Google's prospects

At the time of IPO of Google (GOOG or GOOGL), my wife asked me if we should buy some Google shares. I said no as I thought it would be too expensive at IPO. Indeed it was kind of expensive with the P/E at about 30 times or something like that. I have never bought or traded any Google shares only until very recently. I can tell you I have kept kicking myself all the time for this stupid decision of mine. Google has never looked back since its IPO and has almost always beaten the estimates on its earnings.

Don’t get me wrong that I suggest to simply buy IPOs. I don’t since there is usually a lot of euphoria around IPOs and the prices are generally very expensive. But after seeing the great performance of Google with one after another top-notch earnings, I should have used any weakness to at least get some Google shares in the past few years. I must say I have significantly underestimated the Google’s ability to generate money. This is a very unique company with full of innovations and I don’t see any limit with it. While its core business is still advertisement associated with its search engine, it is a heavy-weight player in the mobile business and other high-tech areas: Google glasses, automatic car, smart lens…….you name it! I really think everyone should have something in Google. Using Dollar Cost Averaging to buy a small portion initially and adding more at its weakness is a good strategy to establish your position for Google. 

Reading glasses may become obsolete soon

Shortly after I passed 45 years of age, I became very frustrated about my eye-vision. Almost like suddenly, I could not read anything small. For all my life, my eye vision was always excellent. As such you can imagine how much frustration I had during this transition. Now many years have passed and I have got used to it, presbyopia. I now have probably 10 reading glasses, in cars, different rooms, in my office bags etc. I’m sure many of you with my age have experienced the same. We can hardly survive without reading glasses now! But there is a hope now that reading glasses may become something obsolete and of history.

If you haven’t noticed, Alcon, the eye-care division of Novartis has just announced a deal with Google to develop health care products by using Google’s technology: smart lens. One very promising product from this partnership that may materialize in just a few years is the contact lens for presbyopia. In other words, people like me and you over 40-50 will not need reading glasses anymore as the smart contact lens will automatically adjust for either looking out in distance or looking in near field. Just imagine and try to visualize what kind of freedom you will have if you don’t need to always remember to carry reading glasses wherever you go.  This is going to be a huge market as there are about 2 billion people in the world who have some difficulty reading. Even just a fraction of this population who choose to use this smart contact lens would mean a big chunk of money for Novartis and Google. In addition to the strictly eye-related clinical use of this new technology, it is also under development to use the smart lens to monitor glucose levels for diabetic patients (DM). If successful, DM patients, which again is a huge population and increasing, will not use needle to spike their fingers anymore to measure their glucose levels. Also imagine what kind of potential this will be!

Both Novartis (NVS) and Google (GOOGL) are the powerful dominators in their respective sectors. Novartis is focusing on pharmaceuticals, eye-care and generics. The two joining together may lead to something really revolutionary benefiting both patients and investors! 

McDonald is severely oversold

McDonald (MCD) is one of the best value stocks in the world. You can simply rely on it to generate tons of money for you as long as you trust it and keep your faith with it. Right now you have a great opportunity to buy it for long-term investment. You may have heard a lot of bad news for MCD recently, which has pushed down its prices dearly. But all of it is just short-life noise and will soon be forgot. Technically speaking, MCD is way oversold: a large divergence from its 50 day MA (moving average); dropping below its lower Bollinger Band; and RSI at 20. At the current price around $95, it is sitting right on its strong support line. I bet MCD is unlikely declining too much further from here but there is a good chance that it may have some strong rebounding. Regardless if you want to invest for long term or trade for speculation, it is a good spot to be in for MCD!

Another orphan drug opportunity

Sarepta Therapeutics (SRPT) is a Cambridge biotech company, focusing on orphan drug development. It was just announcing a positive phase 3 study results last week about the indication of Duchenne muscular dystrophy (DMD), a fatal, muscle-wasting disease. However, its shares plunged 13% on the day. The Street was apparently not happy with the results but I think it was wrong and this could be a good opportunity to buy SRPT.

