Was the market doing anything last week?

We seemed to have experienced enormous volatility last week but if you think about for a minute, the market was not really doing anything during the week in terms of its levels. The best I can say about the market is the words restless and directionless. Bulls and bears were both fighting hard with each other but in the end neither of them could really win decisively. So where are we going from here?


Since the very beginning of this correction, I have said that I don't think this is the start of a long lasting bear market and I still believe we may likely see higher stock prices during the later part of the year. So if you don't mind the short term volatility very much and are itchy to get in, buying and holding good stocks may make you happy few months from now. But you certainly need to be prepared for potentially significant paper loss before seeing good gains. The bulls still have a lot of work to do to overcome many grave hurdles before talking about new highs. See the chart below. The initial strong resistance is its 50 DMA at 2730 and then the downtrend line around 2750. After that, the double top resistance around 2800 and only after that, there is a meaningful hope to challenge the high around 2875. Can the market have enough strength to go straight up to complete the correction? Anything is possible but it will be a mirage type of hope to me! The daily and weekly technicals are still not looking great and there is a great chance that the bears will mount another major attack in the next few days or weeks to shake out all the weak hands before finally satisfied. No guarantee for sure but I think there is a high chance we may see it happen. I maintain my caution for you: don't chase highs for now!

The end is coming?

It has been the Street darling for many years and it can keep alluring people to get in regardless how fundamentally not justifiable. But the big question right now is if the company is on the verge of crash or even ending? I’m talking about Tesla (TSLA). I may be offending many Tesla lovers here by talking about the end of it but I have to be honest with you regarding what I’m thinking. Fundamentally Tesla is indeed in a big trouble as each day passing.

You may recall that not long ago, I was even making a technical bullish case for Tesla for a potential bull flag breakout although I have never been a fan of Tesla from the fundamental perspective. As I said, it was trading within a very large flag range between $300 to $360 and purely from the technical point of view, it could be very bullish if breaking out through its up end beyond $360 and if so, it could easily shoot up another 100 points in the following weeks or months. But if it breaks down through the support around $300, then the bull flag game is negated and it would be ugly for Tesla. Right now we are definitely seeing the worst case scenario for Tesla, which has been trading as low as $250. Technically it is an ugly outlook but what should really concern all the Tesla bulls about is its fundamental challenges that may kill Tesla. There are two major fundamental issues Tesla is facing:

• While Tesla has been in the leadership role in the EV market, the reality is that almost all the major car makers are developing their EVs. So the competition is becoming more and more ferocious and intensifying each day. This of course is not good news for Tesla when it desperately needs to maintain its market shares to generate enough money for survival.  
• More problematic is its current financial situation that is really dire and dangerous. As I said before, Tesla has no way to make enough money to run its business and it has to burn money continuously. The key for its life is having access to solid financing. Right now, Tesla is burning $3.5 billion each year and currently only has $3.4 billion cash on hand. It has another close to $1 Billion debt that is coming due soon. When a company is generating healthy cash flow from its business, it usually has no problems to get loans even if its business is losing money overall, as long as there is no risk for the company to service the loan by paying the interests on time. But if this prospect is under question, the creditors will get nervous and will first request for higher interests for the increased risk or even run away by refusing to provide the loan. So tell you one important trick in investing: if a company’s stock is crashing but its bond price is still doing well, it is usually indicative of a short-term temporary issue for the company, not a fundamental problem. But if a company’s bond price starts to fall sharply, it often means there are some significant fundamental problems for the company that may not be fixed easily, especially in a short term. Tesla is facing such a dangerous reality: Moody has just downgraded Tesla’s overall rating to B3, six levels below investment-grade – and gave the company a negative outlook. In addition, Moody recently slashed the rating for a Tesla’s debt worth $1.8 Billion to Caa1, which is the junkiest of the junk-bonds. In other words, Tesla is really facing a life or death situation and the bond market has already reflected this danger. See this Forbes’ report:  Tesla's Bonds Are In Freefall As The Financial Noose Tightens; Musk Needs To Sell Stock Now.

So what choices Musk has for now? Only two that I can think about: he either pays higher interests to renew his loan which he can hardly afford now or he has to issue new shares to get more money from dumb investors. The latter is probably more likely at the moment and it will mean a significant dilution of the existing shares that will dampen the stock price further when this happens. I personally will definitely not put my money into Tesla for any long term purposes as I think there is a real likelihood that Tesla may not even survive this year. Of course, I could be totally wrong as Musk has demonstrated that he indeed has some unique magic that can always calm down the fears of investors during crisis and can still walk away with the money he wants to kick the can further down the road. But I don’t want to bet on this for myself! Technically Tesla is quite oversold short term and it won’t surprise me to see it bounce back towards the overhead resistance around $290. But I think we may start to see another freefall if it gets there and good luck for Tesla and Musk regarding how low it can go.

Will there be another suicide kissing?

Oh my god! What a master of teasing!! Bears got killed today and the Market God is playing with us again. Apparently too many people over the weekend were talking and expecting a crash for today including myself and the Market God just wouldn't make anyone's life easy. I was hoping to see a sharp selloff today to set up a great buying opportunity but instead the market opened high, followed by even higher closing. There are simply too many people standing on one side of the boat, which is always bad for trading for that direction. Now the question is whether we are out of the woods and the multi weeks' long correction is over? I doubt! It would be more convincing if we had a strong selloff today. But with a strong rebound, I think the market is setting up another trap for bulls to get in and then....kill them!


S&P has made twice fake breakout of its 50 DMA and maybe it is setting up for the third try. While today's huge bouncing off is very impressive and powerful, it has not changed its daily chart bearish outlook yet. Yes, today's momentum can easily carry over for another day or two and S&P can easily go up another 50-100 points but it still has to overcome the 50 DMA first, which is around 2740 as I'm writing and moving. If it simply goes up towards the 50 DMA in the next few days, which looks quite possible, then the chance is really high that it will make another suicide kiss and crash again by carrying all the euphoric bulls. Remember, the market is always trying to kill as many people as possible. Don't chase high and be one of the victims, friends!!

