Is Credit Suisse reading my blog?

What a coincidence! It is almost like Credit Suisse is reading my blog regarding the looming rally of the US dollars. See here: http://pragcap.com/is-the-dollar-rally-about-to-kill-risk-assets.

You may recall, a couple of weeks ago, I started to short Euro as I think there was too much bearish call for the US dollar and too much bullish call for Euro. I was a bit earlier but I still stick to it. I'm adding more positions to the EUO trade. Now Credit Suisse said that there is a 100% chance that the US$ will rally in such an extremely bearish mood. They of course have unlimited sources of information and sophisticated analysis technique to come to this conclusion. Let's see how this will pan out.

Now What?

Apparently the market can be irrational longer than anyone can imagine. This is exactly what is happening now. While fundamentally and technically everything is pointing towards a sharp and significant correction at least for a short period of time, the market just refuses to budge. The market is testing one's will and determination as well as patience. I'm just adding more and more positions to my panic trade, i.e. VXX. I'm pretty sure I will prevail eventually!

If you have a lot of cash, what you should do with it? Saving at the bank? It is almost like a joke to park your money in any saving account given the near zero interest paid now. By the way, if you really want to "save" your money in the bank, I'd highly recommend one of the best online banks, EverBank. It has not been involved in the mortgage mess at all and it is very safe. Relatively it has paid a high interest (over 1%). You can check the safety of any bank at this site (http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx). Just compare your current bank with EverBank to see which one is safer and better. I'm not receiving any commission by recommending EverBank. I just like it.

Will I recommend to invest in stocks? Yes and No, depending on your timeframe and your situation. As I alluded to above, at the moment it is a very dangerous and risky period. I expect a sharp market correction any time. Regardless how good a company is, its stock price may be brought down in a shaky market. Personally I don't want to buy any stocks right now as I expect a better price will come later. On the other hand, if you have a long timeframe and do your home work, there are plenty of solid companies with a great and dominant business and an unbelieveable moat but a very cheap stock price. More importantly, many such companies pay consistently increasing dividends, which are much better than the interests you may get from your saving account. Actually dividend is one of the secrets for successful investment, but it requires a long-term commitment. If you haven't invested much, it may not be a bad idea to start to put some money into work by buying such good stocks. I'd advise to use the dollar averaging technique to gradually establish your positions for better prices. For example, if your final position for a stock is 1000 shares, you may buy 200 shares every several weeks so that in average you may get a much better price than simply buy all the 1000 at one time point. Among many great stocks, I'm really interested in Microsoft (MSFT/dividend yield 2.5%) and Intel (INTC/dividend yield 3.2%). Great business and safest companies but beaten-down share prices. Even in an overall market correction, I think their prices will not drop as much as other stocks. You can sleep very well with such companies. Another company I become more interested in lately is Eli Lily (LLY). It got a big hit in the last several days due to a significant setback in a highly expected diabetes drug Bydureon, which got delayed in approval by the FDA. When a good company got some short-term headwind and its stock price got a hit, it is actually a great time to buy the stock. Eli Lily is also paying a huge dividend at a yield of 5.4% at the current price (around $35). I think it is a very safe company with a great dividend. If you know how to play with options, you may sell its call options (no risk trading) to juice your monthly income safely with such stocks. Suddenly you may be looking at 15-20% income plus any stock price appreciation, if any. So do your homework.

Mannage your 401K wisely

For many people, 401K is a great way to defer being taxed now and let the retirement money grow faster. This is especially true if your employer also matches some of your contributions. So it would be wise to take care of your nest eggs carefully and not let them drop inadvertently due to your carelessness. Unfortunately it it not an easy job to manage your 401K since the choices of investment are usually very limited for 401K accounts. Even worse, the only investment vehicles within 401K are usually limited to mutual funds. For those who know the investment, maybe over 90% of mutual funds are losing money in the long run. So our hands are significantly tied up in making a wise decision what to invest in our 401K. Having said that, you should still not simply give up and let it unattended. I'm managing my wife's 401K and below I use that as an example regarding what to invest within the limit of her 401K defined by their company. Of course, each 401K is different in terms of fund choices but the principle may be similar.

