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Sunday, June 29, 2014

Target is like an ATM for me

Just a quick note that Target (TGT) is becoming a great buy again. I talked about TGT many times in the past few months and I know for those who own TGT and want to make quick money from it may be disappointed as it has been very volatile till now. For me, I'm extremely happy with TGT for two reasons:
- As a long term investment for my retirement money, I don't want to see its share price increase too much too fast. You can see here why I'm saying so. The lower its price stays, the richer I will become in the long run. So if you are interested to invest for long run, buying TGT now is a good time.
- More importantly, TGT is becoming my ATM machine now as I'm regularly extracting money from it. Actually the last passing Friday was the option expiration day and I got another $1300 pure and clean. My naked put option for TGT at $57.5 expired worthless, meaning someone, who bet for a lower price than $57.5, "sent" this amount of money to me for free. TGT was closed at around $58, which to me is a great buy price. I will try to get more such free money by playing the naked puts again.

Buy sand to make money

U.S. Silica Holdings (SLCA) is a 100-plus year old company, a leading producer of commercial silica (sand), a specialized mineral that is a critical input into the oil and gas proppants end market. It is red hot right now. So why does a sand producer become such a Wall Street star? It is all about oil and gas. If you still haven’t heard it, please be informed that the US is currently undergoing an industry revolution in the energy sector, which is making the US an exporter of oil and gas from a net importer. This is primarily the reason why the natural gas price is so cheap in the US as all the other countries are paying 3-5 times more than us. The key technology behind this revolution is so-called Hydraulic Fracking (HF). You can read here to see why the US may become the largest country in producing oil & gas surpassing Saudi Arabia due to HF. HF requires huge amount of sand and water in the process to crack the shale and release oil and gas contained in the shale. Each well will need as much as 5 million pounds of sand. That’s why the demand for sand is super high and the business for SLCA is outstandingly well. Actually the entire year of fracking sand production of SLCA has already been purchased by drilling companies. No wonder you can safely expect that SLCA’s earnings will continue to be strong. In its first quarter of this year, SLCA presented a record revenue of 180 million, an increase of 47.5% over the same period of last year. This is a super bull trend of the fracking boom happening in the US which will last for decades. There is simply no end in sight. SLCA is a perfect Pick-and Shovel player in this shale energy bull run. Given how high and fast it has run in the past year, it may come down a bit but any weakness is a great time to back up your truck to buy!

Sunday, June 22, 2014

Biotech may resume its bull run

About 2 years ago I saw a strong uptrend for the biotech sector. Hope you would agree with me that it was a perfect call! As shown in the chart below, PBE, the ETF I held back then, has substantially outperformed the overall stock market (the green line: S&P 500). But about 2 months ago, I noticed the biotech started to shown its weakness and was likely in the correction mode. To protect my profit, I sold my PBE position to cash in. Looks like it was also a good call.

 
Now it appears the biotech sector is resuming its bull run again. It is especially important to note that the biotech has again shown its relative strength over the general market starting 2 weeks ago. In other words, it increases much more than the market when up or decreases much less when down. This kind of relative strength often indicates that this uptrend has its teeth and is sustainable. I'm considering to get back to this sector. In addition to PBE, another good ETF for biotech is IBB.
 


Saturday, June 21, 2014

Russia's Google


Following my blog on the Genzym experience last week, today I’d like to introduce you a gem from Russia. As I predicted a few weeks ago, I thought the Wall Street was again overacting to the Ukraine situation and because of this, the Russian stocks overall were crashed. People were simply dumping everything related to Russia. I suggested you could buy the Russian oil company, Gazprom (OGZPY). If you did so, you should be happy that in short few weeks, OGZPY has already been moving up nicely over 20% (from $7 to $8.45 now).

