Another kind of value stock

I’m travelling again but this time for pleasure on a river cruise in Russia. So this will be my only blog for this weekend.


While the market was indeed in quite a turmoil this week as I was expecting, I thought the last couple of days should be better after the initial harsh drop early this week. But apparently Mr. Market couldn't hold up well when there was constantly negative news to push it down. However, technically it is still not too bad and more bullish than bearish if you ask me and I still think we will likely see 3020 again soon before more severe plunges. One more thing, oil is on the verge of a big move again and I bet it is more likely towards the up than down, after a quite good dose of correction since the last jump.  

Now the main theme for this blog, the value investment. When we talk about value stocks, usually we will only be interested in those with stable business which will still be doing fine in the long run even with new challenges down the road. Today’s idea does not fit into this category. Actually it may not even be available  for investing publically in the near future if my prediction is correct. That’s why it is an out of box kind of thinking that make me interested in it. Let me explain.

As I wrote many times before, the Bricks and Mortar retailers are trending down big time in facing the e-commerce competition lead by Amazon. With very few exceptions, nearly all the BM retailer businesses have been decimated in the past few years, including major bankruptcies like the toy giant R-Us. The company I’m talking about is also a retail giant with a glory 50 years of history, an icon name in the US. But apparently it hasn’t effectively overcome the challenges by the e-commerce and is trending down as well big time. It is a household name and everyone knows it, the famous GAP store (GPS). Following the 2008 financial crisis, it had recovered quite well with a 4+ times gain within 5 years from $10 to about $45 by 2014. Then its good time has faded quickly with increasing competition by Amazon and other online retailers. It has lost most of its earlier gain and currently it is trading around $17. The common view for GAP is overwhelmingly bearish apparently but I have a different view for it at this price. I think GAP has a good value now regardless how you look at it. Here are a few rationale why I’m thinking so.

• First of all, GAP is very cheap at this price, with a PE only about 7 and a dividend about 6%. While it is facing significant challenges, it’s still generating good free cash flow, nearly $700 million in 2019. Its debt load is not out of whack as many other heavily debted companies and its strong free cash flow can easily severe its debt. This is one major concern for retailers now as uncontrollable debt load can easily kill a company!
• GAP has many great brands including Athleta, Banana Republic, Gap, Hill City, Intermix, and famous Old Navy. These are still the brands loved by Americans and that’s why it can still generate good cash flow. The coming shopping season for the X’mas should be great for these brands and ultimately for GAP!
• The company is highly owned by insiders, especially the founder, the Fisher family. The insider ownership is as high as 36%, in which 60% of it is owned by the Fisher family. When insiders are heavily owning a stock, you can bet they have the same vested interest as other shareholders and they will do whatever they can to boost its share values. One thing we know GAP is going to do to increase the share value is its plan to spin off its high-performing brand,  Old Navy. This will come next year and the Street loves this kind of thing and likely will boost the stock price as well.
• Conversely there is a quite high short floating rate, over 16%. This is a contrarian indicator which suggests how much herd hates the stock and bearish on it. But this may easily trigger a short squeeze when the stock moves up against them. I think anyone heavily shorting GAP at this price will pay a high price sooner or later.
• Last but not least, there is a speculation that GAP may seek private equity to be bought out and privatized. This makes a lot of sense with so many great and performing brands as well as good valuation at the moment. It will certainly be the interest for the Fisher family and the insider owners such as the company executives, who will greatly be benefited if such a deal is materialized. If this happens, typically we may see a 50% or even higher premium over the market price, which means we can easily see something around $30 or higher stock prices if we buy it at the current price.

No guarantee of course for what I’m saying here but believe or not, its TA appears to also suggest GAP is bottoming now and is ready to move up. I want to be in when everyone else is looking down at it. That’s how a contrarian should do.      

The explosive move is yet to come

“It is the worst ever shock in terms of the one-day price jump”! This is what has been reported all over the world early this week and you must know what I’m referring to. Yes, it is about the crude oil, which shot up 15% on Monday following the weekend drone attacks to the Saudi Arabia oil fields. It is truly an oil shock that has rarely occurred. While I don’t want to claim any credit for myself for predicting such an extreme oil price move, I did told my friends about two weeks ago that I thought oil had broken out to the upside based on its recent price actions and likely it is on the move to more upside. You can say it is a pure lucky coincidence but believe or not, TA often knows something in advance that we human beings won’t know. Of course, I don’t mean it can tell what will exactly happen but it can often foresee the direction of the next big moves that can be triggered by whatever reasons. That’s why I’m so fascinated by TA now as personally I do believe it helps a lot for my trading.