How to review a whole life insurance policy

Since I posted my blog on the idea to use a whole life insurance (WL) to shield risks against the potential long lasting bear market that may come in the foreseeable future, I have got some interesting questions about it. Some friends asked me to share a sample illustration about it and I shared the following. I got some good questions about this policy. So let me clarify a bit. But keep in mind, I’m not a professional agent on life insurance. While I’m confident to say I know what I’m talking about, you need to find a trustable agent to work with you to show your personalized illustration for your personal needs.

One question is about the guaranteed vs unguaranteed portion in the illustration. The general reaction to it is that since it is unguaranteed, we should not believe it but only look at the guaranteed portion. It is fine to do so for your risk assessment as the guaranteed portion is indeed the absolute minimal return that one can expect from a WL. But this is really a drop dead scenario that assumes that the company cannot make any money for its unguaranteed dividends. It is possible for poorly run companies but for good companies, it almost never happens. Actually the unguaranteed portion is a more realistic return one can expect. Why so? Believe or not, insurance companies are in general much safer than banks since by law they have to keep a huge amount of money as reserve to handle policy claims. As such, they generally have sufficient cash in place for emergency. Then due to the nature of their business, overall they have to be very conservative and cannot perform too much risky investment. Rather overwhelmingly they put majority of money into very secured investment like bonds. Therefore in general insurance companies are routinely earning about 5-6% per year from their business. Not fancy but very safely. If you are working with an insurance company, like a mutual insurance company that treat policy holders as partners, they are committed to passing all the leftover profits to the policy holders as dividends. With that you can safely expect some dividends for your policy. If a company like mine which has never missed its dividends since its birth over 160 years ao, is it too much for me to expect that I can continue to count on them to reward me with dividends? As I have explained in my previous blog, actually this is the time one should expect higher dividends moving forward (see dividend history) as we are entering into a high interest era and I truly believe that I’m going to see a lot higher return from my policy due to increasing dividends in the years ahead. Currently I’m earning 4% guaranteed plus 1% floating dividends. If I’m right based on the history, it won’t surprise me to see 5-10% dividends within the next 10-20 years on top of the minimal 4%. That’s how I’m reviewing my policy’s future.

The starting death benefit (DB, the face value of the coverage) is about $3.7 mil with a $50K premium. Too low isn’t? That’s why I’m so much in love with this type of WL!  My purpose for this type of WL is to maximize my saving capacity via CV and minimizing the death benefit (to cut down the cost to minimal). In other words, about 70% of the $50K premium is my saving portion going into the CV and only about 30% is for the life insurance portion minimally required by the IRS in order to qualify the policy as an insurance product. That’s really the key to differentiate this WL from others! Have you noticed the power of this strategy? With a moderate contribution/saving each year, this young man can realistically become financial free in 50s and will have over $10 million CV available for him to use already in his 60s. All can securely be reached without him to do anything beyond contributing to his premium ($50K per year for 10 years and $15K for the remaining years). That is what “time is money” means!

Given the high CV accumulation over time, one can easily use the CV to pay the annual premium if so desired. Of course, this will reduce the CV growth and the DB obviously. But that’s the available choice one can take. From the wealth building perspective, I certainly don’t want to do so as more money I put in, more wealth I’m building up via this strategy.

Will a WL ever go down to zero in its CV or death benefit? Definitely not! As long as you pay your minimal premium either out of the pocket or via CV and as long as the company is still doing its business, by law and legally bounded, the WL will protect you for life and the CV will only grow year after year. There is zero chance to go down with the above condition in place. I notice the DB is going down a bit over time for the guaranteed portion while the CV keeps going up. For the nonguaranteed portion, both CV and DB are growing over time. It is a bit difficult to explain the declining DB part as it is something related to how the policy is structured. A good agent can help to clarify.  But definitely it is not going down to zero. It is going towards its initial face value for the DB by year 121, the last year for this policy illustration. As I said, I’m more interested in the nonguaranteed projection which is more realistic and is growing substantially over time.  That’s why it is so safe for retirement planning and also it is so important to choose the quality good company with a long track record of performing well in this business!! But overall, you hardly hear bankruptcy of any insurance companies as they are generally much safer than banks with more protection in place by regulations. Actually there would be much bigger issues for me to worry about before I ever need to worry about my insurance policy!

Who should be blamed?

The market has enormous volatility and has killed bulls a few times in the past 2 months after seemingly showing very bullish moves. So who to blame for the sudden declines? It’s indeed very convenient to pinpoint a specific cause for a crash and each time you for sure can find something to blame. This time, I'm sure a lot blame could go to Trump's trade war with China. But is this the way to follow the trend of the market? Not for me. In reality in my opinion, the market's volatility is very much herd’s sentiment driven.  As a matter of fact, when the market is overbought with a too hyper sentiment, it is vulnerable to a downside risk. When it is in this situation, it will always find some excuse to sell. For this time, even if not Trump's tariffs, it would be something else to trigger the selloff. Similarly when in the oversold condition, it will find excuse to buy when on one is interested to do so. If you follow me for the past couple of months, you know I have mapped out the possible path of the market moves with fairly accurate callings. I of course didn't know weeks before that Trump's high tariffs were coming or any other headline news that triggered some selloffs,  but the TA that reflects the herd behaviors and sentiments does help me to make reasonable prediction. For sure no one can make calls right all the time but at least I feel more comfortable to follow my contrarian calls than trying to figure out what is coming that may trigger buys or sells.


For fun, let me show you the FB chart that has provided a great early warning sign months before the current sharp selloff. Below is the weekly one year chart for FB. FB had a great run in the past year with new highs one after another until early Feb this year. But since last Sep, actually its weekly chart has started to send out warning signals. The green circle for the weekly MACD has started to trend down since then and intensified after Dec. The chart certainly cannot tell you that some scandals are coming for FB but it has kept warning that some troubles may be coming for FB. Anyone aggressively buying FB after it recovered from its Feb low is definitely feeling the pain now. TA of course is not science that can give us 100% accuracy but it does provide useful insights that may not be so obvious weeks before the situation plays out.

