Only buy when you feel uncomfortable

I talked about Target (TGT) several times over the past few weeks when it got crashed and people got scared. You can read the last one here. I went in when others were selling like crazy and got more when it further plunged; it was definitely a uncomfortable period to act. Two days ago, Target reported earnings for the fourth quarter and full-year 2013. The results were not good: net income for the quarter ended February 1 dropped 46%, from $961 million a year ago to $520 million. Sales fell 5.3% to $21.5 billion. So how was its stock responding? It shot up 8% on the day! Sounds confusing, isn't? Not really if you know how the market is working. The market will never make investors life easy and it always tries to scare as many people away as possible. When most people panic and you feel like at an absym, it is likely the bottom has been reached and it would be the best time to buy when no one left to sell anymore. For Target, the shares have already priced in the worst case scenario and being a little bit less bad with better-than-expected earning reports triggered its strong rally. TGT skyrocketed from $56 to $62 just within days. I played with several options along its sliding down and have harvested several thousands in the past few weeks. The best deal? $1000 within one week closed today:

I'm not here to brag but just wanted to let you know how to spot the right opportunities to make quick money or establish your long term positions. So what is the most hated and scary sector at the moment? No question, it is coal! I think coal has likely been at its bottom when no one wants to talk about it and everyone wants to run away. The coal sector reminds me of steel a few months ago, which was another great play we had. KOL is a one shop ETF for the sector, an efficient way to bet for the recovery of this sector. If you'd like to buy good but beaten down coal companies, then the Australian coal mining, Peabody (BTU) is a good one to look. It is also paying a 2% dividend.



Macro: The Bottom Line (2/24/2014)

The curious market indifference toward Ukraine

 

If you feel as though an eerie calm has enveloped the global financial markets over the past couple of weeks, you're not the only one. Bonds and currencies have done little more than trend sideways, while stocks more or less regained the ground they lost during January's emerging markets scare. What makes this market tranquility all the more surprising is what's been happening on the news front: an ongoing string of lackluster US economic data (ranging from retail sales and employment to factory orders, all still blamed on the weather), renewed signs of a Chinese manufacturing slowdown, and ... Ukraine.

I'd like to focus on the latter for this week's edition of Macro: The Bottom Line. Now, for those who've been with us for a while, you've probably noticed that we haven't talked much about Ukraine at all - for the precise reason that the investment implications have been de minimis. But given the dramatic developments of the past week, we think it merits a quick discussion nonetheless.

A quick primer for those who are unfamiliar: Ukraine, an Eastern European nation of 46 million people, had been gripped by anti-government protests since November. The initial spark was a decision by the country's pro-Russian president, Viktor Yanukovich, to scrap a trade agreement with the European Union, which many Ukrainians saw as the first step to closer integration with the West, and in turn, to better living standards. To make matters worse, Yanukovich opted instead for a $15bn Russian aid package, firmly aligning Ukraine's economic fate with the whims of the Kremlin. Last week, the protests reached dramatic proportions, when Yanukovich's security forces attempted to storm the protestors' camps in the capital Kiev, leading to violence that killed over 70 people. Just when the country appeared to be on the brink of civil war, however, Yanukovich fled the capital and was subsequently stripped of his powers by parliament, effectively handing the protestors a swift victory. In fact, the protestors' key demands - a new interim government and early elections - have now been granted.

Quite some drama indeed. So why did markets simply shrug it off? There are a number of possible explanations.

 

First, to put it bluntly, Ukraine is simply too insignificant from an economic standpoint. To give you an idea: years of political turbulence and fiscal mismanagement have meant that the country's economy has wilted since the collapse of the Soviet Union. Today, its economy is smaller than that of Greece (that's right, Greece!), even though its population is four times as large. At a time when the markets already have their hands full with the bigger emerging markets (China, Brazil, Turkey etc.), Ukraine ranks rather low on the priority list.

Second, the geopolitical implications of the political tension in Ukraine are rather limited. In the previous decade, when commodity prices were soaring, and when Western Europe had fewer alternatives to Russian gas supplies (piped through countries like Ukraine), Vladimir Putin's maneuvering in Eastern Europe was closely scrutinized, for good reason. Today's world is much different. The fracking boom has already made inroads into the UK and Poland, allowing Europe to diversify its energy needs away from Russia toward "friendlier" sources. And with the Russian economy growing at little more than 1% (unlike the brisk 5%+ pace in the last decade), Putin has lost much in terms of economic leverage. So those still hoping for a grand showdown between Russia and the West in Ukraine will be disappointed.