Back to oil, the million dollars question is whether this oil price jump has already done its work and we have seen the highs for oil? Short term volatility will continue for sure for oil but I think oil may have a lot more upside to go from here. One immediate potential catalyst will very much depend on how the next steps US/SA will do as retaliation for Iran, the presumed black hands behind this attack although it has vehemently denied. If any military actions are involved, we can easily see a $70 oil in hurry. But this is till nothing for what may come next and I think we may see $200 oil if the worst comes true. Here is some history you need to know about “Oil Shock”. If you are not aware, we have seen two previous oil shocks, both triggered some crisis in the Middle East: First in 1973 due to the Arab-Israeli War resulting in an oil embargo. The other one in 1979 following the Iranian Revolution. What happened both times in terms of the oil price? They both jumped by 300+% virtually overnight! Based this historical experience, I won’t be surprised to see the next oil shock price around $200 if the worst comes worst.

So what will be the worst case scenario in the current situation? Well, as you all know, Iran has been largely cornered right now by the US sanctions and it is increasingly in a desperate mood. So we have seen it started to shoot down the US drone and attacked oil tanks in the Gulf. I won’t be surprised if Iran is also the real guy behind this SA attack. You see, it is doing something already quite aggressive and we cannot say it won’t do something more drastic. This will really post the risk of miscalculation by all the parties involved, which could involve some sort of military actions, especially if Iran is directly attacked by the US and allies like SA and Israel. If this happens, one extreme card Iran may play with is to totally block the famous Strait of Hormuz, the narrow pass way controlled by Iran and is critically important for about 30-40% of the oil supplies for the world that are coming from SA and various other ME oil countries. If oil can jump instantly just by about 5% of the supply disruption, why it won’t triple if 40% of the supply is blocked? Yes, eventually US has the military capability to reopen the Strait but it will take weeks, if not months to do so, not mentioning how much causality will also be involved. It will be a very scary moment if that really materializes. I’m not saying this is a very likely scenario to happen. So far I must give credit to President Trump for quite contained reactions to Iran’s aggressions so far.  But I won’t simply say the chance is zero, based what we are seeing now. The risk is just too high to ignore, folks! Considered you are warned!!     

Get ready for more downside next week

"Oh boy, the market is kind of clueless right now, changing its mood on a daily basis. Yesterday (Sep 18) was clearly bullish but today's price action (Sep 19) is quite bearish, shifting the momentum to downside now. It is very muddy water right now and difficult to manage if not careful. But if you think a bit deeper, you can see how the market is driven by the algorithm-based computer trading nowadays, which is pretty much based on the major support/resistance lines. As I said, S&P 3020 was likely the next resistance for this rally. Well it did seem all the trading computers were setting this up to drive the market up to. We got this level today (Sep 19) and within just a couple of hours, it retreated from the resistance and gave back all the strong earlier gain today and closed barely in green. Very bearish but TA-wise, it makes a lot of sense and gives good traders solid well-defined target to get one or off based on these levels. That's the beauty of mastering some TA skills"


This was the note I sent to my friends last night, expecting a bearish day today. The bulls were still trying hard initially to push the bar towards 3020 for S&P early of the day but failed miserably into a deep red closing.  Sorry bulls! As I said, I don't believe Mr. Market can easily break out the resistance at 3020 (see here) and it has tried at least twice but failed in the past week. I'm happy with the gyrations we are seeing now and today's early bullishness allowed me to add more long positions for VIX. As I said, "I'm gearing up for high volatility"! I mean it by putting the money where my mouth is.


We are quickly entering into the seasonally worst month of the year, October. There are simply too many uncertainties out there that will make traders quite nervous. Having said that,  I'm not expecting a waterfall crash  at the moment but for next week, most likely we will see higher VIX with a plunging market in general. Its next major support should be around 2975 and then 2950. I doubt it will drop more than that for next week as at the 2950 level, it will likely be in a deep depressing mood with a quite oversold condition and therefore should be poised for a rebound. That's how I'm looking at it and my game plan for now. But I will be travelling late next week with a major trip. So I hope the market can be flushed down quickly early next week to allow me to cash out my long VIX position and a few short positions before getting on the road.


