Best buys now

Happy New Year!
I wish you all had a great profitable 2014 and will have a prosperous new year in 2015. I hope my blogs have brought you and will continue to bring you useful ideas for you to make some money. I will try my best to do so in the time ahead.

Due to the busy schedule towards the year end, I don't have much time to write but I have 2 top ideas for you to consider.
- One is Muni. If you don't know what it is, please refer to this blog. The best buy now if NIO, which has a 8% discount and paying a 9-10% dividend (tax-equivalent) or 6% dividend tax-free.
- The other is preferred stocks vis JPS. You can refer to this blog to get an idea about preferred stocks. JPS has a 10% discount and paying a 7% dividend.

If you hold them for long-run, I'm sure you will be happy down the road that you buy them now with a huge discount.

End of world trade

As I said, the energy sector is on a free fall at the moment and there seems no end to be seen, at least for the very vast majority of everything related to energy. If any attempt to step in, it is just like trying to catch a falling knife. It could be very hurtful. Well, the contrarian me just cannot help but be wondering around to look for opportunities. I'm pretty sure there will be great money to be made from this brutal crash in oil and related stocks. I largely missed the last opportunity in 2008/2009 when oil dropped from $147 to low $30s. I don't want to miss this time again. I have started to accumulate some shares of big oil companies such as COP and XOM, which I will keep forever with dividends reinvested. I'm also looking for more speculative opportunities, which may, if I'm right, bring me 5 or 10 times the money I put in. Well, I think I found one that is worth trying.

Triangle Petroleum (TPLM) is a very small integrated oil company, meaning it is not just producing oil, but is also involved in other oil-related business. According to its CEO, they are hedging their oil at the price $85, meaning the falling oil price is not really hurting them and they can still make money even if oil keeps falling. At a price around $5, it is trading below its book value with enough cash available to buy out itself. To me, this is kind of gem I'm looking for when there is a lot of turmoil and blood in this sector. The real kicker for me is its technical setup, though. When for almost all the other oil stocks there is no sign of any turning around, TPLM is behaving as though it is attempting to make a bottom right now. In the past week or 2, TPLM has stopped declining and has started moving up. A higher high and higher low price movement is the first sign that it may have reached its bottom and started to turn around. With a price as low as $5, it is almost like a call option with no expiring date. As a safety net, watch for its recent low around $4. If it drops below this level, then this is a fake attempt of turning around and it will continue to decline. Sell if it happens. Otherwise, simply keep it to catch and ride a potentially fantastic bull run.

Once in decades chance!

Natural resource stocks have got absolutely killed. They include precious metals, nuclear energy, natural gas, oil, coal and other minerals. None of them is not lying in the blood in the streets. The brutal crash of the crude oil price plus the so-called year end tax-loss selling has added more salt on the wound. But the thing is, natural resources have always followed a predictable cyclicality. No exception! When the demand outpaces the supply, everyone becomes euphoric and starts to invest huge amount of money to try to catch the bull train. Eventually after several years of investment  and exploration, the supply becomes too much, outpacing the demand. Then the brutal correction starts. It will last until those weak hands cannot survive anymore and get killed. Initially this will lead to a balanced demand and supply ratio but eventually the demand will outpace the supply again and the cycle starts again. So the best time to buy natural resource stocks is the time when everyone got killed and no one is interested in it anymore. This is the exact bottom feeling like when the supply has come down to the minimal level. The only direction it can go next is up. Based on all my reading, I think now is the time at the bottom of this cycle for natural resources. Friends, this is likely a chance of once in one or two decades that is typical in the resource sector. Once a trend starts, it will last for 10 or 20 years before turning around.   If you have the gut and can handle the volatility (it is always very volatile), starting to get some exposure to this sector will make you a lot of money. I’m talking about a potential of 5 or even 10 bagger profits down the road. I will talk more about this sector in the next few months with some specific suggestions when appropriate. Stay tuned!

End of 3D printing?

