A safer speculation in the risky market?

The stock market is quite shaky and volatile at the moment and this will for sure continue at least in the next 2 months till the US presidential election is done. For trading purpose, buying and holding is likely risky as the market turmoil can easily wipe out your positions. In such an environment, one sometimes has to go out of the norm to find something that may not be so risky in this risky market. I think I may have found one.

 

Caesars Entertainment (CZR), a Las Vegas-based company, is a gaming giant with dozens of operations across the world. But it got serious problems in the past few years, leading to filing in January 2015 one of the most complex U.S. bankruptcies with $18 billion of debt. Needless to say, the stock got decimated and crashed from its peak of $25 to $6 at the lowest. Understandably, when a company is in a state of bankruptcy, stockholders value could very well go down to zero. But savvy investors may make good money from bankrupted companies when they get in at the right moment. I think we may see the right moment now. CRZ just announced that it has reached a deal with major creditors. In other words, the fear of going out of business is virtually gone and the major downside risk have been removed. Think about it, when the company was facing a real bankruptcy crisis, the stock didn’t go much below $6. Now the situation has drastically improved, the upside potential should be much greater than the downside, right? We have seen the worst, as such even a volatile market will not likely make it “more bad”. There are two main factors that make me a bit more confident to make this call:

• Tell you a secret how to just the overall risk of a company: looking at its bond prices. As I said before, bond holders are the savviest investors, much smarter than the stock investors, sort of speaking. They are usually the first ones to smell the risk of a business. When Caesars filed for bankruptcy early 2015, its bonds were traded below $0.2 (a 80% crash). Now it has recovered by over 300%, traded close to $0.7. In other words, the smart bond investors are telling us the most dangerous time for CZR is over.
• Then comes to the technical part. I really like how the CZR chart looks like at the moment. I think it is poised to move significantly higher from here around $7. I’m looking for double or more in the next 12 months.

Of course, even if I’m right , don’t expect a straight line up but expect a lot of volatility. And I may very well be wrong as usual. The most obvious indicator that I’m wrong is when CZR goes down below its all time low, i.e. below $6. That should be the exit point for this speculation.

Long term investment should be boring, not fancy/exciting

When I first bought Microsoft (MSFT) close to 10 years ago, I was laughed at buying such a boring stock as it was virtually considered as dead money. Indeed MSFT had been dead for almost a decade since the burst of the dot.com bubble. After Bill Gates stepped down and appointed Ballmer as the next CEO, there were almost no innovations at all under his helm. Understandably why no one was interested in MSFT anymore or even you could say investors hated MSFT. Well, that was the time I found MSFT as a gem for long term investment. For those who really know me, you can easily understand how much passion I have for good companies at good valuation for my retirement portfolio via dividend reinvestment. This is the only way I know of that can efficiently build up your wealth in an exponential fashion but with very limited downside risk and maintenance. To me, long term investment should be boring, so much so that you virtually don’t need to put too much effort to watch and worry about it but just sit back, relax and pick up your fruits at the time when you mostly need them. So here is my goal for my retirement portfolio that in the next 15-20 years when I reach the age that I really don’t want to do anything for money, I will have a reliable income source from the portfolio that will be more than sufficient to support all the expenses for a good living for the rest of our life. Dividend reinvestment (DRIP) is the only way that does not require a big amount of money to start with but the only thing you need to give is holding a bunch of good quality dividend growth stocks and let time do the magic. That’s why I think long term investment should be boring, not fancy. And MSFT just fit this category when I initially bought it many years ago. You see, when almost every investor hated Ballmer for lack of innovation, he was actually increasing the values of MSFT tremendously under his watch. That’s why MSFT has become such a strong cash cow that generates so much money beyond what it knows how to use it. As such Microsoft has become the safest company in the world, more safe than the US government bonds (technically). Given the ever increasing cash pile it is generating year after year, MSFT is among one of the best dividend growth stocks you can find. I even made an illustration with MSFT to show mathematically how just a small amount of money initially invested in MSFT with dividend reinvestment may easily make you a multimillionaire as long as you given it time and patience.  I have had no slightest regret to buy and hold MSFT since I bought it. On the contrary, I have pounded the table many times to alert my friends here to buy MSFT at its weakness.  Early this year during the turmoil of the stock market as well as a weak earnings report, MSFT dropped quickly at that time. I told my friends that I did not believe MSFT would go below $50. I was wrong as MSFT actually briefly went down to about $48 but really just very briefly. I of course were very happy to see this and took the opportunity to buy more!

