Euro is doomed to go down

By now you must have learnt what has happened in Cyprus. The tiny small Eurozone country is almost kaput as the banks in Cyprus are all burst in heavy debt. It is fun to see the talking heads debating how much impact this event will have for the Euro countries. I often heard such a moronic question: how can such a small country cause any meaningful financial impact in the world?

Yes, Cyprus banks only need $10 B to save them, which is less than a drop in the ocean in terms of the quantity. But the real problem is not the actual money amount, but the way the issue is handled, which has totally destroyed the confidence people have for the banking system in the Eurozone. If the precedent is set that people's bank deposits can be easily taken away in Cyprus, who can ever believe and trust other banks in any Eurozone countries that their money will not be stolen some day? This is how severe an impact this incident is causing. No kidding that a Spanish company — Micholochon — has designed the Ultimate European bank crisis safety net. They want you to — literally — put your money in their mattresses.

I think this will accelerate the dying process for Euro. A few months ago, I thought there was a good chance that Euro could go up as high as $1.40 before topping. Unfortunately there is no chance for it now to show any strength, given the Cyprus situation. It may struggle to touch back $1.30 but I don't think it can hold at that level and it will go down to $1.20 this year as the start of its ultimate downtrend. This is another great easy money opportunity if you know how to short Euro. Either shorting FXE or buying EUO call options will make you money in the rest of the year. This is also one of the critical reasons why one should buy precious metals, a lot!

Ex-dividend date trade with Novartis

As I discussed on Feb 22 that you can make some quick money by trading good stocks per their ex-dividend date. One immediate opportunity I talked about was Novartis (NVS). Well, if you did take the opportunity, you should be happy to at least pocket a few hundred dollars for just a few days of holding NVS stocks. Here is the one month chart of Novartis:

Novartis only pays one dividend per year and it is $2.53 for this year. Feb 26 was its ex-dividend date. Do you notice what happened to NVS price on Feb 26? It came down from $69 to below $67. As I said, the stock price will be adjusted downward to reflect the dividend amount on the ex-dividend date. So this price drop was not really that NVS did poorly on Feb 26; it was just a mathematical adjustment. But see how NVS did in the next few days? Its share price quickly returned to its price prior to the ex-dividend date and if you further held it for longer, you could make more, given it is trading at $71 now. In a nutshell, if you had NVS shares on Feb 25, you will get $2.53 per share early April and depending on how long you held its shares, you could make more with additional capital gains.

Remember, we are just talking about a few days to weeks of buying some good companies' stocks with good dividends. If you can find good companies and do this every month, cumulatively this could be a good income stream over time. By the way, I just did this for Two Harbors (TWO), a mortgage REIT company with a high yield.

Time to buy Arena?

Nine months ago, Arena (ARNA) was the first lucky company to have its anti-obesity drug, Belviq, approved by the FDA. This has been the first such drug to get approved in the US in 13 years! You must think that Arena should have booked in tons of money by now and the stock holders must be smiling all the way to their banks. Shockingly, it is not all. Arena has until now not been able to sell this approved drug and earned any money yet. Why?
 
It is because of the U.S. Drug Enforcement Agency (DEA). Not many people understand that for drugs with an abuse potential, they must be approved by DEA before sales, after they first get the FDA approval. Belviq is unfortunately falling into this category. Thanks to the DEA, sales of Arena's Belviq are still on hold nine months after the FDA approval. As like any government bureaucratic agency, the DEA is in no hurry to review and approve the drug. As you can see the stock chart below, ARNA has been roughly trading in a narrow range between $7-10 in the past several months. And right now, it is at its low boundary around $8.

  

Rumors have been spread out these days that the DEA may finally issue its approval any day now. Of course, no one really knows for sure how long Arena has to wait but I figure now may be a good time to speculate by buying Arena. As you can see, unless Arena gets bad news from the DEA that the drug cannot be sold or with significant restriction, ARNA will not likely go down further from this trading range. If indeed the DEA approve its sales, I bet the ARNA share price will shot up to moon with an explosive jump. Although honestly I'm not so sure about its long-term fate for this drug, given almost all the anti-obesity drugs in the past have ended miserably due to their long-term safety concerns, at least initially the demand for Belviq should be huge. After all, according to the American Medical Association, over 30% of American adults are now obese, i.e. roughly more than 75 million people who weigh at least 20% more than they should. This should boost the company's bottom line immensely. It is estimated that Arena may reach over $1 billion in annual revenue with Belviq.