    

Let snowing pay my retirement after cheating the death

As my nick name implies, I’m living in the deep woods, an area sitting on top of a hill full of tall trees. It is a resort like area I thoroughly enjoy now. But when we first came to see the house at its open house, I didn’t like it at all, an old property not well maintained both interiorly and exteriorly. I’m typically a vision guy usually attracted by its appearance and the property looks not pretty to me at all when I first saw it. But my wife, a naturally born real estate “expert” and interior designer in my eyes, immediately fell in love with it at the first sight and convinced me to make an order. We actually ended up with even a further discount to an already very competitive asking price. Apparently not only I not so interested in it at that time. So why my wife was so much attracted by it? She educated me with this lesson: nearly everything can be changed and upgraded for a housel except location. And this house is sitting in a perfect location she was looking for: in a woody area surrounded by many million dollar houses on top of a hill with great views. Very importantly it’s mostly used rooms (kitchen and dining/living rooms) are facing to the south and slightly towards the east, a perfect facing not so easy to get. I of course realized this only after we moved in: in the winter time during good days, our south side rooms are always with full of sunshine, making the house incredibly warm and cozy. After many upgrades done in the past few years, the house is really attractive to me now, thanks to my wife’s unique vision. Although nothing to do with my investment idea today, let me spoil myself a bit by abusing your time for now to show off some photos about it. Agree with me that it is a beautiful area to live in?

 

 

 

 

 

 

 

But anything has its cost, small or big. No difference to this perfect house we love. Since this is a very matured area, we still see all the power lines exposed in the air. As such, they are very vulnerable to the damages that may be caused by bad weathers like strong wind or snow storm, especially in such a woody area. Since we moved in for 5 years now, we have experienced power outage from time to time due to poor weathers but it has almost always been recovered within hours, except this time with the historical snow storm hitting our area on Mar 7, Wed. Let me post a few photos about the snow storm here. It was brutal but ironically was very beautiful, wasn't?!

 

 

 

 

We went to bed without power and heating that night expecting to get the power recovered by the morning. But by the morning we kind of awoke in the coldness still without power and were sadly notified that the power would not be restored till Sat.  Obviously we could not continue to stay there without power, heating and more importantly without water (as we are using the well water that needs a pump). So we had to clear our driveway to go out to go to our second home fortunately not so much impacted by the snow storm. While I was plowing the snow, I suddenly thought about this company that is doing very boring business but generating very reliable revenues and paying great and increasing dividends for years. This is the company called Compass Minerals (CMP), a leading miner and seller of road salt. Here is the CMP business: Compass Minerals is a provider of essential minerals that solve nature's challenges, including salt for winter roadway safety and other consumer, industrial and agricultural uses; specialty plant nutrition minerals for the quality and yield of crops, and specialty chemicals for water treatment and other industrial processes.

This is certainly not a fancy and sexy business and stock by any means and probably no one would talk about it but I like it for its sound and stable business with reliable incomes for investors. It started paying dividends in 2004 and has managed to increase its annual payout every year for the past 13 years. On top of continuous paying dividends, it has increased its dividends by 200%, or 15% annual growth in average. It is now trading 20% below its recent high with a forward PE about 15 and paying a very respectful dividend of 4.5%. I think it is a good long-term dividend stock for consideration that you may turn the winter snowing into a cash machine to pay your retirement life!

By the way, I literally cheated death this time. We have a long driveway lined up with tall trees. I knew it might not be safe to plough snow during the snowing day with very wet snow piling up on the trees as some branches could easily fall without warning. But I couldn’t wait and decided to do it anyway. So I asked my wife to check if I was still standing up from time to time. Fortunately I completed the work without incident but just minutes after I walked back in, a big branch trunk indeed fell down to the driveway. It could really kill anyone if falling onto him/her. So if you are also living in a woody area, be very carefully during the windy or snowing day under trees. It could be life-threatening! 

This is how the market is supposed to do

"It always amazes me by seeing how fast people can change their mood and now I'm hearing people talking about new highs soon. Of course they could be right and I could be wrong but I do believe it is an illusion to think a straight line up to new highs after such a historically severe and fast correction. The market simply does not behave that way. Instead, it is always doing its best to try to fool as many people as possible into one direction and without warning it suddenly changes its course and scares everyone out of chair. I suspect we are going to see this sudden shock again". This was what I said shortly after the market crashed to its recent low in Feb. Since then the market has done an enormous job to fool people around several times. Two times in the past few weeks it decisively broke out through its 50 DMA, making a lot of people happily announcing the correction was finally over and we were on the way to challenge new highs soon. I even heard this kind of bullish talk today. After all, all the indexes had a great opening today to comfort those bulls. But the wheel fell off suddenly this afternoon and S&P closed at 2588. We are now having a retest of the Feb low against 2581. The question is whether the correction is finally over? I think we are close but not necessarily immediately done. Today's price action is utterly bearish, opening the strong possibility of another significant downdraft next Monday. On the daily chart, 2581 is an important support for S&P. If it can stand firmly on that and start to move up, then the chance is high that the correction may be behind us. If not, then it can easily test its Feb intraday low around 2530. If you are long by chasing highs recently, you need to pray over the weekend and keep your fingers crossed. The immediate future does not looks promising and could be ugly!


By the way, MU did have a great earnings report yesterday but it fell 8% today as expected. As I said, the key is not if it has a good earnings or not but whether it can surpass the super lofty outlook for the future. It was just beyond my understanding how people could keep chasing it after it was so much in the short-term bubble. My short term trade was to target it to drop down to $52 so that to give me up to 10 times gain. Unfortunately it "only" dropped to $54 and I closed it with a 4 times gain instead. Of course I'd be too greedy if still complaining! I think MU has some further room to go down, maybe towards 50. I like it for its long term outlook but be very cautious for its near term risk.   

Can it surprise further?

I talked about this company less than a year ago, expecting it could double within a year. It has done a great job since then, very close to the target of doubling. I’m talking about Micron Tech (MU), a chip company that is flying at the moment. I have no concerns for its long term prospects and indeed holding long for it. But the question is its immediate future in facing the upcoming earnings report tomorrow. As you know by now, I’m a long term investor for quality dividend stocks but also an active short term trader for speculation. I think MU may be heading into a headwind instead of a tailwind. You see, regardless how great a company is, it must face its reality by going in line with its fundamentals within certain wigging room. For Street darlings, they often go ahead of themselves from time to time but if this is too much ahead of itself, then the risk of a shock could be immense. I think MU is probably at this moment. It is a great chip company but is too hot by going up too fast too soon, sort of speaking. At this level around $60, the expectation is super high and its stock has priced in not only a perfect earning but may be super strong earnings moving forward. If there is slightest miss to the unbelievably high expectation, just watch the underneath. The rug will be pulled out suddenly and all the guys chasing high will be relentlessly punished. If you look at its chart, it is too far away from its 50 DMA. If any trading logic still holds true, it should return to means at some point and the earnings report may be the time point for it to do so.  

