The next move is clear now

It is really brutal and scary for this stock market. It had been holding above the important support level of 3000 for two years but finally it broke down and was approaching the lowest point since after the epic crash 4 years ago. By now I hope you can guess which stock market I’m talking about. Yes, it is the Chinese stock market. Since reaching to the bottom around 2760 (the Shanghai index) in early 2016, it has been slowly recovered in the past two years, up about 30%. The sentiment has improved and it seems the stock market is entering a sustainable recovery for long term. Then all the sudden, the floor is falling apart and the Shanghai index has tumbled towards the 2800 level now. It is not news that this is largely due to the trade tension with the US, which seems to be escalating every day.

 

While the stock market can move around reacting to headline news every day, China is facing some fundamental issues for its economy. Although I’m not an economist here to do a deep dive analysis on the Chinese economic problems, at least I understand two gigantic bubbles are created in China that must be handled very carefully: the debt crisis of all levels (governmental, corporate and personal) and the sky-high housing bubble. Needless to say, the Chinese government is crystal clear about the huge problems they are facing and is actively looking for solutions that are hopefully will only lead to a soft landing. But it is a super difficult task for any government to handle. Historically there are two examples (Russia and Japan) with two macro strategies for trying to solve the issues: Russia which resorted to give up its currency to protect its housing market. For Japan, they gave up their housing market to keep their currency stable. Both has resulted in terrible outcomes with deep economic crisis for decades. Is there a third option for China to try? I hope yes but I’m not smart enough to figure it out. Without knowing for sure, it seems to me the most likely approach for China is to try to protect the housing market as understandably an immediate crash of the housing market may likely cause significant social turmoil, which is not acceptable by any means. On the other hand, letting the currency RMB depreciated won’t immediately cause turmoil for the society although its ultimate result won’t be pretty as well over the long run as it will boost inflation and reduce investments and further increase debts. But there is no easy way out and a choice has to be made between the two. Apparently we have got a clear sign by now. The central bank of China has announced to drop 0.5% required reserve ratio for commercial banks to boost lending, adding over $100 billion liquidity to the financial system. I think this is a start of a new round of QE in China with a hope that the economy will be soft landing with the debt crisis being tapered down gradually.

 

Given the history that did not paint a pretty picture for either choice, I’m indeed very worried about ultimate outcome for the China’s economic development in the long run. As summarized here by my son, some internal voice from the top has sent a clear worrisome message that the potential of a “financial panic” in China is very real and should not be ignored.  But in the short run, meaning the next few months or even a couple of years, I think the new QE programs will boost asset classes including stocks and housing markets. Although the past two months have been brutal for the Chinese stocks that have slipped into the bear market territory after tumbling over 20% by now, I think there is a good chance to bet for an uptrend for the Chinese stocks as well as housing market for the foreseeable future after the selling is exhausted and the bottom is reached (which should be near).  Be clear, I’m not talking about long term investment here but as a trading idea. Don’t be too bearish just yet for China! The ongoing trade tension with the US, while could be scary on the surface, is just noise. China is just too big and powerful now for it to simply go crash and it will manage to thrive as long as possible. I just wish it could find a reasonable way out for its long term prosperity without following the footsteps of Japan and Russia in tackling the humongous debt and housing problems. Good luck, China!     

Another Amazon’ed effect

It is a common pheromone nowadays that, when Amazon sneezes, everybody else catches a cold! So a new English word is created now: Amazon’ed, meaning something has been disrupted by Amazon. We are just witnessing a new Amazon’ed effect!

 

I hope it is not any surprise to you here as we talked about this potential move by Amazon a while ago (see here). Here is what I said: I’m thinking loud that there is a reasonable chance that Amazon may also want to jump start by buying a retail pharmacy company. This will allow Amazon to take off the regulatory risk immediately and deep dive into the business much smoothly. At that time, I figured Rite Aid could be the target for Amazon but now looking at the business model of PillPack to be acquired by Amazon, I must say Amazon has made a brilliant move. Of course I’m not as smart as Bezos that I know very well!

 

So why PiilPack is such a good fit for Amazon’s ambition to tackle into the online pharmacy business? Per Bloomberg:  

 

PillPack has mail-order pharmacy licenses in all 50 U.S. states, which could allow Amazon to expand quickly. PillPack also has relationships with most major drug-benefit managers, including Express Scripts and CVS, and says it works with most Medicare Part D drug plans. Those ties will give Amazon access to much of the prescription drug market in the U.S.

 

PillPack sells pre-sorted packets of prescriptions drugs, delivering them to customers in their homes. The closely held firm has software that automates many tasks, such as verifying when a refill is due, determining co-pays, and confirming insurance. That eliminates much of the manual work that pharmacists often are saddled with now.

