Rare opportunity again for a deep value stock

About 2 and half years ago, I got in this great stock at around $55 when it was hit hard, an outstanding retail giant that faced a temporary challenge. I’m talking about Target (TGT) for a moment when Buffett loves to put his money into work. No surprise. TGT quickly shook off the problems, recovering pretty soon and becoming stronger. Since then, people became interested in TGT again and they pushed its price to as high as $85. Along the way, I used TGT  literally as my ATM to draw incomes regularly. I even posted such a blog. Eventually when it got too much hyped, my TGT shared got called away when it was close to $80. I was fine as I knew it was a bit too expensive at that time and I’m waiting for another opportunity to get it again. My patience pays off. TGT got crashed again with a haircut off 20% from its peak recently due to “poor” earnings. When everyone is dumping the shares, I’m happy to pick them up at a discount. You see, this is an American icon retailer that has nothing changed fundamentally. Yes, it has significant challenges especially those from the online retailer giant Amazon but it is still an enormous cash gusher, a very profitable business. As with any other great businesses, TGT will adjust and adapt to the new environment when facing challenges and its long track record of profitability has demonstrated that it will overcome difficulties! As a value investor, I only want to buy when the quality stocks are cheap and the thing is they only become cheap when they are facing temporary problems. This is what is happening to TGT again. With a PE of 12 and the price being only 0.56 of its sales for such a great business, it is really cheap to me. It makes me more exciting to see its decades of the record of paying dividends with a compounding dividend growth rate at double digits. You don’t see many such companies in the world. I’m happy to buy TGT when it is on sale!!

NUGT is not for long-term holding

I got a comment from my friend (Frank) after I posted my thoughts on the gold trading via NUGT: 

 中线来说，我也是看好黄金及其相关资产的，可能短线会有震荡调整，这些观点是一致的，最近也在帖子中几次提及。但 NUGT 这种三倍做多的 leveraged ETF, 由于 tracking error and leveraged ETF 所引起的 value decay，作为中长线投资还是有其风险的，可能比较适宜于短线趋势很强时，这跟 buy put 有某些方面的类似，其风险的控制有很大的不确定性。

On NUGT 5-year chart, 其 reverse split adjusted price 在 Sep 9, 2011 最高 over $20,000，跌至今年1月初的最低 $17.4，不到5年左右前最高点的 0.1%；而其反向的3倍做空 ETF DUST，从 Jun 26, 2013年的 reverse split adjusted 最高 $830左右，跌至最近最低 $12.10，不到3年左右前最高点的 1.5%。可见，中长线来说（尤其经过一次牛熊转换后），tracking error and leveraged ETF 所引起的 value decay 将使绝大多数 leveraged ETF 损失惨重。

 

First of all, I totally agree with Frank that NUGT is not suitable for long-term investment as a general rule. As a matter of fact, any leveraged ETFs are not good ones for long-term holding given the nature they are set up with. They use futures to track the underlying assets and as such, they have to keep rolling over their positions by selling low but buying high, which will therefore keep reducing their values over time. That’s why if you check the initial value of NUGT, eg. it was over $20,000 per unit as  compared with less than $100 as I’m writing. So let me be clear, please don’t simply buy and hold NUGT if you are thinking to go long with gold stocks for years. You may end up with being right on the trend but still losing money.

 

Having said that, I do think NUGT could be a good trading vehicle. This is especially true when NUGT is traded along with an uptrend. When the trend for gold stocks are moving up, NUGT will go up faster due to its leverage nature. Of course, it will equally lose value very fast if the trend turns around. So the best to trade NUGT is to use options to hedge it: when it is overbought, writing covered calls and when it is oversold, selling naked puts. This should be a great technical trading strategy for such a leveraged ETF during the bull run of gold stocks that is ongoing!

Oil will follow gold soon

Since Feb 11 when bottoming around $26, oil has mounted a very expressive soar over 80%, a move that is not often seen. Yes, this usually happens to something that is too oversold and too depressed. As I said back then, I expected oil would go up to $40 first before going down to $20. But the magnitude of this rebound is definitely beyond what I have expected. However, I still don’t believe the oil has come out of the woods and will simply go up from here. Instead, I think oil will follow the footstep of gold to experience some significant correction at the minimum.