 

The bottom line: don't let the media hype over the "Ukrainian spring" get to you. Markets have done little more than yawn at the events in Kiev, and it's hard to blame them.

Create your own biotech mutual fund

I started to be interested in biotech stocks over 2 years ago. I was talking about Amgen and Vertex when they were around $54 and $45 respectively. Now Amgen is at $123 and Vertex $84. Actually you would be doing great if you simply put money into biotech back then. This is another big uptrend and will continue for years. So if you want to join the train, you may consider to create a self-made mutual fund for some small biotech stocks, which could also be the acquisition targets of other big biopharma companies. Let me be clear, small biotech stocks are very risky and you don't want to put too much money into just one or two stocks. Better to evenly distribute your money into a few promising biotechs, hoping some of them may bring you big winners. The following are some good ones with more advanced pipelines that big boys may likely be interested in.

• Dynavax  (DVAX) has an anti-hepatitis B product in phase III studies, HELPLISAV. Dynavax has 18 issued U.S. patents in its portfolio and is also partnered with GlaxoSmithKline for an autoimmune program and with AstraZeneca for an asthma therapy. It is currently just trading at $1.70.
• Ariad (ARIA) had already got a used-to-be very successful marketed product, Iclusig, an anti leukemia drug. However, it got crashed late last year since FDA pulled its leukemia drug off the market due to safety concerns for cardiovascular events. Due to strong demand from the patients who already used the drug, FDA allowed the drug back to the market last December with a new warning label, but the stock still hasn't fully bounced back from those devastating losses. The stock price is extremely depressed at the moment but it may quickly change its course to jump up if the sales of Iclusig exceed the expectation. There is a chance that some big players may take it over as Iclusig is still a great drug, especially if its dosing and schedule can be optimized to reduce its cardiac safety risk.
• Acorda (ACOR) has already got three FDA-approved drugs in its portfolio with the biggest product for multiple sclerosis called Ampyra, which helps MS patients who have difficulty walking. MS market is huge and Acorda reported that Ampyra sales had risen by 13% through the first nine months of 2013.
• Insmed Inc. (INSM) is mainly developing  inhalation therapies for the treatment of lung diseases. The most advanced product is called ARIKACE, which is in phase II trials in the US and phase III in Europe and Canada.  This is an inhaled antibiotic for patients suffering from cystic fibrosis and non-tuberculous mycobacteria.
• Idenix Pharmaceuticals (IDIX) is well known for its variety of products for viral and infectious diseases, especially for hepatitis B, hepatitis C, and HIV. Recently UBS analysts said IDIX was a possible takeover target in 2014 and rated it as a "buy". 
• Portola  (PTLA) has a phase III product called betrixaban, which is for prophylaxis for venous thromboembolism(VTE). VTE is a very common problem in cancer patients but currently there is no approved treatment for VTE prophylaxis on the market. This could be a big attracting factor for potential buyers.  
• Nektar (NKTR) has close to 10 late-stage products in its pipeline for cancer, infectious diseases, viruses, and diseases of the immune system. For many big pharmas that are inflicted with a huge headache of patent expiration for their blockbusters, Nektar could be very attractive to them.

Gold has likely seen its bottom

Gold reached its lowest level around $1180 per oz last year. Is this the end of the 2 years old gold correction? No one can know for sure in advance. Only the history can tell retrospectively. But I think more and more evidence has emerged to suggest that this is indeed likely the bottom for this gold correction.

First technically speaking, the sentiment has never been so poor for gold for a decade. Ask yourself, do you want to hear or even think about gold at the moment? I bet the majority of you, if not all, may even want to vomit when hearing the word, gold. That's the current reality about gold. No one wants to talk about it, let along putting money into it. But believe or not, this is exactly what an atmosphere looks like when a sector reaches its bottom. When no one wants to talk about something, usually there is no one left to sell as well. So the chance of going down further is minimal. When the sentiment is so poor, gold has quietly jumped by 10% this year and the gold mining stocks have advanced 30% so far. So gold has not only passed its 50-day moving average (DMA), it has just broken up through its 200 DMA. Technically this is a trend changing phenomenon.