 

So it is almost like a turnkey business for Amazon that is already in a model nicely fit into the Amazon’s. No wonder all pharmacy retailers including the industry giants CVS and Walgreens have all been wiped out close to 10% of their market cap immediately following the breakout of the news. Ouch! The question is if this is really such a threat to traditional pharmacies? My thinking is Yes and No. I think the long term threat to them is very real and it can come fast to totally disrupt their business model. They better take it seriously and immediately, if not yet, start to think about how to adjust and change their model to be more “Amazonized”, i.e. shifting more to online than store-based pharmacy. Otherwise their life span may be numbered in just a few years, if not faster. Having said that, it takes time for Amazon to fully materialize its ambition and the short term impact should be much less than feared. You see, PillPack is already very active in competing with other pharmacies and I doubt there will be any material changes in the next 1-2 years in terms of competition to the current physical pharmacy retailers. And good companies like CVS and Walgreens won’t just wait and see but likely will also adjust and fight back with their new models. This remind me of what happened when Amazon took over Whole Food about a year ago. The fear to the whole grocery sector was equally strong and they were all haircut by the similar scale, including Walmart, Costco and Target. See what happened following the initial shock? Overreaction as always. I think this is also a very likely scenario for CVS and Walgreens that they will recover in the near future from this tumbling due to being Amazoned. So don’t give up CVS/WBA just yet, especially for their near future!
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Top-level Chinese think thank warns financial panic "very likely" (by Lucas)

In case the latest roller-coaster ride in the markets hasn't been reason enough to be cautious, how about this latest bombshell out of China? According to Bloomberg and a few European financial news sources, a top-level Chinese think tank has just apparently warned that the Chinese markets could be on the verge of a financial crisis. In a leaked report, the government-affiliated National Institution for Finance & Development (NIFD) warns that "China is currently very likely to see a financial panic." In making its case, the NIFD refers to factors such as high default in the bond markets, tight liquidity conditions, and shaky equity markets. In addition, the NIFD notes that the leveraged stock purchases are back up their highest levels since 2015. That's right, remember 2015, the year when the Shanghai composite dropped by a third?

Whether or not you buy the sensationalized tone of the report, the NIFD is on to something. Amid all the hype about China overtaking the West (whether in GDP terms or in the number of tech firms sprouting up year) or its financial firepower, we must never forget that at its core, this is an economy fueled on debt and a highly intransparent shadow banking system. Taking into account government, household, and non-financial corporate debt, China's debt-to-GDP is now approaching 250 percent. Looking ahead, China's fiscal and monetary authorities are stuck between a rock and a hard place: either strike hard now to delever the financial system (and risk a near-term market correction), or keep pushing the issue off into the future (and risk a hard landing of even greater proportions down the road). Add into the mix US rate hikes and a looming trade war, and you have the recipe for a pretty nasty cocktail. 

If nothing else, this should serve as a warning that, in this environment more than ever, a structured and disciplined investment approach should trump any temptations to chase new highs or to "go with what's hot." 

Here's the link to the Bloomberg article: 

https://www.bloomberg.com/news/articles/2018-06-27/china-think-tank-warns-of-financial-panic-risk-in-leaked-note

The Shanghai Composite is down close to 20% year-to-date - start of a new bear market?

A decent bounce is imminent

Two weeks ago I advised about the risk of a hard selloff coming when S&P was flirting around 2780:  Right now the market is quite overbought for the short term and can easily sell off for any news perceived as not so good. I think the downside risk is much more than the upside for its next major move. Honestly I was expecting a much fast correction at that time. But the market god will never make anyone easy in trading and it continued to move in a very tight range for most part of the last two weeks, letting everyone guess which way it would break out. Well, the reckoning day has finally come today with S&P shed as much as 60 points (over 2%) at low and the fear index VIX jumped close to 40% at one point. This was a rather panic selloff not often seen. Recall VIX jumped 50% back in Feb at the start of this overall correction that is still recovering? This is second to that drastic panic, often a good contrarian indicator that it was oversold enough for now justifying for at least a quick bounce back.

One observation that S&P broke down through its 50 DMA at its low intraday but managed to fight back to close just one point above its 50 DMA (1716). Does it mean that it wants to stay above this important trend line? I think it is possible. I'm still looking for a general uptrend for the next few months for the market and if so, it should stay above this level. I think there is a good chance that we may see a decent rebound very soon, if not starting from tomorrow.    

Next Big Short

I tend to be earlier but it is better to be a bit earlier than late, agreed? Actually it is not really new about this topic as I have already started talking about it, but let me add a bit more information into a scary trend that we may likely face in a few years’ time.

If you haven’t watched film, “Big Short”, you may want to take a look. This is about a real life story about how Michael Burry, happened to be also a physician by training, made nearly $3 Billion during the financial crisis of 2007–2008 by shorting the subprime mortgage. This has become an epic short trading eternally engraved in the financial history. If you don’t know yet, Burry was also a few years earlier in setting up his big short that had costed him big paper loss and a huge outcry from his clients before the final crash came. After all, all looked very rosy and bright before 2007 for the real estate market. Even Bernanke famously testified that there was no crisis coming for the housing market at that time. Who needs to worry, right? I hope you do now together with me!

We are heading into a crisis that could be much more severe than the housing crisis and I think there is a high chance this may hit us within the next 5 years. I’m talking about the Corporate Debt (CD). Indeed, no one is talking about it, not mentioning any fear for it. After all, who cares when the borrowing interest is so low that almost any debt can be easily served? Probably not any more in the coming years!