Keep my fingers crossed!

Can this be a 10 times money opportunity?

I talked many times about the COT report, which presents the future traders' bets virtually for anything. Understandably, it moves around a lot but when it hits to some extremes, you better pay attention to it as it is often a contrarian indicator to suggest a change in the direction is likely to come soon. It is not necessarily so much punctual in terms of timing but it is a quite reliable leading indicator for directional trades. We now see another extreme COT indicator flashing. It is about bonds.

Bonds are supposed to be slow moving animal. A 10% move in a year is very reasonable but 15%+ in just a couple of months? Very rarely seen to say the least! This is what has happened for the long term bonds (TLT), which is being chased by Pops and Moms with their hand and feet right now. Not only ordinary people, it is also chased by the professional traders as indicated by the COT report. A couple of weeks ago, we saw a bullish bet reaching to an extreme rarely seen for years. In fact, we have only seen this level of bullishness 3 times before, in  2013, 2016, and 2017. Now this is important for you to know what had happened each time afterwards.  Each time such kind of super bullishness had led to losses in bond prices going forward and BIG TIME. In average we can easily see a 15-20% loss for bonds in the months ahead, if the same pattern plays out. I have little doubt this time is no difference!

So armed by the historically data with technical analysis, let me make a bold call now: I expect the next major move for the long term interest is not down (the hot idea right now) but up and probably a lot higher from the current very depressed level. For the 10 year Treasure with a yield less than 1.5% at its low recently, I bet we may see 2.5-3% in the next 6-12 months. I know it is not something most people will agree with me but as a contrarian, I don’t need such a consensus to comfort me. With that, TLT has to substantially go down, probably 20% lower from the current level around 140ish. For option savvy traders, this could be a 10 times money opportunity if lucky enough. Of course, I could be wrong but we have already started to see the downward moves for TLT in the past week. Likely it will try to bounce back but then a more pronounced leg down will follow. That's my bet.

Be aware, options are wasting assets and are quite risky to play with as their time premium will decay very quickly with time, if the trend is against you. So don’t play with it if you are not good at it. I personally will be looking at a much lower strike price in at least a 6 months or longer duration and with some hedged strategy to minimize my risk. The easiest play for the idea is TBF or more risky TBT. Just be mindful of the risk with appropriate position size and exit strategy.   

The market gyration will continue

Given there may be some significant moves tomorrow, I decide to write something today.

I wrote before (see here) that Mr. Market is just like a schizophrenia with a temperament hard to predict. After 10 years plus virtually a straight line up for the bull market with extremely low volatility, we start to see more and more volatility now. The mood changes by Mr. Market are truly insane and it can jump from the two extremes within days, Oh, no, can be within hours from time to time!  We saw big gyrations this week, which is more so for VIX. Monday noon I told my friends to expect for a jump for volatility. It did jump by 10%+ from 14+ to 16+ by Tue morning. While I was expecting it to jump more to about 17-18, VIX literarily just shot up for a few hours and soon thereafter it faded and came down now to 14 again! For anyone trading for the volatility, they must be very nimble and superfast as the profit window can just be in terms of hours, not days! True insanity!!

Now S&P has totally overcome the depressive mood in the past week and is challenging the resistance around 3020ish today as I predicted last week. As you can see, how the resistance was withheld as S&P literally just touched 3020 but walked back immediately. While anything is possible, I very much doubt it can break it out by this attempt in the next few sessions. One pattern that has played out quite consistently in the past couple of years is the market moves prior to the upcoming FOMC which is always on Wed for the decision announcement. For whatever reason that I’m not smart enough to understand, the market tends to decline on Fri and Mon and then moves up on Tue and Wed morning before the FOMC decision. Then anyone’s guess how it will react to the announcement or the Fed Chair’s new conference in the afternoon.  It is not 100% that way but it is consistent enough to become a kind of norm. So I bet we will see some weakness tomorrow and Mon. Actually today’s nice jump of the market has somewhat pushed itself to an overbought area, which by itself can be a trigger to a technical decline. The significant weakness at the last hour did seem to be bearish in my eyes. Interesting to see how Mr. Market will behavior tomorrow!

I’m gearing up for another VIX jump now!