DMD is a rather rare disease, occurring in about 0.03% of boys and destroying muscle function and quality of life over time. Duchenne patients will gradually lose their waling ability and eventually the respiratory muscles are destroyed. They usually could not live past their 20s. Sarepta said that the results are good enough to seek approval from the FDA later this year and target to get the drug, called eteplirsen, to be approved in 2015. If successful, it would be Sarepta's first marketed drug. I bet the company will try its best to get ready for the submission and the stock will become hot again towards the end of the year or early next year.

I underestimated Intel's bullishness

Intel (INTC) is on fire again following very positive earning results reported on Tue. As I have said several times, don’t simply listen to those Wall Street analysts who are usually late in the game and don’t have the long-term view. They tend to look at the rear mirror and overreact to bad news. Intel  has been considered dead money for many years and almost no one believed it anymore that it would continue to grow. It was one of the most hated stocks in the Street.  But not me as you can see from my blog starting 4-5 years ago. Here is the prove from one of my positions for Intel. It is a combination of 3 option arms I made one and half a year ago (Nov 2012) when Intel was trading at low $20s:

-          The top one is a bullish bet with long call options. 

-          The middle one is a technical component with which I generated some instant income to partially fund my bullish call option above. It is kind of covered calls. While I did get some money from it, the downside is that I virtually have capped my profit from my long call options at $30.54. At the moment, since Intel is much more than $30, this portion is basically offsetting against the top one: i.e. when one is increasing, the other will be decreasing.

-          The bottom one is another bullish bet that I did not expect Intel would go down below $20. It is a naked put trading. With it I also generated the instant income to fund my call options.

 

This is one example how to use options wisely to get paid for betting something. See the middle column with the circle. These are the prices I either paid or was paid for. For the top row, I paid $3.15/share to bet Intel would go up more than $23.15 in 2 years. For the middle and the bottom rows I got instantly paid (earned) $0.54/share & 10.50/share, respectively. So the whole position meant that I earned $7.89 (10.50+0.54-3.15) upfront when I set up this trade and my worst result could be that I had to buy Intel at $19.5 if its price went below this level by Jan 2015. I traded 10 contracts for each (= 1000 shares). With this kind of setup with being paid upfront, you may understand it is very difficult to lose money, isn’t?  While the whole position is very profitable as it stands now, in the hindsight, it was my stupidity to use the  covered call option (middle row) to cap my upside potential.  The idea was not bad to use some instant income to fund my trade. But apparently I did it too soon as it did not bring me too much income (just $540). I guess even myself was kind of underestimating Intel’s ability to move high quickly over $30 within 2 years. I thought it would already be a very good move if it could advance up to $30 and was not so much convinced for it to be over $30 in a short 2 years period.  This is kind of learning process for me as well that in the future I’d think more about the benefit/risk before setting up such kind of combo option trades.

 

So are you starting to become interested in Intel now? I hope you did so much earlier. While I think Intel is a great stock to buy and hold for long-term, I don’t like the euphoria about it at the moment. Suddenly all the analysts seem to wake up as if they are much cleverer than others to see the potential of Intel and are buy to upgrade it for buy. I don’t like it for the short-term. If you want to buy, likely you may get a better chance in a few months from now when the euphoria sets down. I think it is short-term overbought at the moment. It would be a much better buy if it can decline towards $30 or so.

Why Microsoft will be moving a lot higher

A few weeks ago, I made a bold prediction that Microsoft (MSFT) could transform itself to become another Apple. Of course, I know this would be considered a stupid prediction for most of the people out there. Who are still loving Microsoft? Well, it seems I may not be alone. I just saw a good blog talking about the wise move of Microsoft to heat up its competition in the mobile business. I suggest you also take a lot.

By the way, MSFT shares have been going up quite lot lately.

Macro: The Bottom Line (7/14/2014)

Ghosts from the Eurozone debt crisis

 

The Eurozone debt crisis has been dead for months - or so the markets have been behaving for much of this year. Few securities have illustrated this better than Portuguese government bonds. At the start of 2014, the Portuguese government was paying 6 pct to borrow for 10 years. By mid-June, that cost of borrowing had fallen below 3.5 pct! You certainly would've been forgiven for believing that the days of runaway deficits and hundred billion-euro bailouts were forever banished to the history books.