So why I’m sounding so alarming? Well the sheer size of the CD up to now is mind-boggling and it is piling up even more as each day goes by. Similar to those days when the housing market was booming and mortgage could be easily obtained often with no immediate cost, who cared about how to repay the mortgage in the coming years. Corporations are doing exactly the same thing nowadays. Borrowing is too easy and cost is too low; who cares what may come next! Without knowing, they are already approaching the point that there is no return.   According to Wells Fargo Securities, corporations will need to refinance an estimated $4 trillion worth of bonds over the next five years. How much is that? It’s about two-thirds of all the outstanding debt for corporations or about one fourths of the US GDP! Now think about it. During the 2007-2008 housing crisis, the value of American subprime mortgage was estimated at $1.3 trillion as of Mar 2007, less than 1/3 of the total CD now. But it has already brought the whole financial world onto the edge of crash when interest rates started to move up, making a lot of mortgage owners not able to survive but defaulted. How much junk bonds in total now? Coincidentally also worth about $1.3 trillion. Junk bonds refer to those debt issued by the companies without a good credit rating (under the investment rating) and therefore are at high risk of default in general but especially so in an interest increasing environment. This is very similar to the subprime mortgage in nature. We can safely bet most of those junk bond companies will run into serious problems of refinancing and many of those even with good rating may also not be able to afford the increasing cost of their debt when the interest rate shoot high substantially. It is a general consensus that 4% of long term interest rate may trigger a lot of default. Ironically a fast growing and booming economy as we are seeing now may speed up the escalation of the interest rate. I don’t think it is far-fetched to see a 4% 10 year interest rate in the next few years. I’m even thinking we may see 5%+ rate in the not so long future. Then wait to see a tidy wave of corporate bankruptcy coming. It is nearly a perfect storm brewing although not many people are worried about it. On top of that, don’t forget we have historically high government debt piled up, plus historically high consumer debt (like student loans and credit card debts amounted to also trillions of dollars) stacked up. None of them can go easily when the interest rate shoot up. So mark my words: The next financial crisis will be the (non-housing) debt crisis. When it hits, it will make the housing crisis like walking on the beach!

Be Prepared!!     

Crisis trading

It is the news of the century, I would say at least for the Dow Jones Index. If you are living on the earth, you must know the last original Dow member has finally been removed from the benchmark formed in 1896! It is General Electrics (GE) which joined DOW 110 years ago. What could be worse than that for a company that has been struggling for many years by now?  After all, it tanked 45% in 2017 and following the bombshell, it dropped to as low as $12.5 in off-hour trading, the lowest point since 2009. Indeed for any long term shareholders, it has been a heartbroken experience that seems never ending. But as a contrarian, I see the picture a bit differently. You may recalled, a few months back I said we could still make some money from the dead money of GE. While the share price did not do much, I indeed ended up making some good money from it with my unique dynamic hedged trading as it slowly moved up to $15.5 at the recent peak (about 7% up-move after my post). Now with this last straw crashing on it, I thought it would tank at least 5% or more with the worst news it wanted to hear for now. Well, it only dropped about 0.5% on the day. This by itself is a good contrary technical indicator suggesting the multi-years of selloff is likely exhausted by now at least for a short term. Another good technical strength for GE is its weekly momentum that is clearly showing a positive divergence! The weekly chart is a longer term (months) indicator that give traders a hint what the underlying stock will most likely do in the next few months. While there is no question GE is still in a deep crisis although this is not news anymore, the chance is high that it has reached its important bottom by now and its next major move is upside, not downside. Of course I’m not saying the absolute numeric bottom as it could still struggle for a while at this level. But I think it probably won’t go below $12 (it’s trading around $13 for now). How high can it go from here? You probably have to use your imagination for that prediction. But let me give you two recent examples that I did with such kind of crisis trading:

• Remember how scary for Macy last year? It appeared on the verge of bankruptcy due to the Amazon’s fierce competition that drove down its price to about $15 late last year. Clearly Macy was in a deep crisis but its technicals started to showed up strength when it reached to the bottom. Now it is trading around $40 within 6 months, more than doubled!
• Heard about Gamestop (GME)? A video and gaming retailer that is on the verge of being driven out of business by the online digital downloading services. I have seen many reports talking about the end of its business soon. But its technicals again showed good strength when it reached to $11ish just a few weeks ago. Then suddenly we saw the news that GME may be bought out by a private firm and its stock jumped to about $16 immediately. Not a big run for the stocks but my call options shot up by 200% instantly.

Don’t get me wrong as if I’m talking about a fundamental turnaround for GE now. Not at all! It is still deeply in debt  ($60 billion) that it needs to service in an increasing interest environment. It is not an easy task to tackle (I will write more about the global debt crisis we will likely face in the next few years). While GE’s new management is making all its efforts to save the company, it won’t be easy and will take years to solve if ever succeeded. The risk is still high for GE as a long term investing. Its next big shoe to drop, if ever happens, is likely cutting or discontinuing its dividend, for example. However, the thing you need to understand is that the biggest money is often made, not when everything is going rosy and well but when something really bad become “less bad”. The point I want to make here is, while all the doomsayers and naysayers are telling you GE is close to its end of world situation, its technicals are telling a different story, at least for the next few months. That’s something I want to bet now for GE! Of course, trading is a probability game with no certainty and I certainly could be wrong. As always, be mindful of the downside risk for trading!