While I’d love to see MSFT stay low and be boring for years to come, “sadly” I must say that I don’t think it would be a reality anymore. As notably we have seen since Nadella took over the CEO role, MSFT has drastically changed its strategy and is quickly and successfully transforming itself to become an innovative company. In addition to its traditional earning power that will continue for sure, MSFT has swiftly moved into the next hot money-generator via its cloud business. Quarter after quarter, its cloud business has grown in a fast pace and it is firmly establishing its leading role in this sector. Yes, it is still lagging behind Amazon in cloud but the gap is quickly narrowing down.  Additionally, there are two other innovations that MSFT is pursuing that may significantly enhance its growth power:

• Many of you must have heard the most fancy tech words today: Augmented Reality (AV) and Virtual Reality (VR). If not, simply google them.  AV-VR is not imagination anymore but is quickly becoming a technology that will revolutionarily change our daily life in the near future.   Just think about what the smart phone means to our life now.  AV-VR will soon become an essential part of our life that we cannot live without. It is estimated that AR will growth at 75.7% a year and be worth $117.4 billion by 2022 and VR will grow at a compound rate of 57.8% over the period and be worth $33.9 billion by 2022. Microsoft has quietly worked in this field and will likely become one of the leaders down the road. The most concrete example is an innovative product MSFT is working on, called HoloLens, that is a combined AR-VR headset, containing an onboard camera as well as a computer hooked up to 18 sensors that transmit a tidal wave of data every second. Believe me, it will be a huge hit when it comes into the market, probably something like what iPhone first hit the market.  See the demo here.
• In longer term, MSFT may also become a leading player in the artificial intelligence field. It was just announced by MSFT that its researchers will attempt to “solve” cancer by treating the disease group as information processing systems that can be modeled and reasoned, and then use sophisticated analysis tools to better understand and treat cancer. “That is, the key to rendering cancer harmless is to find out which biological processes need to occur for cells to turn cancerous. And then just fix that. In other words, cancer is like any software bug: Figuring out why something isn’t working correctly—debug it—and then fix it.”  This is not something that will become reality soon but a long-term investment that may generate billions of dollars for Microsoft in the future.

I really have a mixed feeling about what MSFT is doing: on one hand, I truly hope MSFT will just continue to be “dead” money with its share price stay as low as possible but with increasing dividend growth. On the other hand, I’m happy to see my beloved company become a leading innovator again with increasing share prices. At the moment, MSFT is just challenging its strong resistance at its all time high around $58. It should be really easy for MSFT to break out beyond $60 soon. How high can it go? Just use your imagination! To me, holding MSFT is like a worry-free investment win-win all the time: when it goes down, I know my dividend reinvestment will be doing better; if it goes up, I’m happy as well.

MSFT is not really cheap anymore but from time to time it may become a great buy. So when I shout next time, don’t ignore me!!

[Sorry for the long reading that my bore you, but when I start to talk Microsoft, I cannot stop :)]

Can Sarepta’s luck be repeated?

A huge surprise for Sarepta Therapeutics (SRPT) investors moonshot the stock price with an instant doubling yesterday. But if you listened to me, you may have not been surprised at all as I predicted this approval of the drug, eteplirsen, over a year ago.  Having said that, it was not a smooth journey at all for SRPT. On the contrary, it was a very turbulent road for it. Simply see how its stock prices have fluctuated in the past few years: Since 2012, the stock has gone from $3 to $45, back to $21, up to $55, back down to $12, up to $40, back down below $12, back to $25, and back to $12 again in May. It got hit especially hard when the FDA advisory board did not recommend to approve the drug early this year. Amazingly now the FDA has approved it under the tremendous political and ethic pressure.

 

So what do you do with your shares if you are the lucky one to have bought it? Well, Duchenne muscular dystrophy is a supper rare disease with only a few thousands of patients in the US. As such, you can bet SRPT will charge a lot for the drug. It has been announced that the treatment will cost $300,000 per year and that is virtually guaranteed that insurance companies will in no ways to deny the reimbursement. So SRPT will be doing quite well moving forward given its size. Technically its long-term trend is quite bullish. But the concern is about its short-term trend. It doubled yesterday and got further pushed up today. I think this has a lot to do with short squeeze. The 2 days of strong rally has pushed the stock to its all time high around $55 and it has been unbelievably overbought at the moment. I can hardly believe it has the strength to simply go significantly higher from here without coming back first. So in the near term, I think SRPT has a high risk of correction towards $40 or so. It would be a good buy for long term if it indeed comes down to that level.