 

That was until Portugal's second-largest bank brought the old ghosts back last week. Espirito Santo International - the parent holding company of Banco Espirito Santo - delayed interest payments on some of its short-term debt obligations. The panic effect was immediate. Stock markets on both sides of the Atlantic tumbled. Portugal's 10-year bond yields shot back up toward the 4 pct market, those of Spain and Italy rose as well, while U.S. Treasury yields dropped. Greece managed to raise only half of its initial estimate of new funds in its newest bond issue. After months of complacency, markets were no suddenly bracing for a return to the horror days of 2011.  

 

But how much do we actually need to worry? Will a not-too-well-known Portuguese bank unleash the next wave of instability in the Euro area? We think not.

 

First, the payment delay at Espirito Santo was more a result of company-specific problems, rather than of broader macro issues. Sure, the operating environment in the peripheral European economies has been anything but rosy, but ultimately it was the labyrinthine, opaque operating structure of the Espirito Santo conglomerate that brought it to its knees.

Second, in terms of systemic relevance and interconnectedness with the European financial system as a whole, Banco Espirito Santo pales in comparison to banks in Northern Europe or the U.K. In other words, it definitely isn't "too big to fail."

Third, in the unlikely case that the turbulence does get out of hand, the ECB has explicitly committed itself as a last guarantor of financial stability in the region. If anything, a pickup in market stress will only prolong the ultra-loose central-bank policy that we've discussed so extensively by now. Over the medium term, that should keep asset prices well-supported.

We're certainly not arguing that the Eurozone debt crisis is over. The list of structural issues - lack of competitiveness, rigid labor markets, an overbearing public sector - has barely been touched. Incidents such as the Espirito Santo episode will surface every now and then. But - not the least given the hyperactivity of central banks - the risk of full-blown market meltdown is not where it used to be.

Free money is waiting for you

I’m talking about the Municipal Bonds (called Muni) a few times and you can check here for more details. As I said, Muni is one area that people often have a lot of confusion and as the result, they often panic to run from time to time due to overreacting to some headline news. This is oftentimes creating a great opportunity for those who understand the Muni and have the gut to step in during “crisis”. I even call this free money to be made.  Right now at the moment, we are seeing this kind of free money floating around for you to pick if you dare. Let me explain……

These days, one of the hot topics in the headlines is about Puerto Rico (PR), a Commonwealth state in the USA. For those who understand the situation, PR, a beautiful island state, is hopelessly insolvent. Just like Detroit, it has mismanaged its finance for years and incurred a huge debt load worth over $70 Billion now. Given the State has not much economic activities that can generate sustainable revenue for it, there is virtually no hope for it to pay the debt. It is inevitable that PR, following the footsteps of Detroit, will bankrupt soon. When people investing in Muni’s saw this news, they got panic and sold amass anything related to Muni’s. This is a typical stupidity of general investors overreacting to headlines news. You see, the Muni is a huge market worth over $3 Trillion. Historically the bankruptcy rate is less than 1% among all the Muni bonds issued by the states. Yes, if you only invest in the Muni’s of certain states, especially if you are chasing for high yield that is always associated with high risk, you may run into a huge risk of losing all your money. But if you are wise enough to only buy the Muni ETFs which will have a mixture of many different municipal bonds from different states, the chance of losing all you money is virtually nil. For closed-end Muni EFTs, you want to buy when they are trading below their NAV (net asset value). This way, you cast a stone for two birds: you will earn money when the ETF return to their NAV, which will almost always happen when the market calms down; in addition, you will also earn a higher interest income that is tax-free. To me the combo of the two is really a kind of free money for you to pick.

Right now, you can buy the Nuveen Municipal Opportunity Fund (NIO) for a 10% discount to its NAV and it has a tax-equivalent yield of 10%. Don’t miss the free money!

