Status of precious metals

I had lunch with a friend recently and got an interesting question, which made me some pondering: If I think silver will be a good buy in $20's and silver may be experiencing a huge bull with potentially gains of several times the current price down the road, is the current price at low $30's also a good buy as it is only around 10% more from the top $20's?

First of all, one concept in investment is critical to understand: if you lose certain percentage of anything, you have to make double the loss amount to simply get back to where you were. In other words, if you lost 50% of a stock, you will need to make 100% gains to just make back all your losses. So in the above question, we will need 20% gain to get back to the entry point if indeed silver corrects with another 10%.

However, even with a 20% depreciation, it would still be of little impact if the overall gain is several times more. I agree with such a reasoning. The problem is: do I really know the exact low end and the upper end?  If I said yes, I'd be lying to you. I certainly don't know. Is it possible that silver will be dropping below $20? Absolutely. No one will know that for sure beforehand. In 2008, the silver price peaked at about $22 in Mar and dropped to about $8 in Oct, a 60% drop in about 6 months. If silver corrects in a similar scale this time, it will drop to &19-20. How about if it corrects more than that?

I guess I'm not really looking for a specific dollar number to add more silver positions. Rather, I'd be looking for the chart pattern to see if a bottoming process is established. I hope to see the bottoming process in $20s. I know it is a bit difficult to see the sliver price snapping back to upper $30s without attempting to jump in. Personally I'm not convinced that this correction is done, especially seeing the light volume involved when its price appreciates. Of course I may be wrong but I'd rather wait. If you haven't had any silver and you can stomach significantly volatile silver prices, by all means start to buy some silver to at least get your foot in. Just be careful about the position size. Don't be too aggressive at the moment.

Gold seems to fare much better than silver. But similarly its correction, if that's it,  is not significant enough for me to get more of it. I will wait, especially till after Jun 30 to see how the market reacts to the end of QE2. My gut feeling is there may be some quite dramatic actions in the market in the next few weeks.

How will the PIGS look like when Greece defaults?

I don't know how many of you are still not convinced that Greece will default, i.e. bankrupt. I have no slight doubt about it. I'm just wondering how the Europe will look like when this happens. Just read an interesting paper exactly about this. The author painted a picture about the sequence of events following Greece's default. You really need to read it to be prepared, as it won't be just confined to the EU. The pain will be spread out throughout the world. Believe me, you will feel it, if not prepared. After all, Bernanke is the head of the central bank of the World and his dollar printing machine will be non-stopping in order to help save the PIGS, although in vain.

I have been non-stopping in shorting Euro in the past year or so. After initial realized gains from the shorting, the tide has turned against me for quite some time now. Am I worried? Not at all. I have shorted more. Although I'm not sure if Euro will ever have any chance to go much beyond the 1.40 level, I'd be laughing all the way up to whatever level it will go to add more short positions against it. This is one of very rare occasions where I do exactly what Jim Rogers said: when the money lies in the corner, simply go there to pick it up!

How to lose $50,000 without knowing

According to the latest statistics, the current inflation rate is about 6.8%. Of course, the government will tell you that the core price index (CPI) is only at around 1% or so after removing the prices for gas and foods. I know Bernanke and the like don't use gas and don't eat foods; so in their book such price increases do not count for inflation. As a normal person, I do feel strongly what the impact of inflation is as we pay everything necessary for the daily life much more these days than before. I guess it is the same for you as well. So how you can lose $50,000 easily even without your knowing it? Just think about how much you may get from your saving account. It will be really great if you can find something around 1% these days. So suppose you have $1 million in your saving account. At the end of the year, how much will you get in terms of the buying power? It is really a very simple math: you will lose about 5% of your money by simply "saving" your money in the bank, that works out about $50,000 for every million dollars. Of course, this is just a metaphor to make my point easy to understand.

