has been trading in a very well defined channel in the past year. Recently it pierced through its low band of the channel at around $35 and now it is trading hands at $33. This is a very bearish sign and often indicates a change of the uptrend. I think there is high probability CGI will go down much more from this level and shorting CGI is a great opportunity!

A clear sign of overbought for Yahoo

Yahoo jumped 3.4% today following an analyst's upbeat call. I guess he is reading my blog and following my footstep? Just kidding. But I think Yahoo is clearly showing the classic sign for overbought. My two best and most reliable indicators are saying that to me: it is moving outside of the upper band of the Bollinger Bands and the RSI is over 80! As the red circles show what happened when RSI went above 80 two times in the past half year. It generally coincided with the stock price curve touching or over the BB upper band and then came down in the next few weeks. I think this is what will happen this time as well. Shorting Yahoo for the short term may be a profitable idea.

Macro: The Bottom Line (12/09/2013)

• US economy gains momentum - but don't expect the Fed to rush to the exits on stimulus

• Update on the Euro and Yen

 

US economy gains momentum - but don't expect the Fed to rush to the exits on stimulus: This week must have been a welcome respite for President Obama after being slammed for several weeks for the Healthcare.gov debacle. Through the week, it appeared that the positive economic data flow just wouldn't stop: (1) very strong new home sales data, (2) an upward revision to 3rd quarter GDP growth to 3.6% annualized, and (3) a jobs report showing >200K jobs created in November and a drop in the unemployment rate to 7%. Positive developments indeed. But are they enough to send the Fed to the exits on stimulus? Definitely not! For one, while the 3rd quarter headline GDP number was impressive, half of the growth was driven by companies stockpiling inventory. Actual consumption growth, on the other hand, was revised down to below 2%. So in other words, the strong growth we saw largely had to do with optimism about future consumer activity, not necessarily about the present. Should holiday season sales disappoint, companies could be left with an overhang of inventory, dampening the outlook for the 4th quarter. Beyond the details of what drove growth in the 3rd quarter, the broader issue with the US economy is that businesses are investing less than before in fixed assets and equipment. Investment in equipment actually fell in the 3rd quarter. Why does this matter? Because business investment is crucial to raising the efficiency of each worker - productivity in economist-speak - which in turn allows for sustained wage growth. With both business investment and productivity growth both showing signs of slowing, a Fed exit at the moment risks hobbling the recovery just when it appears to be gaining momentum. Bottom line: the recent data is encouraging, but the era of money-printing is far from over.

Last week, we discussed why the Euro and the Yen are both subject to weakness in the near future. Here's an update on the two currencies:

• Euro - don't be daunted by last week's bounce: Yes, it's true that the Euro jumped past the 1.37 mark versus the Dollar last week. But this changes nothing in terms of the overall outlook for the two currencies. First, while we don't see an end to Fed printing anytime soon, the FOMC will very likely taper the pace of its stimulus within the coming months, which will be supportive for the Dollar in the near term. What about on the ECB side? Well, they temporarily abstained from implementing any of the new measures under discussion (new long-term loans to banks, direct asset purchases, negative deposit rates). But does needing more time for discussion mean that they won't implement these measures in the future. We don't think so. With the Euro area economy barely managing a 0.1% growth rate in the 3rd quarter, and inflation still below 1%, we strongly believe that the ECB will have to resort to more stimulus.
• Yen - now at 103 to the Dollar: In contrast, the Yen did move in line with our expectations last week, weakening to 103 versus the Dollar. Despite all the optimism surrounding Japan's hyper-active policy mix, recent data suggests that the results have been mixed at best. Just today, Japan's 3rd quarter GDP growth was revised down to 1.1% (a meaningful slowdown from the 3%+ growth we saw in the 2nd quarter). At the same time, exports haven't recovered enough to allow Japan to return to a trade surplus. In short, if things don't start picking up soon, expect further stimulus talk - and more Yen weakness.

Yahoo has a lot higher to go

Yahoo has rewarded me very well since I talked about it about 2 years ago.Yahoo has increased more than 100% since then. You can find the the latest one here. With this kind of value already added, is it running near its end of momentum? Far from it! Actually I bet Yahoo may have another 100% to go in the next 1-2 years. Here is why.

Right now, Yahoo is trading hands at $37 with a market cap of around $37 billion. The Wall Street estimates Yahoo's intrinsic value around $12 billion. In other words, Yahoo seems quite expensive as it is priced at about 3 times its book value. But I think the Street has again largely undervalued Yahoo, as much as they did 2 years ago. Ironically, the situation for Yahoo has not really changed in the past two years but it seems the Street just could not figure this out. As I told you 2 years ago, Yahoo has a huge stake in the Chinese leading online retail (about one quarter of Ali Baba shares) and in the Yahoo Japan (about one third of the company shares). Per the current values of these two companies, they are worth over $30 billion already, almost equvilent to the value of the whole Yahoo market cap. In other words, the Wall Street again counts Yahoo's core Internet business as nothing. But as you must have also known, Yahoo is reviving under the leadership of Marissa Mayer and its own business is booming fast. That's why I think Yahoo will likely continue to advance significantly in the next few years, which should be reflected in its stock shares.

Again, I'm not sure now is the greatest time to buy Yahoo as I'm still leaning towards some sort of significant market correction. If Yahoo declines meaningfully in the near term, take the opportunity to get in.

Gold and Silver: a short term explosive bouncing up is likely

It is all over again! Remember a couple of months ago when everyone was expecting the Fed would ease QE, the Treasury 10-year yield fiercely jumped up to almost 3% and gold/silver fell like a stone? Then Bernanke surprised almost everyone (but not me) that the Fed did not ease QE at all. The Treasury yield dropped all the way down to about 2.5% as I predicted and gold/silver jumped high in revenge!