By the way, let me take this opportunity to clarify something about dividend reinvestment (DRIP). I got a laughable comment from a naysayer that I should include GE for my DRIP as I have been saying that lower prices are good for the long term total return for DRIP. What a stupidest question of the year in my book! 😜😜 Of course this is more joking than anything else but apparently such kind of comment could only mean the ignorance about the DRIP! I know DRIP is not something most of people can easily understand, especially the critical criteria that must be met for a successful DRIP. While technically one can include all the dividend paying stocks for DRIP, the essence of a successful DRIP requires some very stringent inclusion criteria. Briefly, we want a dividend stock that is fundamentally solid with sufficient cash flow that can pay not only just stable dividends but increasing dividends over years. I’m personally even only interested in those stocks with very long history (at least over 10 years) of paying dividends without interruption and increasing dividends at an annual rate of 10% or more on a solid business fundamental. With this prerequisite in hand, you really don’t want to see the share price to move up too much. The share price going up may make you (also me) feel great but actually in the long run, it hurts you/me for the total return at the end. The most ideal scenario is that a stock is not moving much or even moving down while its dividend is keeping going up. If that happens, your tiny investment can easily become a multi million dollar asset over a long period of time. Of course we can rarely see such an ideal situation as good companies often move up with their dividend appreciation. But at least we don’t need to worry about its short term or even sustained longer term share price declines, like we have seen during 2008-2009 or long term bear market during 1960-1970. Don’t forget MSFT had been dead money for a decade while still kept increasing its dividends 15% annually before recently. I think we will likely move into such a long term bear market in the next 5-10 years due to enormous debt crisis brewing at the moment globally over years. It is not a question of if but when the bomb will explode. In such kind of end of world situation, DRIP will be one of the two best strategies to safeguard and yield reliable income to you. Don’t be fooled by those seemingly financial gurus telling you to chase high growth stocks for your long term investment. I’m not against it but I will tell you later why DRIP is much better and practical for most of people (99%+) to safely grow your wealth unless you are a genius to be able to identify such high growth stocks and can stay along with them from the beginning.      

From Cloud to Fog

While I don’t know much about IT, I have to act like an IT expert at home. This is a typical conversation I have with my wife:

“Lao Gong, why I cannot print out my doc now?”

“Really? Let me check!”

I have to stop everything and jump into the role as an IT helpdesk guy. After I quickly checked, I printed out what she wanted.

“Wow, you are really a genius! What went wrong?”  she asked.

“Well, you just didn’t switch on the printer!”  I almost shouted!

“OK, I will remember next time.”

This is often kind of IT challenges I have to deal with on our daily life. So I almost fell out of my chair when one day my wife said: “I have decided to learn Cloud computing”. I thought my hearing got something wrong, so I asked “Do you know what Cloud is?” “No I don’t know. But I often heard people talking about Cloud, so I think I need to understand something about it.” OK, a big relief from my side as I was worried my wife was talking gibberish and confused due to the side effect of the allergy medication she was taking. She just wanted to get some clarity what Cloud computing really means instead of career changing to Cloud business!

Well, Cloud computing is indeed red hot these days and it will be too hard to not hear people talking about Cloud. If you don’t know, Amazon is the leading company in this business and Microsoft is quickly catching up. Actually it is because of the strategic shift to grow its Cloud business that has pulled Microsoft out of its dead money status. That’s how important it is as one of the major IT megatrends at the moment. It is estimated that by 2020, the global Cloud industry will grow to $411 Billion as a whole and probably 50% or more of companies are expected to depend on the cloud in the years ahead. No wonder even my IT dummy wife is starting to pay attention to Cloud now! But, here is a big BUT, whenever something gets too hot, its most powerful growth period is probably close to its end. Of course, I’m not talking about the end of the Cloud business at all as it still has many years to go with great momentum. However, the best time to make big money for it is probably already over. That’s why I want to open your eye for something even more disruptive in this field. It is called Fog computing.

So what’s Cloud computing? Briefly, it is the practice of using a network of remote servers hosted on the Internet to store, manage, and process data, rather than a local server or a personal computer. To use a layman’s language, it is using centralized severs to store and process data via Internet, instead of using our own personal computers. This can substantially increase the flexibility and productivity of businesses and may save IT costs as well. Where the advantage for Cloud computing is the centralized infrastructure, it is also one of the major concerns for it: the security risk. It may also slow down the data transfer that often results in high latency. As such a new innovation is coming, that is Fog computing.  In a nutshell, Fog computing decentralizes the process by sending computing tasks to the most logical, efficient place between the data source and the cloud, rather than large remote data centers. This reduces latency, decreases costs, and solves the security concerns of cloud computing.

Of course I’m not here to educate you what is Cloud vs Fog computing professionally as I’m a layman myself. But you better understand the tidy wave is changing quickly from Cloud to Fog computing. Cisco (CSCO) and Intel (INTC) are the two tech giants heavily developing and applying this technology for businesses. There are also numerous private startup companies that some of them may someday become money machine due to Fog computing. So keep your mind open and your ears perked up, friends!
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We are all facing the inevitable

This is a very heavy topic but all of us have to face it: the inevitable death for everyone. While it is very cruel to say it but it’s a harsh reality that we are all marching towards death since the very second when we were born. This is an inevitable journal all of us are taking. No exception! So why I’m talking about this topic today? Well, you may recall I was asking for help a while ago for my medical school classmate who was fighting for her late stage advanced cancer. I’d like to sincerely thank everyone who has helped either monetarily or even just morally. It means a lot to someone who is dying and certainly to my classmate! Unfortunately she lost her battle and passed away a week ago. A sad moment for me for sure! That’s why I’d like to take this opportunity to talk about this grievous topic and share some of my thoughts related to it.