I don't think I will be a long-term investor for Arena but I'm quite interested in putting some money to speculate for Arena now.

Apple has likely reached its bottom

I was way too early initially to have bought Apple at around $500, kind of catching the falling knife.  Early this year, it seemed to me that Apple could further decline to low $400s but I thought it would be bottomed there. Well I think we have got that. Apple reached to the level as low as $420 a week ago and since then it has posted both higher highs and higher lows, a bullish price movement. More importantly, it has broken its half a year downward trend line. This is often an indicator of a turning point for a trend. I think $420 is likely the bottom for Apple and it may have turned the wave in its favor. Of course, from its fundamentals, Apple is cheap on almost any sort of valuation basis. Its P/E is just 10 times earnings or even just 7 times forward earnings. It has $140B in cash ($42 per share) with no debt. It is expected to have double digit revenue growth with a PEG of 0.55 (under 1 is considered a buy). It currently pays a 2.3% dividend. The real kick now is a high expectation that Apple will finally increase its dividend significantly or pay a special dividend which is likely big due to its huge cash load.

If you are thinking to invest with Apple, this may be a good time for a long-term play.

Investment opportunity on fighting against superbugs

Drug-resistant superbugs are "a ticking time-bomb not only for the UK but also for the world," England's top medical official warns in her first annual report, released last week. There is increasing bacterial resistance to antibiotics that could turn routine operations into life-threatening procedures if infections become difficult to treat.  Similarly the U.S. Centers for Disease Control is also ringing the alarm bell because a nasty new bug has so far killed half the patients it’s infected. Unfortunately currently there is no incentives for companies to invest in research and development for antibiotic medications. While everyday you may hear some new drugs approved and marketed but shockingly there have been no new antibiotic classes since 1987! So we are now living in a very dangerous world now and every one of us may encounter a superbug with no effective treatment.

That's why I'm delighted to find one small biotech company, which is actively engaged in developing anti-infective drugs.  The company is called Trius Therapeutics (TSRX). Trius is currently working on a fast-acting drug – tedizolid phosphate – for the treatment of serious infections, including Super Bugs like MRSA (methicillin-resistant Staphylococcus aureus), which kills 20,000 people a year, more than AIDS, in the US and the same number in the Europe. According to Trius, it has already completed most of the clinical trials required for approval for a new drug with good results. It is currently waiting for the results of another Phase III study by the end of the current quarter. Trius is targeting to file its “new drug application” (NDA) with the U.S. FDA in the second half of this year.

Of course, as betting on any new drug development & approval, it is a risky opportunity and you should be prepared to lose all your money if it fails. But if it is successful, the return could be huge and rewarding. I'm willing to bet for this one.

Watch for natural gas price movement

The stock market is like roller coaster this week, shooting up and plunging down with a huge price movement on a daily basis. Hope you did buy some protection as I recommended last week. This is a trader's market and I wish I had time to closely follow the market and do some day trading. But I didn't. Actually I was in Switzerland tied up with meetings.

One thing I notice these days is the uptrend of natural gas.  Four years ago, natural gas was priced at around $9 per million British thermal units (BTU). This was way too expensive for most electricity needs. However, due to significant advances in drilling techniques in the past 10 years in the US,  natural gas can now be extracted from shale-rock formations, which has made US an extremely rich country in natural gas resources. As a result, natural gas prices dropped below $2 per million BTUs last year. As I said one year ago, natural gas price would not stay that low for long and eventually it would go up again due to cutback of production coupled with increased usage of the cheap natty. Well, natural gas is back to $4 now. I think there is still some room for natty to go further up in price as part of its long term uptrend. The next price target may be $4.5 per million BTUs. However, it has advanced a bit too fast lately and it is normal that it may first come down a bit. If this indeed turns out to be the case, I would be very interested in the leverage ETF, BOIL (ProShares Ultra DJ-UBS Natural Gas).