I’m willingly to bet that MU will miss the expectation and it will crash down towards low $50s following the earnings. As always, I could be wrong and MU can further surprise everyone with another great earnings beyond the current already super high expectations. If so, it can moon shoot again. For this reason, I will be trading with put options without risking myself too much but if I’m right, it could be a 5-10 times return potentially. Let’s watch the fire work tomorrow!

Be ready for some fire work next week

The market was largely not exciting last week with a very tight range of moving around. But this may likely change next week. Who so? Well we are heading into one of the most watched days on Wed next week, the Fed meeting that will decide the next short term interest rate. This is not only a closely and nervously watched day in the US but a global event actually. And it often is a market mover. So how the market will react to the Fed interest decision? Of course it is like a gambling to decisively bet for one direction or the other. But as always I'm fine to put out my thoughts in advance for fun. And personally I think the fire work will be more likely played out to the downside. Why?


There are basically 3 scenarios the market will react to the Fed decision: positive, neutral and negative. The market has already priced in the neutral position that virtually 100% chance that Fed will increase the interest with 25 base points (0.25%) and two more in the year. The thing the market is closely watching is how the Fed will predict the future direction of the rate increase, hawkish (more fast pace of interest hike) or dovish (slower pace). If their tone is deemed more dovish, i.e. less interest rate increases during the year, it will be a great positive surprise to the market that will trigger a good up run for stocks. But I think this is less likely in my mind. Like it or not, the Trump administration is doing everything more favorable for the economy in general although the  potential trade war is a bit worrisome for the market. But I really think people have largely misunderstood Trump for this part and I think there is a good chance he will make it work without real trade wars but better and more favorable trading conditions for the US. The overall trend is quite inflationary moving forward due to more economic expansion expected in the US in the next few years. As such, there is less chance for Fed to slow down the interest rate hike as they are more concerned about the inflation that is hard to control if they are not ahead of the curve. That's why I think the more likely surprise is their more hawkish assessment about the economic prospects, implying more rate increases in the rest of the year. If any such hint perceived by the market, just watch for a sharp decline of the market.


For myself, I'm prepared for either scenario. I'm more lining towards the downside reaction and have many cost-free puts in place to enjoy it if it happens. As a general pattern, the first two trading days prior to the Feb meeting are usually positive and you may expect some gains for Mon and Tue. The real market moving moment will come after 2 PM on Wed and possibly continue for the remaining of the week.

How to survive the next bear market

As stated before, I'm working on a retirement plan that can allow me to survive well during the next bear market. I have specific key components that must be satisfied for my retirement plan, which include:

• First and foremost, it must be supper safe as my family will rely on it if the end of world crisis unfortunately hits us and lasting for 10-20 years 
• It must be an efficient wealth growth strategy with compounding effect, i.e. the longer I hold it, the fast the value of the asset will grow, translating into more money I can use when needed
• Importantly the strategy should only grow without much downside risk, even if all my bet on the future of the financial world is totally wrong
• It must be tax-efficient. Not only it has to grow tax-free, I also want it to be tax-free when using it
• It also should have the legal protection feature so that the asset won’t be impacted even if I get some legal troubles during my life
• The strategy should also be flexible enough so that I can use it any time for any purpose without much limit
• It should also have an estate planning function to the effect that, if not used up during my life, it can be safely passed on to my heirs tax-free

You may think I may have lost my mind to look for such a strategy that sounds like impossible to exist. Indeed it took me several years before I finally found it. Thanks to my contacts with some top financial gurus who have deep knowledge in this field, I was introduced to this unique strategy a couple of years ago. While I have full faith and trust in them, I still could not believe it as it really sounds too good to be true. So I spent a lot of time to research and study it via different sources and contacts and finally I’m fully convinced, so much so that I have started to put in a lot of money into the strategy. So what is it? It is a Whole Life (WL) insurance based strategy. I immediately hear the burst of laugh from many of you: are you kidding me? What’s unique with WL, a century year old insurance type that costs a lot of money just for passing some money to heirs? Indeed that was also my initial reaction to the idea but after understanding how it is set up and works, I’m totally convinced! Let me explain.

 

It is true that WL typically costs a lot of money to set up and maintain it for life. But let’s put the cost aside for now and think about all the other features I mentioned above, WL truly meets all of them: it is extremely safe, independent of the stock market.  It grows cash value (CV that is the living benefit for yourself) tax-free in compounding that can be used at any time for any purposes during your life. It is legally protected (within the state law) and if not used up, it will be passed to heirs tax-free. So the real challenging question is its cost. That’s why I mentioned the experts who introduced this to me as there is a way to substantially reduce the cost to make it very efficient for wealth growth and safely. How?  Well, this requires you to understand why a WL costs so much money. It is largely due to the commission cost that is dependent on the size of the insurance part [i.e. the death benefit (DB) for heirs] for each WL.  Typically for most people, when they think about life insurance, they are thinking about the death benefit, i.e. how much it can be generated at death and passed on to heirs. For that purpose, it indeed costs a lot and is very expensive. But how about if we turn a WL into a “saving account” by maximizing the CV portion and minimizing the DB? By doing so, we virtually turn a WL like your personal bank in the sense that you can grow the CV as much as possible and tax-free and you can use this portion for any purposes at your wish during your life time (not when you die). Since the DB has been minimized to the lowest amount allowed by IRS (yes, required by IRS to have minimal amount in order to be qualified as a tax-efficient life insurance), the cost for the policy is thus substantially reduced, by half at least. In order to reach this goal, you must find an agent, who not only can understand this strategy (believe me, most of them don’t) but also is willing to work with you for maximizing your benefit. Not many are willing to do so as it means much less commission for them. Actually this may become really a hard part for setting it up appropriately!     