How should we think about death? Well, it is a scary question not many people even want to think about it, right? But is there a way to alleviate the fear? It is possible if you’d like to open your mind a bit. One way to do so is a popular approach to turn yourself into a religion believer. Nothing wrong with it but not necessarily suitable for many people. How about to rely on some more scientific ground to change our view on death? Ever heard about Dr. Brian Weiss, M.D., a famous psychotherapy specialist? Over 10 years ago, my wife and I found his book by chance, entitled “Many lives, many masters”, which has totally changed our view on death. Via his medical practices, he has demonstrated with quite convincing evidence that there should be life after death, or in other words, our soul is immortal and will continue after our body death. We are by no means religious but after reading this book as well as all his books we could find, our mindset has totally changed. Happily we are the firm believer of the life after death based on quite extensive scientifically accumulated evidence! Why is this important for us? Well, if we can continue to live after death, why should we be so scared about the death? Of course, I still wish I could live as long as possible but I’m not afraid of death as well if it is coming. This kind of psychologic change is helping us tremendously in facing death topics which are inevitably coming up more and more in our age.  Regardless if you can believe it not, I strongly recommend to read this book as it has some eye-opening stories. I haven’t really read any books in full in the past 2 decades but this and all his other books are the only exception. As soon as I started, I could not stop. Here is the brief introduction about the book:

As a traditional psychotherapist, Dr. Brian Weiss was astonished and skeptical when one of his patients began recalling past-life traumas that seemed to hold the key to her recurring nightmares and anxiety attacks.

His skepticism was eroded, however, when she began to channel messages from “the space between lives,” which contained remarkable revelations about Dr. Weiss’s family and his dead son.

Using past-life therapy, he was able to cure the patient and embark on a new, more meaningful phase of his own career.

And you may find the book in your local library or easily via Amazon.

Are we well prepared for the life before death? When we are facing life-threatening situation, it will be totally messy all around. The last thing I want to ask myself at that moment is how I can handle the ending financially. Obviously my classmate did not prepare herself well and was in a desperate situation asking for help. I hope all of us can be prepared much better but how many of us can comfortably say we are? I don’t think it is a high proportion among folks out there who can say that! That’s why I have been talking all these years that it is important to financially prepare yourself well for retirement which includes the inevitable end stage of our life.  It will be way too late to think about this when the moment comes, and this moment can come at any time in life. One of my classmates died in 30s due to heart attack! This is a rather personal topic and there is no one-size-fit-all approach. But at least from the high conceptual level, I think two critical steps we need to take: first to honestly assess for yourself how much money you will need for your retirement. There is no standard methodology to do so, but you may check this one to get an idea:  Merrill Edge's Retirement Calculator.  The second step is to set up a passive income stream, ideally multiple streams of PASSIVE incomes. In other words, you want to have sufficient incomes coming in automatically without you doing anything during your retirement. Again there is no standard way to do so but I personally think the easiest thing for everyone to do is to invest in quality dividend growth stocks for long term with dividend reinvestment. As I have said all years along, this is really an effortless approach but very powerful that can build up your wealth very effectively to generate massive passive income when you need it. All you need is your patience after gradually setting it up! And the earlier the better!! In addition, I’m a big fan of appropriately setting up a cash value life insurance that is NOT stock market dependent. It is just like a high yield saving account with powerful tax benefits and can also be used for long term care as well as critical illness as needed. With these two set up, I really don’t think I need to worry at all about our retirement life, including the financial need during the most stressful period when facing life-threatening incidents!

Considering this is inevitable trend for death, which is actually trending higher due to the fast aging population, logically death related businesses are needed regardless of the economic situation. Actually adding some “death stocks” for your long term portfolio is not a bad idea at all, especially those with good dividends. You can find an introduction on this idea here although this paper has been a few years old and therefore the 4 stocks (CSV, STEI, STON, SCI) mentioned are not necessarily cheap anymore. But at least keep this in mind and add them when they are on sales! After all, we are talking about an inevitable trend that nothing can disrupt it. Even Amazon cannot undo it!!    

Before I’m closing, my final advice: enjoy our current life as much as possible! Life is too short with full of challenges and difficulties but there is nothing more important than being still alive and enjoying the time with your loved ones. In this Father’s Day, send your thanks to your dad for bringing our life to this world and thanks your kids (if you have) for continuing your life more meaningfully. I’m happy to believe that one way or the other our life will continue into eternity!! This is where I’m finding my mental peace in this risky and uneasy world and hope you can as well.