The first thing is to determine what strategy I want to use. For 401K, I will not actively monitor it as it is not for trading. When I decide what to invest, I will leave it for months or even longer unless the situation significantly changes. So I want to be diversified and follow the big trend as I'm seeing now. Right now, I think the investment world is very risky and we are not out of the woods yet, far from it. While the momentum for a bull market is very strong as everyone is betting the Fed will print more and more money to prop up the stock market, the economic situation may get significantly worse over time and a double dip is not something not possible. If that happens, the stock market may drop astonishingly. So I want my money over 50% in the safe hands. However, I also don't want to miss the momentum of a rallying market totally, especially I think some international exposure may be much less risky than in the US market. Also, I think the big bull of the resources sector including precious metals has a long way to go and I definitely want to be part of that. With this overall strategy decided, the next is to determine what funds to invest. When you choose mutual funds, very importantly you have to look at their long term performance, best for those funds with a 10 year performance track record. For most funds, they may perform very well during a short period of time due to the mercy of the overall market, but their long-term performance is usually very poor. I'd only be interested in those with a very consistent great performance for 10 years. By scanning what is available in my wife's 401K, I decided to put money in the following 3 funds:

(1)  PIMCO Total Return A (the best and largest bond fund in the world). 

I put most of the money in this fund. In the investment world, Bill Gross is called the Bond King. He is managing an over $200 billion bond fund, which has never lost money in the past 10 years, even in the worse market year of 2008. If you want to be safe with your money, no one else you should go to. Of course, safety is usually associated with low return. But as I said, I don't believe this market yet and I want to be safe with most of my money at the expense of high return.  

(2) Prudential Jennison Natural Resources A

While the natural resources section could be volatile, I don't want to be out of this great bull market completely. It is possible you may not see a positive return in the short term, I believe you would be happy to be with the trend in the long run. 

(3) Fidelity Canada

As I said, I still want to be exposed to the equity market to some extent and I think Canadian market is a much safer bet than the US. The overall Canadian economy is in much better shape with a very sound financial structure and the regulatory environment. The long-term track record of this fund is also super.

I hope the above example would give you some ideas of how to wisely manage your 401K.

I'm losing money but I'm very happy

I was too early when I said to buy VXX in my first blog on Sep 28, but I'm really excited when I see the increasing loss on my account with the VXX positions. I must be insane again, you think. No, I'm very sane and know what I'm talking about. Actually the market is insane now. The market's sustained complacency has reached to the extreme rarely seen. I recommend you read the WSJ article regarding VIX, which is the index I'm trading against by using VXX.
http://finance.yahoo.com/banking-budgeting/article/111008/volatility-index-says-investors-are-calmer?mod=bb-budgeting&sec=topStories&pos=2&asset=&ccode=
This is not sustainable. The market volatility will surely come back, and big time. Therefore I have been adding more VXX positions in the past weeks as each day a greater profit opportunity is presenting itself in front of my eyes. I let other people, who bet the market will continue to go up this way for long long time without correction, pay me first so that I can wait till Jan 2012 for the panic to come back. In the layman's language, many people think the market will not fluctuate at all but keep increasing in the next 15 months. They are so sure that they are willing to pay me bigger and bigger money to bet against them. Is it possible that the market will only go up in the next year or so? Anything is possible but to me the probability is close to zero. That's why I'm really happy even though I'm losing money at the moment but "on paper" only.

If you dare enough, buy some VXX now!

Gold: Short-term correction looming

I'm a big bull for gold. I started my first investment in gold back in 2004. In the past 6 years or so, I have put money into various gold products including gold mining stocks, paper gold, gold bullion, gold coins.... you name it. So what happens to me, such a gold bug, to call a gold correction, in the middle of a huge gold rally, almost on a daily basis? No, I'm not bearish on gold at all. On the contrary, I'm even more bullish on the gold long-term trend. However, whenever it is too crowded in an investment idea, I become nervous. Nowadays, you will hear all the talking heads to recommend gold investment on CNBC; you will see all kinds of ads on TV to promote sales of gold. More worrisome for me is to see the record-breaking price of gold everyday in the past 2 weeks. While it is great for my gold positions with record gold price, it is not healthy to see any investment to appreciate too fast within a short period of time. It is just not sustainable! My gut feeling tells me a short-term correction in gold, which may even be severe, is coming. So what will I do with this prediction?