Now comes with the fun part for my long-term plan.  There are two parts:

• Given that this strategy is so safe not impacted by the market in any way as long as the insurance company is solid and sound, legally and guaranteed I can count on at least 4% annual growth on a compounding basis. Although the additional 1% dividend is not guaranteed as it is based on the company performance, the company has paid dividends since its birth for over 150 years and has never stopped paying it, I don’t know why I should expect it to stop it now when the insurance business should be doing better in the next decade or longer (more below).  So personally I think the 1% dividend is also a minimal that I can count on. In other words, I’m growing my wealth in the policy at least at a rate of 5% compounding annually, which for me is the worst case scenario.  Based on this base scenario, I will easily have a couple of millions dollar cash value after 10 years that is available for me to use for any purpose in a tax-free manner. And more CV for me with longer accumulation.  While I’m not saying it will happen, but let’s just assume the worst case indeed happens in the next 10-20 years that I have lost everything in my risk assets due to market crashes or some other crises attacking me.  Even in such kind of end of world situation, I will still be able to stand firmly and live comfortably in my later part of the life with the cash money stored in my life insurance policy. Of course, most likely I won’t lose everything and will still be able to rely on the money from the risk assets. If so, the unused part of the big amount of wealth accumulated in the policy will just become my estate for the heirs and is tax-free as well. That’s kind peace of mind I want to have and I think it is good and necessary for everyone if he or she is serious about their financial future.  In summary, this is a wonderful wealth building strategy that is extremely capital efficient since I don’t need much money to maintain. Yes, I need to put in premium every year but this is just like saving money in the bank as starting from 3^rd year, each premium dollar put in will become part of CV 100% that can grow 5% annually. So the premium in most part is not cost at all if you truly understand how it works. And it is totally hands-free without me doing anything else. I virtually hire the world best bond investors to manage my money safely in a legally bounding manner with a guaranteed return.

• The second part is really exciting for me to anticipate, although it is still like a dream for now. As I have alluded to before, I firmly believe we are getting into a high interest rate era in the next 10 years or even longer. We are already starting to see the first inning of the rate increasing,  which may likely accelerate in the years ahead. If the economic basic is still working in this world, then we will likely see a huge inflation crisis that could be worse than anything we can imagine for now.  The last high inflation we saw triggered the interest rate to go up beyond 15%. We may see more than that this time. This will be very bad in most part of our life but it will be great for businesses thriving on high interest rates. Insurance companies are typically doing great in the high interest rate environment. I include a screenshot here for your information regarding how much dividends insurance companies paid for Whole Life policies during the high interest rate era back in 1990s. As you can see, 5-10% dividend rate was commonly seen across the board. So how much more money will be generated in my policy if the floating dividend goes to 10% or even higher in the next 10-20 years? Just use your imagination! It could double, triple or even more my base scenario above. It may sound like a fiction but it has happened not too long ago in our life and may recur with a reasonably high chance. No it is not guaranteed but I bet it will happen to some degree at least.

 

It took me quite some time to finish this blog but I’m glad I did. I enjoy writing to share good investment strategies. And now I can easily share this not-so-easy-to- understand  wealth building strategy to friends when they ask as from time to time I got such questions from them.  Let me finish this writing with some final thoughts:

• Since this strategy is largely dependent on the safety of the insurance company, it is critical that you need to work with a solid company with long and proven track record, ideally over 100 years at least to ensure they have gone through all kinds of crises and disasters but still survive well. Not all companies are created equally as you can easily understand. In general, consider non-listed private insurance companies, since listed companies have to meet the investors’ demand, for which they often have to do some risky businesses as we saw during the 2008 crisis.
• Agents can help you a lot to educate and screen for good companies and products but unfortunately it Is not easy to find agents who are willing to put your interest first. Try to find an agent either you know well or referred by someone you trust who has got first hand experiences.  For this strategy, you better find someone who is specialized in it and knows all the aspects very well. Not many can say that unfortunately.
• It may sound like a strategy only good with big amount of money. Actually no, it can work with any amount, small or big. Due to the compounding effect, even a small amount can generate a big amount given a sufficient time period. While it is generally the early the better, it can still be great for people already in 50s or 60s+. The premium rating is largely dependent on the health status, not so much on the age per se.  So even a relatively old person may still enjoy a perfect premium rating.
• This is especially a great strategy for young people due to their long life span that will allow the compounding to show its greatest magic. For this reason, I have helped my son in 20s to also start with his own plan. With relatively moderate amount of money put into work, he may very well be financially free in his 40s simply based on this strategy.  In this context, time is money!

I hope this blog can open your mind to think about something you may have never thought about before. I have wasted quite a few precious years with no action for further learning and studying when I was initially introduced this strategy as it sounded too good to be true. But at least I have got it done with great satisfaction and peace of mind. I hope you are smarter than me and will take immediate action to learn and explore.  Remember, we have enjoyed nearly 4 decades long of a gigantic bull market. Statistically and also in reality with all the financial messes we have seen to date, the chance is very high we are going to see another gigantic bear market that may last for 10 years or even longer.  This strategy can prepare you for the worst but will still reward you dearly even if no long lasting bear market ever comes again.

You may still count on dead money

You probably cannot find a better example than GE as the dead money. This once glory American icon has been in a tailspin for over a year now, crashing from $30 to $15ish as I’m writing. One blow after another has made almost anyone who tries to go long with it frustrated and disappointed. I’m not going to sugarcoat it by painting a bright future for GE at the moment as I truly don’t know what will come next that will surprise everyone. But the thing is, you don’t need to count only on Street darling stocks to make money. From time to time, dead money can also deliver you some quick money if you can spot the right moment. I think we are seeing the moment now for GE. While GE may continue to go down in the months ahead depending on what kind of unknown messes will be discovered, it is not necessary going down in a straight line. Actually the easiest money is often made when there is the extreme pessimism and everyone throws in the towel to give up. We got the moment two weeks ago when GE announced to restate its earnings for 2016 and 2017. The stock tumbled almost 4% due to the news but then it recovered all its intraday loss and actually closed higher for the day. This was a quite bullish price action, suggesting the exhaustion of the sellers at least for the time being. When bad news cannot move a stock down, it often means its bottom is in at least for the near term. I bought some cheap calls then, thinking to get a quick double within 2 weeks. It didn’t exactly but still gave me a quick 50% gain.