To avoid being ripped off in such a way, you really have to save your cash in real money, which can keep its value. I guess you know which direction I'm going: yes, only gold and silver are real money now. Unfortunately not many people really understand this. They still love to ONLY keep their cash in the fiat (paper) money. I did a non-scientific survey among my colleagues a year ago at a meeting. Among 10 people or so, no one except me had bought any form of gold or silver. I did this again a while ago after a year for the same group, the result was still the same but only with some remorse that they should have listened to me and bought some a year ago. If you happened to have bough some physical gold or silver (not gold/silver mining stocks), you really should not care in any sense how much it is worth in dollar terms. Just treat it as your saving, the real money you have. That's it. Don't think about it as an investment. The gold and silver are just your money in your holding and they will not lose their buying power over time like the paper money.

For those who cannot sleep if gold and silver fluctuate in dollar values, I find something which may fit into your style: principle guaranteed investment in precious metals. I have talked about EverBank before and I just noticed that they are offering such a CD now. Please read the information carefully as it may not be the kind of investment you want. More specifically you have to tie up your money for 5 years and your total gain will be capped at 50% at the most to exchange for the safety of the principle. I'm personally not that much interested as I think I can do much better than that with my money. But it may be the right product for you.

Internet bubble again?

As professionals, many of you, if not all, have more likely heard or even used LinkedIn, the social media website for professional people. I often got invitation from someone I know to register in LinkedIn. It functions very much like the Face Book, but the focus is for networking among professionals. It is said it has started to earn some money now. Today, it is a big day for LinkedIn, its IPO - the first day of trading. Its initial price was set at $45 but immediately it jumped to $80 or so at the opening and it further rocked up as high as $112 today. At this price, its PE ratio is 1200 times earnings. Do you know what it means? The current S&P PE ratio is about 17 times earnings, which is already expensive. Metaphorically speaking, based on the current earnings of LinkedIn, your investment money will get fully returned in 1200 years if you can hold it that long. Is it crazy? It is to me! This is almost like an Internet bubble again!!

I'm seriously considering to short LinkedIn!!!

Stay put and do nothing

I just came back from Switzerland after a week long business trip, so did not get much time to write. One thing has become more and more striking each time I visited there is how worthless the US$ has been. Everything is awfully expensive. Just a quick note on this as this is not what I wanted to talk today.

I guess you all know how much I admire Jim Rogers, who I think is one of the greatest living investors in the world. I just saw an interview he recently had and the following is part of responses:

Rogers: My advice is that, most of the time, most investors should do nothing. They should look out the window or go to the beach. You should wait until you see money lying in the corner and all you have to do is go over and pick it up. That's how most investors should invest. The problem is we all think we need to jump around all the time and be jumping in and out and that's not good.

We think we have to have investments. No, we don't. If I said you could only have 25 investments in your whole lifetime or if there was some way to limit you to 25, you would be extremely careful. You wouldn't be jumping around doing all sorts of strange things. Patience is what most investors need to learn. You don't have to be doing things all the time. Most of the time the best thing is to do nothing. You just sit with what you have as an investment and let it ride or sit and wait until you see someone sitting in the corner.

Most of the time - unless you're a short-term trader and great at it. I've known some spectacular short-term traders. But for most investors, unless you're one of those guys, then you should just do nothing. Do nothing. If you're an investor, do nothing except re-examine what you have, and if you're not investing, just continue to look until you find something.

As you know, one of the successful investing features is being inactive. This is exactly what you need to do now. Right now, it is a very uncertain and dangerous period, which is also true for commodities and precious metals. It will serve yourself the best that you stay put and do nothing now, except actively doing your homework by reading, studying and learning. This is what I'm busy with at the moment. 

When two drunks walk hand in hand....

On April 28, builder PulteGroup Inc (PHM) reported its first-quarter loss, which was widened as the builder's total revenue tumbled by 21%, dragged by fewer closings and lower selling prices. Pulte is probably the biggest home builder in the US after it merged with Centex. If you know the financial conditions of this company and its unique business model, there is really no surprise to the very poor performance of it. Pulte bought significant amount of lands at the market peak a few years ago, for which it paid of course way too much. Given the current housing market situation, the lands it has can only sit there idle and have become a huge financial burden. Pulte has borrowed too much and it becomes more and more difficult to even simply meet the interest payment. More worrisome is the fact that both companies are based on the business model to develop cheap houses in poor areas, which include all kinds of slums. Think about it: where would it be more difficult to sell houses in the current market, good areas or in slums? Facing the very dire situation, what solution could the CEO think about? You got it, a merger with a company (Centex) also under the water! To me, it is almost like you ask two drunks to walk hand in hand on a straight line. Figure it out what will be the result!