If you are willing to consider more Russian stocks, then I have something that I’m very interested in. One of them is Yandex (YNDX). Yandex is the Google in Russia or Baidu in China. While the majority of you probably have not heard of it, YNDX is actually the 4th largest search engine in the world. Understandably, its market share in Russia in the search engine business is in the overwhelmingly leading position at 60%. In the contrast, Google, the world’s largest search engine has only a 25% market share. You can bet, with this kind of leading role in Russia, Yandex has expanded its business to cover all kinds of areas in the e-business you can think about, including e-mail service, e-commerce portal, auction-based advertising site, navigator service, and various mobile products. I don’t need to go into details but suffice to say, financially it is doing very well and strongly. In terms of various financial indicators, Yandex has shown 30-50% increases as compared with its last year performance. In a nutshell, it is growing really fast. Same as other Russian stocks in general, YNDX got crashed a couple of months ago from its peak of $45 down to $24 in April. Well, the April low looks like its rock bottom now. It has since bounced back fiercely and gained back almost all its loss of this year. Based on its solid fundamentals and the very bright prospects in the future, I think YNDX is still cheap at this price. Of course, keep in mind, anything related to Russia will be volatile. It won’t be surprised to me to see some stupid overreaction again to some headline crisis for Russia causing another major sell-off again. Simply ignore the noises and go against the herd! Unless you think the Russian people will stop using Internet or mobile applications due to whatever reasons, in the long run, I think the fundamentals will trump. YNDX is a good buy for me right now and a strong buy if some sell-off occurs later.

 
 

Wednesday, June 18, 2014

How much is Yahoo worth now?

I said Yahoo is kind of backdoor approach to jump start your bet on the Alibaba’s IPO which you won’t be able to buy at a good price. In the past couple of weeks, the Yahoo stock has gone through a rollercoast price change, first shooting up quite well to $37 and then plunging all the way back to around $34. All was related to Alibaba since Alibaba provided more detailed revenue information that was short of expectations. This in a way further demonstrates that via the Yahoo stock it is an effective way to bet on Alibaba’s IPO. So is Yahoo a good buy at $34 or lower? Let’s do some simple calculation.

Yahoo bought 40% of Alibaba in 2005 for $1 billion and has sold one third of its stake. While I don’t know how Alibaba will be valued at IPO, the general expectation in the Wall Street is that Alibaba will be priced at $200 billion when it goes public in August. If this turns out to be true, then Yahoo’s stake of Alibaba will be worth approximately $48 billion. With Yahoo’s current price around $34, its market cap is only about $35 billion. In other words, if you buy Yahoo now, you get an almost 30% discount of its Alibaba’s stake and you basically get all of Yahoo’s other assets free. To me this is a huge gem the market is offering to us. Yes, Yahoo’s shares may still be up or down depending on the mood of the market but as a value investor, I will be very interested in it for long-term. I have already taken some substantial profit via the position I made when Yahoo was around $15. This is another great time to invest in Yahoo! The lower it goes the better you can position yourself!!

Monday, June 16, 2014

Macro: The Bottom Line (6/16/2014)

World Cup 2014: no panacea for Brazil's woes
 
For this edition of Macro: The Bottom Line, we shift gears from ECB policy to what'll be on the minds of millions around the world for the next four weeks - the FIFA World Cup in Brazil. Well, not exactly the teams or the play-by-play recaps - for that you'd have to go over to ESPN. Rather, we'll give you some background on the host country itself.

From a public relations perspective, the lead-up to the World Cup has not been kind to Brazil at all. The country has been getting a stream of bad press for months: the snail pace of construction work on stadiums and infrastructure, cost overruns (the 12 stadiums together ended up costing three times the original budget), concerns about rising crime, and a wave of strikes (including a walkout by the ground crew at Rio's international airport on the World Cup's opening day).

At the same time, on the macro front, things finally appear to be turning a corner for Latin America's largest economy. For one, the country's equity and fixed-income markets have come roaring back from a shaky January - the country's benchmark Ibovespa stock index is now up around 9 percent year-to-date Likewise, the Real currency has been on a tear, advancing by almost 9 percent since the end of January. What's more, global financial market conditions have stabilized to such an extent that the central bank could afford to pause its rate-hike cycle.

So, which version represents the "true" state of affairs in Brazil: the press version of organizational disarray and violent street protests, or the market version of fast-recovering financial asset prices? The answer is, both.

There's no denying that Brazilian markets have been stellar performers this year. But so have markets in Spain, Greece, Turkey ... the list goes on and on. That's because the catalyst for the euphoria has nothing to do with virtuous government policy in Brazil. Rather, it has to do with - you guessed it - the Fed and the ECB recommitting themselves to accommodative monetary policy. With the era of easy money set to continue, the yield seekers are back doing what they do best: indiscriminately pumping up valuations in emerging-market assets. And Brazil - with some of the highest inflation-adjusted yields in the world - inevitably benefitted from this trend.
 