Buy some protection for your portfolio

The Dow Jones has set another record after reaching record high, continuously going up for 10 days, which has never happened in the past. I got it. This is likely a huge bull market fueled by the Bernanke easy money and will last as long as Bernanke is printing money. But I'm really worried about the immediate future and become more scared about the upcoming correction that may occur any time. I have no crystal ball to predict exactly when it will occur but I know it for sure will occur. It is just not natural that the market will simply go up without a breath. So I'm starting to buy some protection against the likely fall. The good news is that it is very cheap to buy such protection at the moment when everyone is so hype and euphoric. I have bought call options of VXX, TZA and SDS. All of them are inverse ETFs and will go up when the market goes down. I feel safer to have them in my portfolio.

Did you buy NLY or AGNC?

I alerted you about 5 months ago when NLY and AGNC were screaming buys when people were engaged in panic selling of both. Two months ago I updated you about the opportunity again when they were still good buys. I hope you took the opportunity and bought one or both when they were fire sales. If so, congratulations to yourself for a good move. You are not only seeing a nice capital gain (over 10%), you can continue to enjoy a very nice dividend yield which should be around 12-15% depending on your buy price. NLY is currently trading at $15.66 and AGNC at $33.12. At these prices, I won't buy them now as NLY is almost at its book value (98%) and AGNC is actually over its book value now (1.02%).

For myself, I'm having both positions outstanding but in an unconventional way. I sold their long-term puts and currently seeing quite good paper gain along with their share prices going up.


NLY Jan 17 '15
$15 Put                  $1,500.00 -100   $3.65   +$9,912.5     +27.09%   -$26,000.00

AGNC Jan 18 '14
$30  Put                 $50.00      -10     $5.05   +$2,482.22    +48.98%   -$2,550.00

Iamgold: a productive gold miner for screaming buy

As I said last week, while I don't see anything really cheap for the vast majority of stocks, precious metals are probably the only sector with a great valuation at the moment. I'm aggressively buying. I'm sure that I would be kicking myself 6 months from now if I did not buy now. In addition to RGLD and SLW, one middle size gold company, Iamgold (IAG), is a screaming buy for me. It is a Canadian company that is already productive and profitable. People are just stupid in dumping its stocks at the moment, which creates a great opportunity to pick up shares of IAG if you are courageous enough. Here are a few facts about IAG:

• Its share price plunged over 60% in the past half a year, from $16 to less than $7 at the moment
• As the result, it is currently 30% discount to its book value with a book value at $9.9
• P/E: 7.78
• It has cash of 2.21 per share (32% of its current share price)
• Profit margin: 20%
• Dividend yield: 3.7%

This sounds really great to me and I'm buying when others are selling.

I'm buying more when precious metals are decimated

As I said, I have been largely sitting on my hands at sidelines in the past few months while watching the stock market going up and up relentlessly. Till now I have been wrong in betting that the general stock market will significantly corrected soon but I still believe firmly that the day of reckoning will come. The more it goes up, the more risk it becomes, especially if you jump in now at this very inflated level. Having said that, the only sector I'm aggressively buying right now is the precious metals. I guess no surprise for those who have known me for some time via this blog that I'm a gold/silver bug. Nothing can really shaken me up in my belief in gold/silver, and now platinum. On one hand it does not make one feel good when watching the prices of gold and silver coming all the way down from its peak of $1900 almost two years ago. On the other hand, I do hope it can go down more but quickly to shake all the weak hands out while allowing me to buy more at a cheaper price. It is a bit frustrating to see it bouncing back and forth within a narrow band percentage wise.

