If you haven’t got into Chinese market, you are getting another chance

3 months ago, I suggested that a bull run for the Chinese market might be just starting and you should consider to buy if you were bold enough. The safest way to bet the Chinese stocks would be via FXI, the ETF for the 25 biggest companies in China. As you can see below, Both the Shanghai stock index (SSEC) and FXI have gone almost straight-line up in the past few weeks. This is way too fast too soon.  Just like any long distance runners, they cannot keep running without rest and from time to time, they may even stop to accumulate energy. As can be expected, the Chinese stock market needs to take a rest and come down a bit before regaining enough energy to move further up. Same for FXI.  This is exactly what is happening now. Technically speaking, the SSEC was actually just hitting its strong resistance line around 2260. It is usually too much to ask for the initial try to break through a strong resistance level. The most logic area for it to rest is its 50 day moving average (DMA, the blue line). Usually for a stock with an uptrend, it will not go straight up but chopping around its increasing 50-DMA. I bet FXI will follow the same path, coming back toward its 50-DMA around $39.50 or when SSEC declines to 2135. When it tests this level, you should really consider to buy if you also want to ride this bull run. While no guarantee, I think this is likely the start of a multi-year bull market. If history is any guide, I won’t be surprised to see a gain in the range of 100-500% in the next few years.

Emerging markets are very bullish

I made some predictions at the year end of 2013. One of them was emerging markets, which I predicted would be doing well in 2014. It did not immediately show its strength during the first half of the year but it is catching up right now. Actually it is showing its rather bullish trend at the moment. EEM is an ETF for emerging market. As you can see below, EEM is breaking out its important 2 years' resistance (the red) line and is at the same time approaching and in the process to break out its long-term (6 years) trend line (green line). While nothing is guaranteed in investment, this technical setup is extremely bullish, indicative of the start of a long-term bull run for EEM. Fundamentally, emerging markets are also much cheaper than the US market and are poised to do the catch up work. I bet in the next 5 years or so, S&P 500 may not be doing well but EEM will be to a great extent outperforming. Don't ignore it!

Following Buffett’s footstep to build up wealth

I bet not many people knows how much the Buffett’s flagship company, Berkshire Hathaway (BRK.A), is trading now. Without much attention and seemingly silently, BRK A shares are crossing the $200,000/share level. Yes, over $200,000 per share if you want to buy BRK A shares today. BRK is certainly not sexy and not chased by people like other high-flying stocks such as Google, Apple, or Tesla. But believe or not, Buffett’s way is the only sure way to build up your wealth without taking much risk.

 I started my trading/investing about 20 years ago in Switzerland. Around 2000 when I just moved to Canada, I first heard about Buffett via a free investment newsletter. I clearly remember the story that author was telling in the letter: his friend bought a luxury watch worth about $50000. He said he would never buy such an expensive item which would only lose value over time. He would rather buy one share of Buffett’s company, which was about $50000 at that time. I also clearly remember what I was thinking then: could anyone really make money from such an expensive stock? What was the chance to have my money double with it? You can guess, I passed this idea and continued with my style that, I can bet most, if not all, of you are doing: more interested in ideas or tips of high-flying stocks, especially penny stocks. The conventional “wisdom” is that low priced stocks are easier to double than high priced ones. I was busy with trading in and out with no interest in long-term investment in the following years. What a stupid me at the hindsight!! Now in about 15 years time going through 2 very devastating stock market crashes in 2000 and 2008, BRK has quietly moved up 4 times in values, while during the same period of time, my style of trading had made me lose a bundle in my earlier years of investing. It would have made me much richer to simply buy BRK and sit there doing nothing for 15 years. Finally I got that in a very hard way!!