 

Back in Feb, I started to notice the parabolic move for gold and was expecting a correction should be on the way. I was a bit early but gold indeed has started to correct in the past week or so. This correction should continue for a while. One early indicator for the gold correction was from the behaviors of speculators vs commercial traders in their trading positions as reported in COT. After gold got a significant move upwards, the commercial traders (smart money) started to short gold, which became increasingly intensified as gold further moved up. On the contrary, the speculators (dump money) started to become euphoric for gold and they added more and more long positions along the way. The thing is the smart money is almost always right at the end although they tend to be early. Indeed, at the moment, the smart money proves themselves again this time that gold has been too hot and needs to cool down. This is almost exactly the situation we are in for oil. Per the COT report, the dump money (speculators) usually gets very depressed when oil is low and their future positions will drop to around 200,000 contracts. This was what happened back in Feb. When oil goes up, their future positions will go up as well and when their positions go as high as 400,000 contracts or more, it signals that they have become extremely bullish. However, this is usually the time when the smart money get substantial short positions, signaling the high for oil is in and will go down in the near future. The recent COT report did show that the speculators long positions have gone beyond 400,000 as the oil price is close to $50. I think there is not much left for oil to go up in the near term but rather there is a high risk that oil will tank soon. Be prepared for it if you are long oil now!

The market is heading down

Three weeks ago, I warned you about the scary chart on high yield bonds (HYG). As I said, this was a setup for heading down. Below is the updated chart for HYG. It is now showing a bearish head-shoulder pattern, furthering pointing towards the downside. Along with the weakness of HYG, the overall market is also struggling, although it is still trying to stand up. But I think a big leg down is on its way. S&P will at least test its next support around 1950-1970. If the bulls cannot defend at that level, then watch for the lows below 1900 in the weeks ahead.

The best position I can expect to have

As you know, I'm expecting for a significant softness of gold and its stocks for some time. Here is what I wrote last week about the gold stock ETF (GDX): Most likely, two things may happen: either GDX will just chop around this level in the next few weeks to allow its 15 DMA to catch up moving towards it or it may go down by 10-15%  to meet its 15 DMA. Just within days, GDX got smacked. On Wed, in responding to the less dovish tone from the FOC minutes, GDX dropped by over 8%, the worst day within months. This is typically what we often see when a stock is too much loved with a lot of hyped euphoria in it. I'm not sure the correction is already done. Gold and its stocks may continue to go sideway or go down further in the near term. This is a healthy and necessary move if we want to see a sustainable long-term bull run.


For me, the big bang made me really happy and today is a rather felicitous day for me. I have accumulated the leveraged ETF for gold stocks (NUGT) for some time. This is a rather volatile ETF for sure, which could easily swine 10-20% within days. I used naked puts to long NUGT when it was slapped to $70-80. Then it got chased up to $120 recently when I saw a lot of euphoric sentiment as people were feverishly talking about how soon NUGT would hit $150 or even $200. When we see this kind of hype for anything at the time the underlying technicality is pointed towards the opposite direction, I know a short-term top is in. So I started to sell covered calls at $110-120 against my long NUGT positions. Given the leveraged nature for NUGT, the premium is rather high either way (calls or puts) as people tend to be too euphoric or depressed. That's great to me as the options seller. Now NUGT is closed at $89.5 today, both of my naked puts and covered calls have expired worthless on the May option expiration day. In other words, with NUGT is around $90, I'm simply walking away with all the premiums I got from selling puts or calls as my income.  Of course I still have my long NUGT positions in place and I will continue to sell puts or calls as the opportunity is presented itself. As I said, in the current situation, writing covered calls is a great strategy for trading gold stocks and I expect sideway choppy market for gold/silver will likely continue for a while. Remember, true bulls do not like spotlight. Rather they prefer to go up without much notice!

How to buy gold stocks now?

Since early 2000, gold has started a gigantic bull run. It has recorded a 13 consecutive years of annual gains, for which none of any other assets have done so. After such a long run, it needed to take a break and it did so after it reached all time high of $1900. In the past 3+ years, gold has entered into a substantial correction, declining almost 50% of its value. Since end of last year, gold has likely bottomed and started its next leg up. Again, gold has done something amazing, recording a quarterly gain of over 20% that has never occurred in the past. Believe me, this is just a beginning for its next bull run, which will last for years. As always the case, when gold shows its strength, gold stocks will perform much better and strongly. The gold stock ETF, GDX, has gained over 60% in the past 3 months already. I’m pretty sure many people who haven’t got up the train are very itching to buy gold stocks now. I don’t think it is a bad idea to do so now as long as your timeframe is long and you can stomach a potentially very volatile fluctuations. You see, GDX is currently sitting on its 9 DMA at around $24.5. Its 15 DMA is quite far away at around $21.5, a 15% difference. Technically a stock rarely stays too far away from its 15 DMA and when that happens, it tends to come down towards its 15 DMA. In addition, its momentum index, MACD, is also trending down at the moment. Barring a black swan showing off to shake the world, I doubt gold and stocks have sufficient energy to immediately break out its recent high ($26 for GDX). Most likely, two things may happen: either GDX will just chop around this level in the next few weeks to allow its 15 DMA to catch up moving towards it or it may go down by 10-15%  to meet its 15 DMA. It is very hard to say which one will pan out but given how messy the world is, a sideway fluctuations may be more likely to allow it to accumulate enough energy for another strong upward move. In this kind of situation, simply buying and holding is not bad but there is a better alternative: writing covered calls. This will allow you to set up a position now but may also reduce your downside risk if indeed GDX simply going side way or correcting by a few points.

