I'm wrong about Home Depot so far

Home Depot (HD) reported earnings today and apparently the market liked what they heard. HD popped up 5% today. I thought HD was too expensive back in Nov 2012 but I have been wrong till now. Well that's the nature of the stock market. You never know for sure about anything but just a best bet at the time based on the information you have and understand. Also the stock market is not always rational and expensive stocks could become more expensive, but only to certain extent. Sooner or later, the fundamentals will come to play. I think HD is just at such a state: it has become more expensive. Don't get me wrong. HD is indeed a great company, especially in the environment of the recovering housing market. But I'm afraid its valuation of P/E at 24 is way too much to justify and at some point, it will break down.

Barnes & Noble shot up 11% today

I first introduced Barnes & Nobles (BKS) half a year ago when it was traded around $12. Similar to what I was thinking about Yahoo, I thought BKS was a good bargain at that level and could be a good long-term investment. Well, BKS did not disappoint me. It has advanced 25% since I discussed it and today it surged $1.55, or 11.5 percent, to $15.06 after chairman Leonard Riggio said he wanted to back control of the company's retail business. Of course it could be volatile along the way but its trend is clear up.           

Get Quick Cash Around Stock Ex-Dividend Date

Not sure if you have seen and understand "ex-dividend date" for dividend paying stocks.  Simply speaking, ex-dividend is a date to define when a stock holder may be entitled to get the next dividend declared. Ex-dividend dates are extremely important in dividend investing, because you must own a stock before its ex-dividend date in order to be eligible to receive its next dividend. However, an investor only needs to own the stock for one day (the record date) to be entitled to receive the dividend payment. If the investor buys before the ex-dividend date, and sells on the ex-dividend date or after, the investor will receive the dividend payment, even if the investor is no longer holding the stock on the dividend paying date that is usually weeks after the ex-dividend date. In theory, the stock price will drop in the same amount as the dividend on its ex-dividend date but in reality, for most stocks with a single digit yield, stock price may not decline or even increase due to other factors. With this understanding, do you know by a simple strategy you may get some quick cash by trading around the ex-dividend date?

Let's take Microsoft (MSFT) as an example. Here is the notification I saw in my trading account associated with the MSFT quote:  On 11/28/12, MSFT announced a regular quarterly cash dividend of $0.23 per share, payable on 3/14/13 to shareholders, with an ex-dividend date of 2/19/13. It means you have to buy MSFT stocks before the ex-dividend date of Feb 19 in order to be eligible for getting the next dividend of $0.23 per share, even if you just own the stock for one or a few days, i.e. if you immediately sell the shares on or after Feb 19. Let's say, you buy MSFT 1000 shares on Feb 15, one trading day before Feb 19. Most of the day on Feb 15, you may get a price below $28/share. If you don't want to own MSFT and sell it the next trading day on Feb 19, you can sell it around $28/share. So by holding MSFT just one day, you can get its dividend of  $230 on Mar 14. Much better than any interest you may get from your bank, right? If you are savvy about options, you may do much better than this. For example, by continuing to hold MSFT for one more month and sell its March $28 call options, you can immediately get $470 (based on the call option price on Feb 19 as below). In other words, with a little bit work, you may get $700 in one month without much risk.

MSFT Mar 2013 28.000 call (MSFT130316C00028000)

0.47 +0.09

Of course, this strategy should only be used for good companies which you don't mind to hold. It would be best when the company stocks are trading at a good valuation, e.g. a low P/E ratio like MSFT or INTC at the moment. If you like this idea, there is one opportunity just at the corner for Novartis (NVS). Here is the announcement: On 2/6/13, NVS announced a regular annual cash dividend of $2.53 per share, payable on 4/5/13 to shareholders, with an ex-dividend date of 2/26/13. Basically you only have one day left (next Monday/Feb 25)) to own NVS shares in order to get its dividend. With every 100 shares (~$7000), you can get $253. Please note, NVS has appreciated quite a lot lately and it is not really cheap. No guarantee that NVS will not decline if you want to sell immediately after you buy. But if you don't mind holding it, NVS is a good company and I'm quite comfortable for its long-term valuation. Along the way, you can sell its call options to generate income regularly.