Surf in the air

I’m writing this blog in the air when I’m flying back to the US. What is the thing you most want to do during the flight? Surfing the web to kill the boring time, right? I’m sure everyone is likely having this kind of wish but in reality this is a kind of luxury not many people can have. You see, till now, there is no easy Internet connection in the air and even the service is available in some airliners, the cost is forbiddingly high and is not affordable for most of passengers. But hope is coming because one company is a pioneer in providing the in-the-air Internet service to general passengers. I’m talking about GoGo Inc (GOGO). This is a fast growing company that provides a service which will be of a huge demand. You see, GOGO’s in-the-air connection is already very hot among business travelers as they don’t care too much about the cost but they just need to have their work done. When I’m travelling on a business trip, I want to check my emails in real-time and want to have access to my company’s Intranet so that I can have a lot of things accomplished during the flight instead of having to catch up hours later when I arrive at the destination. Therefore, GOGO is targeting a huge market and its in-the-air connection will soon become the norm for everyone when they fly. It is just a matter of time. Yes, there will be competition coming but GOGO has the competitive advantage; as the pioneer it has already dominated the market with all kinds of patent protection in place. If someone wants to step in later, they may likely be challenged for patent infringement by GOGO. This is one niche area with a huge potential and GOGO is the one to go with it. Buying GOGO for long-term will likely make money for you. Looking at the chart, actually this may be the good time technically speaking as it is right sitting at its support line.

These 23 Charts Prove That Stocks Are Heading For A Devastating Crash

This is the title I copied from another blog in Forbes and you can read it here. This is somewhat long but quite interesting and informative. With no doubt, the warning signs for the manually inflated stock market are everywhere and as an investor or trader, you always should be prepared for a crash to come. It is not if but just when. I don't feel it is something imminent but the market won't let you know precisely in advance when the crash will happen. Just keep this though in mind for whatever you are doing in the stock market.

It is a bull market

I'm travelling now and don't get much time to write. It is just a quick note that the market is running really hot now. The Dow had just reached its historical high over 17000 last week! Wow!!

For those who have followed my blog for long time must know that I'm one of those who have had a lot of doubt about the strength of the market. I have been expecting for a 10-15% correction of the market for quite some time but till now I'm wrong. While there is no doubt that this is not a bull market driven by the fundamentals, I have to admit that this is indeed a BULL market, although without solid foundation as it is primarily driven by the Fed loose money policy. As long as the Fed is willing to keep the zero interest in place and print as much money from the thin air as possible, people are simply having no where to go but into the market for higher returns. This has been translated into higher stock prices. With this in mind, one should always be prepared for a severe correction which could come any time but it is a bad idea to simply sit on your hands at the sideline. There is no way to predict precisely when the correction may come. I have been waiting for it for a few years but it has never come. So my strategy is of two fold:

• I'm heavily putting money into the stocks but largely those which are solid blue-chip stocks that I want to hold for long. I'm especially interested in those which have run into some short-term problems and got sold by weak hands, such as IBM, TGT, APPL, MSFT, Intel etc. For such companies, my goal is long-term dividend reinvestment and as such, I don't care about their price gyration. Actually lower prices of them are great for me in the long run, but believe or not, such companies are usually doing much better than other stocks if there is panic. So you can really sleep well at night with such great stocks in your portfolio. As a complement to this strategy, I'm also actively trading such good stocks for short term income like the one I just talked about for TGT.
• Back in my mind, I'm always waiting for a severe stock market correction. To be better prepared for it, I always have some short positions in place which will benefit me if the market starts to fall. For example, I always keep some VXX open, which will shot high when in panic. I also short some weak stocks which will likely go free fall if everyone runs.  SPG is one I'm shorting. But shorting is not easy and you have to treat it as an insurance policy that you are not really expecting to get back anything but just as protection in a disaster. You also have to be vigilant and are willing to cut loss quick if it is turning against you.  

Macro: The Bottom Line (6/30/2014)

Party spoilers?

 

For most observers of the financial markets, the past couple of weeks have been rather dull - not the least because much of the globe has their attention fixated on what has been a thrilling World Cup in Brazil. With the likes of Neymar, Messi, Müller, and Robben unleashing the full wrath of their goal-scoring machines, what's there to spoil the mood?