3D printing was the darling of the Wall Street a year ago. Everyone was talking about it and the share prices of 3D printing companies shot to the moon as a result. It was way ahead of themselves. As with any stocks, if their valuation could not be supported by the fundamentals, sooner or later they have to come down to face the reality. This is what has happened to this industry and related stocks. Take 3D Systems (DDD), one of the biggest 3D printing companies as an example. The euphoria at that time pushed it to the peak close to $100, a very crazy valuation level. Then it got burst and crashed by 2/3 of its values to about $30 at the moment. What kind of the blood in the streets! Even at this level, its PE is still at 160 but the overall market PE is just around 17. You judge if it is still too expensive.

Having said that, 3D printing still has a great future in general and I don't think it is already ended. It just needs time to consolidate and eventually will come out strongly again. I'm especially interested in the biomedical 3D printing as it has a huge unmet need in front of it. I talked about Organovo (ONVO) before when it was traded at around $8. I cautioned that it could jump up crazily but could also easily nose dive. In other words, it would be very volatile. Along with the overall correction of this sector, ONVO is not immune to it. It is currently traded around $7. But as you can see below, it fairs much better (red) than DDD (blue) during this downturn. It appears it has a strong support as the level of $5-6. To speculate on this kind of new technology, the safest thing to do is to only put in a small amount of money when they are at the level with a strong support. As long as this support level holds, you should also hold and you should take some profit off the table if it goes up too much too fast. If you play this rationally, you may end up with several times your initial investment. I still have a great faith on biomedical 3D printing!

Oh, boy!

The best day since 2008, WOW! Dow Johns jumped over 400 points in one day that has not been seen for over 6 years. As I said, it is a Santa Claus rally that is knocking on your door now. I cannot resist it. In the past few days, I have started to make orders for quite a few quality stocks, especially those which have been beat down badly. IBM is one of them. One of them is especially impressive percentage-wise. In the evening of Dec 16, I placed an order for Microsoft MSFT) call options, trying to catch up some fire if the overall market gets on fire. MSFT is one of the best companies for long-term investment, which I have talked about here many times. Lately MSFT was under pressure after a persistent bull run this year. Usually quality stocks that got "crashed" short term may shoot up most if the overall market is on fire. Fortunately my order got filled the next day, i.e. yesterday. Today, MSFT jumped almost 4% with the market and my call options? Almost double in one day! See below. This is kind of short term extreme trade purely based on technical analysis. I believe there is more to go!


Add caption

The Santa Claus Rally has likely started today

Following my calling of a major bottom a few days ago, the market has been chopping around in the past 3 days with a lot of volatility. But I think finally and starting today, we are entering the Santa Claus Rally, sort of speaking. The recent sell-off has set up a perfect platform for the market to jump high towards the year end and may be more into early next year. We will see. If you believe me, buying SSO at any weakness is a good choice.

Buy IBM!

I know I sound crazy and losing my mind to suggest to buy IBM at the moment when it is like a falling knife. I totally understand it is a lot of pain for those holding the IBM shares. If you are buying just hoping for a short-term profit, you should not buy at all. If you are in for long-term investment with dividend reinvestment, then you should be happy to see the falling of IBM stock prices. This will only be doing great to you over a long run as the lower its price goes, the more shares your IBM dividends can buy, which will bring you more dividends and more shares and so on. If you are nervous, just think about what Buffett is doing as I told you last week. He is buying more of IBM. You should do the same, period! I hope you can understand, for great companies like IBM with sound business in place, the lower its price goes, the less risk you will get when you buy and eventually it will bring you a lot more wealth down the road.

In this uncertain time when there is still a possibility that IBM may further go down, the best strategy is to buy IBM with dollar averaging, i.e. you buy a bit now and buy more if it falls further. This way, your average cost will come down as well. This is what I'm doing now.