Well, the market is playing this game again. In about 2 weeks time, the Fed will meet again and herd investors listen to and believe again the pundits talking about QE easing at this Dec Fed meeting. The Treasure yield is again crippling up to almost 2.9% and gold/silver is getting decimated once more. My bet? No way the Fed will ease the QE and the market will be surprised once again.

I expect gold/silver will fight back violently with an explosive moonshot, at least for a short term. If you are a trader, this may be a good opportunity to buy DGP, a double long gold ETF for some quick money.

Macro: The Bottom Line (12/02/2013)

 

A Tale of Two Currencies

With US markets largely devoid of major developments due to the US Thanksgiving holiday, this edition of Macro: The Bottom Line will be short and sweet. We'll focus on the Euro and Yen, two currencies about to be driven lower by their respective central banks.

• Danger for the Euro - the ECB is becoming less German

• Yen - $70 billion per month is not enough 

Danger for the Euro - the ECB is becoming less German: Now, we understand that you've been reminded too many times on Red Bull about the dangers of the Euro. And yes, we still view the monetary union of 17 (soon to be 18) countries as dysfunctional and vulnerable to further existential crises down the road. But before we even get there, the Euro faces a more immediate danger: the European Central Bank is becoming less German. What does this mean? Well, though it's been in crisis-fighting mode for the past 3 years, the ECB has in fact refrained from QE. This was largely because of the influence of the Germans on the ECB Governing Council, who with their trademark inflation-phobia refused to join the Fed's money-printing club. Until now. With annual inflation in the Euro region now below 1%, it seems the ECB has decided deflation is now the greater evil. So now speculation has been rife that the ECB could unveil new measures - long-terms loans to banks, outright QE, or even negative deposit rates. Importantly, the Germans have been remarkable silent (whereas in the past they would've been loudly pounding the table at the first sign of money-printing). All this could play out very badly for the Euro.

Yen - $70 billion per month is not enough: The Euro is not alone in the danger zone. Its Far Eastern cousin, the Yen, could also be on the verge of further weakening. You see, even though the Bank of Japan (the central bank) has already been printing the equivalent of $70 billion a month with a goal of bumping up inflation to 2% within 2 years, it's become clear to several members of the BOJ board that it will likely miss its goal. Some have now come out publicly in favor of an even more aggressive monetary stance. What that will look like remains unclear. But one thing's for certain: there's only one direction for the BOJ to go - toward money-printing overdrive. 

On the geopolitical front, high-octane anti-government protests are festering as we speak in Ukraine and Thailand. We'll spare you the details, but suffice to say both protest movements seem to want to dig in their heels until their respective governments resign. So far the market reaction has been largely contained within those specific countries, but Red Bull will continue to monitor any broader implications from these events.

What do the new statin guidelines mean for investment?

Statins are a class of drugs to lower cholesterol levels. This is a huge market because high cholesterol has become epidemic in developed world, especially in the US. I guess everyone understands that high cholesterol is one of the major risks for cardiac diseases. Heart disease is the No. 1 killer of men and women in the United States. It is estimated that one in four deaths, or roughly 600,000 annually in the United States, are caused by heart disease. Understandably, selling statins is very profitable. Do you know how big the sale used to be for the top statin drug, Lipitor sold by Pfizer? The annual sale for Lipitor topped $12 billions. Yes, correct with just one drug, the biggest drug ever in the whole pharma industry! Until now, the indication for statins are purely based on the levels of cholesterol but this is about to change, a big time.

A few days ago, the American Heart Association and the American College of Cardiology released new guidelines for the way doctors treat high cholesterol. In a nutshell, using statins are not just based on the cholesterol levels; rather, it calls for considering the risk factors such as age, weight, blood pressure, or whether a patient smokes or has diabetes. Since such risks are so prevailing for Americans, likely the majority of the people having more or more, it virtually dramatically expands the indication population for statins. With this new guidelines, the medical insurance will cover the drug cost, which means the sales for such drugs will be of moonshot. Actually it is estimated that about 10% of Americans who are not qualified for statin treatment per the old guidelines will now be qualified for the treatment. This a tremendous profit potential for drug companies which sell statins.

While many companies will be the beneficiaries, I think the biggest winners are probably the generic companies which sell cheap statins which have lost patent protection. There are many such generics and more to come in the next few years. I like Teva (TEVA), an Israel company that is also the largest generic company in the world. It is already selling a billion dollar statin, a generic version of Zocor. With the new guidelines, the sales will likely shoot up significantly. Another generic company that may benefit a lot is Mylan (MYL), it is selling a generic version of Lescol, which is not only indicated for both heredity and non-familial high cholesterol, but also for the secondary prevention of cardiovascular disease. One stone for two birds, sort of speaking.

Uranium supply is about to plummet

Two years ago, the uranium industry got crashed following the Japan's tragic Fukushima disaster due to an earthquake. Japan virtually shutdown all its nuclear reactors. Similarly German and other EU countries also announced to shutdown their nuclear reactors gradually over the next few years. The demand for uranium has been plunging, so is its price. The spot price of uranium dropped from $90/lb to currently around $30. Needless to say, the ming companies for uranium got killed and have been struggled to survive. But there is a good chance that this downward trend is about to reverse and those who get in early in the trend will likely make a lot of money.

