"Warren Buffett loses $2.5 billion in three days on Coca-Cola and IBM"

This is the title of an article and it went on: "It's not been a good week for billionaire investor Warren Buffett. His bet on Coca-Cola (KO) and American tech giant IBM have cost him more than $2 billion in just three days." I couldn't help but laughed! Apparently this guy didn't really understand who is Buffett and what is his investment style.

Do you think Buffett would be really sad for a minute about this "huge paper loss"? Not a chance! On the contrary, Buffett would be very happy for 2 reasons: I won't be surprised to see his increase of his holdings for IBM and/or KO in his next investment disclosure as it is typical Buffett that he loves lower stock prices and will buy more when others run away. Also he will be happy to see more shares that his dividends from IBM and KO could buy, which in the long run will substantially increase more of his wealth than if the stock prices simply go up. Don't believe? See an example here.

I'm anxiously waiting for another leg down of the overall stock market, which could further bring down the prices of IBM or KO. I will be the buyer at that time. Maybe the opportunity is just a few days away.

I'd like to get more money from smokers

I like tobacco stocks and have talked a few times here, especially the dominating company, Altria (MO). As I said, I hate smoking as a physician but I love such stocks as investment since they can bring me very reliable income for my retirement. One tobacco stock I’m holding is Phillips Morris (PM) which has done great for me since I got it. To be clear, I did not buy PM myself but got it for free from MO since it was spun off from MO in 2008. When I got it, it was around $50 and has since then appreciated to $80-90 in the past 6 years. Similar to its parent company MO that has paid increasing dividends for half a century, PM has done exactly the same thing to reward investors with increasing dividends with an annual dividend growth rate of 12%. So the dividend I’m getting now has been increased from the initial .45 per share to $1.0 per share. You can count that it will continue to hike the dividends for long long time!

As I said, I was busy buying in the past couple of weeks and PM was actually one of them. When there is panic, everything may come down regardless how good a stock is. This has created a great bargain for those long-term investors. Yes, PM is also on sale at the moment from its peak over $90 to low $80s lately. I’m happy to see this as I’m getting more shares via dividend reinvestment but at the same time I bought more PM stocks myself. I’m pretty sure those who are selling now will regret greatly when they look back in a few years. We have gone through this in 2008/2009 when I bought MO and at that time no one seemed to be interested in it. I wish we would see this kind of opportunity again but I won’t bet on it any time soon. The mini correction right now is probably the best opportunity for us for the foreseeable future.

Sell XIV but buy SDS now

This is a typical market bipolar mood swing often seen at the extreme situation. As I said a week ago when there was kind of extreme depression that buying XIV would likely make you some quick money, it shot up 20% within days. Now XIV has moved up substantially along with a fast decline of VIX that is now at about 16, the easy money with XIV is gone. I have already cashed out my XIV for about a 20% short-term profit. As it stands now, the market has suddenly become too much euphoric. It is simply too much overbought! Yes, I believe the market will move up further in the next few months with a strong year end rally but the normal course of moving up from the bottom should not be a straight line up. Given how fast the market has moved up within days, very likely it will come down again to test its recent low before finally finishing its bottoming process. This is just how the market works.

Now it is the time to sell XIV but buy SDS if you want to trade for extremes.  SDS is a leveraged inverse ETF for the S&P 500 index. As you can see below, SDS (red line) is inverse to XIV (blue line). When the market goes up, XIV goes up (due to declining VIX) but SDS goes down. If I'm correct that in the next 1-2 weeks the stock market will "crash" again to test its recent low, SDS will shoot up quickly. Of course this is purely speculative and let's see how it plays out.

What to do at the market panic?

The markets have been truly at a panic state in the past few weeks and I'm pretty sure it is of a lot of pain for most of the investors going through this. For the majority it is no fun to see the markets declining day after day and their stocks depreciating in value. Of course, it you are truly a long-term investor, managing a portfolio of high quality of dividend paying stocks, then a market correction like this should be welcome and make you happy. I'm definitely so, knowing that my dividends are buying more shares of stocks I want and I can also increase my positions with lower investment costs. So I was busy in the past few weeks to buy, not run. One particular stock I have been closely watching is Intel (INTC).

You may recall that exactly 3 months ago, I talked about Intel and my option positions. At that time, Intel was on fire and I thought it should come down first before moving further higher. Here is what I said: "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 busy 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." Well, as expected, Intel did come down substantially in the past few days, almost touching $30, the level I was waiting for. Intel at this price is a great value. It has just reported great earnings but the market was too pessimistic that they basically dumped everything regardless. So I took the advantage and did two things:

• As I said, I was stupid to set up a cover call too early to cap my long call profit potential up to about $30. I think Intel has a greater potential to go up much higher from here. I was definitely not happy about it. So this mini crash of Intel declining to about $30 gave me a great opportunity to unwind this portion of my options. I closed my Intel covered calls and my remaining long calls have no limit now regarding how high it can go. No need to say how happy I am with this chance!!
• The panic mood has enlarged the premium of options significantly. In other words, it is a great time to earn higher income from options. I sold more short term put options of Intel and expect to earn 3.3% from it with 2 weeks, which is equivalent to an annualized return of 85%!

If you haven't bought Intel, this is clearly a great time to buy! I don't know if Intel may go down further in the near future but I don't care as I know it is already very cheap at around $30.