Now fundamentally, there are quite a few factors supporting gold:

• China is quietly buying all the gold she can find. Last year she has imported 1000 ton gold. This is on top of all the gold produced in China that has been kept in China. China is now the largest gold producer in the world and she dose not allow gold to be exported. So physical demand is quite high for gold.
• On the supply side, it is becoming tighter and tighter. The current gold price is almost at the production cost level. In other words, many gold miners cannot make money at this low price. So many big mining companies simply close down their projects to avoid losing too much money. This in turn will make the gold supply less and less available while the demand will only increase. 
• After the bloodshed seen in the past 2 years for gold with its price at this low level, big money funds are now also starting to move into gold and mining stocks. This is again trend changing.

Does that mean gold will only go up in the months ahead? Not at all. It will still be very volatile with up and down price movement along the way. But I think the volatility will be confined to certain band range with the bottom not below $1180. If it declines again through $1180, then I'm wrong and another leg down for gold will follow.

I know not many of you dare to buy gold at this level, but just in case if anyone has the gut, buying DGP, the double long gold ETF, is one way to catch up with the trend. I personally like RGLD a lot, which is the best way to ride the gold uptrend. You can check it out here about some details on RGLD. Basically there is virtually no risk for RGLD to go out of business. At this very depressed level, one can simply buy and hold while enjoying its increasing dividends. Given how much it has advanced in the past two months, I won't be surprised that it may give back some of its gain in the next few weeks, but that will be a great opportunity to buy at is weakness.

The best Chinese Internet player

What is the most active and eye-attracting business sector in China? Definitely Internet-related business! For those who know China, Chinese people are not necessarily good at originating new technology, but they are for sure very good at expanding and applying any new ideas. Oftentimes, with full imagination beyond the original scope! If you don't want to miss the boat and want to ride the e-Commerce train in China, I have found a great one-stop player: KraneShares CSI China Internet ETF (KWEB). This is a quite new ETF that holds almost all the key online business players in China. You can take a look here at Morningstar about its information. You will notice that it has held the big Internet fishes such as Baidu, Soufun, NetEase, Qihoo, & Tencent etc. Such heavy weight players are well established businesses and are often also traded in the US stock markets. There is probably one additional perk. You may have heard that the No.1 Chinese online retailer, Alibaba, will issue its IPO this year. This will likely be a very successful long-term story and I'm sure there will be a huge interest in chasing the Alibaba's stocks. One way to play Alibaba is to buy Yahoo stocks that I first told you 2 years ago and many times thereafter. Yahoo has a significant stake in Alibaba. But buying KWEB may be another great way to get exposure to Alibaba with much lower risks. Although no guaranteed, I'm pretty sure that KWEB will buy Alibaba big time at some point. It will be very hard to understand why it will not given its focus is in the Chinese e-Commerce. I hope KWEB can come down a bit and if so, I think this will be a great buy if you are also interested in the huge online market in China.

$500 is a line in the sand for Apple

Ten days ago I urged you to buy Apple (AAPL) when it plunged 10% to about $500. You could either buy for long term or you may get some quick income via dividend and call option premium. Sure enough, Apple has recovered quickly and it is now at $544 per share. Likely Apple may get some resistance at its 50 days moving average  around $548. I won't be surprised to see it decline again from this level and may retest its support level at $500 in the next couple of weeks. However, I don't think Apple will go down too much. I think $500 is a line in the sand for Apple. For one thing, this is a very strong support line for Apple technically speaking. There is another reason for it. One of the most successful activitists and billionnaire, Carl Icahan, bought a huge amount of additional Apple shares (worth $500 million) when it dropped to this level. This means Icahan also considers this as a very good deal for Apple. If Apple indeed plummets again, don't miss another opportunity. I'm not sure Apple will stay at this low level for long.

Macro: The Bottom Line (2/10/2014)

Muddled messages on the US economy

New Fed Chair Janet Yellen is barely a week into her term. But if the past week's economic data releases are any indication, she certainly has her work cut out for her. For at the moment, the economic figures are painting - at best - mixed messages on the state of the US economy.

First, we had the ISM Manufacturing index on Monday. Think of this as a barometer of US manufacturer confidence. Long story short: after several months' worth of strong readings, the index plunged from 56.5 to 51.3 in December, suggesting that a pullback in manufacturing activity is in store. As all of you on the East Coast can attest to, a good part of the drop can be attributed to the horrendous weather conditions we've seen lately. That being said, weather is unlikely the only culprit. As the Wall Street Journal* noted, the recent breakneck buildup in inventories - which was also a strong contributor to the US economy's 3.2% growth rate in the 4th quarter - may be taking its toll. Indeed, when you have a glut of stockpiled goods, at some point orders will slow.