We are getting to a major bottom

I heard from CNBC yesterday that the market had the worst week since 2002. Yes, anyone who watches the market closely is certainly feeling the pain about the relentless decline of stocks day after day. As I said, the market is a bipolar animal, meaning its mood can change quickly just like a teenage girl. Just a few weeks ago, everyone seems supper bullish and the market just kept going up and up. Then all the sudden, it has become extremely depressed and keep going down and down. But everything has an end. I think we are getting very close to the bottom for this time but it may still take a few sessions with some volatility. How could I be so confident to call a bottom? Well, you have heard me talking a lot of volatility index, VIX. When it is up over 20, it is usually suggesting some panic in the market and very depressed mood for investors. This is often the contrarian indicator for a turn of the market. In the past 2 years as shown below, when the VIX average (green line) is high with a +2 standard deviation (SD) from its mean (red cycle), each time it lined up perfectly with the bottom of the market (S&P 500 in black). The VIX is over 20 now with a +2 SD. Next week starts the a very bullish season for the market as well. I think there is a good chance that you may see a jump of stocks soon. If you want to enjoy the overall market increase, you may buy SSO. I'm confident, SSO will be a lot higher toward the end of the year.

Buffett bought more shares of IBM

Now the information has been disclosed, which is consistent with what I had expected: In the third quarter, Buffett's Berkshire Hathaway holding company bought 304,034 additional shares of IBM.  That brings the company's total stake to about 70.5 million shares… worth approximately $13 billion, or 7% of IBM. This is Berkshire's fourth-largest position. Remember what I said just a few weeks ago? Here it is: 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.

 Buffett definitely keeps his words. In his 2014 annual letter, he made a wish that IBM’s stock will not go up for years: “If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.”

 20 years ago, IBM successfully transformed itself from the world largest hardware company to a specialized software & IT service company. Since then its profit margin has consistently increased year over year and along with that, its annual dividend has increased more than 600% in the past 10 years from $0.7 to $4.4 today. So let me ask you, if you save your money in the bank, can you expect to earn your interest with an annual increase of 60%? Not a tiny bit of chance! On the contrary, you must know that your money buying power in the past 10 years has actually significantly reduced, thanks to inflation. That’s why to me, buying and holding IBM stocks is much better than saving in the bank. Your money will definitely beat inflation!!

Why is the Chinese stock market so bullish?

I have been pounding the table a few times in the past few months to buy Chinese stocks. Sure as expected, the Chinese market has been on fire now. The Shanghai stock index has been up 37% this year, the brightest stock market in the world now. I have put my money into more conservative FXI but recently also more aggressive ASHR, which is the ETF directly tracking the performance of the Shanghai stock market. Thanks to the recent extremely bullish move, my ASHR has already doubled in just 2-3 weeks. It is too much too fast to me. So I cashed in half of my positions to take my original investment capital off the table. The remaining is just my house money.

So is the Chinese stock market a bubble now? In a short term, it smells like that and I’m afraid it will get some sort of mini-crash soon. But in the long run, it is far from over. As I said, if the history is any guide, the Chinese market may go up by 100% to 500% before it is done. The driving force is becoming more clear that this is the government engineered bull market. You see, the Chinese government has recently taken a couple of major steps to encourage people to invest in the stock market. Last month, they launched a program called Stock Connect that links the Shanghai and Hong Kong stock exchanges. This has created a platform to allow foreigners to buy Chinese stocks on the Shanghai Exchange and Chinese citizens to buy foreign stocks by trading shares in Hong Kong. Then a few weeks ago, the People's Bank of China (the Central Bank), reduced one-year lending rates 0.4% and one-year deposit rates 0.25%. It is also reported that the Chinese authorities has cut fees for trading and opening investment accounts to lure more small investors to get back into stocks. All these efforts have obviously been effective as only in November over 1 million brokerage accounts were opened in China, which was almost triple from a year ago. This has been translated into an explosive increase of the trading volume on the Shanghai Composite Index, rising 85% over its 30-day averages according to Bloomberg.

Putting all together, I’m more confident than ever that there is powerful force behind the Chinese stock market to skyrocket for at least a few years. Don’t miss it! Any weakness will be a great buying opportunity!!