Investment is not gambling and you got to have patience and let the time work for you. Just like gambling, while there may be some supper lucky guys who can win and become rich overnight, the vast majority won’t become rich that way. You have to patiently build up your long-term portfolio with good dividend paying stocks and buying them at the right price and keeping them forever. Let dividends reinvest, which will bring you magic over time. You can become very rich, much more than you can imagine simply by dividend reinvestment due to the supper compounding power. See one example here I wrote last year how your small investment with $32000 could make you millionaire some day. If I were that smart 20 years ago, I could have already retired multiple times by now. But it is still not too late for us. Many of us will still have 20-30 years from now for investing, even if you start from scratch today. My goal is to build up a retirement portfolio that can generate monthly income of tens of thousands automatically for me, when I don’t want to do anything. Such a day will come inevitably when you get old: you need money to support your daily life but you cannot physically work anymore to make money. This is exactly what I have been doing since about 6-7 years ago. Looking for great dividend paying stocks and buying them when their price come down to a good level and then simply keeping them with dividend reinvested. You don’t need to worry about what the market is doing short-term. Actually borrowing Buffett’s words: 'Down days always make me feel good' , because you can buy great stocks at bargain. Initially you may likely not feel anything great as such stocks tend not to rise in a fast pace but keep steady. However, after observing them for 6-7 years, it becomes more and more evident that this is truly an effective wealth building machine: your number of shares becomes bigger and bigger every quarter and accordingly the dividend amount you get becomes bigger and bigger. All is working automatically without any of your further effort. As a matter of fact, a declining stock price will become beneficial for this type of investment as your same dividend amount can buy more shares, which in turn will bring you more dividend (see the example link here for MSFT). What a truly worry-free investment!!

This has become a cornerstone of my retirement portfolio. But I’m doing something more: I use option techniques to effectively boost income and dividends from such stocks and therefore to accelerate the pace of inflating my portfolio value. I have never felt so good nowadays in managing my portfolios. I’m also helping my son to build up his long-term investment. I’m sure in 20 years from now when he is in his 40s, he will likely be already financially free simply from his investment.

If you like what I’m saying and would like to start, take actions. At the moment, MCD, WAG and TGT are all at good valuation and are worth buying. Currently I’m discussing with a few good friends to think about pooling money together to set up a partnership company and invest using this philosophy and my well established trading techniques. I’m pretty sure this will be a very successful wealth building business.

Time to short Euro again

Long time readers certainly know that I have been bearish for Euro for years (see here and here). I even made a bold prediction that Euro would not survive in 5 years. Of course Euro would have already clasped if purely based the economic terms. It can rather survive for so long simply because of the political will. Following the financial crisis in 2008, the Eurozone countries have tried very hard to get back on foot. Yes, their situations are not as abysmal as 5 years ago, but have they really come out of the woods? No way! The Eurozone is still in a mess, a bit mess economically, period! Our recent bottom line blog was touching some key structural problem in the Eurozone.  While they are still struggling to survive, they are pulled into the confrontation with Russia due to the Ukraine crisis. Put geopolitics aside, sanctions against Russia are also hurting EU themselves very much economically. This has become more than evident when German’s GDP data showed that they were going into recession last quarter. You have to understand Germany is the only economic engine in EU that keeps the whole Eurozone floating. If they cannot keep their head above the water, the whole Eurozone has nowhere to go but sink. So what is the prescription from the EU Central Bank to save their economy? You can guess: printing money and flooding the market with Euro as much as needed! In other words, Quantitative easing in EU is escalating on four cylinders. The net result of QE? A weakening Euro. As I have said before, the EU Central Bank will not allow Euro to strengthen too much as they don’t have the economic power to support that. This is exactly what has happened in the past few months: Euro strengthened to $1.40 or so but could not stay that strong and has plunged to $1.33 just in the last couple of weeks. This is just the beginning. Euro has much more to drop and I won’t be surprised to see it go down to $1.20 or even lower. I think it is a safe bet to short Euro now. The easiest way to do so is to buy EUO, a leveraged inverse ETF against Euro.

Macro: The Bottom Line (8/18/2014)

What the bond markets are telling us

A mere two weeks after markets ebulliently cheered the 2nd quarter US growth numbers, dark clouds are converging once again. Nowhere has this been more apparent than in the bond markets. Just last week, the 10yr Treasury yield dropped to nearly 2.30 pct, a level it hasn't seen in 14 months. Even more dramatic was the situation in Europe, where Germany now pays less than 1 pct to borrow for 10 years, for the first time in history!

The free fall in developed government yields has to do with two factors. 