The thing is, the world still needs nuclear power and cannot afford to not use it. Actually nuclear power is the most efficient and green energy source. Even the founder of the Greenpeace, Patrick Moore, has said, "Nuclear energy is the only non-greenhouse gas-emitting power source that can effectively replace fossil fuels and satisfy global demand." Due to the severe shortage of energy, China and other Asian countries have planned to build more nuclear power stations, 30 more for China alone. Believe or not, even Japan is likely to reverse its policy to restart some of its nuclear reactors. After all, it is a huge cost of importing liquefied natural gas (LNG) for Japan to maintain their power supply. In the US, over 100 nuclear reactors are running and more are to be building. In other words, the demand for uranium is not decreasing but increasing, and significantly more in the years to come. So how about the supply? Not many people know, the uranium supply is going to be hit very hard pretty soon, actually in about a month in Dec. Why so? Well, 20 years ago in 1993, the US and Russia signed an agreement, so-called Megatons to Megawatts program. Under this agreement, the highly enriched uranium contained in ex-Soviet nuclear weapons was downblended and converted into nuclear fuel. So it is a win-win situation: the US got the nuclear fuel it needed and Russian got the hard cash it was longing for. It is said this source of uranium accounted for about half of the fuel needed for the US commercial nuclear power stations. But this agreement is ending in Dec 2013. You see, suddenly there will be a huge crunch of the uranium supply in just a few weeks. So what will happen to the uranium companies in the situation of very poor sentiment but very high demand however with drastically reduced supply? I think it is a no-brainer: it is bullish, very bullish.

I like Cameco Corp. (CCJ),  the largest pure-play miner of uranium and one of the world's largest uranium producers. It accounts for over 16% of the world's supply. CCJ has been struggling in the past two years with the stock price cut half, but the momentum is behind it now to go up. I think it has bottomed and will shoot up soon.

Macro: The Bottom Line (11/25/2013)

The Highlights:

• Fed creates more commotion; but low rates are here to stay
• China signals looser grip on the yuan
• Iran nuclear deal - another blow for oil 

Fed creates more commotion; but low rates are here to stay: A week after Yellen's uber-dovish Senate testimony reassured markets, the Fed dropped another bombshell that sent dollar bears scrambling for cover for the n-th time this year. This time, it was the minutes from the FOMC's end-of-October meeting, which implied that tapering (i.e. a scaling-back of the Fed's monthly money printing) was just around the corner, and could even begin in December. Market observers, who had pushed back their projections for the start of tapering to March, were caught off guard. But before reading too much into this, let's step back and think about what tapering means. It merely slows the pace of the Fed's money printing, it doesn't reverse it. Even once the Fed stops printing, that doesn't mean its near-$4 trillion balance sheet will shrink. No, the Fed - especially under the leadership of a dove like Yellen - will not risk a still-sluggish economic recovery by tightening anytime soon. All the liquidity pumped into the markets over the past five years will stay, and the era of the ultra-low fed funds rate will continue. So don't come rushing back into the dollar!

China signals looser grip on the yuan: Early in the week, China's central bank governor Zhou Xiaochuan was quoted as saying that the world's second-largest economy would "basically" end currency intervention, and that the case for stockpiling FX reserves is no longer as strong as before. What does this mean? Well, as a refresher on what China has been doing in the past: for years, due to perennial trade surpluses and capital inflows, dollars had been flowing into China en masse, putting upward pressure on the yuan. To counteract that, Zhou's People's Bank of China printed new yuan to soak up all those dollars coming into the country, thereby artificially weakening the RMB. Importantly, because a lot of the reserves were recycled into US Treasuries, it kept the US federal government's cost of borrowing at manageable levels. Now, with China trying to reform its economic model, Zhou appears to be hinting that China will at least ease up on the policy, allowing the yuan exchange rate to be more market-driven (read: appreciate even further). True, this could lead to some short-term pain for Chinese exporters, but they're not the ones who should be most worried. That distinction belongs to the congressional lawmakers and Mr. Obama halfway around the world in DC. Why? With the end of Chinese reserve accumulation, financing the US twin deficits has become that much harder.

Iran nuclear deal - another blow for oil: Over the weekend, the five UN Security Council members plus Germany reached what was hailed as a landmark agreement with Iran. After years of confrontation and hostility, an agreement came into being that would loosen sanctions on Iranian exports of precious metals, in return for the Islamic Republic restricting its uranium enrichment activities. While the agreement is modest in scope (and does little to free up Iranian oil exports to the West), it marks a remarkable change of tone between Iran's new moderate President Rouhani and the Western powers. Suddenly, the specter of war in the Middle East and the Persian Gulf has diminished (notwithstanding some saber-rattling from Israel). Speculation leading up the agreement had already put significant pressure on oil, with WTI crude falling below $95 during the week. Coupled with the Obama administration's backtracking from intervention in Syria, and the fracking boom in the US, the "perfect storm" for oil only looks set to continue for now.

My cool feet have cost me dearly

Sturm, Ruger & Company (RGR), founded in 1949, is the biggest gun maker in the US by sales. Sturm produces hundreds of thousands of firearms annually for hunting, target shooting, collecting, self-defense, law enforcement, and government agencies. With a market cap of $1.4 billion, RGR trades over $75 a share and a PE of 14.5, which is still cheaper than the overall market's ratio of about 15. It has a 16% profit margin and a return on shareholders' equity of an  eye-opening 64%. It is paying a 3.10% dividend even at this high price and may be one of the best dividend paying companies at the moment, considering its booming business and relatively cheap valuation.

I wish I had known this long before today and had not let this cash cow slip away from my fingers. Unfortunately my cold feet cost me dearly. Shortly after the financial crash in 2008, I saw an analysis about RGR, the first time I had heard about it. It was said that gun sales would likely go up much more during the financial turmoil and the coming US policy on gun control could further triggered people to rush to buy guns before too late. I figured that this did make a lot of sense and I used naked puts to have actually obtained RGR at a very good price, around $10 (red circle below). However, in the next few months, RGR did not behavior as what I had expected and even went under water for a while. I got cold feet and lost patience as well. So I sold it with a little bit profit when it bounced back a little. Since then everything has become history for me. If I could stick to this great company, even during its difficult time period, I'd have made a fortunate on it. I have really missed a huge pile of money, almost 8 times the cost I paid and I would have earned probably over 15% of its dividend based on my initial cost. DAMN IT!