What to do if a prolonged recession is inevitable

Early last year, I forwarded a macro paper from BoA regarding the major trends for the future. One of them was about the coming high volatility, which was largely subdued for many years due to historically long lasting mega bull run since 2009. I told you to take this call seriously and read this paper not just once but regularly. I’m pretty sure such kind of call will usually fall into a deaf ear and not many will pay any attention to it. For those who did, the Oct-Dec crash last year would not be a big surprise to them and hopefully they were much bettered prepared! It is still not too late to read this paper if you haven’t done so (see here).  
 

If you have followed my blogs for some time, it should not be any surprise to you that I think a painful recession is coming and probably a lot sooner than expected. More importantly the upcoming recession will likely be a gigantic one that may last for many years, not just a passing-by event. Right now it seems unthinkable when the US economy is quite robust, thanks to the very successful pro-business policies by the Trump administration. Yes, this momentum may continue for a while but it does not change my long term bearish view at all due to one critical factor: the mounting pressure from the decades long accumulation of all kinds of debts! It is just a matter of time, not if, that the final reckoning day will come. Be prepared, folks, if you are still happily and blindly chasing stocks around. This is a very risky market environment for investors and traders. Protecting yourself from the downside risk is far more important than making money actually! Whatever you do, make sure you won’t fall off a cliff without preparation. Just think about what the market had done to you during the 2008-09 period and multiply it by a few times for the pain. This is how I’m seeing it. So the natural question is how to be prepared for such a dire prospect. Well, there is no magic and panacea and everyone will do something differently in coping with risks. By no means I’m telling you what’s the best thing to do. But since I have got quite a few similar questions in the past, let me at least share with you what I’m doing. I’m not recommending anything to anyone here but just an info sharing. Three major approaches I’m taking for the inevitable prolonged recession:

-- Setting up my own business. You may laugh for the idea as this dose not sound like something most of people can do. Well actually this is something everyone can do EASILY as long as they are willing to. I’m not talking about create a company and produce or sell something yourself. On the contrary, you don’t need to change anything from your daily working life but at the same time you can easily transform yourself into a businessman for solid businesses. It is just a matter of mindset change: buying and holding stocks for solid businesses that are treating you well with increasing dividends. This is how simple it is! I have talked about DRIP idea many times here and you can refer to this and this as examples. The point I want to make now is that you are automatically becoming a businessman for the business that you are holding the stock. As a stockholder, you are really the business owner (in fraction of course) and you should think like a businessman. Ask yourself, if you own a business, should you really worry much about the fluctuations of the stock prices if you know the underlying business is doing well and will continue to do so? I don’t think a restaurant owner will outcry simply because the daily customer volume is changing every day, as long as he dose not see any deterioration trend for this customer base and revenue/profit margin! This is how you should treat your long-term quality dividend stocks as a business owner and should actually be happy to see lower stock prices for long term gains. In other words, the prolonged recession period is actually benefiting you much more in the long run as long as these businesses have no fundamental issues. If you want to see a mathematical proof on this point, just read this again.

-- Setting up an ironclad End-of-World insurance. While I don’t think we will see an end of the world any time soon as opposed to what AOC has warned you, there are too many things that may make our life off-tracked with unexpected crises. The last thing I want to see for me and my wife is to face a dire situation that we lose virtually everything at our late stage of life. I’m certainly not expecting for this but I just want to be 100% prepared for a black swan event in our life. This world has too many unknown risks and we should never take anything for granted! So I’m a big believer for a cost-effective Whole Life (WL) strategy which meets all my needs for potential crises. I posted a very long blog on this topic and won’t repeat it here. Just read it again if interested.  However, I can share with you two real life examples how great this strategy is working for us. For one, as you may know, my son is doing his MBA at INSEAD right now, which costs him a fortunate relative to his earnings in the past few years, not a small amount! After all, the global top MBA program makes sense to charge big money just as you can expect from other similar top class programs like Harvard or Wharton, right?  A few years ago, I helped him to set up his own WL policy and now he is using his CV (cash value) easily to pay for his high tuition. No any hassle whatsoever in the process without any pressure if he would otherwise have to deal with a commercial loan. Then we decided to close out a mortgage for our 2^nd (vacation) home, which again is not a small amount. We did that by using our available CV from our policy without any issues: no question, no pressure and no nothing! We basically made a loan for ourselves and manage it in our own terms and pace. No credit checking and no payment schedule to deal with. It is so easy to manage just like a saving account. So we have a great protection in place with the very liquid fund available for whatever usage we may want to use down the road. As I have explained in detail in my blog, it is just like a high yield saving account with life long protection. If nothing bad happens (and I do hope so), it is simply generating great tax-free compounding gains for us, which is super safe and legally protected! In case we do face a prolonged recession as I’m expecting, I can freely use my accumulated CV to buy more great dividend stocks at fire sale prices. Think about what it would mean to you if you had sizable free money to buy buy buy in Mar 2009! I could be wrong and such a moment may never come again but I won’t count on it and actually I’m looking forward to the moment to come again in the next few years simply because I’m well prepared with this unique ironclad safe strategy that will provide me with the needed “free” money in a large sum if necessary! This is actually goes beyond the traditional stock buying. There is another huge opportunity when the next devastating crisis hits: the distressed debt investment. I will write more as this is not something many people know of but a fantastic low risk investment opportunity for the savvy bond investors. I have learnt a lot over years on this and will be eager to take the opportunity when it presents itself in the next few years! It is coming, not if but just when.