Domestically, however, the situation is far from rosy. The problems that the World Cup has brought to international attention, are symptomatic of broader structural issues that are increasingly strangling Brazil's growth potential. Cost overruns and delays in completing stadiums? These are nothing new in a country where the bidding process for infrastructure projects is opaque, bureaucratic, and plagued by corruption. Widespread street protests? Not surprising in a nation that taxes its citizens at Western European levels, but in return delivers potholed roads, Third World education and healthcare, and inflation north of 6 percent. Elevated crime levels? Hardly shocking in a society where - due to poor education standards, low productivity, and absurdly high costs of doing business - high-paying jobs and opportunities for entrepreneurship are increasingly hard to come by. The opportunity cost of crime is enticingly low.

These problems have existed for decades, and can only be addressed by resolute action by political decision-makers. Instead, these very political leaders continue to waffle, in the hopes that these issues will somehow dissolve amid the generosity of global central banks and the convergence of global soccer teams on the world's biggest sporting event. But once the whistle blows on the last World Cup game on July 13, Brazil will be back to where it started (oh yes, and 12 empty stadiums "richer").

Keep this in mind the next time someone tries to justify an investment in Brazil using the World Cup ...

Saturday, June 14, 2014

Don't follow the crowd

As I have talked many times, when there is panic with a feeling of blood in the street, there is likely a great opportunity that you may find some gems to pick up. This is so-called contrarian investment. You go against what all the other people [the herd, including those Wall Street (WS) analysts] are doing and act lonely at that time. More often than not, you will be the winner, not the herd! Let’s use an example I talked about here to illustrate this. A few years ago there was a major sell-off for Genzym, a very successful biotech company specialized in orphan drugs for rare diseases. The reason for the bloodshed for Genzym was that it had some recurring quality issues identified for some batches of its products and the FDA issued a warning for it. People got nervous and all were rushing to dump it, cutting the stock price almost by half. This is a typical WS herd behavior that they tend to sell first before asking. When I saw this, I became very interested in the stock and wanted to know what was going wrong with it. It turned out this was nothing fundamental at all but just some temporary issues that all the companies could run into at some point. I was pretty sure that the company would fix the problem and all the business would return to normal before long. Actually what was more unique to this problem with Genzym was that even the FDA acknowledged that there was no replacement for the product of interest and advised patients not to discontinue the treatment, since this was an orphan drug only Genzym was producing. So what was the concern? To me it was more of a psychological concern than anything material and it was a great contrarian buy for Genzym. Yes, I did so when Genzym was around $50. Guess what happened to the company?  It was bought up by Sanofi in less than a year with a price tag over $70 per share!! The lesson? Find gems during a crisis. I hope my blog may help you to target something interesting to you and I think I find another one. Stay tuned.

Friday, June 13, 2014

Is it surprising to see Intel on fire now?

Intel (INTC) is on fire and making a moon shot today, jumping high by 7%. This is not commonly seen with blue-chip giant companies such as Intel. Now suddenly all the analysts start to upgrade Intel as if this were totally a surprise that Intel is raising the guidance on earnings, especially its business in the PC market. But not me. You may recall, I said to buy Intel early last year when those analysts were busy downgrading it and everyone was running away. I even made a bold prediction that Intel would double from the low $20s level. Well, it is still far from a double, but I feel more confident that it will become a reality.

I personally started to put money into Intel when it was below $20 and I started to talk about Intel back here in 2010. You can check that blog of mine here. Since I not only buy Intel via its stock for long-term dividends, I also bet heavily on it via its options which are leveraged in nature, I’m certainly very happy with my paper profits from such positions. Due to the leverage, it is not small at all. Now, if you haven’t bought Intel, is now a good time to buy it? Well, over the next 1-2 years, I think Intel will very likely shoot up for a double to around $45 or so and may then even challenge its old pre-bubble high around $80 eventually. But in the very near term, it is natural to expect that Intel may need to take a breath after such an explosive move. Technically I bet it will drift back down to test its support level around $27 in the next few weeks before resuming its bull run. In other words, you may get a better chance to buy Intel.