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A historic week

Next week is going to be big, so big that I even cannot recall any weeks before that have so many critical events lined up day by day. Let me call it a historic week. Below is the summary about the most critical events for each day:

Monday: Chinese CPI, PPI for May

Tuesday: CPI for May; North Korea/U.S. Summit in Singapore

Wednesday: FOMC Policy Announcement (2pm) & Fed Chair Powell holds Press Conference (2:30 pm)

Thursday: ECB Policy Announcement & ECB Chair Draghi Holds Press Conference

Friday: U.S. To Release Final List of Chinese Imports Subject to Tariff

Of course I don't have a crystal ball to tell you how the market will certainly go with all the news coming out from these events but I'm pretty sure it will be a very volatile week to go. As I said, the market is usually set up  for its short term moves and then use any news as excuses to make a drastic move when it's ready. Right now the market is quite overbought for the short term and can easily sell off for any news perceived as not so good. I think the downside risk is much more than the upside for its next major move although I cannot say yet whether it is just a one day move or longer. Get ready for high volatility in the next few days!
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Another new high, another milestone

As all the long time readers know, I love Microsoft (MSFT), not as a short term trade although I do trade it very frequently for quick money, but more for long term investment and actually very long term, so much so that I don’t even think I will ever sell it in my life time. For those who don’t know me well yet, you can read here to find outwhy I’m so much a fun of MSFT as a long term dividend reinvestment (DRIP) stock that I expect will return me millions of dollars during the late part of my life without me doing anything else by simply enjoying its dividend growth and the investment compounding effect. The beauty of this powerful strategy is that I don’t need to put in a lot of money upfront (although it is my biggest holding for now). All I need to do it is to buy it (e.g. just $10,00-50,00) and leave it there and forget about it. I have already forgot it for about 10 years since I first bought it and it is becoming increasingly better from its business perspective. Now it has touched its all time high over $100, a major milestone obviously for it and there is no sign it is slowing down from here!

As I said, my fundamental interest in MSFT is for its boring businesses that can generate tons of cash flow which can fund its fast increasing dividends for years to come. For this type of long term DRIP investment, I don’t like high growth stocks that certainly make me feel good for now but in the long run, it will actually hurt my overall return. I know it’s very hard for people to understand this although I have explained many times and even via a mathematical illustration (see here). I saw some very interesting comments questioning the validity of this strategy in comparing to the potential gains from chasing high growth stocks. They thought I was simply interested in getting a few bucks of dividends hoping to get rich from them while ignoring the high flying stocks via their fast increasing share prices. What a lack of understanding about the true essence of this powerful strategy! That’s OK for me as the loss is yours not mine if you simply ignore this low risk, stress-free wealth building strategy that is so powerful and easy to do for everyone. “Unfortunately”, MSFT is becoming more and more like a growth stock now than a boring dead money type of stock better for DRIP.  Under the current CEO, Microsoft has really revived and reinvigorated itself and has become a leading high tech company again in all the major forefronts of the tech innovations nowadays. The latest smart move for MSFT is its acquisition of the open source software developer, GitHub. It will put MSFT in a much stronger position to compete with Amazon in the Cloud business, one of the hottest tech futures at the moment.  I’m not an IT guy and cannot explain the benefits of this MA better than other experts. But judging by the market reaction, which is usually negative to the acquirer’s stock, it clearly suggests the market loves this deal as MSFT was even trading higher following the announcement, You can read the business case why MSFT should buy GitHub here but in a nutshell: “So the opportunity for Microsoft is fairly straightforward. If it can get the Microsoft Azure cloud tightly integrated with GitHub — basically, give developers an easy way to get a GitHub project up and running in the cloud — it can kill two birds with one stone. Developers could love GitHub even more, and it would drive more usage of Microsoft Azure.”

We have already heard Street analysts talking about the potential forMSFT as the first company to become the Trillion dollar company.  I will certainly not be surprised to see this happen but with a mixed feeling. I’m wishing MSFT will not go highs too fast although in a vain hope. To compensate for my long term “loss” due to its share price fast growth, I’m doing a lot of short-term income trading with MSFT. I have many virtual/digital ATMs that are keeping generating incomes for me. MSFT is one of the most reliable and profitable ATMs for me for years. I love MSFT and will continue with my love affair with it!

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Our best long term investment

Let me do something different today. Instead of a usual money investment topic, l’d like to do some father’s talking today as this is a special weekend for us, our beloved son’s birthday! And coincidentally the Father's day as well!! 

My wife and I are not kind of parents having extremely high expectations for our kids, wishing them accomplishing something that must have some historical impact or something like this. For us, our expectation is very low; we just hope our son can grow up happily and can do what he loves to do and at the same time can live comfortably without the need to worry about his financial future. If he happens to be able to achieve something more impactful, that will be great but it is definitely not what we are looking for. This is how we have tried to do in raising our beloved son in the past 2 decades. So today, I’m just taking the opportunity, when he reached his next important life milestone, to share some of our happy experience. While every child is different and unique and there is no such thing as a standard template for raising a child, I do find useful by exchanging some experiences with friends as we all can learn something from each other. This is the whole purpose of this writing. It is nothing to do with stock investment but for me it is the most important long term investment for parents.

Everyone with the parenting experience certainly knows how challenge to raise a child! There are so many challenges that I cannot cover all in just one blog, but I think three challenges are among the most important ones all parents must handle very carefully.