Second, Friday saw the release of the second downbeat employment report in a row. The headline job creation number (+113K jobs created in January) was not much consolation for the even more dismal +75K number in December. With employers churning out jobs at a 200K+ clip just three months ago, the slowdown is truly astonishing. Again, weather quickly comes to mind. But with certain weather-sensitive sectors - especially construction (+48K jobs) - creating jobs at an admirable rate - some underlying weakness is likely at play. Adding to the confusion, a separate household-based survey showed that Americans were reentering the workforce and finding jobs, pushing the unemployment rate to a five-year low of 6.6%. So all in all, a very mixed report that's gotten economists scratching their heads.

 

All we can do at this point is wish Chairman Yellen good luck in deciphering these enigmatic signals from the economy. While it's unlikely to force the Fed into a U-turn from continuing its stimulus reductions, it'll certainly have some FOMC members thinking harder about the true state of the recovery.

 

*Here's the link to the WSJ article: http://blogs.wsj.com/moneybeat/2014/02/03/dont-blame-the-weather-for-disappointing-ism-report/

Two distinctive trends unfolding

First, what are you seeing from the chart below?

Easy, isn't? You see two stocks are moving up handsomely in the past 5 years, KORS and DLTR and the other two down painfully, JCP and SHLD. Correct, but do you know what it means?

DLTR and KORS represent two ends of the American population: Dollar Tree (DLTR) is a discount retailer for low-income class and Michael Kors (KORS) is a luxury retailer for high-end class. Clearly in the current economic environment, both stocks are booming because they are targeting either poor people or rich people. So who is suffering? The middle class! Both JC Penny (JCP) and Sears (SHLD) are targeting the middle class and both are struggling for survival.

These trends will likely continue for a long time. DLTR is experiencing a correction and KORS is just breaking up. So both are worth considering for a long haul.

A speculative penny stock that could triple or more

Penny stocks are very risky but somehow people just love to play with them. The general feeling is that penny stocks can more easily appreciate than blue chips. After all, it will be a double if a $1 stock increases just by $1. In reality, it is not that easy. Percentage-wise, you still have to increase by 100% before doubling, regardless of if it is from $1 or from $100. The key is to find the right stock with good catalysts. Trading in penny is supper risky as they can easily go out of business. So never go all in with your house money, regardless how much you are convinced! For me, it is more of an informed gambling: I bet with small money but if I win, I expect something big. Last year, I bought a small biotech, Inovio Pharmaceuticals (INO), which is developing vaccines for influenza & cancers. I went in at $0.54 and luckily it went up to $2.57 as of now. Percentage-wise, it is a huge jump by almost 400% but as I said I only put in a small amount. I will see if it can go 10 times up.

I found another penny stock, which is quite interesting. The company is called Capstone Turbine (CPST). Ten years ago, the stock was trading over $90 as it was supposed to revolutionize the power-generation industry by using its micro-turbines that promised a great deal of flexibility for onsite power in remote areas, and could also serve as a backup source in the event of blackouts. But this promise never materialized and it has lost over 95% of its value. But now, it seems to see a light at the end of tunnel. It starts to produce and make the micro-turbines commercially available. Revenues have started to be generated.  I like its prospects and we may see it move fast upwards if the Street also sees its potential. What if it returns back to its old highs from here?

Again, it is purely speculative and you may lose all the money if it does not work out. Trade accordingly.

 

Macro: The Bottom Line (2/3/2014)

 

• Emerging market woes continue as three central banks pull out the stops
• The Bernanke era comes to an end, but the Bernanke paradigm is here to stay

The drama in the beleaguered emerging markets continued this week, with markets still intently focused on the yawning external deficits and increased financing vulnerabilities in these countries. In fact, anything with an "emerging markets" tag on it (with the exception of the officially managed Chinese yuan) wilted before the relative safety of the USD and US Treasuries. The Fed's decision to taper a further $10bn from its QE program on Wednesday certainly didn't help, plus data showing yet another strong quarter for US growth (again driven by inventory and exports), certainly didn't help. The situation was such that three EM central banks - those of India, Turkey, and South Africa - decided take matters in their own hands, raising interest rates in an attempt to spare their currencies from further carnage. In the case of Turkey, the rate hike was a whopping 5 percentage points! The worst part though, was that for all the drama that accompanied the announcements, they actually didn't do much. In fact, the currencies of all 3 countries, and those of many others (including Argentina, the theme of last week's post) are in no better shape than the same time last week. The moral of the story is: tampering with interest rates is a Band-Aid solution, and nothing more. Until the emerging economies tackle their structural problems head on (overvalued currencies, rigid/uncompetitive labor markets, distortionary price controls, runaway public spending etc. etc.), they will never be fully immune from speculative attacks. You never know when the next George Soros will come swooping in ... 