 

Are You About to Lose Your Savings in the Currency War?

In addition to you guys reading my blogs, someone else must be also reading as well. And it appears my idea has been "stolen". See this write-up. Isn't it almost identical to what I've said about the currency war?! Now seriously, take the advantage of the dropping gold/silver/platinum prices to accumulate. I'm buying more happily.

Last good buying opportunity for gold?

Gold got quite a hit lately and it is trading around $1600. I started to get the feeling of nervousness among people who had bought gold. When you turned on the TV, you saw the talking heads having quite depressed mood when talking about gold. The general consensus for them was that the good day for gold had gone and it was the time to say bye bye to gold (and of course silver).  The charting "expert' on the Friday show of Currency Trading on CNBC announced that he had sold all his position of gold since he could not take it anymore. I'm happy to see this kind of poor sentiment spreading out for gold and silver. Unfortunately you just cannot expect precious metals to really continue their bull run when there is euphoria about them. The weak hands must first be shaken out before any bull can resume its run. Fundamentally I just cannot see where is the end for gold/silver's bull run when all the world is printing money to deal with the huge debt crisis and everyone is devaluing their own currency. Technically one can argue that gold may decline to as low as $1500 to meet its next strong support line. But it is equally possible that countries like China and Russia may take the good opportunity to buy gold in huge amounts as its price comes down. This will put a floor for gold and prevent it from further plunging.

I have a strong hunch that this is the last time that gold is going through the correction mood before starting to break out its long-term resistance line at around $1790. I don't want to miss the good opportunity to buy gold at this depressed level although I'm fully aware it may continue to slide down a bit. So I'm starting to buy gold now and will buy more if it drops further. This is the only sure way to not to miss the buying opportunity while being able to reduce my average cost as well during this process. I don't know what will be the gold price in the next few weeks or months but I'm very sure that 5 years from now, I will be extremely happy for my today's action to buy gold at this price! Actually I'm also accumulating silver and platinum along the way.

I have sold ValueClick

ValueClick shares jumped 19% on Thu, due to better than expected earnings. Revenue in the fourth quarter was $199.6 million, narrowly topping the consensus estimate of $199.2 million and earnings per share were $0.56 as compared to the $0.52 per share profit that investors were expecting. The following is VCLK's chart in the past 3 months, during which I held the stock.

As I said back in Nov when I bought the stock, VCLK is more or less a cyclic stock, which tends to rise over the first quarter of each year due to the expected better business performance during the Thanksgiving and Christmas high seasons for commercial activities. While I cannot say VCLK won't continue to go up for a while, it has met my expectation for the time being and I won't be surprised if it comes down a bit after such a quick jump. I simply took my profit off the table and moved on to other opportunities.

Currency War Has Started!

No declaration, no firing, and no physical fighting, but a war has already started, believe or not! It is a Currency War across the world. We are now at the stage of a full-blown currency war, very similar to the situation in 1931 when the UK broke itself from the gold standard in September. Within months, the UK pound depreciated by 30% against the US$. Not surprisingly,  this triggered a chain reaction from the United States, France, Germany, Sweden, Norway etc, to take similar actions. There is no winner in such a war. We know what happened in 1930s, a Great Depression followed.

I'm afraid the world is taking the same path now. Every country wants to have a cheaper currency and is at the full capacity with its printing machine to create money from the thin air. Of course, no one will acknowledge this and ironically they will even declare that they want to have a strong currency. But look at the chart below, comparing the major currencies (US$, Euro, J-Yen, A$, CAD$, and Sfr) against the only real money, gold (the top blue line). All the currencies have been worth much less than gold in the past 5 years, i.e. losing their real value over time. People used to think Swiss Franc was a strong currency but nowadays, even Swiss government cannot help but join the currency war. They have now tied the Swiss Franc to Euro. The latest action of the Japanese government to print unlimited Yen in order to push up its inflation to 2% is probably the final straw on the camel back. I think there is no way back. The paper currency system will eventually collapse.  Who will be the final winner? No one among any paper currencies but the real money, gold as well as silver and platinum!