However, if you look at the ratio of gold stocks vs gold, gold stocks have not been so cheap in the past 5 years relatively to the gold price. It is now at the same extremely low level only seen in Mar 2009 when everyone felt it was an end of the world. But that, looking back, turned out to be the best time to buy anything. We are now having a similar sentiment towards gold and silver stocks. Almost like there is no future for them anymore and no one wants to have them. This in my mind will be one of the best times to buy them actually. Of course I don't have a crystal ball and can tell you that this is the exact bottom for mining stocks but I'm holding my nose and breath and start to buy more and more these days. I especially like the gold and silver royalty companies like RGLD and SLW. These two are the best and safest gold and silver companies you can find.

How far can this market go?

The market is super bullish and day after day, it is going up and up and now Dow Jones has broken out its all time high reached in 2007. Technically this is very important as it has entered a new bull territory. To further fuel this bullishness, the Dow Transportation has also catched up and reached its all time high. Based on the famous Dow Theory, when both Dow Jones Industrial and Dow Transportation go up, it is a confirmed uptrend and should last. As it is commonly said in the Street, DON'T FIGHT WITH FED. This is definitely a Fed engineered bull market with all the cheap money floating around. Regardless you like it or not, you have to accept the fact that this bull market will continue as long as the money printing by the Fed continues. This is likely a multi-year bull stock market which may reach to a level higher than everyone can imagine before it is finally over. The Fed's free money will drive everything crazy.

But the question is: will this uptrend simply go up without interruptions? I really don't believe so and I'm still thinking that some significant correction should come first before it can go much higher. Keep in mind that this bull market is not really supported by its fundamentals but more by the Fed policy. Overall, the market is already quite expensive. The following chart, from Morgan Stanley, offers some insight into just how broadly 'expensive' this market is. Over the past 13 years, there were only 2 times in the past that when more than 45% of stocks reached the expensiveness level we are seeing now, the market said "enough is enough" and just gave up. A huge free fall ensued each time. Will this time be different? Certainly it is possible with Fed's money behind but I'd be cautious before deciding to put more money into stocks.

If you don't want to miss any opportunity during this bull market, you may consider to buy the Dow Jones index ETF, DIA. If you do so, I'd suggest you keep a very tight stop loss in place and get out quickly if the trend suddenly turns even for a short term.  For myself, I'm not interested in stocks in general but I'm aggressively buying something now (a subject for the next blog).

Alexion looks ominous from its chart

I'm a bit reluctant to write this blog as I have many friends working for Alexion. I'm sure no one whats to hear bad "words" for what they have deep stakes in. I'm also taking a huge risk by being against almost all the analysts who are extremely bullish about Alexion (ALXN). Among 23 analysts, 10 have a rating of strong buy, 7 buy and 6 hold. None for underperform or sell. The mean target price by the analysts is $114.80 with a median of $119. After all, who am I with no financial background but dare to challenge those guys specialized in analyzing stocks? So simply keep this in mind that this is only my personal non-professional view and very likely I could be wrong. Just a different opinion on the stock. In case it happens to follow what I'm predicting, there will be no surprise that no one was talking about it.

With this cautionary preamble, here is what I'm thinking. I'm not talking about fundamentals at all. Fundamentally, ALXN is extremely expensive with a P/E at 70. But over years I have learnt that stocks can stay at inflated levels longer than anyone can imagine. Agree or not, ALXN has been in an uptrend at such expensive valuations for a few years now. It can certainly continue. However, what really looks ugly for me is its price curve as shown below. Technically, the chart shows a text-book head and shoulders pattern, which is very bearish. The head is of course in the middle with the price around $120. The shoulders on both sides are around $95. If ALXN really follows the typical course of the H&S pattern, here is my prediction in the next few weeks to months for ALXN: it may go up a bit to around $95 or even up to below $100 and then starts to resume its downward trend. When this next leg down starts, it can easily drop down toward $70 or so, the next strong support level.

Why was Yahoo shoting up over 3% today

Yahoo shares (YHOO) rose 3.46% to $22.70 today, after Barclays analyst Anthony DiClemente raised his rating on the company’s stock to overweight, or the equivalent of buy, from equal weight. DiClemente also raised his price target on Yahoo to $26 a share from $22. In a research note, DiClemente said the value of Yahoo’s minority stakes in Alibaba Group and Yahoo Japan are “not fully reflected” in the company’s current share price.

