Buffett is reading my blog and agrees with me

Two months ago, I wrote:   Buffett’s company, Berkshire Hathaway, is the most expensive stock in the world. Its A share is traded at $107,300 per share. But from the valuation perspective, it is very cheap actually and you should buy it if you can afford.

I thought Berkshire Hathaway (BRK) was cheap and was a good buy. It seems Buffett is reading my blog and agrees with me by announcing that Berkshire will buy back its own stocks when the share price is within 110% of its book values. Clearly Buffett thinks his company is too cheap at the current price. A few things worth attention:

-  Buffett has never bought back his own stocks in the past 40 years since he founded this company. In 2000, he once also made a similar announcement for share buyback when BRK-A share was $50K-60K. But immediately its share price jumped above the level he was interested in to buy and he never got a chance to implement the buyback plan. So this is the first time if he is really able to buy back. Buffett is a super value investor and the best one in the world. If he thinks his company is cheap, it must be dirty cheap. It is so cheap that he cannot find anything better that he will take this historical action.

- Buffett has $77 billion cash or cash equivalent. He said he will not buyback share if the cash drops below $20 B. So he has about $57B to buy his own stock shares, a monstrous amount of money to support the stock price.

- Berkshire has over 70 companies under its control. It is almost like a mutual fund but managed by the greatest investor. Buffett must be very confident about the business prospects of these companies and thinks they will be doing greatly in the next few years.

While anything could happen and in theory Berkshire share price may also go down to zero, in reality it is impossible. Now with Buffett’s buyback plan, BRK will have a floor to stand. Its book value for its A share is about $98,000 as of end of June. So for B share (1/1500) it is about $66. Buffett will buy its shares if it drops within 110% of the book value. So the floor for Berkshire B shares (BRK-B) should be at around $72. I think buying BRK-B around $70 is cheap and safe.

The volatility status one year later

Time is flying. Today is the one year anniversary of my blog writing on investment and trading.
Exactly one year ago on Sep 28, I wrote my first blog regarding trading on volatility of the stock market via ETF, VXX, which tracks the volatility index, VIX. At that time, the VIX was at around 25 or so. So how has this trading idea being doing one year later?

Well, it did not do very well for the most part of the past year. As always, I was a bit too early with my idea. I thought the market was too high one year ago and investors were too complacent then, which meant low volatility. The market went on even much higher since last Sept and VIX went down much lower during the next 9-10 months or so. VIX dropped to as low as about 12, which had not been seen for many years, meaning investors were just extremely complacent and felt the market would only keep going up. While I looked like being wrong & stupid all along, I was just not convinced that I was actually wrong. I was stubborn, sort of speaking. As I wrote several times, I added more VXX positions to bet that the market would eventually become rational, which would bring down the market to shake out those complacent investors. It did and everything is history by now I assume. As I said before, the ultimate winner will be the last one to smile and I’m smiling now! The following are the 2 VXX positions I have and still open,  with a different strike price and both mature in Jan 2013. They are both doing very well for me in this terrible market for general investors. That’s the beauty of being a contrarian against the herds. I hope you have followed me for doing the same.

Why should one buy best companies with high dividends?

The following was what I wrote on April 3, when the market was up and running like everything was beautiful:


       ......But the stock market simply ignores all of them (the risks) and is roaring straightly up and up, no stops. I like the metaphor to say that the market is firing on steroids. Those who know medicine can understand that patients with severe infections may still feel very good if they are given steroids but this is only a temporary effect. Fundamentally the steroid effect is only making the situation worse and the patient will suffer more due to the worsening condition without feeling it. Honestly I become more scared than half year ago to see this kind of euphoria in the market. The market is clearly irrational to me!

By now everything is history and those we were complacent and simply following the herds are likely suffering painfully now. Although I did not like the whole stock market, I did recommended a few good companies that I considered the best in their respective industry. Their stable and high dividend yields were among the keys for me to be interested in them. I figured that their solid business with high dividends should make them perform relatively well even in the bear market.See the few examples below. The S&P 500 index has declined about 13% in the past 6 months (by Friday, Sep 23). But these great companies are either at even or have significantly appreciated in the same period of time: MSFT (no change), WMT: -5%, MCD: +18%, and JNJ: +5%. You can also add Intel (INTC), which was up +10%.  Adding their dividends, they are even doing much better.