The Role of Child. This I think is often a misunderstood and underestimated aspect in raising a child in terms of its importance. For most parents, especially among Chinese parents, parents must have the absolute authority and power to order and children must obey to follow. I think it is very detrimental actually, although may not be so obvious, to kids’ personality development. My wife and I have got the consensus since day one that we must treat our son as a friend, not a child. So we have always talked to him like a friend since he was very young by listening to his needs and making suggestions instead of ordering if we would like him to do something we wanted. We also shared our challenges and difficulties we were facing with him so that he really got the sense that he was our friend, the best friend for us! Of course there are many nuances into it but the key is that we truly acted like friends to him. The result? He has been so close to us all the times, so much so that we didn’t experience any teenage challenges with him as he just treated us as friends and naturally shared everything with us without hesitance whenever he got frustrated or had problems. Even in his late 20s nowadays, he is still so close to us by hanging on the phone with us several hours during the weekend whenever possible. It is just so natural for him to want to talk to us regardless if there are any specific topics for discussion. What a great and happy lifelong achievement we have made!! We feel sorry to hear many stories of friends that their kids are almost like suddenly changing to a totally different person when they get into their teenage. One mother friend complained why their angel like daughter suddenly became a monster. Another was questioning why their son stopped talking to them and would only lock himself in his room at home. My wife’s colleague said that their college daughter never called them unless asking for money...... Well, it is really not uncommon to see such sad changes during the kids’ teenage period. The last thing any parents want to face is to try to figure out what their kids are thinking, what they are doing or even worse where they are. I don’t know if there is a panacea but at least for our experience, making your precious kids as your friends is likely an effective way to overcome the challenges. We have tried and it has worked perfectly for us but importantly, it is not just a simple saying but an daily act that you need to make your kid feel and trust you as friends!   

Shaping up of Personality. As I said, each child is unique and different and there is no absolute best personality one can acquire. It is just a given that we all have some strengths in our personality and some weakness. Same for each child. So it could be a daunting task for parents to help their kids to overcome some obvious weakness in personality. For example, our son has always been a very nice and easy going boy. But we noticed from very early on that he was a bit shy and afraid of speaking in front of crowd. He was always among the last ones to speak in a group. As we all know, when something is naturally born with, it is very difficult to change. We have tried many different ways to encourage him to overcome this and one thing we experimented I think was very effective but required a lot of time and effort on our part. Each weekend, we made a setup mimicking a public Q&A, asking him to stand up to answer our questions impromptu and we even videotaped it. After he got used to it with months of practicing, we took every opportunity to ask our friends to join the rehearsal. We noticed significant improvement in his self confidence over time in public speaking.  Then we encouraged him to join the public speaking club at school and attended real life competitions whenever there was an opportunity. He ended up winning the national championship for the Canadian High School Bilingual Debating. This has indeed become his lifelong gift as he told us that making a public speech is a piece of cake for him now, the best music to our ears of course!

The last but not least, the Career Future. Needless to say, making a decision on what to do in life is by no means easy and simple. As physicians by training for both of us, we naturally first thought about the medical career for our son but he strongly objected it. He was even not much interested in science in general. So what he liked and wanted to do? He is very talented in language and therefore can speak 6 languages fluently. Just a side note, while he has never formally leant Chinese in any school (even weekend school), you probably would think he grew up in China if you simply talked to him verbally. And he knows much more Chinese history than us (a shameful feeling for me honestly).  Actually his Chinese writing is not so bad in my opinion. Here is one simple note he wrote to me lately: “ 爸，我们最近在先期认证方面政策好像有变化，等我老板回来后我和他确认一下。Love”. Does this look like from someone who has never formally learnt Chinese?  But he can easily unmask his true weakness ( 露出马脚) when he says or writes something like: 我会在我的心脏里记住你的。Anyway, he is more interested in liberal science, especially history or political science. After knowing his career interest and tendency, we knew we had some work to do to guide him towards something more practical. Of course, as a friend, we didn’t want to just force him to listen to us but wanted him to make a more rational choice for his future career. Fortunately I had already fallen in love with finance and therefore started to engage him more into the financial topics and discussions. It was great to see him becoming more and more interested in economics and ended up in studying economics and business (double majors) at the Haas School of UC Berkley. By the way, one thing we have been trying to influence him all the years is about the personal finance. We love our son but we never spoil him. In order to make him understand the real life difficulty in making money, we got a job for him when he was only 10 years old to deliver newspapers. It was really a tough job by any means as he had to get up around 6 AM each weekend, even during the winter that was often -10 or -20 C, to finish his job. He continued this job for quite a few years as the first taste of bread earning challenges with his tenacity and persistence. All his earnings have then been invested via my favorite strategy, dividend reinvestment. We have kept advising him and he has now well understood the importance of financial freedom, which has become his personal goal, aiming to realize by 40s. He often tells us that his real dream job is to become a historian and to teach or write history related stories. But he understands that he has to make efforts to get himself financially free first and then do what he really enjoys and dreams about. We are thrilled to see him well on his way to realize his ultimate goal with happiness and enjoyment.   

