Ride with insurance companies

Insurance is likely one of the best types of business. It takes in a huge amount of money upfront and uses it to invest for years for profits. Only part of the money will be used to pay back for claims but usually many years later. That's why the iconic living investment master, Warren Buffett, really loves insurance companies, which are the major component of his holding company, Berkshire Hathaway, and have made a killing over years. I think insurance stocks should also be part of your portfolio.

Validus Holdings (VR) is a holding company. The Company, through its subsidiaries, provides reinsurance coverage in the property, marine and specialty lines markets and insurance coverage in the same markets. VR has two wholly owned subsidiaries, Validus Reinsurance that underwrites property catastrophe reinsurance, property per risk reinsurance and property pro rata reinsurance. The other one is Talbot, which writes primarily short-tail lines of business. Due to its risk insurance which has to pay a lot of money to claims due to natural diasters such as hurricanes etc, VR tends to be seasonal in terms of its stock price. It's often doing poorly during the summer time when many natural disasters occur and then climbs up in the rest of the year. Valuation wise, VR is cheap with a PE of only 7.7 and currently traded around its book value. It also pays a high dividend yield of 3.3%. It will be a good timing to buy the stock during the next couple of months when it typically pulls back.

Westport is a good buy again

If you've followed my blog for some time, Westport (WPRT) should not be strange to you. I talked about it a couple of times in the past. Back in Sep 2011 and again Jan 2012 when natural gas was crashing, I suggested one should pay attention to WPRT. I followed the price movements of WPRT in the past 2 years or so and traded it twice with quite good profits. I think now it is the good time again to get in WPRT. I don't want to repeat the fundamental rationale why to buy WPRT.  Right now, it is the technical reason that WPRT is a great buy. As you can see below, In the past year or so, WPRT has been trading within a tight range between $28 to $31. In the past few days, it has broken up through the range. This is a very bullish move, often indicating the start of a significant uptrend. It may pull back to re-test the support line around $31. If it can hold up, then its next move may likely jump to around $40. With the strong fundamentals of the natural gas as the driving force, it won't be a surprise for me to see it go further up to challenge its all time high in the next few months. But first let's see how it proceeds from here.

Buy Treasury bonds as a short-term speculation

As I have talked a lot lately about the US government bonds, you must have known that the long-term Treasury bonds have crashed in the past month with its yield shooting up to moon. The red line below is the ETF (TLT) for the 20-year Treasury bonds, which is almost a straight line down. On the contrary, the inverse ETFs, TBF and TBT (2 x leverage) have jumped up nicely.  While in the long run, the Treasury bonds will definitely go further down, a lot more down, the question is: will it simply go down from here without looking back? I highly doubt. Don't forget, Benanke will not allow it to happen so easily, as the increasing interest rate is simply too damaging to the US economy. I think too many people have jumped to one side of the boat too fast too soon. I think it is highly likely that the Treasury bonds will bounce back strongly in the near term and the interest rate will come down from the moon soon. If this is indeed the case, then a logic speculation is to long the Treasury bond. One can either buy TLT or its call options,  or short TBF/TBT with their put options.

Volatile period for mREITs

Mortgage backed REITs such as NLY and AGNC are being decimated these days. It is certainly no fun to see them dropping everyday. While I don't think the good time for NLY & AGNC is over, in the short term, they are likely very volatile and maybe continue to decline a bit. The reason is also related to the very fast shooting up of the yields of the long-term Treasury bonds. Actually with the short-term interest is still near zero and the long-term interest is fast increasing, the spread between the two is much wider, which should be very beneficial to mREITs as this is how they earn their money (borrowing with low interest money and lending with higher interest). However, the other side of the coin is that the mortgage bonds held in the mREITs' portfolio is decreasing in value quickly when the value of the long-term bonds are decreasing (value of bonds is just inversely related to their yields). This has brought down the net asset value of mREITs, causing people to dump them.

If you have bought NLY or AGNC, better to keep a stop loss on them as I don't know how low and for how long they may go down before recovering. If you are thinking to buy them, then better to wait to let the dust settle down a bit. Eventually they should come back as long as Benanke keeps the short-term interest low, which won't start to increase till 2015. You just need the gut to go through the volatility during this turmoil time period with bonds.

Is S&P repeating itself for a similar crash in 1998?

With the markets crashed over 3% in a single day yesterday, I should feel like a genius for moving out a substantial amount of money from stock funds to cash in my 401K just days before. Of course it purely a coincidence and luck but as you know, I did say that something big could be coming. Actually I'm afraid that this is just the beginning of a belated significant correction in the stock market. S&P500 has slipped down through its 50 day moving average, which is often indicating a change of trend. Of course it won't be a straight line declining. On the contrary, it is likely S&P500 will bounce back to challenge its 50 DMA next week. The question is, will it be successful in holding up its uptrend? I just saw a blog, which presented an amazingly similar pattern of the S&P500 current price curve as compared to its curve in 1998 (see below), when the market crashed 20% that year (See details here). Apparently I don't know what will happen next and if S&P will follow exactly the footstep of its 1998 history. But people often say history tends to repeat itself. So just be aware of this possibility and be prepared accordingly. If you have too much in stocks, maybe it is the time to at least trim down a bit.