Hope you understand better why you should buy the best companies with stable dividends. They can really defy poor markets and deliver good income at the same time. This is what you need to build in for your retirement portfolio so that you can sleep well at night.

Another opportunity for shorting Euro

Euro may bounce back next week. Why so? There are 3 major events, which may potentially benefit Euro, although only temporary.

- The German Parliament is going to vote to decide whether they will agree to grant the next tranche of money to Greece.
- The Finnish parliament is also going to vote regarding the aid to Greece.
- Greece herself will vote again to decide whether they will agree to continue with the required austerity measures.

As we all know, no one is happy these days in Europe. Greece has virtually defaulted already. It is surviving only technically speaking with all the life-saving money from others. But they must meet strict austerity measures, which their own people really hate and want to fight against. But can they really afford to say No for the austerity? I don't think so. The German and Finnish people are also hating so much about the charity money they have to give to Greece when they themselves are facing serious economic problems. But can they also afford to say No? Their politicians certainly know clearly what it will mean if they do so. It will mean a sudden death of the Eurozone, which will also mean a catastrophe to the world financial market.

Although anything can happen, I really don't expect this will happen next week. Everything will be fine and Greece will get their money to survive for the next few months. An inevitable death for Greece is delayed again and they can live a bit longer. Wow, a big relief rally will likely occur to Euro. But it is only a relief, nothing has been resolved. I think Euro may bounce back to around $1.38 or so. At that level, I think it is a great opportunity to short Euro. You can do so by buying EUO, or better by buying EUO call options.

The can has been kicked down the road and there is no way back. The gravity is doing its work now to bring it down further and further. The Euro is done, at least to me!

Carnage for gold and silver

A drop of 10% and 15%, respectively, in a day for gold and silver is a carnage. Needlessly to say, it is painful for anyone who holds them. I'm one of those. However, over years I have learned that this pain is something you have to take if you want to really be successful in joining the gold and silver booming trend. No other way around. As I said before, the gold bull does not like publicity. It wants to shake out weak hands before it launches ahead again. Volatility, sometimes extreme, is just a normal part of the bull course for gold and silver.

So why did gold and silver plunge so much these days? 
- As I have said before, the US$ is likely getting stronger, which will bring down the prices of commodities, including gold and silver. This is what is happening now.
- Hedge funds were selling their positions in gold to raise cash to meet increased capital demands for their borrowings from Wall Street banks as the assets they have put up as collateral, like other commodities or stocks, have declined sharply in value.
- Even banks, especially European ones, could be also selling gold to raise their capital, given what a messy situation they are currently in.
- Most interestingly, I have seen reports with reliable evidence claiming that big banks, especially JPMorgan, are manipulating the prices of gold and silver, since they have too much short positions and losing a big time with this wrong betting. They want to bring them down so that they can lose less. There is even a lawsuit ongoing against JPMorgan about their manipulation.

So is this correction over? I said before that I expected this gold correction could bring it down to $1600s. Yesterday, it touched as low as $1630 or so. Gold has a very strong support level at $1522, its 200 day moving average. There is a chance that gold may go down another $100 to finish this correction course, although I'm not saying it will happen for sure. For silver, I have said and actually am hoping that it will decline to low $20s. Silver has breached a major support line at around $33.5 and briefly touched $29 yesterday. It may bounce back to this resistance line in the next few days but I think there is a good chance that it will drop further to $20s. I start to get back in to take the advantage of the cheaper prices but more serious buying will begin when they plummet further, especially when I hear more people crying that this bull market for gold and silver is over. That's the time of capitulation and the time of real bottom.  

I don't like what I'm seeing now with gold

Gold is not doing well these days and I think the risk of heading down is much bigger than going up in the very short term. Normally you should see gold going up when the world is falling apart and the market is in panic selling. But it didn't. The gold price action is signaling that it wants to go down. Technically, it is showing a double top pattern, which often indicates a bearish trend. I think there is a good chance that gold may go down to low $1700s. If it breaks through that support level, then dropping down to $1500s is not something unthinkable. Having said that, it is just a short-term volatility and I have no doubt that it will bounce back to new high pretty soon.