 

Personally I don’t feel comfortable to simply buy something when it has some technical weakness. Rather I’d like to buy with some hedge. The covered call strategy is the one I’m using to trade gold stocks at the moment.

When oil cannot move with good news….

Since hitting bottom in Feb, crude oil has bounced back strongly with over 60% gain in just a few weeks. A rather impressive move for sure. After touching $46 just a few days ago, the heat for oil is cooling down a bit. I think we likely have seen the high for oil for a while. Technically oil is showing a double top with a near term bearish head and shoulders formation as well as a negative divergence for its momentum, MACD. Now we also have a more fundamental signal for this  bearish call.

 

Not sure if anyone notices that there is a huge forest fire raging in Alberta, Canada. If you are not aware what Alberta means for oil, it is the center for the Canadian oil production. It is estimated that this fire will cost more than 18% of Canada's total oil production, or a loss of 800,000 barrels of oil that will be offline per day. This is a huge loss by any means for oil supply and it should make oil price shooting to the moon. But it barely moves the needle for oil prices. As the Street often says, when good news cannot move prices up, it usually means the top is in for whatever the prices are for. In this case, I think a near term top has already been priced in for oil. Let’s face it, the world is simply having too much oil that the economies around the world cannot consume. When a major catastrophe like this cannot move oil up, it indicates how out of whack it is regarding the supply-demand balance at the moment.


Don’t be surprised to see significantly lower oil prices in the next few months. We may have seen the top for oil for this year already!

Why gold must go higher from here

I have written numerous posts over years about the mega bull run for gold. The latest one is here. In a nutshell, when everyone is competing for debasing their currencies, coupled with the trend of going deeply into the negative interest rates, people have no choice but to go to something that cannot be debased and printed. That will be gold, and also silver!

We are now in really a messy world in finance that negative interest rate policies (NIRP) are not just a fiction but a reality around the globe. Two major financial powers, EU and Japan, have already begun the NIRP. It is still considered unlikely in the US but Yellen has openly said NIRP is not removed from the table for consideration when situation becomes suitable. While no central banks will openly acknowledge, we are likely witnessing the start of a global bank run starting from now.  You may call me crazy to talk about this but just hear the question from the recent CNBC interviewer who asked the superinvestor, Warren Buffett, “Are you talking about a potential run on the banks, essentially?” This question was raised when Buffett discussed the effects of negative interest rate policies (NIRP) around the globe and mentioned that he’d consider removing his company’s funds from the bank if they started charging him to keep it there. Just so you know how much cash Buffett has with his company, $60 billion! If Buffett is considering doing this, you think other major companies with tons of cash hoard will not do the same? Then a domino effect will start to trigger a run on the banks.  Actually some companies are already testing this in action. Munich RE, the European reinsurance company (the world’s second largest managing $231 billion in investments),  began a radical experiment earlier this year….. Bloomberg reports, to avoid negative interest rates, the company has pulled $11 million in cash out of its overnight accounts with the European Central Bank (ECB) so that it won’t pay the ECB’s negative interest rates.  Instead it is storing $11 million in paper money in a vault. It is really shocking news!!

Don’t take it lightly, friends! If a bank run really starts and intensifies, there is no other way to stop it but to restore the gold-backed currency system. If that happens, we are not talking about just $2000-3000 gold price. It will be much much higher than that. Just think about how much paper money has been created from the thin air by the central banks around the world and how little gold the whole world has, given its limited quantity available on the earth. Buying some gold now as an insurance will be a great asset protection for your wealth.


Of course, I'm not talking about the short term fluctuations of gold prices but the very long term trend. In the very near term, gold is vulnerable to a correction, probably a quick but sharp heading down. If that happens, buy gold as much as you can!