Over these years, gold has corrected many times on its way up. It has never been a straight upward line. Even in the last huge gold bull in late 70s and early 80s, gold price corrected almost 50% before moonshotting from $200 to $800. In the last several corrections, I sold some of my positions hoping to get a better chance to go back. But honestly most often than not, gold quickly reversed its course and rallied even higher. Given such lessons, I won't sell my gold positions this time regardless. No way! On the other hands, I do want to protect my paper profits. There is an easy way to do that actually. An ETN, symbol DZZ, will do the work. DZZ seeks to replicate twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return. So it is a leverage tool, which will increase roughly twice against the reduction of gold price (but not exactly against the gold price). I use DZZ as an insurance to offset some of loss from my gold positions if a severe correction indeed comes. Even if you don't have any gold positions at the moment but if you are itching for making some quick money from a gold correction, you may simply buy DZZ. Of course, there is no guarantee for this bet and gold may simply go straight up, although highly unlikely to me. Make your own decision.

Doomed Euro: Euphoria All Over Again!

I told you it is close but maybe still a bit early for the top of Euro against US$ at the moment. But I cannot help but jumped in when I saw the news about the worsening Irish credit crisis. I'm still thinking it may yet be the top for Euro and it may still be strengthening a bit. However, no one can really pick the exact top for anything. If the Euro trend reverts, it can be swift and violent. And I want to be in the game, even if it means I may see some paper loss initially.

I assume everyone knows what the Euro zone is facing, especially the PIIGS, standing for: Portugal, Italy, Ireland, Greece and Spain. These five countries in the Euro-zone foolishly did what a lot of big-time spenders do, borrow way too much during good times and then run into problems repaying their debt. That, of course, raises the specter of debt defaults, the kind of news that rattles investors and pounds world markets. I urge you to read more about the problems of the PIIGS at http://www.huffingtonpost.com/dan-dorfman/piggs-problems-could-pepp_b_497463.html.

As I told you, I started shorting Euro early this year and made a good profit with it. It was an easy money. But when everyone became so bearish and the trade became so popular by Jun, it was the time to get out and move on. I thought I might not have any good chance to make money again by shorting Euro as it is such a bad currency with so many critical problems involved. But I'm happily wrong! It has not only reverted its course which I did predict, it has done that so powerfully, which is way beyond my expectation. I cannot believe it is all over again with the Euro euphoria and a great money making opportunity presents itself right in front of my eyes AGAIN! Not sure if you have heard Big Mac Index. Long story short: the Economist uses the price of the ubiquitous McDonald's meal to calculate the "Big Mac Index", a guide showing how far from fair value different world currencies are. Currently based on the Big Mac Index, Euro is way too expensive against US$, although it may have not yet reached the point of 50% over-valued, which I hoped for.  The great investor, Jim Rogers, once said: I don't move and wait till the time when the money lies in the corner. I simply go there and pick it up. Friends, I really think this is one of the kind moments Rogers has described. Don't miss it.

There is a very easy way to short Euro, using ETF with a symbol EUO. This is an inverse fund with a leverage, i.e. twice the inverse performance of the EUR/USD daily price change. In other words, if Euro increases by 1% against US$, EUO will reduce in price by 2% on that day. Vice versa, if Euro decreases by 1%, EUO will increase by 2%. So it is a perfect way to bet against Euro and we hope EUO will increase to make a profit. As I said, I have got into this trade. Since I may be still a bit early, I'll use a so-called "average down" technique to establish my positions. I stated with a relatively small position to get a foot in. If EUO decreases in the next few days (meaning Euro is strengthening), I will buy more EUO at a reduced price and will do so further down the road. This way, my average cost of the ultimate total position will be substantially reduced. This is a very effective way to establish your positions in trading, so that you won't miss some great opportunities by hopelessly waiting for the lowest price possible. Buying EUO is just as buying any stock, simple and easy. I'm totally convinced that in the next few months, you will be happy to see that you are on the trend to profit. But please be mindful of your position size. Any trade has some risk and don't overkill by betting too much beyond your capacity.