Don't be too complacent with Euro

Long time readers of my blog certainly know that I'm a perpetual Euro "disparager", since I really don't think Euro will work in the current format. In the past several years, I shorted Euro several times and made some good money from it. The latest one I talked about it  was in Aug 2012, for which by the way I had held it till expiration and got the full profit. I know Euro won't disappear overnight and it will fight back along the way. Actually I like the way it behaviors that from time to time it will bounce back. This way, I can make more free money from it. I think the time is coming again and close. Euro has appreciated against US$ quite significantly in the past few months and has been up as high as $1.35 lately. Euro lovers get really excited now as they think Euro has survived the worst crisis and it is now rebirthed. Really? Let's look at a few statistics:

- According to the World Economic Outlook by the International Monetary Fund (IMF), they have changed its 2013 forecast for the Eurozone from growth of 0.1% to a contraction of 0.2%. The Eurozone economy contracted 0.4% in 2012.
- As we all know, Eurozone countries have instituted many crippling austerity programs, which are supposed to bring down the government debt for those countries. But government debt in the Eurozone countries actually rose over the past year from 86.8% of gross domestic product (GDP) to 89.9% of GDP.
- Understandably, with all the harsh austerity programs, unemployment in the Eurozone is very high and has reached record highs. Eurostat figures released earlier this month showed November Eurozone unemployment at 11.8%, with the actual number of unemployed rising by 2 million from a year earlier.
- Worse and more alarming is the unemployment in several of the troubled nations: Portugal's rate was 16.3%, Greece's was 26%, and Spain's was 26.6% - all significantly higher than a year ago.
- It is more desperate when one looking at the youth unemployment figures - 56.5% in Spain, 57.6% in Greece and 37.1% in Italy

Do these figures look like a healthy recovery ongoing in the Eurozone? I thought it is a no-brainer No! While I believe and have said for years that Euro will fail eventually and disappear with its current format, it is certainly not a straight line downward. I guess there is no surprise that for anything, there are always believers vs disbelievers. In the investment world, one important factor to be successful is to side with the minority, believe or not. Right now, the Euro believers seem to be on the winning side, which is pushing it upward. I’m happy to see this as this means more free money is coming my way. For any currency, when a trend starts, it usually takes some time before it turns. I don’t think Euro has exhausted its energy yet to go up and there is chance it may go as high as $1.40 in the next few months. But mark my words: Euro will come down and hard. The higher it goes, the harder it will plunge. In addition to the natural life of Euro to go down, there is also the artificial force behind to push it down. We have already seen the nervousness the Eurozone leaders have shown when they see the strengthening of Euro: The ECB president Draghi and the French president Hollande have already tried to talk down the Euro. If Euro continues to go up, they will for sure start to do things to bring it down, just like what Japan is doing for the Japanese yen.

So I’m patiently waiting on the sidelines and get myself ready to pick up the free money when the moment comes. EUO, the inverse EFT for Euro is the one I will likely to use again. If you are really an aggressive trader, you can even think about getting long with Euro to get on board with its short term uptrend for now and then short Euro for its inevitable downtrend.

Technical trade (Apple) & Fundamental Trade (ValueClick): playing out as expected

On Jan 24, Apple's shares got crashed with panic sales for that day. I argued however that AAPL was oversold based on the technical analysis and it was due for a rebound. I put the money where my mouth is. The following is a position I had for Apple, a 2 weeks trade with a naked put option. Apple dropped to below $440 on that day and I thought it would rebound to above $450 within the next 2 weeks. So here we are. Yesterday, Apple was trading at $475. The $450 put option expired worthless and I got all the money ($1261) for free. Not a bad deal for just 14 days, I guess.

AAPL FEB 08' 13 $450 Put    Expired   1      $12.7    $1,261.23  100.00%

Now for some trades, we need to look at the fundamentals to see if the trade makes sense. I talked about the seasonality of a company, ValueClick (VCLK), on Nov 18, 2012. Based on its business model and the seasonality of its price action in the past 10 years, I figured that VCLK would likely performance well in the next few months till around end of the first quarter. Again I had a small position with its call options. VCLK was below $18 when I talked about it and it is now over $21, a 17% increase in about 2 months. For my call options, the increase is much more significant and it has doubled actually. I intend to keep it further as it may go up more when it is close to its earnings reporting.