Almost a sure way to make money at panic

The stock markets are crashing and everyone is running away, which makes a moonshot for VIX, the Volatility Index and so-called the market's "Fear Gauge". VIX shot up 20% today and briefly touched 30, a level not seen in almost 3 years. So can you make money when the market is in the panic mood? Definitely yes! As you can see below, VIX has rarely gone over 30 (the higher it goes, usually the lower the market goes, indicating investors are more nervous and dumping stocks). Since 2008 when VIX went all the way up to over 80 during the peak of the financial crisis, VIX has only been over 30 two times. It is even rarely above 20 in the past 2 years, a clear very complacent market! You may notice, regardless how high VIX goes, it always comes down when the market calms down from panic. There is no such thing that the market will be at the panic state all the time. So you can bet safely that sooner or later, the market will calm down again and VIX will decline as well. I bet VIX won't stay above 20 for long and may come below that pretty soon in a few weeks or even sooner.

 

So how can you trade for a declining VIX? Buy XIV, an inverse ETF for VIX. XIV will go up along with VIX coming down. While I expect VIX may start to decline pretty soon, you will still not likely lose money from XIV even if I'm wrong and VIX stays high or even continues to go up for a while. Why? As I said, it is just a matter of time when VIX will come down. As long as you can hold XIV, you will eventually make money. In investment, I don't want to say 100% for anything, but this one is close to a sure thing to make money, if you have enough patience and nerve.

 

Below is just what occurred today for XIV when it was bought at the time VIX was close to 30. Within a few hours when the market closed, XIV was already up by 10%. This is how fast it can move. If VIX is still above 25 in the next few days, buying XIV is a good trade. 

 

 

 

Should you run now?

It cannot be more scary than this: the Dow tumbled 335 points, the much broader S&P 500 got shellacked 41 points, and the tech-laden Nasdaq lost 90 points, and all occurred on the same day last week! This was a worst day of stocks which we hadn't seen for at least over 2 years. The plunge has erased the whole gain of the stock market in this year. If you feel shattered, frustrated or depressed, I can understand. So should you consider to run? Yes and No!

If you have many risky stocks in your portfolio that you are only speculating for short-term trading profits, then definitely you should be worried. Such kind of stocks are usually the first ones to crash and the last ones to recover, if they even can recover. You should always have some exit strategy to run quickly if the trend starts to turn against you.

On the other hands, if you have a portfolio with high quality dividend paying stocks, you should feel lucky that their stock prices are declining. You can benefit in 2 ways: 1) you can sleep very well at night knowing that your next dividends from such stocks will buy you more shares. This in the long run will bring you much more wealth than from the stock price appreciation. Don't believe it? See here. 2) You can buy more of such great stocks with lower prices to increase your positions.

One thing I still believe in is that this is the bull market and nothing fundamentally has changed to justify a reversal of this big trend. To me this is just a needed breath and rest for the market during its bull run. Therefore this plunge should be short-lived and I think it has created a great trading opportunity at moment. I think the oil market is specially interesting as it has been beaten down so badly that a strong rebound is very likely with any slight better or even no-so-bad news. USO is one way to bet for the oil market. I'm also expecting to see some general bouncing back from the overall market very soon. SSO is an effective way to do so.

Buy more trees for your retirment

A friend was asking me about PCL that I talked about almost 2 years ago. At that time it was around $39. It went up to almost $50 but it is now coming down to $39 again. I was asked whether it is still a good buy? Definitely so. Nothing I liked about PCL has really changed except that after many years of great run, it needs some rest. I still think it is one of great way to invest for retirement. Trees will grow regardless of what happens in the world, good or bad. They will beat inflation over the long run. PCL is now paying you 4.5% dividend. To me it is still a great buy at this price. Go for it and hold for long term with dividend reinvestment!

By the way, I was asked about another stock, WPRT, which is the manufacture for gas engines. I talked about WPRT a few times and made some money in the past. Unfortunately WPRT is not doing so great at the moment and its management cannot effectively monetize its unique technology and its leading position in gas engines. It is punished for their poor performance. While I'm still thinking this company has a great potential in the future given the super mega-trend in the natural gas industry, I think at the moment it is not the right time to continue hold WPRT, not mention to buy more, even though it is very cheap. I will let you know when I think it is safer to buy it again.

A potential blockbuster

Keryx (KERX) has just got a drug approved, called ferric citrate. It treats hyperphosphatemia (or high phosphate levels) in patients with chronic kidney disease who are on dialysis. These are very sick patients, who often end up with bone disease, vascular calcification, cardiovascular disease  that could lead to early death. For dialysis patients alone, it would be in the $250 million to $500 million range, which is big for a biotech as small as Keryx. So you would think KERX should soar following the FDA approval news a few weeks ago. Wrong, the stock got crashed by 11% on that day and continued in the following weeks. On one hand, it is a typical Wall Street behavior to buy the rumors and sell the news. There is another wrinkle in this case. Investors were kind of spooked by the “unexpected” finding that there is a warning in the product label that the iron levels have to be monitored during treatment. Is this really unexpected? Not at all in my book. Almost any drugs on the market will include some sort of warning & precautions since no drug is side effect free. I really don’t think this is a big deal and oftentimes the company can use the label information as the marketing means to approach physicians. In my mind, this is again a typical Wall Street overreaction! There is even another huge potential not many people understand, which may turn Keryx into another very profitable and successful biotech company. KERX is working on to expand its indication into pre-dialysis patients with chronic renal failure. This is really an extremely big market and if successful, this drug may bring in over $1 billion for KERX, a truly blockbuster product.

If you are willing to take some risk and have a long-term horizon, I think the current weakness of KREX is a great opportunity!