First, the growth picture is not all that rosy:

• US: True, the US is experiencing both impressive growth and breakneck job creation. But as we pointed out two weeks ago, there are still several structural issues - such as lukewarm wage growth, sluggish productivity growth, and a lower participation rate - that need to be addressed before we can break out the champagne.
• Europe: Just this week, the EU's statistics agency revealed that the 18-nation Eurozone once again stagnated in the 2nd quarter. Germany, until now one of the few bright spots in the region, contracted 0.2 pct.
• China: China appears to be weathering the challenging macro environment well, maintaining 7-plus pct growth amid improving sentiment indicators. But it's worth remembering that this can be attributed in large part to the government's mini-stimulus - including incentives for banks to extend more credit. Such measures do assist growth in the short run, but at the cost of exacerbating China's already elevated levels of private-sector debt.
  

Second, geopolitics continues to rear its ugly head, with three regions (Ukraine, Israel/Gaza, Iraq) all convulsed in a seemingly endless conflagration. And even more so, the conflicts appear to be striking closer to a point where they could have global economic implications. This has especially been the case in the Ukraine conflict, where a tit-for-tat sanctions war between the West and Russia has already taken hold. With Russia now banning imports of key food items from the EU and the US, the agricultural sector in several European countries is already feeling the pain. The risk is that the sanctions spiral sucks in other sectors that account for an even greater share of employment and output in these countries. Not to mention the risk of energy-supply disruptions and higher utility bills in the EU. 

Of course, both these factors may ultimately prove to be transitory. But they are a sobering reminder that we are a long way away from the rosy days of pre-2008.

China is quietly breaking out

Two months ago, I talked about the idea to start betting on the China’s stock market and you can see here. I took some profit from FXI, thinking it could come down first before moving further up. Looks like I was too cautious. The Shanghai Composite Index went almost straight up non-stop for a month or so. As you can see, it has clearly broken out upward over its upper trading box range. This is a very bullish move! Taking into consideration how poor the sentiment has been for the Chinese stock markets, how long it has been struggling, and how cheap the Chinese stocks as a whole have become, I think there is a good chance that the Chinese stock markets are entering into an early stage of a multi-years bull run. If this turns out to be true, we are talking about potentially several times the current level based on what happened last time when the Chinese stocks started their bull run. Now the index’s break-out level becomes its support line at around 2150. It will certainly not be a straight line up and likely will be very volatile. But if it declines, I bet it will be supported around the 2150 level and its next upward target will be around 2240. Using this as guidance, I think the safer way to bet on this potential supper bull market will still be FXI. If you are really a risk taker, you can consider a leveraged ETF, XPP for the same 25 Chinese blue chip stocks. I’m already in with XPP.

Buy crude oil now

Crude oil has plunged over 5% within just 2 weeks, from over $100 to $95 now. This is a rather drastic move. Technically speaking, crude has been quite oversold and is poised for a rebound, probably a significant rebound. Using the technical indicators as a guide, I really think there is a good chance that oil will jump back in the near term and there is at least a great short-term opportunity for profit. USO is an ETF for tracking crude oil. As you can see below, it is flirting its lower Bollinger Band and RSI is sitting right at the oversold territory at 20. In the past year, USO has dropped to RSI 20 four times. And as you can see from the red line, each time, USO climbed back in the next few weeks toward its 50 day moving average, which is around $37. Although no guarantee and speculative, I think this is likely what may happen to USO to move up toward $37 in the next few weeks.

Tekmira's windfall

Tekmira Pharmaceuticals (TKMR) jumped 45% on Friday and more yesterday. If you are smart enough and have bought the stock, pat yourself on the back but I strongly suggest you should take the profit and run.

According to the company, the FDA loosened a hold on the Ebola treatment in the company's development pipeline that enables the potential use of TKM-Ebola in individuals infected with Ebola virus. The thing is, this is an investigational drug just started in human tests. In other words, there would at least a few years from now if everything goes well. Even if the drug can be successfully developed and approved for marketing, is there really a profitable market for it? I highly doubt. Ebola is a disease confined in Africa and we all know how big the market is. My gut feeling tells me that when the euphoria about this drug recedes in a few weeks or months, this stock will likely come back down to where it belongs to. Consider you have been warned.

Pick up the gift the market is sending you

Have you heard tax inversion? If you know the saga Pfizer was playing recently in trying to buy the UK company AstraZenec, then you should know what it is. In a nutshell, a large US-based company buys up a small foreign company located in a country with lower corporate tax. Then the US company moves its tax headquarter (on paper) to that country but maintain its operations still in the US. Without practically changing anything, suddenly the US company becomes a foreign company and pay much less corporate tax. This is a tax loophole but perfectly legal and makes a lot of sense business-wise, although in the eyes of the US government, this is very unpatriotic.