Monday, June 9, 2014

Macro: The Bottom Line (6/9/2014)

The ECB (finally) acts
 
After 2 years of mostly verbal interventions, the ECB finally decided last Thursday that it was time to get its hands dirty again. Faced with the same issues that we've been discussing for weeks - stubbornly low inflation and a strong euro that risked jeopardizing the fragile recovery - Draghi and company announced a slew of measures.

1. Interest rate cuts. The most headline-grabbing of these was the decision to cut the deposit rate from 0.0 percent to -0.1 percent. In other words, European banks must now pay 0.1 percent to park their excess liquidity at the central bank. By thus "punishing" banks for sitting on idle reserves, the ECB hopes to nudge banks toward more lending to the real economy.

Will it work? As novel as this idea sounds, negative interest rates are not without precedent. As recently as summer 2012, Denmark's central bank imposed a similar negative deposit rate (and the rate remained negative until April of this year). In the Danish case, the primary goal was to stave off strength in the Danish krone. On this count, the measure worked, with the krone weakening to more acceptable levels. But what about easing credit conditions? One of the interesting side effects of deposit rates was that banks found a convenient excuse to increase loan rates, precisely the opposite of what Eurozone policymakers would want to see. Add to the mix the possibility that liquidity will dry up for money-market funds, and you've got a very blurry picture. 

2. Expanding direct lending from the ECB to European banks. The ECB extended a provision (known as "fixed rate full allotment") that allowed commercial banks to borrow however much they wanted at a fixed rate for one week. In addition, they introduced a separate program whereby the ECB would lend banks funds for up to 4 years at uber-low rates, up to 7 percent of their total loan books. Given the current aggregate size of Eurozone banks' loan portfolios, the latter program could add about 400 billion euros of liquidity.

Will it work? Again, massive lending programs are not unheard of. The ECB itself unleashed its bazooka (over 1 trillion euros of 3-year, low interest loans) in late 2011/early 2012. The problem back then was that this cheap cash came with few strings attached, and a non-trivial portion of the funds got redeployed into sovereign-bond investments rather than towards lending to the real economy This time, the conditions are much stricter - the volume of new cash is directly tied to the aggregate amount banks lend to businesses and households. In theory, this makes logical sense, especially considering that the primary means of corporate finance in Europe remains bank lending. But let's not forget the root cause of the tight liquidity conditions in Spain, Italy, Portugal, and other peripheral countries. The recessions in these countries were so harsh, and the loan losses local banks suffered so severe, that the key element underlying any functional banking system - trust between creditor and borrower - disappeared. Even today, despite more stable macro conditions, this lack of trust (or "information asymmetry," in economist parlance) continues to handicap access to credit in several Eurozone countries. Until these root issues are properly addressed, throwing more funds at the problem is unlikely to do much.

3. Vague hints of QE. Aside from announcing these measures, Draghi noted that the bank was not necessarily "finished," and would initiate "preparatory work" towards stimulus measures for the ABS market. In other words, the ECB is keeping the door toward outright asset purchases open, especially in the market for repackaged loans. Again, a well-intentioned step that will run into a slew of practical complexities. How does the ECB avoid provoking potentially destabilizing fluctuations in a market that's not all that liquid? How do Draghi and his colleagues decide on the fair allocation of purchases between countries? How will they avoid creating undesired arbitrage opportunities between countries and sub-sectors of the ABS market? There are no simple answers to any of these questions. 
 
How did the markets react?
As we discussed above, the jury is still out on whether the measures will have their desired effects. But the markets certainly took it in stride. Equity markets on both sides of the Atlantic reacted favorably, with the S&P 500 edging ever closer to the 2,000 level. Even more impressive was the rally in peripheral European bonds, with Spain's 10 year yield falling to within 10 basis points of the 10-year U.S. Treasury yield. Outside the developed world, emerging market currencies from Brazil's real to South Africa's rand also had their moments in the sun. Just as we noted in our post from two weeks ago, the 2013 "consensus" is being unwound, and the era of easy money is making itself felt again.