I'm short PHM. I think it is especially a good time to do so now. I'm not sure if PHM can survive long and less so in a house market that has officially entered the double-dip phase. In addition, the overall market is facing a D-day, the end of QE2 in less than 2 months. A big sell-off may happen anytime. A struggling stock will be hit more in a depressed market. You may short sell PHM stock shares directly at the current price around $8 or you can buy its put options. I like it better by short selling its call options at the strike price of $10. This way I have more room to be right, i.e. PHM can increase up to $10, by which I can still make money.

Is silver correction started?

Silver price dropped about 16% today. I hope you did not buy silver in the last few days when the silver sentiment was extremely high. As I cautioned last Mon/Apr 25 that it looked like parabolic for sliver given how fast and significantly the silver price had increased within a very short period of time. People with big paper profits would always want to find some excuse to take profits. The news of the death of Bin Laden gave such an excuse. I bought more put options to hedge against a possible silver correction last Friday and its price started to drop in such a scale almost immediately. Did I time it so well? Not at all. I could not and no one could. It was purely a luck in terms of timing. But my gut feeling told me that I needed to hedge against the risk. I did not know exactly when it would come but I believed it was likely to come and soon. Coincidentally it was a perfect timing for me. So my paper profits of silver positions have been protected with the short positions. 

Whether or not this means the start of a significant silver correction is dependent on the price actions in the next few weeks. One or a few days of price movement won't be sufficient for determining a trend.  In the next few days, it is likely that the silver price may rebound. The sharp drop of its price was actually a kind of oversold, for which some sort of support is very likely. This is an uncertainty period of time and I'd still suggest that you do not buy or add new silver positions at the moment. I'm more inclined to think silver may have started a real and severe correction and I wish it could drop below $30 before I want to add more positions.

Spectrum Pharmaceuticals: A potential meger target

Spectrum Pharmaceuticals (SPPI) has got 2 pieces of great news in the past 2 weeks: FDA approval for its ready-to-use version of Fusilev under the approved osteoscarcoma indication on Apr 21 and a more critical FDA approval on Apr 29 for Fusilev (levo-leucovorin) for its new indication of metastatic colorectal cancer (mCRC).

I first bought SPPI over 2 years ago when it was less than $2 with call options. Since then, it has appreciated quite a lot. After my call options increased over 100%, I sold half of them to lock in my invested capital and exercised the other half and have held the stock shares since then. It has been up and down and quite volatile, especially it dropped from about $9 to about $5 when it failed to get an approval for its first try for mCRC. Fortunately I did not give up and kept my shares till now. Actually knowing that the FDA would announce its decision on Fri/Apr 29, I even bought more call options early this week to bet that this time it would likely get good news. Fortunately again, it did finally get what it had looked for after several years of trying and so did I but with much less pain as it was just a few days of betting for me.

So what I would do with my shares of SPPI? I intend to keep them as there is a good possibility that Spectrum may be acquired by Teva, the number one generic giant in the world. Teva has already marketed the generic leucovorin. However, due to manufacturing problems, it has voluntarily stopped making generic leucovorin. So currently there is huge shortage of  leucovorin for mCRC patients. This is obviously fantastic news for Spectrum. Even before this approval, demand for SPPI’s Fusilev, a pure form of leucovorin, has increased dramatically as off-label use. With this approval, the company can now actively promote its use. So Spectrum is expected to be doing very well in the future. In addition, it has some promising late stage products in the pipelines. That's why I have seen some analysis speculating that Teva may buy Spectrum, which to me makes a lot of sense. If not Teva, it could be another hungry cash-rich hunter to potentially acquire a growing small biopharma like Spectrum. If this turns out to be the case, needless to say, SPPI will further appreciate and probably substantially more.

Of course, it is a pure speculation and no one knows for sure.