 Walgreens (WAG) started its buying process for a UK-based company, Alliance Boots. The Wall Street has always expected that WAG would for sure to go with the inversion to lower its tax. But last Wed, WAG announced that it would not pursue an inversion. I’m there are a lot reasons for them to make this decision but this unexpected decision definitely got the market off the guard. WAG was severely punished and its share price got a haircut with a 14% plunge. Well, this is to me a classic overreaction we have seen so many times by now. I take this as a gift the market is sending you. You see, the underlying business for WAG has not changed in any way. It is still a great healthcare company that will continue to thrive along with the aging population and increasing costs on medications. Walgreens is a high-quality company I have been watching for long time. It is very investor-friendly by paying increasing dividends and buying back shares for years. I don’t see this trend will change any time soon. I won’t pass this gift sent my way for free. I have not only bought WAG for myself, I also bought some for my son's portfolio.

 

 

Have you become the government's landloard yet?

If you haven’t bought Government Properties Income Trust (GOV) when I talked about about 2 years ago (see here), then you got a great second chance now. This is a fantastic income generating machine that you can trust since its tenant is the governments, which for sure will have the money to pay the rentals. If they are short of money, they can always tax you and me to make it up. Unless GOV changes its business model someday to stay away from the excellent tenants of Uncle Sam, I don’t see how it won’t make money.
Well, apparently somebody got panic lately and dumped the stock en mass. It has dropped over 10% in the past 2 weeks. The reason? GOV was making secondary share offering to pay down its debt. When a company issues more shares, it is diluting the existing shares and that spooked the shareholders. They ran in rush. But it is stupid. The thing is, GOV is actually doing something great in the long run for the shareholders because it is a cheaper way to reduce debt by selling more shares than borrowing money. Apparently the insiders think the same as I do and see this panic selling as a great buying opportunity. Two insiders, Trust directors Barry and Adam, bought $10.3 million and $8.5 million worth shares, respectively, following secondary share offering. If they did not consider this was a great buy, they would not have bought the shares, period. I bet they know much better about the company’s prospects than those outsiders who dumped the stock. I will go with them and have added more to my existing positions. By the way, GOV’s current dividend yield is 7.5%.

Macro: The Bottom Line (8/4/2014)

Don't get too excited about the U.S. recovery just yet

Amid geopolitical tensions in Eastern Europe and the Middle East, and with the Eurozone on the verge of deflation, the U.S. comes across as an oasis of stability. And this past week's data certainly reinforced this view. First, we had GDP figures pointing to 4 pct growth in the 2nd quarter, a full point above consensus estimates. What's more, the growth was broad-based, with contributions from consumption, business investment, and even state/local government spending. And to top it all off, July posted yet another month of >200K job gains. Without a doubt, the U.S. economy has left the winter blues behind. 

But is the U.S. economy strong enough to stand on its own feet? Can it now do away with the crutches of ultra-loose Fed policy? To put it bluntly: absolutely NOT!

 

The first consideration is wage growth. And to say the least, it continues to be disappointing. As the chart below shows, wage growth has more or less stagnated around the 2 pct YoY mark. Considering that inflation in the post-crisis era has averaged around 2 pct as well, this essentially means that in real terms, American employees' purchasing power has barely improved. Considering that consumer spending accounts for 70 percent of U.S. GDP, faster wage growth would be indispensable if the U.S. economy had any chance of achieving "escape velocity." This is not something we've seen. 

Source: Federal Reserve Bank of St. Louis 

 

What could lift wages going forward? The key is productivity growth - after all, firms would only feel justified in paying higher wages if their employees each produced more. On this score, recent developments are also hardly encouraging. After a brief surge following the 2008-2009 recession, productivity growth has been stuck at rock bottom since 2011. And with U.S. companies preferring to deploy their windfall profits toward stockpiling cash and buying back shares (rather than toward productivity-enhancing investments), this scenario is unlikely to change for the better anytime soon. 