What about the euro? Many would be surprised to learn that the currency not only didn't collapse after the ECB's announcements, but actually rose slightly. Does this contradict everything that we've been writing about for months? We believe not. You see, the markets had been pricing in ECB action for quite some time, and many institutional investors had been building up sizeable short positions in the currency. True to the maxim of "enter on the rumor, exit on the news," many of these investors took advantage of Thursday's news to unwind their shorts. But once the reality settles in - that inflation won't be anywhere near normal levels anytime soon, and the ECB will very likely need to keep its foot on the stimulus accelerator - the euro will likely once again find itself in the crosshairs of the markets.

Sunday, June 8, 2014

The era of negative interest is here!

The US stock market has had its bull run for 5 years without interruptions. Since the low of Mar 2009, the S&P 500 has surged over 180%. Is this strong bull market supported by a strong US economy? I guess everyone knows it is not. It is purely supported by the extraordinary Fed’s loose money policy with historically low interest rates near zero and unlimited supply of easy money printed from the thin air. When people cannot earn much by saving their money in the bank, guess where their money will have to go? The stock markets! While the US stock market may further go up as long as the Fed easy money is still in place, the US stocks as a whole are not cheap anymore and there is a great deal of danger that the market may crash first before shooting up further.

 So is it too late for you to catch such kind of artificial asset bubble? Not really. Right now, there is another asset bubble under creation exactly following the US footstep. It is the sibling of the US, the European Union. As we all know, the EU is suffering from a historical economic crisis which is still ongoing. While the situation appears to be stabilizing, it is facing a significant threat of so-called deflation. For those who don’t know what deflation means, just think about what has been happening to Japan in the past 20 years. JP has been deeply in the deflation hole, in which it has been trying to climb up for 20 years without success. Just remember, deflation is much more devastating and difficult to tackle than inflation and everyone will try all they can to avoid. EU inflation rate in May was 0.5%, the lowest since Mar 2009 and below the expectation of 0.6%. The EU central Bank (ECB) is targeting a 2% of inflation rate but it is moving toward a wrong direction. That’s why Mario Draghi, the head of the ECB is so scared that he is taking a drastic step no other major central banks have ever taken to date, to cut the deposit rates to below zero (-0.1%), which was just announced on the passing Thu. In other words, banks have to pay ECB for keeping their money in the central bank, not earning any interest! The idea is to discourage banks to save but lend their money out. In addition, ECB also provides cheap, long term loans to banks, tied to the understanding banks would loan the money to businesses, boosting growth. Draghi has also said he's willing to deploy unconventional measures if needed, meaning to print as much money as necessary. In principle, this is exactly what the US Fed is doing. We all know what has happened to the US stock markets in this kind of extremely easy monetary policy. I’m sure the EU stock markets will follow the same path.

Regardless of how you think about the EU economies, the stock markets will inevitably go up when excessive money supply is floating around. Yes, this kind of markets will crash at some point, if not supported by the underlying strong economic growth. But until such a day comes which is likely a few more years down the road, they will jump up first. The easiest way to invest in the EU stocks is via the ETF, FEZ. I first introduced FEZ over a year ago and FEZ was also one of my year-end predictions for 2014. It has increased over 70% already in the past year (see the one year chart below).  But I don’t think it is too late and there is more money to be made in it. This is just a beginning of a bubble to be blown up!

Saturday, June 7, 2014

Next Apple?

Long time readers know that I love Microsoft (MSFT) and actually it is one of the largest positions I have in my portfolio. Not only I have it as my long-term retirement investment, I’m also repeatedly extracting quite good short-term income from it by selling call or put options from time to time. Microsoft is very royal to me to “send” me a lot of free money in the past year or so. As I have said before, for such kind of long-term dividend reinvestment, your goal is not to have much capital gain but rather to accumulate as many shares as possible. That will be a more efficient way to make you rich. As much as I’d like that MSFT will stay where it is now or even lower, I’m afraid it may start to transform to a more actively growing stock. I just saw a video about a new product it is working on: Skype Verbal Translator. It is very impressive and I think it may become a revolutionary product with a huge market, something similar to what Apple was doing when it was transforming itself. Think about it: how much would you wish that you could go anywhere in the world without any language problem? I’m pretty sure this will be a product everyone loves. Of course, this product is still premature for commercialization at the moment. My son can speak 6 languages including German. He viewed this video and told me that the translation from German to English is quite good but English to German is only about 40% accurate grammatically, although the content is definitely understandable. But I’m confident Microsoft will overcome the hurdles and eventually market this amazing product successfully. When it does, watch its stock price! Keep in mind, this is likely just one of the innovative products Microsoft is working on under the new CEO.  If I were you, I would start to accumulate its shares now to enjoy its very reliable and increasing dividends while waiting also for the days when its share price also skyrockets. It is not if but when. I'm even betting Microsoft may become another Apple: a stock used to be something no one was interested in but suddenly one day it became everyone's darling! I love Microsoft!!!

