How will the Greek drama play out?

The Greek drama is ongoing, intensifying and becoming more interesting. As it stands now, Greece for sure will miss its first scheduled payment tomorrow, which means Greece is heading to a default. Needless to say, the market is getting really nervous now and the stock markets are falling around the globe. So what does that mean? Will this default automatically drive Greece out of the euro? Well, the short answer is no. And I stick to my guns that Greece will not leave the euro and at the end it will be the same drama all over again for the next year or so. Why am I thinking this way? Well, if you follow my blogs longer enough, you know I have been calling Euro a defective currency and will eventually kaput for sure for many years now. Including a country like Greece that has no financial discipline at all and will spend the money they don’t have like crazy will never make the euro a sound currency over the long run. However, I really don’t think Greece will be forced to leave the euro this time. There are many reasons for this bold call but one most critical reason is that Germany is not yet ready for this move. Believe or not, among the countries in the Euro or broadly in the EU, only Germany is virtually supporting everything floating economically and financially. One thing that very much benefits Germany with the current situation is a weak Euro. After all, Germany is a very much export-oriented economy and it needs a weak Euro to keep its competitiveness. If Greece is out of the euro, while initially the reaction to Euro may be very negative, I think over time when the dust settles down, Euro will become much stronger, which will hurt Germany dearly economically. This is last thing Germany wants given how weak their economies in EU and Germany are shaping up at the moment. For that reason, I think Germany will try everything it can to keep Greece in the Euro in the next few days/weeks. At the end it will be another kicking the can down the road drama and the Greek crisis will be resolved with a last minute deal. Then we will start to see another drama all over again when the next round of payments by Greece are approaching. This will be another story of course.

So believe or not, if anyone who has the gut and brave enough to buy the Greek stocks now (e.g. GREK), they may be rewarded handisomely if the Greek drama indeed plays out per my scripts. Of course, it is a high risk speculation and you may lose everything if I’m wrong. Greece will hold a referendum on Jul 5. So the market will likely be very fluid and volatile prior to that. If it drops significantly by Friday, I will attempt to buy to bet for a sharp rebound next week. But please never overplay. Only bet with the money you can lose!

What happened to the Chinese market and what I'm doing with it

I have been very bullish for the Chinese market for over a year but I was very bearish about it for a few weeks. Here is what I said early Jun: "But I’m really worried about the extremely euphoria presented in the Chinese market at the moment. To me it is almost like a huge bubble already blown up, which is on the verge of bursting up at any moment. I firmly believe that without a severe correction to kill the crazy euphoria first, it is very difficult for the Chinese stocks to go up further. " Now in the past week, it seems the reality is finally coming to the front stage. Within 2-3 days, the Chinese market crashed by 20%, directly going into the bear market. Now suddenly the panic and depression mode prevails and people are wandering about why this will happen and what are the reasons. Here are a few thoughts I have about the Chinese market:

• First of all, there is no special reason for the crash. The simple fact of the extreme euphoria and frothy stock valuation with wide-spread crazy leveraged speculating behaviors is sufficient to kill any bull market. It is not unique to the Chinese market but universally same anywhere in the world! It is just a matter of time when this moment will come.
• There are unique features associated with the Chinese stock markets: in generally investors and traders are highly immature in China and can easily be manipulated and the regulations are not yet very well established, which can be largely abused to their advantages by those who have the power and money. So it is very difficult to use the conventional technical or fundamental analysis to assess the Chinese stocks. Some unconventional gut feeling and reasoning is often more important in the decision making.
• As I said before, this bull run is driven by the Chinese government, not by the economic fundamentals. As such, it has a long way to go as long as the Central government wants to continue the bull market. After all, there is a political consequence if the bull market stops too soon. When everything is associated with the political stability, it is almost a certainty that at some point, the government will come to save it if it is on the verge of crash. In other words, there will be no end of world when the end of the world seems to come.

I once said before that this bubble like bull run may be ended with tragedy. While sounding brutal, I already predicted that we would start to see reports of suicide or jumping from the high-rises as the result of the market crash. This is usually an indicator of the bottom. Well I did see some reports last week about suicides. Technically, while not necessarily reliable for the Chinese markets, I did see an oversold condition set up. Together with what I'm thinking about the Chinese markets as above, I started to get in when it dropped 6%, more when down by 13% and further more when down by 20%. To be honest, it is a bit painful to see a sharp plummet of my positions within days but my gut tells me it is the right thing to do if I want to play with it.

A few final cautionary words to end this post: be mindful of the risk for the Chinese stocks. Don't overplay regardless how tempting it is. Always be prepared to lose everything with reasonable sizing. And always have a good exit strategy if you are wrong and use good hedge to protect if you are right. Great volatility with a wide range of fluctuations will be the norm in the Chinese markets. If you are lucky enough to have a double, better to sell half to get back your principle first and let the house money to run further. Don't be too greedy!