Actually gold stocks are a good buy right now. There is a very big divergence between gold and gold stocks with the latter lagging significantly behind. In other words, gold stocks are cheap relatively to gold and they usually catch up. I think they are very attractive right now. If you are interested, please read my previous blogs on gold stocks.  

US dollar is a better bet, relatively speaking

Looking around, crisis everywhere. No exception! I have said for weeks now that the stock market is not something you want to touch generally speaking, unless you see some interesting and justifiable opportunities very selectively. I'm mostly sitting sidelines and watching except something like RIMM which was too attractive to pass. 


If you are itchy and really want to do something, I think you should consider the currency trade. While stocks can go down all together, currency is relative to each other. If one currency is going down, there must be something going up. Therefore, if you are right with one or two currencies, you may still make money even if the overall stock markets are doing poorly. So what is relatively better right now? You know what I'm thinking by the title. Yes, I think the US$ is a better bet at the moment. Although I really dislike the US$ as a long term trend, I think it does fare better as compared with other major currencies at the moment. Look, the US$ has been beaten down for most part of the year but at least any problems related to it are something within one single country. See what's going on with the Eurozone countries, where no one country can do anything independently and they cannot make any sound and reasonable decision without huge hurdles. Do you really see any other countries doing better than the US in proportion to the degree of the US$ depreciation in the past 8 months or so? I'm not so sure. So among all the garbage and trashes, I think the US$ is relatively better than others in the short term (several months to half a year).


If you agree with me, you may bet for the US$ appreciation via UUP, an ETF called PowerShares DB US Dollar Index Bullish. UUP is designed to replicate the performance of being long the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. I believe you may make some good money to stay long with the US$ in the next few months. Of course, it is not a trade based on fundamentals but purely a speculation. So trade accordingly.

Research In Motion: Crisis with Opportunity

It is a total fiasco; I don't know how to describe it.  Research In Motion (RIMM), once a pet of the Wall Street and the famous manufacturer of the BlackBerry, plunged 19% on Friday. Since the birth of the iPhone, the BlackBerry has quickly become a thing of the past.  It simply cannot compete with iPhone. While everyone runs away from RIMM and dumps it as quickly as possible, I start to see opportunities. A few things begin to interest me now about RIMM:

• It is true that RIMM's products are out of favor now but don't forget, Apple was in a very similar situation just a very short few years ago. Who can say for sure that RIMM won't find some way out with all the technology, inventions and patents in hands?
• One of the key problems for RIMM is its governance structure: it has 2 CEOs, which is a killer due to unnecessary conflicts and bureaucracy. I think the board has been wakened up this time and there is a good chance that one of the CEOs will be removed. Or even better, a totally new CEO may be brought in who may have the vision of Steve Jobs to lead RIMM to revivify. 
• While RIMM's stock price has plummeted, its valuation has become much better. Let's see a few stats: PE is as low as 3.8; it has $2.4 billion cash with no debt, i.e. $4.6/share of cash; its book value is about $18.4 per share. And it is still bringing in revenues of over $20 billion.

With this kind of valuation, I won't be surprised to see some sort of buy-out or merge if its share prices further decline. I do see this as an opportunity emerging from the crisis RIMM is experiencing. I cannot help but get in. Of course my way of speculation is to take the opportunity now at its price of around $24/share but also leave a high margin of potential errors. In other words, I won't lose money unless RIMM drops another 40% or so to around $15/sh. I think it is a good bet.  



By the way, one of my put selling positions was closed on Friday when it reached its maturity. I shorted the emerging market via ETF EEV. While most of the time in the past year the emerging market was holding not too bad, it has been hit also very hard lately this summer, which is great for me given I have been shorting it. The put options expired worthless, meaning I reached the full profit target ($3900 minus trading fees).