 
So what could be the next one with a similar luck as SRPT? PTLA immediately comes to my mind. As I talked about it a few weeks ago, I think PTLA has a muchbetter chance to get an approval given its good clinical data. That FDA did not ask for an advisory board meeting is  strong evidence for their data quality. I strongly believe that it is just a matter of time for the approval if they don’t mess up with the requested manufacturing information. Technically PTLA is also showing a similar strength as SRPT prior to the approval. I feel quite good about PTLA!

Prepared for the unthinkable

The Fed will start the FMOC tomorrow to determine if a rate hike is necessary.  You know my personal view about the likelihood and personally I'd say there is a zero chance that Yellen will rate the interest rate at this meeting. The market has put a 20% for a rate hike. So overwhelmingly the expectation is there will be no rate increase in September. But there is of course no guarantee and no one can be sure about the decision beforehand. There is always a chance the Fed and Yellen may surprise everyone to decide to raise the interest. If she dose so, she would be my hero to defy the political pressure to do what she is supposed to do for a long overdue rate hike.  Again, I really don't think it is possible but I'm nobody and can very well be wrong. So what will happen if the Fed dose raise the interest? It would be a huge surprise and market will likely face a severe selloff. In addition, gold  and Treasury bonds will get killed and VIX will shoot up to moon. We'll likely see a huge turmoil in the market. I really don't think Yellen has the gut to do so but again it could happen. If you want to be prepared for the unthinkable, tomorrow is the last chance to do something to hedge: short gold against your long positions, buy some VXX for volatility and short Treasury by buying some TBT.


Consider you are warned!

A disaster waiting to explode

Low interest rates, zero interest rates, or negative interest rates, these are the situation facing millions of people around world whose incomes are dependent on interest rates. It is probably not an overstatement that the world is currently in its madness in the sense that virtually every country is expanding its debt load to make interest as low as possible. As such retirees have no choice but to look for high yields to generate their incomes. So in this zero or negative interest world, where can they go? High yield bonds or junk bonds! One example is the incredible premium people are paying for Pimco High Income Fund (PHK). This is a close-end fund (CEF) that seeks high current income with capital appreciation through investment in corporate debt obligations and income producing securities. In other words, it is a junk bond fund. Given the nature of CEFs, the number of their issued shares are fixed and as such they are traded daily as a stock purely based on the demand and supply, which could lead them to be overpriced, i.e. prices higher than the its net asset value (NAV), or discounted (prices lower than NAV). Here is the key for CEFs: they tend to return to its NAV over time. If you pay too much, you are more likely to lose money just as general stocks. So what’s the situation for PHK? Well, its NAV is below $7 at the moment but its share price is around $10 (see the chart below). In other words, people who are chasing for its high yield (about 12%) are willing to pay almost 40% more than its real value. If PHK simply returns to its NAV, the shareholders’ value can easily be haircut by 30-40%. The thing is, bonds are very sensitive to the long term government bond rates, especially for junk bonds. If there is any expectation that the long term rates are moving higher, the junk bonds can easily crash. I think the bond market is sending a warning signal that we may start to see higher long term bond rates. In the past 2 weeks or so, the 10 year Treasure yield is breaking out to the upside to 1.7% at the moment. If this trend indeed continues, it will be a disaster for junk bond investors. PHK will surely be among the first ones to explode! If you hold PHK, better to get out immediately before too late. As a trader, I will consider to buy TBT, a leveraged inverse ETF against long term bonds (e.g. TLT). TLT may be a bit oversold and is due to rebound in the short term but any bounce is likely an opportunity for buying TBT to bet for the next leg down for TLT.

Don't get too excited about Apple just yet

About 10 days ago, I commented on Apple: I think Apple is a good buy at this price. But be aware, technically Apple may decline in the near team towards $100 but I doubt it will be more than that. Buying Apple at its weakness will be a great gift for long term! This was when Apple was trading around $108. My timing and prediction appear to be perfect as Apple almost immediately declined following its iPhone 7 debut to about $103. I started to hear about talks that Apple could go down to middle $90s. But amazing things happened in the past few days: Apple has mounted a 3 days of strong rally to over $115 today. As I'm writing now, Apple has broken out its strong resistance of 5 months old around $112, a quite impressive bullish move!


If you bought Apple when I talked about it, especially if you had the gut to get in when it dropped to $103, you are having a nice gain over just days. But don't get too excited about this move. While long term Apple has clearly shown an uptrend and it can easily challenge its next major resistance around $125 in the weeks ahead, it is quite overbought short term due to panic buying (likely because of massive short squeeze). I won't be surprised to see it get down below $110 as the next immediate move. Take your profits if you are in for short term only but stay long if for long term!