A potentially new breakthrough for cancer

What is the hottest thing in oncology? You likely know it is immune-oncology, involving CTLA-4, PD-1, or CAR-T. A lot of euphoria has been created and definitely a lot of money will be made in this area. Right now, there is a new finding that may even create a much bigger and huge opportunity in immune-oncology. First just a little bit basics on the immune system. When the body encounters foreign invaders such as bacteria and virus etc, the initial immune reaction is often via a process called phagocytosis, which simply means the immune cells called macrophages will find, engulf and clean such foreign articles. Scientists recently found that the body immune systems is recognizing a signal protein called, CD47 that are widely expressed on the body healthy cells and with CD47 on their surfaces, the killing cells, macrophages, won’t attach such normal healthy cells. Interestingly cancer cells, even not healthy at all, will also expressed CD47 to avoid the attack by macrophages. Logically, if this signal can be turned off or blocked, this will create another efficient way to have cancer cells killed. The beauty of this means is that CD47 is not cancer type-specific and actually almost universally expressed by almost all the cancer cells, hemotologic malignancies or solid tumors. If this proves to be a valid pass way for treating cancers, you can imagine how lucrative a market will be opened for early birds.

 So who is the leading player in this new front? Well, it is a small biotech company, Trillium Therapeutics (TRIL). TRIL has a CD47 inhibitor under development, a fusion protein (SIRPαFc) that can binds to CD47, which will then block its signaling power. As such, the cancer cells without potent CD47 signaling can be killed by macrophages. This has been demonstrated in the animal studies for acute myeloid leukemia. Now TRIL is planning to start a phase 1 clinical trial in the 2nd half of 2015. If the trial of this agent proves to be safe and efficacious, the commercial potential for SIRPαFc is unlimited as this may be applied to a wide range of cancers. I think Trillium’s prospect is very bright, but will be associated with a lot of volatility and uncertainty.  

Newborn baby deers and their growth

This is not about investment but for fun.

In our backyard, there are a lot of deers wandering around everyday. A couple of weeks ago, 2 new baby deers were born right at our yard. Below is the video how a newly born deer looks like.

 

 

 

They grow up quite fast. Just in a couple of weeks, they can be happily running around while they are still in breast feeding. Actually only until now I just learnt that deers are also breast fed.

It is time to buy Chevron

The market has been in a roaring bull run for 6 years without any significant interruptions. In this kind of super bull market, it is very difficult to find good quality stocks with good valuation for long term investment. It is very frustrating for value investors at the moment to try to find value stocks. But from time to time, you may still find some gems in the bull market. Chevron (CVX) is one of them. You may question, how could an oil company be a good one to buy when the crude oil is in a deep bearish market? Well, there are 2 parts for that. First, you won’t find good value stocks when everything is great. The best time to find them is when there is panic or depression and no one is interested in them. The oil sector is in this kind of mode and it is the dream coming true time for value investors if they want to find something with great values. Now comes to the 2^nd part which is more critical: if the company is great, then it is a perfect situation when its stock price is low. So the key is whether the company is good for long term investment. CVX is definitely one that you can say that.

While people may think Chevron is an oil exploration and production company, it is only half right. Actually CVX is involved in all aspects related to the oil business including the exploration, development, and production of crude oil and natural gas, as well as refining crude oil into petroleum products and manufacturing and marketing commodity petrochemicals and fuel and lubricant additives, and also plastics for industrial uses. That’s why it is called an integrated oil company. As an IO company, it is hurt by declining oil prices for producing the crude oil but at the same time it benefits from a low oil price for refining and manufacturing petrochemicals and related products. So it is the market stupidity to punish CVX because the oil price has crashed, which creates a great opportunity for value investors to buy CVX for long-term. CVX is one of the best run oil companies that are in a great financial shape. It is quite profitable, gushing out a lot of money. It pays good dividends for decades that you can rely on. While I’m not sure the oil price has necessarily bottomed, CVX is hitting a multi-years support around $100. Regardless what will happen for the oil prices, I doubt CVX will go down much further from this level. Right now, CVX is paying a 4%+ dividend, which is very rich. Believe or not, it has only happens 3 or 4 times for CVX in the past 20 years that its dividend yield has been over 4%. And each time this happens, its price appreciation will follow. CVX is really a great buy for now. I’m not only buying for myself for retirement but also buying for my son’s portfolio. It won’t make you rich overnight but it will allow you to sleep soundly at night and make you very rich down the road as long as you have patience to keep it for long.