Then another bomb dropped again a couple of days ago when an analyst reiterated his target price for GE at $11. The poor GE which just recovered a bit got sold off again and is trading around low $14 now. I’m not going to argue with the analyst for the downside target as it is indeed possible. But based on the price actions and its daily momentum with positive divergence, I think there is some hope for a dead cat bounce. If I’m right I think we may see GE moving up 10-15% first before seeing its $11 in the next few weeks. If so, some quick money can be made as well.  

Again I’m definitely not in for any long term commitment for GE. Rather I’m trading for a dead cat bounce!

Go with biplor trades against the herd

As I said, the market is at its bipolar state that can drive traders to alternate their sentiments between the two extreme ends frequently. We just saw extremely bearish mood a week ago and now extremely bullish expecting to see new highs soon. I don't buy it although I'm ready to be proven wrong. The hype we saw Friday seemed very strong but actually with low volumes, not a convincing move for new highs. Likely there were a lot of short squeezes to rush to cover with a sudden change of the market direction triggered by a positive job report. After all, the sentiment was too depressing and nervous just days ago that was often the time for a short term bottom. Only time can tell if this will be another fake breakout as we saw a short while ago. And it still has several important hurdles to overcome before challenging its recent highs.  I maintain my view that we will likely see more gyrations of the market in a wide range of fluctuations for a few weeks, a kind of sideway movements for a while. Then when everyone gets used to the new norms and believe the correction is over, it will strike again to cause maximal pain before finally completing its bottoming process. People may say they will not be fooled again  by the market and will keep a cool head from now on. Can you believe them? For thousands of years that has changed virtually everything in our life except one thing, the herd behavior. You can bet with 100% certainty that most of people will feel more comfortable to go with the majority of other people by chasing highs when everyone is buying and selling lows when everyone is selling. This will surely continue forever, believe me! Even for myself I must say it is not an easy thing to do being against the herd. I'm doing much better by not chasing highs but oftentimes I have to pinch my nose and close my eyes to buy when there is panic selloff ongoing. But virtually each time brings me great profit margins although I could be early from time to time.





For this time, I structure my trading in such a way that I'm playing with both sides taking advantage of the bipolar herd moves with a general target for a low testing in the weeks ahead. I call it Bipolar Trades! I have longer dated puts (e.g. April or May) in place for the short side moves. But as I have repeatedly said, nothing goes straight line either up or down. As such using the extreme depressing moment that often comes these days during the down drafting, I pair my puts with long side plays (often weekly put selling) and I take profits quickly when the sentiment is shifted to the bullish extreme expecting for the ensuing selloff. A few rounds of such alternation has allowed me to make much more money than the cost of my puts and therefore I'm sitting with a lot of puts without costing me anything now. If I'm right and the market crashes again, I can make good money from my puts. But even if I'm totally wrong, they are just my risk-free insurance and I can still make good money from my short-term long plays that are always protected now. Giving you a real example how I'm doing it with CSCO. This is a great tech dividend stock that I'm holding it for long term with dividend reinvestment, my second largest long-term holdings after MSFT. It is doing great after several years of holding and I certainly have no intention to sell it due to the market selloff. But the panic selling when S&P crashed down toward 2530 caused everything on sales. That was the week I said I was really busy selling puts for all these great stocks. CSCO was among them when it was sold to about $38ish from a recent high of $43ish. Amazingly I found that I could set up a trade that could make me immediately profitable and then allow me to repeatedly earn incomes from it. I bought CSCO April $38 puts and then sold CSCO weekly $40 puts, betting CSCO would recover to above 40 very quickly within the week after the panic faded. Indeed that was exactly what had happened and the market quickly recovered with bullish sentiment built up. The gain from the put selling with just a week time had already made me much more than the cost for the April puts for CSCO. So I'm holding CSCO April puts for free now with net gain already realized and then I repeatedly sell CSCO weekly puts in the following weeks whenever the market sentiment is in favor of a short term uptrend. Each put sell brings me more net gains while I still have the downside safely protected. Right now, CSCO is alternating between $42-45ish. Will it be sold hard again down to $38 or below in the weeks ahead? I think it is possible if the market indeed starts another panic selloff. If so, my Apr $38 puts could also be profitable. But I really don't need to rely on it anymore. Even if there is no low testing and the market is simply going sideway or up to new highs, I can still make good money from it several times before April expiration. I have similar trades for AAPL, FB, MSFT and even directly with SPY, all having made me net gains by now with risk free puts in place. I truly love the herd sentiment shifts so drastically and frequently, which has made my life a lot easier to look for the exact points to be long or short.


At the moment as I'm writing, the market is getting into the bullish extreme state and quite overbought with Friday's panic buying. I had closed most of my longs when S&P shot up towards its 50 DMA and was busy closing my remaining longs Friday with the last push up.  And now I'm largely with net shorts. It is possible that Monday will start with another bullish gap high, which will drive the market into further extremely overbought status. If so I will likely add more shorts to bet for the upcoming selloff. I'm confident betting against the herd is a wise and profitable strategy with bipolar trades!

Can you survive the next bear market?