Don't repeat my mistake and for companies with sound business fundamentals, stick to it even during their difficult time periods. I hope RGR will correct significantly soon so that I can get it again for years to come.

The next Apple in biotech

3-D printing is a revolutionary mega trend currently ongoing. It is still at its early stage but it may repeat what has happened to the creation of Internet and its impact ensued to the whole world. Of course, this is a very big trend touching all the aspects of the human activities but its application to medicine, so-called Bioprinting, could be one of the most important ones. Actually, using this 3-D bioprinting technology, scientists have already created create artificial airways and cartilage, but future innovations may bring in greater potential for revolutionizing medicine.

One small company is clearly the front-runner in Bioprinting and if it can maintain its momentum and continue with new exploration of this technology in various innovations, it may become Apple in this field, leading the super trend of 3-D Bioprinting. I’m talking about Organovo (ONVO). There are two areas in the foreseeable future that ONVO could make some breakthroughs:
 

·         Organovo is developing its first commercial product due in 2014: bioprinted liver tissue. For people like me and many of my friends who have been involved in drug development, it is well known how costly it is to successfully bring a drug to the market for a company. In average it takes over 10 years and over $1 Billion. One major cost is the high failure rate due to drug toxicity and liver toxicity is also one of the most common and important one to determine the fate of a drug. If a company can freely print 3-D liver tissue that can be used by the company to test drugs on their potential toxicology problems at the early stage, it will be a huge cost saving for the company. The market is huge beyond imagine. The next product line for Organovo is bioprinting of tumors.  Organovo is currently working with Oregon Health and Science University's Knight Cancer Center to use 3-D bioprinting to generate tumor models. This kind of 3-D tumor models can mimic the actual physiology of the tumor and therefore can dramatically improve the drug development process with respect to testing new cancer drugs.

·         The longer term of more aggressive use of the Bioprinting technology is to create new human organs for transplantation. As we all know, the medical technique for organ transplantation has been very mature but the critical bottleneck is the source of organs that are available for waiting patients. Unfortunately many patients cannot wait till the time when the organ becomes available and pass away prematurely. If printing live organs becomes a reality, which I’m sure will be sooner or later, organ transplantation will become a routine operation to save life of millions of patients. The research and development in this area is certainly actively underway in Organovo.

Of course, I’m not saying you should buy Organovo immediately as its price has been chased up dramatically in the past few months. It will likely be very volatile. This is a very long term trend and along the way, it will be very bumpy for ONVO. Remember, Apple has come to the brink of bankruptcy at least two times before it becomes what it is now. Those with the faith, persistence and courage to accumulate more shares of Apple when it plunged like a stone are the ones who have become rich with Apple. I think there is a good chance that ONVO will follow a similar path. If it is indeed on sale someday, consider to get in.

Paid-off to be lonely

The plane maker, Boeing, was the big winner at the opening day of the Dubai Airshow, landing $100 billion in orders, twice that of Airbus. Its share price got boosted by adding $2.28 to $138.36 yesterday. Is it really a surprise for us?  Boeing seemed to have endless problems early this year but I told you to take the opportunity to buy when everyone hated it. If you did, pat yourself for an almost double in less than a year. What's more? Yes, you've also got a higher dividend yield at 2.6% based on your original purchasing price, regardless how high its share price has gone up. I bet you will get even more dividends moving forward. After all, if its bottom line is secured, you will for sure get more pay from it.

As I have shown you again and again here in my blogs, don't be scared by others' reckless herd behaviors. When everyone is doing the same thing, it is almost sure you will win by going against them. Being lonely is one of the most important and critical characteristics a successful investor must have. It is not easy but it is essential! Try to learn it.

Macro: The Bottom Line (11/18/2013):

Starting this week, Red Bull Money Talk will be posting Macro: The Bottom Line, a weekly column covering the top macroeconomic movers affecting the markets today. The inspiration behind this column is simple: in an age of unprecedented policy intervention by central banks and governments alike, it's impossible to make isolated investment decisions without considering the broader picture. But with the likes of Bloomberg, CNBC, WSJ, FT etc. bombarding us from all sides with information 24/7, how do busy working professionals like you keep track? This column will present you what you need to know, without the frills.

• Yellen comments signal no change in Fed's easy-money policy  
• China introduces bold reforms, but the devil is in the implementation
• Spain exits its bailout, but Eurozone issues not over yet

Yellen comments signal no change in Fed's easy-money policy: Despite all the hype leading up to Fed Chair-nominee Janet Yellen's confirmation hearings, her initial comments to senators on Capitol Hill last week revealed little that we didn't already know. In a nutshell, Yellen repeated what she and her mostly dovish colleagues on the FOMC (including outgoing Chairman Bernanke) have said over and over again: without strong signs of growth, the Fed's printing presses will stay on. And we'd better take her word for it. For all the panic over "tapering," it's worth remembering that Yellen is an unconditional believer in an activist Fed. The era of easy money is here to stay, and don't expect any rate hikes from the Fed anytime soon. What we've been warning about on this blog from the start - that (1) inflation is set to trend higher over the long-term, and (2) favor gold and real assets over the dollar - remains very much the case.

China introduces bold reforms, but the devil is in the implementation: The key measures unveiled following the Communist Party's Third Plenum meeting included: (1) allowing farmers to buy, sell, and collateralize land; (2) loosening the household registration system to facilitate migration to urban areas; (3) scrapping the one-child policy under certain conditions; (4) upgrading the role of the private sector in the Chinese economy. In a nutshell, the idea of these reforms is to lift the purchasing power of ordinary Chinese consumer, halt the demographic ageing of Chinese society, and sustain the country's growth momentum. All very noble goals, and the reforms are certainly a step in the right direction. It's too early to pass judgment though, as these reforms will not be fully implemented by 2020. And the details on other key areas - such as reining in the shadow banking system (which now eerily resembles the CDOs and ABS markets of the pre-Lehman US) and tackling surging local-government debt levels - remain lacking. So the risk of a financial crisis in China still cannot be ignored. But these risks aside, the reform efforts in China are nonetheless a positive development. In fact, they serve as another reminder that the sources of growth will increasingly come from the world's emerging markets, and not from a nation governed by a dysfunctional Congress and "kick-the-can-down-the-road" policies.