The world most expensive stock

Probably everyone here knows Netflix (NFLX). Back 5 years ago, I used to be a happy customer for its convenient film DVD renting business. Indeed it was really a great business that one could simply order online with free delivery and return. I must say I was not clever enough to understand its potential as an investment and have never thought about buying its stocks. In the past few years, Netflix has successfully pioneered the online video streaming service that has basically replaced the DVD rental business. It has become so popular that its stock has really skyrocketed into the moon. It has indeed done a great job in expanding its customer basis, not only domestically but also now quickly into the international markets. Netflix has now over 62 million subscribers worldwide. With the stock price so much inflated, it is now a company bigger than Sony in terms of the market cap ($38 billion). Is its stock price justifiable based on valuation? Not an iota! Actually Netflix is one of the most expensive stocks in the world with a ridiculously expensive valuation. When you look the key probability metrics for Netflix, you will be surprised to see that it is not a very profitable business: profit margin at only 4.09%, operational margin at 6.9%, and return on equity at 14.02%. It is beyond my ability to understand how such a mediocre profitability can justify its nose-bleedingly high PE at 172. In other words, one has to wait for over 170 years to get their investment back. In addition, another good barometer for a stock’s value is the PE to Growth (PEG). With PEG at 1.0 as considered a fair value for a company, Netflix’s PEG is of another nose-bleedingly high at 19. In other words, by all means, Netflix is greatly overvalued.

To be honest, I’m very itching to short Netflix given the risk of tanking for Netflix is quite high. But it is not so easy. With such a high-flying stock that almost everyone loves, it is too risky to short its stock naked. Using options is certainly more favorable but again the option prices are heavily inflated. Now Netflix is planning to split its stock. Maybe after the split with its nominal share price coming down, it’s a bit easier to short it. If you are a lucky shareholder, you need to be aware of the risk associated with it. It is a great company as a business but it is a terrible one for investment. Watch your downside closely!!

This time may be different

The US stock market has been in a bull run since 2009 for 6 years non-stop and in the past 4 years, it has not experienced a 10% correction even once. This kind of uninterrupted bull run for so many years has only occurred 3 times in the history. Over these years, there have been quite a few instances when the market looked like to fall off but only came back even more strongly. Needless to say, this kind of bullish behavior has made easier for people to be more complacent and think this time will be no difference that the market will keep going up. I’m not so sure and I think this time may be different. You see, almost all the factors that are not conducive to continuing uptrend are lining up at the moment, arguing for a significant correction: non-confirming Dow Transports per the Dow theory, breakdown of the junk bond sector, a record high level of the margin debt in the NYSE, and a sharp increase of the 10-year Treasury yield. After all, it is certainly overdue for a more severe correction, even though I also agree that this bull market is far from over. What makes me more concerned is the technical setup for S&P 500.

As you can see in the chart, S&P500 is in as ascending wedge for a few years with consistent negative divergent MACD, a bearish trend.  It is now breaking down from this wedge as well as its 50 DMA. Its 9 DMA is crossing its 50 DMA from above, a bearish cross. It is now facing a short-term downward trendline as well as the middle line of its Bollinger Bands, both around 2111. After a rather strong bounce up yesterday, it was trying to break through this resistance at the opening but failed to do so at closing. Unless there is any significant positive news that may come out suddenly, I don’t think S&P500 will be able to break out to the upside. Instead I think it is more likely it will resume its downtrend from here and start a 10% or so correction in the next few weeks.

This is really not the time to be heroic. BE CAUTIOUS! Buying some SDS may help hedge against your portfolio if this correction indeed is materialized.

Get paid to wait for gold to resume its bull run

Not sure how many of you really know bond investment. I bet not many. Just some basics. Difference between bond vs stock investment is just like lender vs owner. If you buy a bond, you basically lend your money to the business or the government. Your expectation is to get pay via interest and you don't care whether the business is doing well or poorly. It is a legal obligation that the business must pay you the interest as long as it is not bankrupted. So the only thing you care about is that the business is still alive even if it is not making money because legally it must pay you first. Just think about your mortgage obligation. Will the bank waive your monthly payment because you are not doing well financially? You are kidding me if you think so. On the other hand, if you buy a stock, you are basically part of the owner of the company, even so very tiny part for most of us. As the owner, you will only get pay if your business is doing well, right? There is no law saying that your business must legally pay you first! I hope you can understand the difference now: buying bonds is generally much safer than buying stocks but the earning is fixed via the predefined interest rate. It won't go up even if the business is doing well and it won't go down even if the business is doing poorly unless the business is bankrupted. If you buy a bond from a reasonably well company, your money is rather safe. Actually even if a company is bankrupt, most of the time the bondholder can get at least part of their money back via liquidation. Rarely they will loose everything but it may well be a total loss for shareholders if a company is not dong well.