Source: Federal Reserve Bank of St. Louis

 

The third major obstacle to a full-fledged U.S. recovery can be summarized in the below chart, courtesy of Reuters. The good news is that the number of officially unemployed has almost fallen back to pre-recession levels (the bluish-green line). But at the same time, the number of people not in the labor force (the orange line) has gone in just one direction - up. In other words, there has been a steady stream of individuals leaving the U.S. labor force. This has been mostly driven by demographic changes, specifically baby boomers retiring, though there has been a meaningful contribution from discouraged workers as well. Regardless of the cause, the fact is that the slice of the U.S. population neither working nor looking for a job has risen. This raises the bar even further for how much the U.S. economy would need to grow before policymakers can declare victory.     

Source: Reuters

So for all the media hype surrounding the headline numbers, it's important to keep the (equally-important but less cited) underlying numbers in mind: wage growth, productivity, labor-force participation rate. Until these measures show meaningful improvement, the Fed will be in no rush to tighten the screws on easy money. 

Earn money by managing others’ money

Do you want to earn money by managing others’ money? I guess everyone would love that if they have such a chance, as long as there is no mandate for guaranteed profits. Does not sound like something that other people would accept, right? Wrong! This is exactly how fund managers are making money. You are probably one of them who are willingly pay them for managing your money regardless of whether they make money for you or lose your money. For mutual funds in general, they usually charge fees (often 1-3%) based on the amount of the managed money in the fund, not based on the profit. In other words, even if the fund is losing money day in and day out, the fund manager will still make money as long as there is money in the fund. It is even more aggressive for hedge funds that the fund manager will in addition get a portion of the profit, usually 20%. But you should understand, most of the funds, over 90%, are actually losing money based on their long-term performance. So you should think twice if you are thinking to buy mutual funds. In general, I’d check their fees and also their performance track record for at least over a 10 year period. So how about switch the roles and let you become the one to earn fees? You may think I’m kidding but no, you can do that by investing money in a good fund management company and enjoy their profit from such exuberant fees.

T. Rowe Price Group, Inc (TROW) is a financial services holding company, which provides global investment management services. It is one of the world’s largest asset managers with more than $700 billion in assets under management. For those who have bought mutual funds, you may likely have heard about T. Rowe funds as it offers a wide range of mutual funds in a variety of sectors including equity and fixed-income around the globe. In a nutshell, TROW is a very successful asset management company and is very profitable. You can see their revenue and earnings that are quite stable and climbing. Since it is making so much money, T. Rowe is also a relentless dividend grower. In the past 25 years, TROW has grown its dividend at 20% per year, a rather astonishing record! Its currently dividend yield is 2.26%. If TROW can keep this rate of dividend growth, in 10 years, your dividend yield would be 14% based on the current stock price.

So if now is the good time to buy TROW? Apparently someone inside the company thinks so. According to the public information, Director Mark Bartlett recently purchased 4,500 shares, at a price range of $83.32 – 83.32, with a total amount of $375,000. Keep in mind, there are many different reasons of selling stocks but only one reason for insiders to buy their own company stock: they think the current price is great based the prospects of the company! At the moment, you can even buy TROW at a much better price: $78 per share. Technically, $77 is a very strong support for TROW and I don’t see much downside from here, barring any unexpected bad news or the overall market turmoil. Regardless, long-term I like TROW very much for its growth potential as well as a great dividend. Investing in TROW is like you are making money by managing others’ money.

Wait for 500 years to get your money back!

Amazon (AMZN) lost 10% since Jul 24 and 24% from its high. Is it cheap to buy or what you need to do if you have already bought AMZN? Dump it!

Don’t get me wrong. I like Amazon as a customer and I often buy things online from Amazon. It is indeed a great experience and reliable company to shop online. But as an investor, I must say it is stupid to buy AMZN. This is a stock with the most ridiculous valuation associated with it. Believe or not, for so many years since its inception, it is still bleeding and losing money. Just last week, it reported record quarterly sales of $19.3 Billion. Sounds great, isn’t! But it spent $19.4 Billion. So it still lost over $100 million. Per its own report, this situation will continue in the foreseeable future. So what’s its valuation? Let’s use the P/E ratio as a rough estimate. For the S&P 500 index, the average P/E ratio is about 19 times. For Amazon, it is astonishing over 500 times. What does this mean? It means you will have to wait for 500 years to get all your invested money back. Say another way, if AMZN wants to be in line with the S&P 500 P/E valuation, its stock price will have to decline over 90% to around $12 or so. I’m not predicting this is what will happen but for me I will definitely stay away from the stock and let those insane “investors” continue to play with it.