Spain exits its bailout, but Eurozone issues not over yet: It's true, you've seen quite a lot of Euro-bashing in this blog. But we see the need to do so again in light of the Eurozone finance ministers' decision this week to allow Spain (yes, that's not a typo) to exit its 100 billion-euro bailout program. True, the situation has calmed down, Spanish bond yields are no longer at stratospheric levels, and the bleeding in its banking sector has been bandaged. But does this mean that it has fully reverted to being a "normal" economy? It suffices to look at the the 25%-plus unemployment (more than 50% for youths), the hundreds of billions of euros of bad loans on bank balance sheets, and the absence of a viable growth model (after years of a construction-led boom) to answer the question. The broader issue is that markets appear to be taking the European Commission's bait, and the Euro currency has recovered the 1.35 mark against the dollar. Don't read too much into it - while Europe appears to have stepped back from the brink for now, the region's economic misery is set to continue.

Royal Gold - A gold company never mining gold

Royal Gold (RGLD) is a precious metals company with royalty claims on gold, silver, copper, lead and zinc at mines in over 20 countries. It is the best gold company with no mining risks whatsoever. Why so? You see, RGLD is not a traditional gold company engaged in exploring and producing gold; rather it is simply collecting gold at extremely low prices. How could that happen? Well, what RGLD does is to finance the early stage small gold mining companies when they desperately need money and in return, instead of simply collecting fixed interests on the money lent out,  RGLD will get certain percentage of gold at a much lower price than the market price when the company starts to produce gold. And RGLD shares none of any political, economic and operational risks any mining companies must face. Right now in its portfolio, RGLD has got 36 mining properties producing gold already and additional huge line up of other companies still working towards gold production. Since RGLD collects more and more cheap gold and sell at much higher market prices, it has become a hugely profitable gold company. At a market cap of over $3 Billion, tell me how many employees you think RGLD should have?  21 people for the whole company!

Right now, RGLD is paying 1.9% dividend but since you can bet that it will get more and more gold moving forward, its dividend will be going up substantially in the future. In the past 5 years, it dividend growth rate has been around 25% and I think it will be more in the future. RGLD is definitely one of those companies I absolutely must have for my retirement portfolio. I don't care if its share price may fluctuate or not. I know holding Royal Gold is just holding a gold mine, from which you can collect more and more golden eggs.

Gold is struggling at the moment and RGLD has plunged 60% along with it. It is now at a much reasonable price.  I think it is a great time to accumulate  RGLD shares. You will regret 10 years from now if you don't act now.

Buy Greece if your guts allow you

Am I losing my mind? Yes, it is possible but this may be a very lucrative speculation although with a high risk. Yes, Greece has been inflicted with all kinds of financial missteps you can imagine and its economy has been in abysm for years. But this has let Greece's stock become one of the cheapest in the world, believe or not. There are few things you need to learn in investing: anything regardless how bad will become valuable if it is cheap enough, as long as it still has some values. Greece as a country as well as its stock market as a whole certainly still holds some values. As such it can become attractive when cheap enough. I think now is the time for Greek stocks. There is another kicker. The index provider MSCI announced in June that it demoted Greece from developed market to developing market. It sounds very bad, isn't it! Actually it is great news for Greece stocks. Why? Because now MSCI Emerging Markets Index ETF (EEM) must buy Greek stocks to reflect the status change. This is a boost for the Greek stocks and will happen on Nov 27. Now S&P has also demoted Greece to emerging markets status and as such its SPDR S&P Emerging Europe ETF (GUR) should also add Greek stocks.

I will be buying Greek stocks as a speculation. The easy one to trade will be the ETF for Greek stocks, GREK.

Bloodshed for Cisco means easy money for you

Cisco (CSCO) reported disappointing earnings yesterday and its stock price has plunged 12% now as I'm writing. Well, this is the moment I'm craving for: a solid and world dominating company facing temporary setback and its stock price dropping like a stone. This is exactly the easiest money one can make, like a stack of money lying at a corner waiting for you to simply go there to pick it up. Just as easy as such! Naked put is the best strategy to collect the easy money.

Is it a better sign of a marriage coming for Novartis and Bristol-Myers?

Bristol-Myers Squibb (BMS) just announced that it will shift its strategic focus in R&D by ending new work in diabetes, hepatitis C and neuroscience and pouring more resources into immune system-based cancer therapies.

Remember what I told you about my speculation that Novartis may merge with BMS? The key interest for Novartis is BMS immune oncology portfolio. Now with BMS to enhance its immune oncology and to slim itself, I think BMS will become more attractive to Novartis. I bet a deal is under active discussion and it is becoming more likely this marriage will become a reality!

A 15% gain almost guaranteed

I talked about an arbitrage trade when Onyx was bought by Amgen. It was almost like a guaranteed money one could get. Today, there is another opportunity showing up right now.

Home Federal (HOME) is a small, Idaho-based regional bank. While it is small, it is financially rather solid and it is sitting on a huge amount of cash, over half of its current stock price. That's why another regional bank, Cascade Bancorp, offered to buy HOME worth around $270 million. This is equivalent to $17.83 per share for HOME. But right now, HOME's share price is only $15.31. In other words, there is still about 15% value the market has not yet taken. In you buy HOME today, it is almost guaranteed that you will get a 15% gain by just waiting for the deal to close. Actually there is even another possibility that some other bidder to come in to offer even a higher price for HOME as Cascade is already the 2nd one to outbid another regional bank for HOME. If that happens you will make more money. But of course, don't bet on this as 15% gain is already very good to me with very low risk.