Monday, June 2, 2014

Macro: The Bottom Line (6/2/2014)

The undoing of the 2013 "consensus"
 
In last week's edition of Macro: The Bottom Line, we discussed at length how central bank signaling has caused rates to pull a 180 relative to May 2013. We made the case that, with neither the Fed nor the ECB ready to pull the plug on ample liquidity, low rates and easy money are here to stay. Well, in case you were still not convinced, take a look at what happened this past week. Long story short, bonds continued their extraordinary run, with the 10-year Treasury yield testing the 2.45 percent level (again, as a reminder, the yield at the start of 2014 was 3 percent).

The culprit this week was the revision to 1st quarter GDP data. And by all accounts, what was already a bad number became a horrendous number: the initial estimate of 0.1 growth in 1Q was revised down to a 1 percent contraction. Business investment and exports both declined, as did inventory accumulation. We have already written in the past about how the inventory binge of 2013 was unsustainable, and the hangover certainly materialized in the first quarter. In short, besides consumption, there was little else going for the U.S. economy in the first quarter.

Yet again, the naysayers have tried to downplay these numbers.  
 
Some resorted again to the argument that - you guessed it - much of the U.S. got slammed by Arctic-like weather in Q1. There's no denying that weather pushed the growth figure into negative territory. But even if we removed the "polar vortex" effect (estimated at about 1.5 percentage points by private-sector economists), the numbers still aren't all that positive. A rough back-of-the-envelope calculation (-1 percent plus 1.5 points) gets us to half a percent, hardly something to celebrate.

Others pointed out that some of the key detractors from GDP this quarter - notably exports, inventory, and business investment - are highly volatile. Many would also add that as temperatures get warmer, at least one of these GDP sub-components should turn upwards. Fair point, but it's important to keep in mind that, using an alternative gauge that excludes inventories and exports, growth was 1.6 percent. Better, but nowhere near the pace needed to sustain the gains we've seen lately in the labor market.

Of course, we can spend hours and days debating how "reliable" the 1Q data is. But the more relevant concern is: what does this mean for Fed policy going forward? We'd argue that, even taking the naysayers' arguments into account, the data gives a further reason for Yellen & Co. to think twice before contemplating any type of monetary tightening. Why allow corporate lending rates to drift higher, when the goal is to push business investment back into positive territory? Why tolerate an increase in mortgage rates, when broader economic sentiment has so much staked on the housing recovery? Why induce a stronger dollar, when the economy needs any support it can get from the export sector? No, like it or not, exceptionally low rates and easy money are not going to disappear anytime soon. Slowly but surely, the 2013 monetary-withdrawal "consensus" is melting away.

Sunday, June 1, 2014

A hedge against the potential downward market

The stock market is a roaring bull and has reached to its all time high again. While it is very difficult to fight against the bull run, just keep in mind there are tons of warning signs that this is a very dangerous situation to blindly chase hot stocks. For seasoned investors, it may also be a great idea to have some hedges against the downside.

Salesforce (CRM) used to be the Wall Street darling in the past few years. It has got a ridiculously expensive valuation when everyone was chasing it up. But lately in the past few weeks, CRM could not get the steam and even could not rally when the overall market was marching higher. This is a big warning sign that this stock may have finally run to its end. Its price chart has shown a text-book bearish Head & Shoulders. I bet CRM will plunge in the next few months. If you buy some put options for CRM and if it indeed goes down, you can make some money. I bet, if the overall market goes down, CRM will be among the first stocks to go down with it. This is one way to hedge and protect your portfolio. Even if the overall market is doing fine, I still think there is a good chance that CRM will plummet further before finding its bottom.