The world is falling apart and feels like ending. Have you ever experienced this kind of feeling in your investment life? I have and twice: one during the dot.com bubble burst back in early 2000 and the other during the housing bubble burst in 2008/09. Regardless how strong your nerve is, it is no fun to go through this if you have significant assets in the market. I have all the major assets in hands with significant money: stocks, precious metals, real estate properties, and cryptos. What is common among them? Yes, all risk assets that could be hugely impacted by the market one way or the other (less so for real estate properties I know but think about the 2008/09 crash). Since I was still making good money from my active income and increasing during the past 2 crashes, I was in a much stronger position to sit them through, although extremely painful when seeing the values of my assets keep going down. I definitely don’t want to go through this again but are we totally immune to this kind of end of the world type of crisis during our life? You should know my answer! Yes, I seriously doubt about the immunity and actually think it is very likely the next crisis that could be even bigger than the dot.com and housing crisis may hit us in the foreseeable future. Actually if you seriously study the stock market history, the two crises I mentioned above should even not be considered as bear markets but just part of bumps within the huge ongoing bull market. In the past 100 years, we have only experienced 2 real bear markets each lasting for 15 years or longer. The first one was the most famous Great Depression, which caused the stock market into depression as well for 20 years from 1929 to 1949. Then the next long lasting bear market started in 1966 till 1982 for 16 years. Although the dot.com crash and housing crisis made all of us want to vomit for stocks, each only lasted for less than 2 years and neither of them caused the market to decline below its bottom seen in 1982 (Dow below 1000). So in reality, we are still in a long lastingbull market starting from 1982 till now, about 36 years already. So naturally we all have to ask what will happen and how long it will last when the next real bear market hits us. It will be naïve to just believe we will only continue with the current bull market without experiencing a painful bear market anymore. To me it is not if but just when.  Don’t call me a pessimist as I’m not.  Otherwise I’d not have so much money in all the risk assets since I’m still thinking a bright future is lying ahead us. The big dilemma is that before we see a truly bright future, we may first see an unprecedented thunderstorm in a scale much bigger than what we have seen before. I guess you don’t need me to go through the reasons why I’m so worried about this since I have talked about them from time to time but more systematically outlined in this previous blog.

For younger people 40 or younger, this may not be so devastating as long as you have sufficient active income generated during the period and you still have time to rebuild up your wealth. For people in my age or older who are entering the retirement phase and the active income will become less and less either by choice (i.e. reduce working even if not necessarily) or  involuntarily (due to health reasons or physically too old to work), the last thing you want to see is the significant dropdown of your asset value that may take years to come back, even if it can recover. What can you do if this truly happens to you during your inactive years when you are heavily relying on the passive income from your assets but they cannot meet your demand? The more I think about it, the more worry I have, given my strong believe that a huge financial crisis will hit us within the next 10-20 years. Don’t forget there is no free lunch after trillion dollars of phony money has been created in the system in the past 10 years. It is not if but when the reckoning day will come and hit us very hard at the extent more than anyone can imagine at the moment! Just put yourself back into 2006/2007 years: did you feel a crisis almost bringing down the whole world financial system was coming? I bet you didn’t by far! That’s why I have been thinking about exploring a strategy for several years that will allow me to still stand firmly even if the end of world type of financial crisis hits us. I want my family in such a situation that we can lose everything held in the risk assets but can still survive and maintain our life style in the rest of our life. Thanks to my connections who were experts in this area and introduced me to the strategy as well as myself extensive research and studies, I’m happy to say that I have found such a great strategy that meets all my needs and can safely secure my future regardless what may happen in the stock or real estate market. I have already started to implement this plan, which I call it my "market risk free retirement plan”. It is too long for this blog and I will share more details next week. Stay tuned!

Dance with bipolar

Bipolar disorders have “mood episodes” that are drastic changes from a person’s typical mood, behavior, and energy.  Mood episodes can be manic, depressive, or mixed. A manic episode consists of experiencing manic (extremely hype) symptoms for at least a week. In mixed episodes, patients experience a manic episode and a major depressive episode at the same time.

This is the medical definition for bipolar disorder. Of course I’m not here to teach anything medical. But anything you are seeing now is very similar to bipolar? Correct, the stock market! It can shoot up very high for a few days or a week to make everyone happy and euphoric like today and then suddenly it become extremely depressing by dropping hundreds of points (for Dow) to turn traders into an icy mood. This kind of gyration of moods can drive most of the traders crazy. Indeed, it is very difficult to make sense what the market wants to do at the moment. Unless you are good at deciphering the market intrinsic code that can tell you what’s its most likely next move (like you ready my blogs here ☺), you will be totally lost by simply following it. So what’s the best strategy to dance with the bipolar? There are three:

• Just sit on the sidelines and hold cash. For most people probably this is the best way when the market is in the bipolar mood.
• Read my blogs to go a step ahead but of course there is no guarantee!☺☺
• Short something that will likely do poorly in good or bad market. This is probably the most practical way to dance with the bipolar market for most active traders. Let me give you one idea as a starter.

You probably have heard and visited Bed and Both (BBBY). I don’t think I need to do a lot of explanation to convince you that this is dwindling business that will likely continue to worsen over time. For any good business that can last long, it either has a great brand that everyone loves even for higher prices or it sells something with pricing competitiveness. But for BBBY, it has neither of them.  It charges more for the products you can easily get elsewhere, especially online. I have been long wondering how BBBY can still survive in this increasingly competitive market where it has virtually no any advantage! Almost by any metrics for a retailer, it is among those that are going down and sinking. In my area, BBBY is just sitting beside the used-to-be famous toy store (R’US) that is already bankrupted. I think it is just a matter of time when BBBY will declare bankruptcy probably not in a very remote future. With this in mind, I think it is a safe bet to short BBBY that will likely do well regardless how the marketing is doing in the next few months. The less risky way to short it is to buy long dated out of money puts that will not cost you too much but will reward you greatly if indeed BBBY goes under in the near future.

Think out of the box when dancing with bipolar!

Second guessing

The market god is playing with us again. It was stopped right around its current 50 DMA yesterday at 2739 and let everyone guess what's the next. In the normal situation, I'd think it will back off from here to let the bearish H&S play out. But as I said, this market is anything but normal. It is especially true in front of the coming Job Report due out in just less than half an hour as I'm writing. Here is what I'm second guessing for fun.


If the Job Report is deemed negative (in the sense whether it is good or bad for the market, therefore can be good news is bad news), then obviously the market will tank to follow my pre-defined roadmap. If the Job Report is deemed positive, then an initial response will be good and the market will shoot up. Technically it can go as high as up to 2775 for S&P but still within the range of a dead cat bounce for this round. I think this gap high may likely a fake breakup as last time and will likely fade and reverse either within today or early next week. Unless it has its strength to break out through the resistance of 2775 for starting a new floor, I will keep my faith for a sideway market with a high chance of low testing before this correction is finally over.

TOO BAD!!