A bond is usually issued at a face value of $1000 with a fixed interest and duration. You get paid by the interest for the duration and you get your principle back at $1000 per bond when it matures. Sometimes, a bond price will be less than the issue value, i.e. less than $1000. Say if you buy a bond at $850, you get a discount but you will still get back at $1000 per bond if you hold it up till maturity. So you will make $150 capital gain, in addition to the interest you have accrued.

Right now, the precious metals sector is very depressed and almost everything in this sector is on fire sale, including bonds. I think you can buy the AngloGold (AU) bond with reasonable safety.
The bond I'm talking about is AU 8.5% bond that matures on 07/30/2020. Right now, it is priced at around $1090 per bond. The CUSIP is 03512TAD3. Since the interest of 8.5% is based on the face value of $1000, your real interest income would be little bit lower at around 7.7% (85/1090) based on your bond price of $1090. As long as you hold the bond, you will guaranteed to be paid at 7.7% till Jul 30, 2020 as long as the company is still running. At the maturity, you will get $1000 per bond. If the precious metal industry is really recovering in the next few years, which I highly expect, your bond price may even go higher than $1090. If that happens, you can also decide to sell your bond earlier than 2019 with more profit. The fact that the bond is selling higher than $1000 at the moment, it clearly suggests that bond investors have also increasing confidence on AU's business and its ability to pay the debt.

Trading bond is a bit different from stocks. In Etrade, you can search a bond with the CUSIP number at the bond platform and then request for a quote of its price. Given its relative safety and reliable income, you may want to consider to add some bonds into your portfolio to diversify. One last note, bond price is sensitive to and inversely related to interest rate. It is almost guaranteed that the interest rate will substantially go up in the long run and bond prices will go down with it. Generally speaking, don't buy long-term bonds beyond 7 years of maturity as short-term bonds are not so sensitive to interest rate increase and you can always hold your bonds to maturity to get your full money back regardless of bond price.

My game plan to play the Chinese stocks

I have posted some pretty harsh words on the Chinese market and has been expecting a severe crash for almost 2 years. Till now, I’m still just a crying wolf and have been largely wrong. So what can I do in terms of riding the super bull run of the Chinese stocks but without enduring much risk? As I said clearly before, I was very bullish about the Chinese stock market long term and thinking100-500% gains were possible. Since my initial talk a year ago, the Shanghai composite index (SHI) has already moved up about 100%. Has this bull run been over? I definitely don’t think so. But I’m really worried about the extremely euphoria presented in the Chinese market at the moment. To me it is almost like a huge bubble already blown up, which is on the verge of bursting up at any moment. I firmly believe that without a severe correction to kill the crazy euphoria first, it is very difficult for the Chinese stocks to go up further.

Having said that, I have no crystal ball to know exactly when this severe correction will happen. After all, I have expected this for 2 months but failed so far. In addition, the Chinese investors or traders are probably the ones who can mostly easily be influenced and manipulated in the world. You see, almost anyone in China can influence the Chinese retail stock buyers, including the government which can simply voice some bullish view to excite the general people to jump in, stock analysts, so-called insiders, or among investors and traders themselves. In other words, if the government wants this bull trend to simply run without a breath, they may be able to do that since the general Chinese people will likely simply follow the lead. So if I simply stay sidelines, I may totally miss the ongoing gigantic run from here. But on the other hand, it is a great risk to just buy Chinese market at this level and it may crash any moment. I have been looking for an opportunity to get in without much risk. Well I have just got it! I few days ago, the Shanghai index got dumped by 6.5% in one day. As I said, a bouncing back was likely to form a double tops before SHI resuming its downtrend again. With this thinking in mind, I bought ASHR calls expecting for a quick bounce up. It did. SHI has been moved up strongly for 2 days and has recouped all its 6.5% loss. On its chart, we are clearly seeing a double tops pattern now.

Technically speaking, this is very bearish and should lead to a more severe decline. But it is difficult to say for the Chinese market given how much manipulation can be done to simply keep it floating. So I’m now adding my second leg for a combo position. The beauty of this combo setup  is that I’m now totally risk-free in playing long the Chinese market: If SHI simply falls off the cliff and starts a severe correction which is what I’m expecting, my downside hedge will recoup all my investment cost and a bit more for a small profit. On the contrary, if SHI just keeps going up from here, which is also possible, I will then enjoy the bull run for much greater return. I feel really great now about the Chinese market as I can safely stay in the game for as long as possible without any risk! Either a bursting bubble in the short term or a gigantic ever-growing bubble will be fine to me!!