 

 

 

I'm afraid the bond market is telling us something big

As I said before, the bond market is the actual driving force behind the financial market, which is much much bigger than the stock market. The direction of the bond market will really determine where the overall market has to go. If you are watching the bond market, you may notice that in the past 2 weeks or so, the long-term government bond yield has suddenly moved up very quickly, from below 2% to 2.2% for the 10-year Treasury bonds. This is a huge move for bonds in such a short timeframe! I'm afraid the bond market is trying to tell us that something big may be coming. The bond market has enjoyed an over 30 years bull run, which has definitely ended by now. Dose the recent sudden mini-crash of the bonds mean the turning point has finally come? I don't know but I think this is likely the time period that bulls and bears are fighting to take a control but sooner or later, the bears will prevail to push down the bonds, leading to substantially higher interest rates. This is likely a very volatile period with quite some turmoils. Taking into consideration almost all the technical indicators flashing a warning sign for the top of the market, I just don't feel good about the current situation. I'm afraid the final moment is probably fast approaching to trigger a significant correction for the stock market in the next few months. Here is what I'm doing right now for my own 401K account: all my new contributions will go to cash with the money market fund. I also exchanged half of my equity funds into the money market fund to raise my cash position, waiting for a much better opportunity to re-enter the equity funds. I don't want to see my good profits from those equity funds to vanish with the correcting overall market. I may be still early but I feel safer this way.

Likely another good opprotunity for Amgen

I talked about a few biotech companies about a year ago, including Amgen (AMGN) which was trading at about $50. I thought they were good buys back then and sure enough they all took off and flied higher and higher since then. But often times, things will go ahead of itself, sort of too far too fast. AGMN is one of them. I has more than doubled to reach $110 recently. But since then it has come down quite a lot in the past few weeks. With more than 10% decline already done, I think now is likely another good opportunity to buy AMGN at the price around $95. I don't time to talk in details but all the technicals I'm seeming for it are pointing to the buy side. Briefly: close to its 200 day moving average (DMA), close to its low boundary of the Bollinger Bands, around the oversold side based on RSI at 20, and significantly below its 50 DMA. Of course, at the price of $95 or so, it is not as cheap as $50 or so a year ago but if you know how to play with options, you may structure in a way to get a free ride or even get some money upfront. E.g. using a combo of buying a long-term call and selling a long-term put, you can virtually get paid upfront to ride with its uptrend, if it indeed starts to take off again. The worst you just buy it at a significantly lower price, say another 15% off its current price.

Supercycle in uranium

The sentiment for uranium has been hammered severely and no one wants to talk about investing in uranium at moment. You may remember, 2 years ago, following the Fukushimka earthquake and the following disastrous tsunami, the Japanese nuclear power plan experienced a deadly meltdown. A panic reaction occurred across the world: Japan shut down all 50 of its nuclear reactors; Germany shut down 8 of its 17 reactors and will phase out the rest by 2022; Switzerland decided on a slow phaseout starting in 2019 and extending through 2034. Even prior to this Fukushimka meltdown, Austria, Sweden, Italy and Belgium had plans to eliminate their nuclear facilities. As a result, the demand for uranium has plunged, which sent uranium prices from $70 to $40. The thing is, the world simply can not function without the nuclear power: there is just not enough power out there, period! Actually, according to the World Nuclear Association, there are 60 reactors being built around the world today. Another 150 or more are likely to come online during the next 10 years. Over 200 are further back in the pipeline.  In other words, the long term impact on the demand from those overreaction due to the Japanese reactor shutdowns is minimal, if any. On the contrary, the demand will only significantly go up. However, it is reported that the supply of uranium will be substantially reduced in the future since many mining companies have cut down their production. Just to think  about what will happen when a increasingly demanded resource is facing a declined supply. It is just a sweet spot for the investors. Now it is likely a great time to invest in uranium as no one wants to own it. That is the beginning of a suppercycle for a resource.

The perfect means to invest in this sector is to buy the stock of Cameco Co (CCJ), the biggest supplier in Canada. Actually Cameco mines are responsible for about 14% of global uranium production. It owns the world's second largest deposit of high-grade uranium. When people wake up and realize that there will be a shortage of supply for uranium, shares of CCJ will likely explode higher on such news. You want to own it before this happens.

Another opportunity to buy discounted MUNIS

If you haven't heard MUNIS, you should. It is the nickname for municipal bond funds. Municipal bonds are debt securities issued by a state, municipality, county, or special purpose district (public schools, airports, etc.) to finance capital expenditures. They are exempt from federal tax, and are generally exempt from state tax for residents of the state in which they are issued. In other words, MUNIS are a popular fixed-income investment for people in a high income tax bracket due to its free tax benefit. The best time to buy MUNIS is when it is traded below its Net Asset Value (NAV). Right now, many good MUNIS are traded with a significant discount against their NAVs. If you buy them now, you are not only enjoying the high yield which is tax-free, you will likely also enjoy some good capital gain when they return to their NAV or even higher. As you know, your income tax is going higher and higher and investigators are becoming more and more interested in those securities which can yield tax-free income. One such MUNIS, Invesco Insured Municipal Income Trust (IIM) is trading around 7-8% discount from its NAV. It pays 6% dividend. In other words; it is almost equivalent to a 9% yield if the dividend is taxable, for those who have to pay a high tax rate. I think IIM is a good buy at the current price.