Catch the UHDTV trend

Heard about UHDTV? It is Ultra-High-Definition Television. When HDTV debuted, its crystal clear picture shocked me but I was wondering how many people would buy such expensive TVs. Well, in just a short few years, HDTV is a must for a normal family now. But without knowing, UHDTV has come up and likely will soon replace HDTV pretty fast (see this Youtube video on UHDTV). It is estimated that 5% of the TVs sold next year will be UHDTVs and maybe within 5 years, HDTV will be just a history and UHDTVs will be the mainstay.  If you want to get on board the train with UHDTVs, you should take a look at Ambarella ( AMBA), which develops semiconductor processing solutions for video that enable high-definition (HD) video capture, sharing, and display. While AMBA is small, financially it is rather healthy and strong: it has over $118 million cash without any debt. In other words, it has cash close to $5 per share and is very profiting due to its highly demanded sophisticated chips used for UHDTV-suitable high-resolution video cameras.

UHDTV is still new and just starting but I'm sure it won't take too much time before it becomes popular and a must-to-have fashion. The biggest money is always earned at the beginning of a new trend before most of people even know it. Hope this is the one at the right moment for early birds!

Some easy money again

Well, just as I've expected and described yesterday, Microsoft could not hold up its artificially elevated gain and has today given up almost half of what it gained yesterday. The stock price plummeted about 2% today. For my put options, my paper gain was 30% overnight. Not bad for just a day. But I think it is just the beginning. MSFT may need to come down to around $35 before this correction is over. It is over $37 at the moment. I will still hold my put options for now.

What's the lesson? Never follow others as part of the herd to chase a hot stock. More often than not, such kind of herd chasing will end badly. For savvy traders however, this is the opportunity for some easy money to make. I love to see others blindly chasing up a stock as I know my term has come. The more & higher,  the better. But I hope my blogs can help you avoid such kind of traps!

I'm shorting Microsoft

I'm back home but still on vacation, although kind of working as well. At least I have more flexibility to do something interesting to me. Here is one thing I find interesting today: shorting Microsoft (MSFT). Well, MSFT is one of the positions in my retirement portfolio, meaning I like it and will likely hold it forever. It is a great value stock that I doubt I will ever sell it. I have bought and kept it for over 8 years and it is doing great to me with dividend reinvestment. As I have shown you, this is the stock which may make you as a millionaire if you are patient enough.

So what's the heck that I'm shorting MSFT now? Well, it is all due to technicals and a very short-term speculative trade. MSFT jumped almost 4% today due to the report that it has narrowed down its list for its next CEO. While I'm happy to see my existing position to jump higher as well, technically it is very much overbought short-term, which won't be sustainable (click the chart below to enlarge):
- It has jumped outside of its upper band of the Bollinger Bands (BB)
- It is away too far away from its 50 day moving average (DMV)
- And RSI is over 80, meaning overbought

All the 3 momentum indicators point toward an extreme overbought condition for MSFT. I don't think it can stay there without first giving back a good portion of its recent gain. I bet it will correct short term, a good target for shorting. That's what I'm doing right now: buy MSFT put options.

If you also have long-term MSFT positions as I do, you may also consider to sell its call options to lock in the gain you have seen.

Goldman Sachs is following me

US Steel (X) jumped 40% in 2 months since I talked about it. Here is what I predicted back then: With this kind of super depressed mode in this sector, a little bit good news may probably make it jump by 20-30%. I was actually underestimating the momentum of it! Now Goldman (GS) is following me to also come on board by upgrading the steel stocks: it is now rating X as BUY from SELL, a rather big jump by its standards. I'm afraid with GS on board, the steel sector will be too much under the limelight, which is not necessarily a good thing, I hope the euphoria will not come too fast for the steel stocks and its uptrend can last longer.

Go International

Diversification is one of important factors for successful investment. People often got confused about diversification and thought they had appropriately diversified if they bough multiple stocks. The matter of fact is that you won't really diversify even if you buy 100 stocks but in one or related sectors, e.g. all of them being in the tech sector. The idea of diversification is that if one sector got crashed, the other sectors might hold up well so that your risk is reduced. After all, it is less likely that everything goes down all at once, unless we are facing an Armageddon type of event like the finanacial crisis in 2008/2009. So it is prudent to diversify. One important diversification is to go different markets instead of focusing on one or two markets. If your portfolio has all or most of the stocks from the US, it would be a good idea to also buy some international stocks, i.e. go international. One easy way to do so is to buy an ETF, iShares International Select Dividend ETF (IDV). IDV includes dozens of stocks across a wide range of sectors and in over 20 countries, although it is more concentrated in the Europe. However, Australia is its largest holding country, which is what I like as I really think Australia is one of the countries with the brightest prospects. Actually I have already invested in the Australian ETF for stocks as well as the AUS currency, both of which have done very well.

Over time, IDV should be doing great as it is relatively cheap and also paying a very healthy dividend at 4.8%.

Make money again via a seasonal trade

It is time again to collect some money from seasonal shoppers. I traded ValueClick (VCLK) a year ago and made over 100% gain within 3-4 months. Check it out here. I don't need to repeat the rationale again and everything is exactly the same as it is a seasonal trade. VCLK lost almost 40% since it peaked in May this year when its last high season was over. Now a new season starts again. If you want some free money for your Christmas, you can get it now!

I'm writing from Panama and will be heading back this weekend. It has been a great adventure here. Panama is amazingly morden and booming. We like it so much and will explore more opportunities here.