EEV110917P00032000

-10

0.00

3.90

$3,900.00

               -

A wihpsaw market to be cautious about

I have been tied up with full day meetings in the past several days with evening activities, therefore no time to really sat down. Looking back what has happened in the market, it is just like a schizophrenia patient with whipsaw movements. One day he is depressed, the next day he is happy again. Don't be fooled into believing that the worst time has been over yet. You may likely regret if you do so. I'd rather be sitting sidelines to wait for a clear direction to show up before taking any sizable actions.

I noticed that Euro seems bouncing back. I'm really amazed by the "investors" who would simply believe what the German and French leaders, Merkel and Sarkozy, have said with a hollow joint statement that they believe Greece will stay in the Eurozone. It means nothing to me to suggest that the situation is improving in any way. Rather it simply means that the debt crisis has fallen into a state of greatest possible uncertainty, for which they must come out to say something to calm the market. Actually more signs that the Eurozone is having a huge mess, so bleak that their bank deposits are flying away. The most concerning part is that this is not only happening for Greek banks, but also for German and French banks, a truly EU wide deposit flight.

Technically speaking, this kind of price action is nothing unexpected. Whenever something is falling too fast too soon, it will usually bounce back to its resistance line, which was its previous support line. For Euro, it is the price at around US$1.40. Those who were foolish enough to buy Euro these days would like be the weak hands, who will be the first ones to be shaken out when the Euro resume its downtrend. As I said, I'm waiting for the moment if it comes and will jump in to short Euro more with EUO if it hits $1.40 or above again. To me, it is free money, for which I must go to pick it up.

A business idea: Low risk, high return

I guess all of you have heard about investment being High Risk High Return. You must think what a big boast for me even to say this. I can understand and I’d have also thought this way if I didn’t know what was involved. But I hope you can understand me better after you read the following. 

Is high return always associated with high risk? Usually it is, especially for retail investors. But I have learned a special technique, with which I have truly got high return with very low risk. You may have seen a few examples I discussed in the past. Here is another example regarding Boston Scientific (BSX). I entered this position less than 2 years ago, when BSX price was around $7. After almost 2 years, its current price is around $6, about 14% decline. You may think that I must have lost money for this trade, right? Just opposite. See below the trade I have closed with a 62% profit recently:

BSX120121P00005000

-100

0.22

0.59

2899.999512 $3,700.00

62.71%

It is hard to believe, isn’t it? This is the unusual technique I have mastered which will allow you to do the following:

·         you will definitely make money if the stock price increases

·         you will also make money if the stock price does not do anything around your entry price level

·         you can still make money even if its price declines within certain range (depending on how you specify your price range)

·         the worst case scenario is that you buy the stock at a much lower price desired by you

Isn’t amazing? Yes, it is. Actually believe or not, the worse the overall market goes, the better and easier money you can make with this technique. That’s why I’m quite happy to see the plunging of the stock market which is currently ongoing, since I know more money I can make from it. So what is this special technique I’m talking about? It is called put selling, an option strategy. I’m not going to attempt to explain the dynamic of it as it requires quite good understanding of stock options. For those who do understand the option concept, it should be easy for them to know how to sell puts. But I must warn you that it is not a given that you will automatically make money with selling puts. Actually if is not used appropriately, you may lose a lot of money, potentially big time. So it is very important that you do NOT try it if you don’t know it well. For an effective use of this technique, you need to have all the conditions in place: a good company with a good valuation, for which you want to own anyway at the current price; a good strike price with a reasonable maturity date; an appropriate position size without over leverage. You see, to make it “operationable”, many things have to come together. It took me over 3 years with a lot of trying and testing to finally become confident with the technique. After you really understand the essence of it, the odds are very much in favor of your success. Why? Two major reasons: (1) Among the 4 outcomes as outlined above for buying a stock, you have got 3 of them leading you to make money, a 75% chance in favor of you; (2) Statistically, about 80-90% of any options will expire worthless, which is what you want to see when you sell an option.