Nobody wants the free silver bar?

 "Congratulations, you’ve won a 10-ounce bar of silver or a chilled king-sized Hershey chocolate bar. Which one do you want?”



If you were approached with this offer, what would you choose? Not sure about you but for me it is a no-brainer that I’d choose the silver bar worth $150 vs the chocolate bar worth $1. I thought most people, if not all, would make the same choice. WRONG, WRONG, WRONG!! You can see the video below posted in YouTube.



So what does that mean? Well, it means a lot to me. In the investment world, one thing which has never changed over thousands of years is the people’s emotion. For the vast majority of investors/traders, they like to go with the herd, i.e. become bullish when there is euphoria and bearish when there is pessimism. When everyone wants something like the tech stocks during the dot.com bubble time or the real estate stuff before 2008, you can bet the top is in. Similarly when nobody wants something, oftentimes it means the bottom is in. This simple street test clearly demonstrates that there is virtually no interest in silver or precious metals in the streets even though silver has gained over 20% this year. Does this sound like a top for silver. No way! On the opposite, it is a very strong reassurance that precious metals including silver has a long long way to go up. When all of your friends or taxi drivers start to talk to you how to buy gold or silver, you should then start to think how to sell your gold/silver.

 

This country’s return is 4 times better

Probably no body will be interested in this country’s stocks but believe or not, it is much better than the US stocks with higher return potential and better valuations. I’m talking about Russia’s stock market. For this year, the Russia stock market (ETF: RSX) is returning 4 times better than S&P (+30% vs +7%). Even better, this has not yet included its dividends at about 3%. It sounds unbelievable as Russia is largely dependent on its resources, mainly oil and natural gas, both of which have been beaten down so much in the past 1-2 years. How can Russia’s stock market perform so well? Well, it’s all about valuation. Regardless how bad a stock is, as long as it has values and its valuation is cheap enough, for sure at some point people will come in to buy. This is what has happened to Russia’s stocks. You may think about up so much, Russian stocks must be very expensive already. Wrong! It is still one of the cheapest markets in the world. At this level, RSX PE is only about 7 and is trading right around its book value (P/B 1.1). In comparison, S&P PE is 25 and P/B is 2.5. In other words, S&P is still 2-3 times more expensive than RSX. For sure Russian stocks are more risky and will be more volatile but for those with a long-term perspective and good risk tolerance, buying RSX will likely be doing much better than S&P in the next 1-2 years.

This giant is back on bull run again

It is a long weekend for the Labor Day. So I will be brief.


Everyone knows Apple and I have written about Apple many times here. It used to be the Street darling but has lost its fame for a couple of years due to lack of innovation since the death of Jobs. This is a $600 billion gigantic company that controls almost a third of the smart phone market as well as 35% market shares of PC and tablets. As such, Apple is extremely profitable with a 20%+ profit margin. It is generating almost $4-5 billion in profits every month.  But it is trading at a PE of 12, a huge discount for such a profitable company. After a relentless sale-off for about a year, Apple appears to have bottomed around low 90s and has recently broken out its downtrend line. While its technical looks quite strong at the moment, the recent two events made it even more convincing that Apple has bottomed: Apple had a "terrible" earnings report a couple of weeks ago with sales and earnings per share both declined by 15% and 23% respectively but its shares shot up almost 7% on the bad news. Then this week Apple was fined by the EU for $15 billion for its accounting practices in Europe but again, Apple's share did not budge for such a hefty fine (2.6% of Apple's market value). When bad news could not push down a stock anymore, it usually means those who want to sell have already sold and no one else left to sell anymore, a typical bottoming phenomenon. I think Apple is a good buy at this price. But be aware, technically Apple may decline in the near team towards $100 but I doubt it will be more than that. Buying Apple at its weakness will be a great gift for long term!

My conspiracy theory came true

Exactly as I predicted via my conspiracy theory two days ago, the NFP came in just short of the estimate today. How convenient it is! Now Yellen has good excuse to not raise the interest rate in September, exactly what she is hoping for. While we all know which candidate she will be helping with no action before the election, she will also not be blamed to try to influence the election. How perfect it is!!


Well, as expected, gold is on fire today but I think this is more to do with short covering than a real rebound. As such, don't expect it will last for long. Most likely, it will go down again to test its recent low and if the lower lows are coupled with a positive divergence with MACD, then it may be bottoming and ready for its next leg up. After all, its technical pattern has suffered too much damage with a fast plunge in the past week or so, it will need some time to recover.