I'm just wondering what this guy and other supposed more "knowledgeable" analysts were doing when I talked about YHOO's value a year ago and again a few months ago. As you can see, the Alibaba and J-Yahoo were exactly the major values I was talking about why Yahoo was so valuable when it was about $15. Looks like these guys just woke up now. Anyway, I'm certainly happy with what YHOO is doing for me. Below is the status of my 2 holdings for YHOO:

                                                        Today  Contract       Cost base      Unrealized Gain/loss         
YHOO Jan 18'14 $15 call       7.90      2        $3.05    $956.48    +153.40%
YHOO Jan 18'14 $20 call       3.85      20      $1.13    $5421.77  +237.95%

High yield fund to benefit from the long term trend on natural gas

Here is what I said a year ago about the long-term trend on natural gas: I think there is a huge opportunity for investing in companies involved in natural gas. But it is a long-term trend. In addition to companies which are directly involved in exploring and distributing natural gas, there are many  other compnies so-called Master limited partnership (MLP) that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. Since MLPs do not pay corporate tax, they have to pass most of the profits to its partners (the share holders). So MLPs usually pay quite a high dividend yield, often 7-10%. However, the headache for investing in MLPs is tax filing. Each MLP will issue a special form called K-1 form, which can be complicated, especially if you buy multiple MLPs. This has deterred me from investing MLPs although there is actually significant tax benefit with MLPs.

Well, I have found one company which will solve this problem for me. It is called ClearBridge Energy MLP Total Return Fund Inc (CEM). This closed-end fund is primarily investing in energy MLPs and as such it returns high yield of dividends to share holders, currently at around 6%. The beauty of CEM is that, while it is a MLPs investment fund with high dividend yield, it has been structured for a simplified tax reporting.  Investors in the Fund, while gaining exposure to multiple MLPs, will receive a single Form 1099, instead of individual Schedule K-1 forms. I really love this. CEM is relatively new and is currently trading at its highest level. I will take any pullback to add it to my long-term portfolio to ride the huge long-term uptrend for natural gas.

Speculation on Affymax's disaster

Affymax (AFFY) was a very successful biotech company just a few days ago. It had a newly approved anti-anemia drug on the market, OMONTYS (peginesatide) , competing with Amgen which used to be dominating the market on anemia. But its fate had totally changed a week ago, upside down more precisely. See the chart below. AFFY lost 85% of its market cap overnight, from $18 to around $2. Omontys is its only drug but it has been associated with fatal anaphylaxis, for which the drug was withdrawn from the market. It was almost a fatal blow to Affymax. AFFX is now trading at its cash level: it has cash of $2.66 per share and its stock price is $2.68 at closing today. So why am I interested in AFFY at this time?

 

Back in my mind, I'm asking what if Affymax finds its way to get the drug back to the market in some way. I used to be working with GSK and remembered GSK withdraw a drug called Lotronex for irritable bowel syndrome in less than a year after it was approved. However, GSK soon found out that the fatal colitis was largely associated with some patients with certain risk factors and could still be relatively safely used for other patients. With some safety measures in place, GSK successfully brought back Lotronex to the market (see the story here). With this successful story as an example, I'm sure Affymax management would not simply sit there to pray but is likely actively working to find a way out. Maybe such fatal allergic reactions only happen to some patients but not others and there is still a room for the drug in the market. If this turns out to be true, I think it will easily double the share price of Affymax, given how small Affymax is.

 

But I must say this is purely a speculation with no certainty at all and I don't know anything about the drug. Even if this will eventually happen, I don't know how long it will take. However, if you want to play with this speculation, buying the stock directly or cheaper, buying its 2015 call options, is one way to do it. A better way is to buy the 2015 call options and sell its 2015 put options simultaneously. This combo strategy will not only cost you nothing but even pay you a bit upfront to wait for its turnaround: you pay for about $1.30 per share for buying the $3 calls but get paid for about $1.50 per share for selling the $3 puts, a $0.20/share credit in favor of you. It is a rather sophisticated option strategy not many people understand and is certainly difficult to explain here. Just an idea to share with you in case you do understand the option techniques.