A potential activist target

I bet you likely have never heard the company called Kulicke & Soffa Industries (KLIC). KLIC is a rather small company with a market cap of only $1 B and based in Singapore. But it is actually a industry leader in the semiconductor market: manufacture and sell wire bonding to bond semiconductors to circuit boards. While small, it is a cash gusher with a huge free cash flow in terms of its size. It has over $5 million cash in hands without debt. With a share price of $13, half of the stock price is actually cash. Right now, its P/E is about 10 but if you factor in its cash load, the P/E can be halved or even lower. In other words, KLIC is extremely cheap at this price. However, KLIC revues to pay a dividend or buy back stocks. With this kind of cash rich business at this low stock price but failing to return values to investors, it is normally attracting the attention of the so-called activist investors. The most famous one is Carl Icahn. Whenever Icahn touches a company, its stock will shoot up to moon as investors know that Icahn will do all he can to boost the value for the investors, which will also add great value to himself.  I won't be surprised to see this happen to KLIC by Icahn or someone else. It make a lot of sense to me. If you want to bet on this, you should consider to get in now when KLIC is still cheap at the moment.

The death of the Euro

We are heading to Panama for vacation today. Just a quick note about Euro.

I have lost track how many times I've talked about Euro here and predicted it will fall apart within years. I have traded several times with quite some profits taken. The latest time I talked about it was probably this one. Well you have probably also noticed that Euro has become stronger these days against the US$, $1.38 at the moment. Does this mean the Eurozone countries have solved their crisis effectively, which is then reflected in the euro? Not a chance! According to Citigroup, the slight rebound in Europe over the summer will not be enough to stop the Eurozone going from bad to worse, with a string of soft defaults/restructurings. Citi is forecasting Greek devastation and unstoppable debt spirals in Italy and Portugal

To me Euro is still a dying currency, just a matter of time. No need to simply believe me, but see what other people, especially those from the Eurozone, have thought about the situation:

An astonishing new book by François Heisbourg – La Fin du Rêve Européen (The end of the European dream) – argues that the "euro cancer" must be cut out to save the rest of the EU Project before it is too late.
"The dream has given way to nightmare. We must face the reality that the EU itself is now threatened by the euro. The current efforts to save it are endangering the Union yet further," he writes.

Yes, Euro is appreciating against the US$. But this is just like two types of toilet paper competing to see which one will go to the toilet first. Sooner or later, both of them will go. Right now, people got tired of the US$ due to endless problems associated with it. But it is no better with Euro. I'm sticking to the gun that I will short Euro again. The current poor sentiment for US$ will push Euro up further. However, the higher it goes, the better profit one may get.  I'm just waiting for the another extreme to come before pulling the trigger. I will let you know.

Apple has broken out to the upside

Apple jumped $12 today and has definitely broken out through its resistance line. I expect Apple will quickly touch $550 in the next few weeks. Tomorrow the Apple CEO Tim Cook will unveil the next generation of its tablets–the iPad and iPad Mini and some people even expect more surprises such as iWatch etc. While anything could happen and Apple may jump higher further depending on what Cook will say, please remember that the Street has the habit to buy the rumors and sell the news. I feel it is more likely the share price will come down tomorrow. Since the previous resistance line ($509) becomes now the support line, it will become a good buy again if Apple indeed comes down to the support level. We will see.

A pivotal point for Apple

If you bought Apple around $450 as I suggested, you should be happy now as Apple is reaching its near term high again, closed at $508 on Friday. I think Apple has a great potential to double in the next 12-18 months, since it has a lot of new products lining up and ready to be introduced in the next few months. No doubt Apple's worst time is over. All it needs is the momentum to push through the resistance line exactly at the current price point. You see, Apple is sitting right at this resistance line. If it breaks up through it, likely it may quickly jump to its next stop around $550. But it is also poised for a bearish technical patterning: a double peak. If it does not have enough strength this time to go further up, it then has to come back again and likely to test the low around the first support line at about $475. However, I'm biased for a strong and bullish prospect for Apple and I think it will likely follow Google to break out over the $1000 mark in not so far future! I bet this may happen next year in 2014.

Why am I so happy when IBM plunges?

IBM plunged 6% (about $12) Thu after reporting “disappointing earnings. People were flying away from it by dumping its stocks but I’m thrilled about the plummeting share price. To me this is BUY, BUY, BUY opportunity! Am I losing my mind? Well, if you read my blog about how Buffett would like IBM stock to behavior or my yesterday’s blog on Schloss’ philosophy on value investment, then you should not be surprised about this reaction of mine. IBM is a great company, which you can hold forever for your retirement. But a great company does not mean it will not encounter hiccups from time to time. Just like a strong man who may also suffer from illness, any great companies may also suffer from temporary setbacks. However, as long as fundamentally they are sound, no worry whatsoever should a value investor have. Rather, such panic days should be the fantastic time for the value investors to buy. I won’t be surprised if Buffett is buying more of the IBM shares these days. My initial cost basis for IBM was $199 and it appears I’m losing money on paper. But I can tell you I have made much more money with my IBM positions in the past few months than the amount of the seemingly loss. I’m making money via 3 ways: IBM pays me an annual 2% dividend on a quarterly basis; I sell covered calls against my position every 2-3 months to earn more income; and I sell naked puts to make more income from it or buy cheaper stocks for more dividends. I’m simply happy and I think IBM is one of very few best value stocks out there at the moment, which are super discounted.