 

So what is the business plan I’m thinking about? I was asked by a few friends whether I could manage some of their money for investment. My initial response was absolutely NO NO NO! While I thank them for their faith, I don’t want to take this kind of responsibility, which is rather heavy. However, as time passes by, I’m kind of thinking about it, pondering this may be something I can consider. While I’m definitely not interested in managing others’ money individually, there may be a way by setting up a company to pool the money from those who are interested in to invest collectively. With this technique, the bigger the capital base is, the more effective and efficient it becomes in terms of the profit margin. Of course, it is just a thought at the moment and I will need to sort out relevant legal and accounting issues first before this can really become operational. I don't know how long it will take for me to be prepared, as my daily job is also very demanding.  If I want to do it, I want to do it successfully and I definitely don’t want to let my friends down. I will show you in the future more of my such positions when they approach the maturity date. I literally have dozens of such very profitable positions reaching to the ultimate target and waiting for my harvesting. I’m talking about tens of thousands of profits on the paper to be taken. This is just too powerful not to be proud of. After all, following years of learning and practicing, which involves a lot of painful failure, I finally know how to make high returns with low risks.

Greece may default within days

Euro finally broke its tight trading range between $1.40 to $1.45 in the past few months and got smashed hard today. It is around $1.36 today. The Eurozone debt crisis is accelerating and worsening in the light speed now. I may be too pessimistic but I think Greece may default within days, even as soon as this weekend. This will send a huge shock wave across the world. You probably have already felt it today via the severe market plummeting.

It is reported that the German government is making an emergency plan that involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if Greece defaults. I feel more convinced that this fatal event is coming when I heard that the Greek financial minister came out today, saying that Greece would not default. When a governmental officer says that something won't happen, it usually means that the crisis is imminent and will almost for sure happen very soon. I think Greece is just on the brink of collapse!

I hope you have already got some positions with EUO to short Euro. Maybe too late for me to add new positions but if there is a dead cat bounce for Euro in the next few days, e.g. if it appreciates to $1.40 or so, I will add more EUO.

Westport - a long term play for natural gas

Not sure how many of you have heard about Westport Innovations (WPRT). It jumped 20% today. Westport Innovations, based in Vancouver, Canada,  is a global leader in alternative fuel, low-emissions technologies that allow engines to operate on clean-burning fuels such as compressed natural gas (CNG) and liquefied natural gas (LNG). Today, it announced that it has teamed up with Shell to launch innovative co-marketing program to develop North American market for liquefied natural gas vehicles & fuels. Previously WPRT has already entered into joint ventures with other companies such as Cummins to develop and commercialize natural gas-enabling technology for buses, refuse trucks and vocational vehicles as well as for the heavy-duty diesel engine and truck market.


What is so interesting for WPRT? It is natural gas! Although natural gas is very depressed in terms of  its price, it is actually one of the next super long-term trends you can bet on. I believe natural gas is like gold in 2001. All the things have lined up for its bullish trend. It is only a matter of time that the market will wake up to recognize it. At the moment, no one is interested in it. That's great for someone like me. I want to get in early in the game for this super-bull-to-be. I been looking for ways to invest in natural gas and WPRT is one of them very interesting to me. I'm sure I will talk more about natural gas in the future, more so as time passes by, just like about gold and silver.

How to play in this volatile market?

I'm not sure about you but I have been very bearish for the stock market overall for quite some time as you know. And I don't believe that we have seen the real bottom yet for this correction. As I told you recently, September and October are statistically and historically bad months for stock market. This does not bode well for a recovery if there is one ongoing. On August 9, I told you my game plan. It appears that I was a bit too optimistic in thinking that S&P could rally back to about 1250 before resuming its another leg down.  But it did try and was close to that level at around 1225 or so end of Aug before turning lower again. I took the opportunity to exit my quite many long positions for profits in the past 2 weeks. As I said, I want to be prepared by having as much cash as I can for the coming buying opportunities. While we are waiting for the market to hit its real bottom, is there a strategy to play in this very volatile environment? I think I found an interesting one.

The strategy is called the FactorShares 2x  Gold Bull/S&P 500 Bear, which offers a leveraged gold long paired with a double short S&P 500 index with daily resetting. This is an ETF with a symbol of FSG. You can simply trade it just like any stocks. What it intends to do is to make money if gold prices increases while S&P index is dropping, and it is leveraged by 2 times. This sounds a good idea to me since I do think in the next 2 months or so at least, the overall market will test a new low but gold will further appreciate. What a great concept to capture these 2 opposite trends in one trade!