Plenty, it seems, if the U.S. Treasury market is any indicator. In fact, last week saw yet another sharp decline in Treasury yields (the 10Y fell from near 2.65 pct to close to 2.50 pct). The reasons were two-fold:

First, there was the downward revision to 1st quarter U.S. GDP growth. Now, according to the Bureau of Economic Analysis, the U.S. economy contracted 2.9% annualized, not 1% as previously estimated. This is the severest quarterly contraction since 1Q 2009, when the country was still licking its wounds from the subprime crisis and Lehman bankruptcy.

Second, geopolitics again reared its ugly head. New Ukrainian President Petro Poroshenko's "ceasefire" looked like nothing more than a cynical joke, especially after rebels in the country's East once again shot down a government helicopter. And worse, just when the Obama administration thought it had finally extricated itself from the morass in the Middle East, radical militants of the "Islamic State in Iraq and Syria" (ISIS) steamrolled through the Iraqi heartland, coming as close as ever to their goal of an Islamist caliphate.

The headlines are indeed alarming. But are these events truly potent enough to turn the 2014 bull rally on its head? Or are they mere tempests in a teapot, whose ripples were somewhat amplified by the last couple of weeks' relatively thin liquidity? I'd argue for the latter:

On the U.S. GDP front: As banal as this sounds, the number was skewed by a couple of one-off factors. Again, there's no denying that weather played a huge role in the contraction. The rollout of Obamacare also caused some difficulties in quantifying government healthcare expenditures over the quarter.

 

True, the meaningful drop in business fixed investment is cause for concern, and continues to point to an economy that's not yet firing on all cylinders. But the markets are already fully in "2013 detox" mode, to an extent that any bad news on growth only fuels expectations of more central-bank accommodation. So if anything, far from derailing markets, the GDP print will likely further help undo the 2013 consensus, as we've discussed in several posts so far.

 

Now, on the geopolitical front: This is trickier. Crude oil did make a meaningful move above $105 this past week, and the prospect of an Islamist caliphate controlling swathes of oil reserves is indeed concerning. But the true likelihood of a black swan event - a broader conflict in Ukraine or a disruption in global oil supplies - is rather remote.

In Ukraine, the conflict will likely become a localized disturbance in Ukraine's breakaway Eastern regions, rather than a full-blown conflict with wider ramifications. This is especially evident in view of Vladimir Putin's recent behavior. Just this week, he asked his rubber-stamp parliament to revoke his "right" to intervene militarily in Ukraine. A symbolic gesture? Yes. But the timing is important. It comes just as EU leaders gathered to discussed economic sanctions against Russia. With the Russian economy already growing at snail's pace (projections for growth in 2014 are below 1 pct), and faced with a wave of sanctions from his largest trading partner, Putin has given a clear sign that there is a pain threshold he does not wish to cross. Astute tactician he is, Putin is well aware that as economic hardship settles in, the pride over the Crimea annexation, as well as his own legitimacy, would evaporate very quickly. Long story short, further escalation in Ukraine is unlikely.

In Iraq, the potential of "hostile elements" controlling the country's oil infrastructure is real. But there are a number of mitigating factors. For one, the ISIS threat has achieved what years of multilateral talks have failed to do: bring the U.S. and Iran onto the same side. While the two countries remain locked in a dispute over the latter's nuclear program, they have already made some progress toward expanding mutual dialogue and reducing tensions, and the specter of a common enemy will likely accelerate that process. In addition, the energy revolution here at home, with the exploitation of fracking technology and shale gas reserves, has already brought the U.S. several steps closer to energy independence. As a result of both these factors, the fallout in the financial markets will in all probability be muted.

Of course, these developments can turn in the most unexpected ways, and the last thing we want to do is to become complacent and unplugged. But for now, they pose little danger to the "2013 detox" - the primary drivers of price moves will continue to be Yellen, Draghi, and the central banks. And these monetary authorities likely to keep the liquidity floodgates open for some time.

Market participants can turn their eyes back to Brazil for now ...