By the way, you may have known that 3 economists won this year’s Nobel Prize for economics. One of them is Prof Eugene Fama from Chicago University. His famous theory is the so-called Efficient Market Hypothesis (EMH). According to this theory, the stock market is highly efficient and the price of each stock should immediately reflect the fundamentals of the company. In other words, what you pay for a stock is what the stock is worth. Really? If this is true, then we should not have Buffett, Schloss, Rogers, and Soros etc who are the great masters to pick great stocks undervalued to beat the market. Ironically, one of Prof Fama’s brightest students, Clifford Asness, who practically did just the opposite of the EMH in investment and has become one of the richest men in the world. Asness left academia and joined Goldman Sachs for several successful years and then left Goldman and lunched his own hedge fund firm, AQR Capital Management. AQR is an extremely successful hedge fund, which has made Asness a billionaire. What he has done is simply to find the distorted prices (either too high due to irrational exuberance & complacence or too low due to irrational pessimism & panic)for companies when the market is out of its mind. Right now, IBM is exactly at this moment that the market is losing its mind to have dumped its shares. All you need to do is to hold your gut and buy more of it.

You probably have noticed that I’m talking more and more about value investment. Actually I have become obsessed to it. After almost 20 years in the stock market, I can say this is one of the best and most efficient way to make money with very little risk and without much attention needed. Also, there are so many different ways to further draw additional money out of it. FYI that right now I’m writing a step by step little guide book on value investment with dividend reinvestment. I’m thinking to present a model retirement portfolio in which a few value stocks could turn to over a million dollars after 15-20 years without additional  capital input and much attention. You simply hold them with dividend reinvestment. I have been over half way done and will publish it online. Will let you know when I’m done.

How to turn $10K to $12 Million

You probably have never heard of Walter Schloss, who was another Buffett type of great value investor. Even Buffett called Schloss a "superinvestor" in 1984. He managed a investment fund via Walter & Edwin Schloss Associates. From 1955 to 2002, by Schloss’s estimate, his investments returned 16 percent annually on average after fees, compared with 10 percent for the Standard & Poor’s 500 Index.

 

So what does that mean? Well, for that period of time, say in about 45 years, you could turn your $10,000 of initial investment with Schloss to a draw-dropping amount of $12 millions. All you need to do is to keep your money there and let it compounded at 16% annually.

 

You may think that Schloss must have used some sophistic technique to trade in and out high flying stocks to reach this staggering return. Nope and wrong! Schloss simply bought the highest-quality stocks at the right prices and held them for goods. If the price of those quality stocks fell, he bought more. In his won words: “Basically we like to buy stocks which we feel are undervalued, and then we have to have the guts to buy more when they go down.”  

 

It is a simple but very powerful strategy to become rich with investment.

 

Earn extra income like a pro

In the zero interest world nowadays, you virtually lend money to your bank for free if you keep your money in the bank. Savvy people invest their money in the traditional income assets such as bonds or bond-like securities, i.e. preferred stocks, utility stocks, and mortgage REITs etc. Yes, these assets used to be safer income investments but not any more. You see, the interest rate has nowhere to go but up, which will kill bonds and similar assets. Therefore one has to explore non-traditional ways to generate income. One way to do so is to write covered calls, an option strategy which is rather safe and effective for generating extra money. In a nutshell, you use your existing stock shares as a pledge to allow the other person to buy your shares at a pre-determined higher price at a later date, if the stock price goes to that price. In exchange, that person will pay you some money upfront. If the stock does not go up to that price by the expiration date, you keep the money free and clear. You can then make such a deal again and again. The worst case scenario? You sell your shares at a higher price after earning that extra money first. This is a technique professionals are using all the time for safe income, which can usually generate 15-20% income per year rather easily. But it sounds pretty complicated & daunting, doesn't it?

Well, you don't need to worry about the complicated technique anymore but can still enjoy the income strategy now. How? There are closed-end mutual funds or ETFs which employ such a low risk and high probability covered-call strategy,  called "buy-write" funds or "covered-call" funds. The fund managers will do all the dirty work for you to select the right stocks and write the corresponding covered calls. They then distribute the income via dividends, which are usually quite high. It is more attractive to buy such funds at the moment because they are trading below their book values, or at a discount to their net asset values. In other words, with one click away, one will not only enjoy the high dividend income, they may also get additional capital gain when the funds return to their normal values. Sounds a pretty good deal to me! I think the following 2 funds worth considering:
Madison/Claymore Covered Call & Equity Strategy (MCN) with a current yield close to 9%. The other one is BlackRock Enhanced Dividend Achievers (BDJ) with a current yield around 7%.

Of course, I cannot say these are risk free investments. Rather, they just offer you an easy way to explore another powerful income strategy, if you want to diversify a bit.

Follow Buffett's footstep for a great value stock

As I said, IBM is a great value company. At the current price around $185, it is deeply discounted and cheap, a valuation you don't often see. You should buy and hold IBM forever. By the way, the trade I talked about a few days ago has already shown me good money (up 30%). By the way, I used some variation for the trade by using $185 as the strike price with a bit more "risk" but to me it is no-brainer or free money anyway. Also, this is just my short-term income trade to juice up my long-term position of IBM.

 
Now, what Buffett thought about IBM? Well, Buffett considered IBM as one of Berkshire’s “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. He bought 63.9 million shares of IBM worth $10.9 billion in 2011. Since he liked it so much at the price and valuation, he purchased additional shares of IBM in 2012 and increased their position from 5.5% to 6.0%.

I guess you all would agree with me that Buffett is by far the most intelligent investor in the world. His wisdom is insurmountably valuable. When he talks, I listen, so should you. Instead of that I'm trying to convince you  about how valuable IBM is, let's see how Buffett talked about IBM in his 2011 annual letter. For such a great value stock, Buffett advised that one should wish for lower (languish) stock prices rather than higher prices, if he or she wants to keep it for long term.  See below (red highlighs mine) and you can read Buffett's full 2011 shareholder letter here.

 Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary.

But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period? I won’t keep you in suspense. We should wish for IBM’s stock price languish throughout the five years.

Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%. If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1 1/2 billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.

Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.