However, I must warn you that this is likely a risky trade and there is no guarantee that it will for sure bring you a profit. You have to be prepared for a loss if you do want to try. Two main reasons:
- Of course, on one is more clever than the market itself. It is very cunning and likes to tantalize those who want to play with it. Regardless how much I believe what I think, I could be wrong. The market may turn to go up without prior notice and gold may simply plunge. If so, FSG will be doing very badly.
- FSG is a very new ETF, just debuting in Feb this year. One thing I have learned about EFTs is that some of them may not do what they are supposed to do. The most notorious one is UNG, an ETF supposed to track the trend of the natural gas. This fund actually is behaving almost like an inverse fund, going down while the natural gas was ascending. So it takes time to ensure that an ETF is indeed performing as it should be. In the past 6 months, FSG appears to have kept its promise but I don't know if this may change.

For myself, I will try FSG. I call myself as an informed and defined risk taker. As long as I know the risk is within my control, I don't mind to try. FSG indeed sounds a very good strategy in this very unstable and volatile market but I will not go crazy with it given the uncertainty involved as discussed above.

Buffett is dead wrong this time

You must think I have lost my mind. No, I’m not yet. Buffett is the most successful investor in the history, ever! I have full respect for Buffett and his words are usually just like proverbs, to which I listen very carefully. However, recently I have found Buffett is dead wrong on 2 aspects:

First is about his opinion on gold. Buffett does not like gold and he even thinks gold is just something useless.  In a speech to the 1998 Harvard graduating class he said:

“Gold, It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

I like Buffett’s humor. But I’m just puzzled by his stubbornness that he still sticks to his opinion when gold’s value has increased more than 5 times in the past decade. No any other asset has ever had such kind of performance to increase its value year after year consecutively for 10 years. Very likely this year will be its 11th year of success for gold.

Second is about his optimism about the US prospects. He has said severally times that the US has gone through all kinds of difficulties and challenges in the past decades since Great Depression but the US has always come back strongly. No difference this time. REALLY?

Buffett, the world has changed significantly and this time it is very different for the US. US had always been the greatest creditor in the world in the past and therefore it could endure a lot of financial challenges but still survive well and strong. But not this time. Why? Because US has become the greatest debtor in the world now. Americans are relying on life-support from other creditor countries like China and its world reserve currency status will be lost for sure. Just a matter of time. See a few facts below:   

• Americans grew their debt from around 70% of their income in 1990 to about 120% in 2010 
• About 70 percent of the U.S. economy is built on consumer spending, but Americans don’t have much money to spend. The trend will only become worse  
• The official US national debt is $14 trillion, in which about $4 trillion was added in the past 2 years since this administration took the power  
• The total debt could be $75-100 trillion or more when you account for Medicare and Social Security, or about $700,000 per family. Simply the interest for this amount of debt at the current super low rate is equivalent to the current budget at around $4 trillion. Think about what will happen if the interest rate just increases a little bit. Actually the interest rate will increase significantly in the next few years for sure, which will crash the US government 
• Per Bill Gross, the United States will default on its debt while picking the pocket of every citizen through inflation, dollar devaluation, and interest rate games

Yes, US could survive this time as well but only if it can make fundamental and structural changes to resolve its life-threatening debt crisis through some very painful choices. Unfortunately we cannot see any political will till now in the US from anyone to seriously tackle this problem. Believe or not, Greece is the tomorrow of the US, which is taking the exact path towards self-perishing.

I happened to see a long-term chart for Dow. It is presenting a very ominous long-term trend for the stock market. The Dow appears to be completing its right shoulder. A head and shoulders pattern is very dire for stocks technically speaking. If it is true this time, Dow could drop to the level of below 8000. Of course I’m not talking about a 30-50% plunge or more in the next few weeks or months. It is a long-term trend, which can take 3-5 years to materialize. This long-term pattern actually is very consistent with the overall bleak US prospects. I’d strongly advise you to keep this in mind in managing your portfolio and your nest eggs for your retirement.