VCLK Mar 16' 13 $18 Call         3.60       5      $1.70    $941.17     109.59%

Cover call: extreme euphoria is here

There are many technical indicators to call for the top or bottom of the stock market. One indicator that may be much better and more accurate than most of the technical indicators is socalled Press Cover Call. This is usually a good contrarian indicator, suggesting either a top or a bottom is coming due to the extreme sentiment associated with the cover story. For example, on Jun 13, 2005, TIME had a cover story calling for easy and big money everywhere from house properties. This was exactly the top of the housing market and everyone knows what followed after that.




Now we have got a fresh cover call from Barron, a prestige investment magazine. Yesterday (Feb 4, 2013), Barron's posted a cover title acclaiming an upcoming record on the Dow. You know I have been talking about a coming market top for a few weeks. This to me is another strong indicator flashing for an extreme euphoria sentiment, which is usually occurring at the top of the market. Be extra cautious!

What to do with the current market?

The stock market is extremely bullish at the moment. You don’t need to tell me that. Although I have been saying that the market is quite overbought and due for a sizable correction, I have been wrong till now. But does it mean that it is wrong to take this kind of bearish view point when deciding to what to buy at the moment? I really don’t think so. I have been wrong about the timing, which no one can always be right over time. But I’m pretty sure a significant correction is coming; I just don’t know in days or weeks or even longer.

I’m basically sitting on my hands at the sidelines for quite some time and avoid adding new positions for my long-term portfolios, except in very few exceptions when I see some good valuation for some stocks, such as Intel. I’m also quite active in short-term trading for quick profit for stocks such as Microsoft or Apple etc. I will be more aggressive in adding long-term positions only after a significant correction, say at least over 5% decline of S&P 500 and very depressed sentiment in the market.

My suggestion for your profitable positions? If you are the lucky ones to have good exposure to the market for the past 2-3 months and have seen sizable profit for your stocks, be cautious now and don’t let your profit slide away. When a correction hits, it can be swift with no prior warning and can wipe out your total profit within days. If you have doubled your share prices, consider to sell half of your position so that you have no risk at all after getting back your invested money while continue to enjoy potential further gain regardless how long this bull run may take. Or you may want to tighten up your stop loss, say 5-10%, to ensure you will have some profit taken if the market indeed starts to turn south. The most important thing to be successful in the stock market is to have an exit strategy and stick to it.

I was wrong about Amazon

I was dead wrong about Amazon when I talked about its P/E ratio a week ago. I said its P/E was 164, a very high ratio in any sense. But actually Amazon's P/E ratio is over 3000! Yes, over three thousands!!! I'm not aware of any company in the whole stock market history that has ever got this kind of ridiculously high P/E ratio. What does P/E ratio mean? In a simplified way, it means you will have to wait for over 3000 years in order to get all of your invested money back as an Amazon's investor, if you simply wait for Amazon to return your money with its earnings. In other words, you won't see your money back in your life time if you buy Amazon at this level. For me, I'm not only not going to buy AMZN, I would also think it has even become a more sure thing that AMZN will go down from here. Its price action was terrible in the past few days, especially following its earning report. Below is its 5 days price chart, a clear downtrend. Look at its price action on Jan 30 following its earning report on Jan 29 after closing. While Amazon missed its earning estimates, its profit margin was considered better than estimate. The herd of investors got very excited about this report and its share price was immediately shooting up after hours. As you can see, it jumped up almost 15 points at the opening on Jan 30, but what followed was really terrible for it. It had been struggling the whole day trying to hold up but after all it could not. At closing, it had given up most of its initial gain and closed only marginally higher than the day before. It is technically very precarious and often a very bearish sign for a stock. Amazon continued to slide down the next 2 days.

I truly believe that this is the beginning of a much large downtrend for Amazon and I won't be surprised to see a 20% or more decline for it in the next few months. Of course it won't be a straight line to go down and its bulls will try to fight back along the way. But they cannot stop the momentum and will go down with it. Short AMZN!