 

The Bernanke era comes to an end: The mayhem in the emerging world almost overshadowed the leadership change in the world's most powerful central bank. After eight years, Ben Bernanke's tenure as Fed chairman formally came to an end on Friday. For better or for worse, the Bernanke era has truly transformed central banking's place in economic policymaking. Whereas central banking used to be a simple exercise in hiking short-term interest rates when inflation pressures ticked up (or vice versa), it's now much more than that: bond and mortgage purchases, emergency loans to banks, collateral swaps, banking supervision, forward guidance etc. etc. One needs to look no further than the quintupling of the Fed's balance sheet to $4 trillion (and the hundreds of billions more in euros, yen, and pounds that have been pumped into the markets) to recognize the scale of the paradigm shift. And with that, be under no illusions: the Bernanke paradigm is here to stay. Though the new FOMC chair is named Yellen, this will remain very much a Bernanke-esque Fed. We've mentioned this several times and we won't belabor it too much further, but as a reminder: the low rates and activist central banking won't go away anytime soon.

I cannot get enough

Apple (AAPL) plunged about 10% in just few days. Long-term readers must know that this is the time I love the most: great stocks are encountering short-term setbacks! I don't think Apple will have risk to go much further down. Eevn if it does go down further, it won't be long before it comes back strongly. It has just gone too far too fast and needs to take a breath to accumulate energy to run again!

If you haven't bought any AAPL, this is a great time to establish your long-term positions. But you are also having a fantastic chance to get some quick income within days. Apple is going to deliver its quarterly dividend ($3.05 per share) to anyone who holds its shares on Feb 5, even just for one day! As I have shown you several times, buying around the ex-dividend time is a great strategy to get some quick income. By using the very conservative covered-call option technique, you can easily make hundreds or even thousands within days or a couple of weeks,  in addition to the dividend itself. I just did this for CSCO, MSFT, and TGT in the past few weeks and I will definitely do it again for APPL!

A dire warning - "Insiders Are Selling Like Crazy.....Short U.S. Stocks, Buy Treasuries & Gold"

Marc Faber is famous for predicting the financial crisis in 2008/2009 and he has always been very bearish for the overall market conditions. So take his warning with a grain of salt. But fundamentally I'm at his boat and become more and more worrisome that how people would simply ignore the risks and be unanimously euphoric.

Stocks will go up until they don't

Amazon reported earnings last week. What would you think about the market reactions to the following earning report?  "Amazon.com Announces Fourth Quarter Sales up 20% to $25.59 Billion." And its operating income actually beat estimates -- $510 million vs  $489.9 million. Its shares should shoot up to moon, right? Nope! Amazon's shares fell almost 10 percent a few minutes past 4 p.m., after the company reported the earnings. What went wrong? Well, whether a stock goes up or down is often not about the actual results but about the expectation which has already been factored into the stock price. For Amazon, the expectation for its sales was over $26 Billion. In the past few years, the market has become more and more lavish in expecting what Amazon can do, which has pushed its price to an unbelievable valuation: 20 times its sales. No company, regardless how wonderful the business it, can meet this kind of unrealistic expectation. Yes, its share price can keep going up until it cannot. I think this is just the beginning that the market is coming back to the reality. This reminds me of another crazy expectation for a stock used to be the Wall Street darling: the First Solar (FSLR). The high expectation pushed it to $300 per share until the final reckoning kicked in: its share price dropped like a rock to $10. The lesson? Any dream will come to the time of wakening and any stock price will eventually follow and reflect its real business status, not the inflated expectation.

Last year, I made two predictions for Alexion (ALXN) and Tesla (TSLA). Both were and are still the darlings of the Street with unbelievable valuation but both are still going against the gravity and keep going up, big time. Of course my prediction that they would go down from this high level has been a total failure. Yes, I'm wrong until now but I have my words here that the reality will kick in eventually at some time. I don't know when but I know it will. Just be careful, extremely careful if you are long for such darling stocks.