So what’s the milestone I have alluded to? Well, after several years working in the top bond company, Pimco and now JP Morgan, he is ready to take a shot for the next level. Have you heard  INSEAD? I bet most of friends have never heard about it, including myself till my son told me about it. This is actually one of the global leading MBA programs, ranked at the top, even above Harvard or Wharton school by Financial Times (see here). What is even more attractive is that it has a one-year MBA program to go instead of typically at least two years. I was very surprised but happy to find about it and hopefully this is good information for those who are also thinking something in this nature for their kids. Armed with great language skills with deep knowledge on history and political affairs, he is really very internationally oriented and loves to go beyond the US. So Insead is his natural choice when he wants to do his MBA. He has now been enrolled in the program for next year. I’m really happy for what he has done in all the years up to now and I’m more happy to see he is able to do what he likes to do in his life. Nothing is more important for us as parents.  Selfishly I have a dream. I dream to have a family business in finance that I can use my son’s credentials, experience and network to jump start it. Maybe I’m seeing more than just the light at the end of the tunnel now?   

HAPPY BIRTHDAY, SON!   

Where is Tesla standing now?

I have been bearish for Tesla for the past two months or so and I was even trading for a downside move for it. In the past week (especially today), Tesla has made some strong moves to the upside. So it’s interesting to see where it stands and what may be the next major direction for it. But let me first be clear that there is no way to analyze Tesla from the fundamental perspective as there is no way for it to ever make money based on the current business model. As I said and I maintain my opinion that I’m long term bearish for Tesla fundamentally. Therefore anything we are talking about here is purely technical and TA is largely driven by the traders sentiment, which can be extremely bullish or bearish at any point of time. As a Street darling, Tesla has no lack of both. Right now and interestingly, its TA has several major setups that can trigger its next major move. Let me try to decipher it a bit for you with the chart below.

Downward trend line: Since its all time highs around $360 back in March, it has tanked with a clear downtrend for the past three months. It briefly touched below $250 at its low. But now it has broken out from this downtrend line. That’s a bullish sign.

Sideway moves: While it feels like to have moved a lot in the past few months, actually it has been simply moved sideways between $270-310ish in the period. The strong jump today pushed it towards its upend of the band, a strong resistance. It is also hitting its 200 DMA, another strong resistance. Unless it can decisively break it out, it will still be confined within the sideway moves, which is directionless.
Double bottoms: It has also formed a clear double bottom during the sideway moves, which is a bullish sign.
Head & Shoulders: We can also see the H&S formation now, which is typically bearish.
Neutral Flag: Its sideway moves have also created a flag, which is not clear yet bullish or bearish. If it breaks out to the upside, then the next major move is likely in the scale equivalent to the flag pole, about 30-40 points. If breaking down, then it can easily tank towards $250 again. Today’s seemingly strong pop is just letting it bump against the upend of the flag. It will be critical for it to decisively break out to be bullish but the resistance is also overwhelming for now.
Momentum indicators: Its daily MACD is showing positive sign as well as its RSI. Its weekly momentum has more work to do but is also moving for its upside. I think it is more bullish than bearish.


It’s amazing to see so many technical setups within one chart and I hope my TA analysis for Tesla can be included in a textbook as a case study!😜😉 I guess you all get confused by so many conflicting TA signals, right? Me too but I’m now more lining towards the bullish side than bearish when putting all together. The momentum indicators give me more weight in the analysis. In other words, while Tesla may still be moving sideways for a while, its next major move is probably to the upside and the downside risk is much smaller in my mind.
 
Just a quick word how I have done with my Tesla bearish trade in the past two months. In the past, I tended to just stick to my direction with a trade maintained in the period (i.e. static without changing). Overtime I learnt that it is very challenging to make money for either direction, especially for high flying stocks like Tesla that is extremely volatile and can either move up or down sharply by headline news. This kind of volatility is especially damaging for option long only trades (up or down) as the time decay can easily eat off all the potential profits even if my ultimate direction was correct, i.e. losing while being right. So I have changed my trade strategy significantly now with dynamic option spreads. It’s a bit complicated to explain to most of folks without knowing the option trades well. For those savvy with options, let me just give you a simple idea. I was expecting Tesla to move down towards $260 when it was bouncing back towards $300 two months ago. So my long put arm has that strike due Jun 15. The other arm was a put selling initially also at $260 with an earlier date. I then used the volatility of Tesla in the past two months to have pocketed two times nearly full profits of the put selling arm (i.e. closing them nearly worthless when it jumped high), which has already made me more money than the long put cost. Using its last significant drop about 3 weeks ago, I reinstituted my put selling arm with a strike of $280 due in Jun 15 since I started to see more bullish sign for Tesla now while I’m still holding my $260 put arm intact. As of now, it appears the chance is very high that Tesla will not drop below $280 in another week before the expiration. So my total return from this dynamic trade via a few times of maneuvering is quite sizable while Tesla is doing virtually nothing in terms of its share prices and with very limited losing risk. Well I’m not exactly right to expect it to tank down to $260 since I opened my trade but do I need to care?  Talking about the art of trading! Of course, it is not for everyone, probably not for most of folks as it requires some good TA skills and the willingness to think out of the box. So next time when you hear me talking down on something, it just means I’m having a general bearish view for its direction for a period of time but my trading may just be swinging, up or down moving with the waves. Always remember, trading is just an art, not a rocket science!

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