-- Last but not least, buying and holding some real assets that could be recession proof. Although I’m not a big fan for real estate investment that involves rental property management, we do hold a few. What I really think important is to hold some precious metals in a proportion that may have significant impact during financial crisis. I cannot say what is the best proportion but 5-10% of your total asset may be a good one to start. I also treat it as an insurance in the sense that the capital gain from it is not the primary goal although I do expect we may see run-away inflation and/or deep deflation at some point in the future, which should be great for precious metals in terms of their real value. This is especially important in a world that is full of black swans politically and financially! The gold/silver rush in the past two months or so should have already given you a taste what it can do in much deep and big crises we will almost surely see in the future.

-- Not yet in reality and will be another topic for future, we are entering into a tokenization era in the foreseeable future, thanks to the revolutionary new technology, Blockchain. What it means is that virtually all the assets can be digitized and tradable easily in the future via tokenization. Just think about a time when you can buy and hold a piece of the da Vinci master painting Mona Lisa, or own a fraction of the NY Empire State Building! Sounds like a fiction for now but the time will come very soon in just a few years time. So be prepared to have the money that can be used to buy such real assets when you can. You may buy for collection or trade them just like general stocks! In other words, auction of master pieces of anything will not just be a game for super riches only but will be part of our daily life for virtually all the ordinary people like you and me!!                   

This is how I’m dealing with our financial matters, which is making me sleep well at night regardless how the world is going that is far beyond what I can control! Hope this short writing can also provide some food for thought for you. While I cannot predict anything, one thing I’m pretty confident to say is that this world is not as safe as you’d like to think and it is full of unknown risks that can easily derail our life. Be prepared with something you are comfortable with!

A new high in sight?

Due to some private reason with an emergent travel involved, I was away for three weeks without being able to actively watch and comment on the markets. Seems the market has done a lot but did it? Not really. Not only in the past three weeks but  for the whole past month or so, the S&P was just stuck in a very clearly defined range, a 100 points wide (2840 to 2940ish). That's why it was felt moving a lot but in reality nothing at all. The sentiment in August was extremely nervous and depressing, which was actually a bullish sign. That’s why I was betting to see S&P break out through the upend of the range, i.e. breaking out the 2940 level and going to move towards the all time high. The breakout happened on Wed with a follow through on Thu and today. Strictly by TA, S&P should have no problem to at least go up toward 3020ish. If with more strength, it may even try to challenge all time high around 3050ish. But can it break it out and make all time highs this time? Don’t bet on it, at least for now. I think it is more likely to back down again with another hard drop in late Sep or Oct. That's how I'm expecting the market to do in the weeks ahead. There are simply too many bearish signs embedded at the moment. One big divergence that makes it less likely to have all time highs soon is the ugly TA setups for the famous FAANG stocks, which were the major driving force to push the market up in the past few years. Now they are all fading at least technically. I don’t have the time to run their charts here but they are not looking bullish at all now. That’s one of the major reasons why I don’t believe we will see all time highs soon or even with a new high reached, likely a fake one that will fade soon after.

It is not the time to be too bullish even if the market seems marching high vigorously! Trading for either direction is still a better way for the current market.