Almost like my idea was stolen by someone that the young Microsoft like company is gone for now! I’m talking about CommerceHub (CHUBA) that I posted just days ago here. It is announced today that a private company GTCR and Sycamore Partners will buy CHUBA in all cash worth $1.1 billion, i.e. $22.75 per share for CHUBA. Unfortunately it will mean CHUBA will become private as well and won’t be available for investors anymore after the deal is closed! It is great for the company for sure as well as for the investors who have bought the shares (if below this price of course) but too bad for long term investors who want to see much more fruits and far greater profits from it. The 25% jump within 2 days seems great but really means nothing if considering how much more gains, maybe 10 times or more could be seen in the long run! TOO BAD!!

CHUBA’s price is trading around $22.5. No surprise as apparently the company is happy with the deal and Street does not expect any problems for the buyout to close as planned. Since not much additional gain left ($0.25 per share) when the deal is closed, it does not make any sense to still hold the shares for another half a year or so waiting for the closing. Although unlikely it could happen that the deal falls apart due to some unexpected issues arising and if so, its stock price will drop quickly as well. Better to just sell CHUBA for now to take the quick profits to free your money for other good opportunities. You will find more here if you simply follow me☺

Is there a reason?

People always try to find out some good reasons that trigger the market to run either up or down but in reality, short term moves are largely driven by sentiments and technicals. So don't need to try to find out why for either direction as it is just wasting your time. When the market is oversold, it will find an excuse to move up regardless and vice verse. As I said, the market was quite oversold last week and was due for a rebound. My target is towards its 50 DMA around 2736 which is very close with today's strong rebound. If you expect it to go much higher than that, you may likely be disappointed as the current rebound is likely still a technical dead cat bounce! As such I'm following my road map and the plan by taking profits today from most of my short-term longs as they are moving up so fast just within two trading days and with more shorts left in place now. Waiting for another selloff maybe started in a day or two.

As always, I could be wrong but I'm positive that this is what the market is going to do next for its major move!

Microsoft just like a bond?

Following my blog on Microsoft (MSFT), I saw an interesting comment questioning why bothers to put money in MSFT as it is nothing better than investing in Treasury bonds. To some extent, I'd agree with this view as from the safety perspective, indeed the money in MSFT is as safe as Treasury, or even safer I'd say. But making MSFT equivalent to Treasury in terms of investment return is so shocking to me that I think I need to provide some education here. Apparently there is quite lack of knowledge about dividend investment vs bond investment, which may not be only among a small number of people. Let me first start with a quick brief how bonds work.




Yield and bond price move inversely from each other. So when yields are rising (i.e., when interest rates are rising), bond prices are falling.  Let's say a bond is issued for a yield of 4%. If you bought that bond for $100 you would get $4 in interest each year, no matter where the price of the bond is trading at any given moment. Now let's say that bond's price fell from $100 to $70, a buyer of that bond at $70 would still receive $4 per year in interest, exactly same as the person who bought the bond at $100 would. Obviously receiving $4 per year on an $70 investment would get a current yield of 5.7% per year, not 4% anymore. And if the bond price continued falling all the way down to $50, the buyer of the bond at that price would receive a current yield on investment of 8% - i.e., $4/$50. That's why investing in bonds when interest rates go up is a terrible investment as your money cannot compete with the rising interests, i.e. your money is devalued due to inflation. Yes, you will always get your principle money back after maturity plus the accumulated interests you get during the period. But will you be happy with the less valued money even if you still have the same amount back?




Now let's get back to the initial question, is investing in MSFT for dividends the same as for bonds. For comparison purpose, let's assume we put money $10,000 for 20 years with the same 2% interest/dividend at the outset. As explain, for bonds, the interest rate is fixed as soon as you bought it and it won't increase or decrease. Below is the result how much you will get from the interest. Since generally there is no interest reinvestment for bonds, we can forget about the reinvestment scenario (the right portion). As you can see below, no surprise you earn a total of $4000 from the $10K investment in bonds in 20 years. Pretty miserable, isn't it?!

So how will we do with MSFT? The current MSFT dividend yield is also about 2% and if it can only pay this amount for 20 years, then nothing different indeed from bonds. But here comes with the sharp difference when we talk about quality dividend growth stocks. They don't pay static dividends year after year. Rather they grow their dividend payout year after year and for MSFT, actually its dividend annual compound growth rate is astonishingly 15% since it started to pay dividends 14 years ago. Don't believe me? Just check its dividend history that is easily available: it paid $0.24 in 2003 as the first dividend year and it paid $1.62 in 2017, a total of over 5 times increase in 14 years, or about 40% increase each year in average. So how our initial $10K will work out in 20 years, if we start with 2% dividend with a 15% annual growth rate? There are two scenarios:

• If you simply get the dividends without reinvestment (the left portion), you will get a total of over $23,500 earnings in 20 years, or almost 6 times better than the bonds above. In other words, after 20 years you will get about $33 per share per year as dividends ($3300 per year) for your initial $10K invested, or 33% yield. And you will continue to earn this and more if MSFT continues with its dividend hike as expected!
• Even much better if you reinvest your dividends; you will get a total of $77,200 dividends in 20 years, or almost 20 times more than the bonds. In this case, your total value of your investment is close to $90,000, a very close to a 10 bagger investment return without much effort on your side. All is realized via the dividend compounding magic!

That's why investing in high dividend growth stocks is the best way to beat inflation. You don't need the stock price to increase to make you rich. All you need to do is to buy and hold with dividend reinvestment and then you can go away to sleep and forget about it. In 20 years or longer, you suddenly find yourself sleeping on a gold mine! With this very safe long term strategy, it is even better to have the stock share price to decrease as long as the dividend is safe to grow. You will get much more money in the end as demonstrated here: Buffett's wisdom- why you should be happy to see your stock price go down. That's why I'm not really happy to see MSFT share prices double and triple in the past few years, although it makes you feel good. Shortsighted actually!




If you want to get some second opinion on MSFT, here is a good one to read: Is Microsoft Corporation (MSFT) Stock the Best Dividend in Tech? Here is the main conclusion from this author: MSFT stock has offered both explosive upside and also a rapidly growing dividend in recent years. So don't be intimidated by others laughing at you for liking MSFT's seemingly miserable dividend yield in less than 2% at the moment or any other quality dividend growth stocks for this matter. You should know better now how great it can be if you truly understand what I present here to you!!