The market is building up energe for the next big move

The market has been extremely lethargic during the seasonal bullish time towards the year end. We are supposed to have a Santa Claus rally and I was hoping for a strong drawdown by early Dec, which could more likely trigger a strong rally towards the X'mas time. But all we got for this month was about 5 points moving around for S&P. The market seems directionless for the year end. It is anyone's guess where it will go when the new year starts. One way or the other, I think the market is building up its energy for its next big move. I'm leaning towards a quick correction soon.




Although technically the market is at its neutral level, neither overbought  nor oversold, the volatility is quite low with VIX around 10. It is too quiet for me. As the Wall Street cliché goes, low volatility is always followed by high volatility. While I don't know the exact timing when VIX will shoot up high, I bet the time will not be too far away. After all, January is typically a bearish season. When VIX starts to move, it is not unusual it could shoot up 30-50% without any prior warning and move up very quickly within days.


Let's see if this time is different! In any case, Happy New Year!

GE is poised for a big leg up

Exactly one month ago, I was talking bullish about GE and felt that its bottom was very near if not in already. Since then, GE has been largely drafting lower towards low $17. While its price action has not shown any positive sign yet, it is becoming more technically bullish. Its momentum indicator has become more positive (MACD moving up) when its price is moving down. This week it has shown another very strong sign of bottoming. A Deutsche Bank analyst provided very bearish comment on GE with his price target of $15. Normally such a bearish analyst call will move the stock strongly to the downside, this time GE did not really budge much. After all, all the points the analyst talked about were nothing new and have likely been priced in for the stock by now. I think this is another very good sign that GE has got its bottom and its next big move will be upward. I bet GE may be among few stocks that could move up quickly by 15-20% in the next few weeks. It is one of the low risk stocks for short term bullish trading. Since no one is interested in it, its call options are quite cheap and could be a great way to bet on it without much risk involved.

Potential M&A targets for 2018

Merry Christmas and Happy New Year!

Since this is a holiday weekend for relaxing, let’s just get something easy. I simply forward a post regarding the potential biopharma M&A targets for 2018. Of course it is highly speculative and no one knows for sure which ones, if any, may indeed materialize. But indeed I found it interesting as at least some speculation is floating around for these 8 companies.  Good luck if you happen to hold any of them! Years ago, I even speculated that BMS could be bought out for its immuo-oncology leading pipeline but it has never materialized. Looks like now someone thinks the same thing as I did 4 years ago.

Be ready to lose all of your invested money

This is the  headline news someone forwarded: Bitcoin buyers should be prepared to lose all their money, top UK regulator warns,  sounding a pretty dire and scary warning, isn’t! Looks like this is very timing warning as bitcoin and virtually all the altcoins have lost 30-50% of their values as I'm writing. As you may already know, I’m a bigger believer for bitcoin and its underlying technology, blockchain (BC) and I have no doubt in my mind it is the future of our daily life! But regardless how much I believe it, as it is such a new innovation and no one has a crystal ball for future, I will never say there is no risk for it. I have actually warned several times here that the recent moonshot of bitcoin was too frothy short term and would be subject to sharp correction any time.  More strongly, I will also acknowledge the possibility that it may be totally a failed innovation and bitcoin may be wiped out to zero. Enough for the downside risk warning for bitcoin/BC?

 

Now getting back to this guy’s warning, it sounds like a specific warning for bitcoin but if you think about it more deeply, is there anything new and specific? You basically can change bitcoin with anything and you can issue such a warning for any types of investment/trading, correct? Tell me which investment has no such a risk that you may lose all your money, especially when you chase highs for something that is already very expensive? And this is especially true for something very new and innovative but not many people could understand yet at its early stage. I happened to see the following information a friend forwarded to me, summarizing very well the risk and reward for great companies during their life time.  I think bitcoin may very likely go through a similar rollercoaster type of path. Yes, it may drop 80% as it has already experienced several times. Who said it cannot happen again but anything surprising? Not a bit to me!!  

 

But the lessons of history are not all doom and gloom. For long-term investors, history provides a much more hopeful and optimistic lesson: Time covers a multitude of investment sins, like the "sin" of buying richly valued stocks just before a major market top.

For example, even if you had purchased a stock like Wal-Mart or McDonald's exactly one day before the crash of 1987, your investment would have soared more than 400% over the ensuing 10 years.

Or if you had purchased Amazon or Apple at the very peak of the dot-com mania of 2000, you still would have fared quite nicely over the next 10 years. Despite suffering immediate and enormous mark-to-market losses of more than 80% on both stocks, your investment in Amazon would have doubled over the next 10 years, while your investment in Apple would have soared more than 800%!

If you still held those positions today, you'd be sitting on a 1,500% gain on your Amazon stock and a gain of more than 3,700% on your Apple stock. And remember, those are the results you would have achieved from investing at these stocks at the very top of the dot-com mania.

A turnaround story of the year?

I’m pretty sure no one is interested in it and many of you may even laugh at me for even talking about this company. Yes, it is one of most hated stocks in the past two years. Quarter after quarter, it has disappointed investors and it has been punished accordingly by losing 85% of its values from its peak to the recent low ($70 to $11). I’m talking about the world biggest generic pharma company, TEVA. So why I’m interested in it now? Well, as a contrarian, I’m naturally interested in something no one likes and would like to find some “gems” from the seemingly “garbage”.  I think TEVA may be one of such companies that may surprise people as a great turnaround story of the year for 2018.

 

After glory years of growth for decades becoming the largest generic drug company in the world, TEVA has suddenly started to face really challenging environment for their business. With growing difficulty and shortage of budget facing all the governments around the world in their finance, more and more countries have started to find ways to cut various government fundings  and healthcare is more of the most expensive sectors and therefor e with a great potential for government savings. Due to their cheap prices, governments are the biggest buyers of generic drugs and they all want to cut prices significantly from the current levels. This is especially true in EU and US, the two biggest drug markets in the globe. TEVA has apparently not well prepared for the changes coming pretty quickly in the past few years and their sales have been declining continuously quarter after quarter.  One big mistake the management made last year was to borrow huge money to buy Allergan's global generic drugs business for $40.5 billion. So the biggest challenge facing them is the huge debt load of $35 billion. With a reducing revenue but increasing debt interest to pay, investors are becoming really nervous now whether TEVA can survive the debt crisis. This is a real concern but I think it will survive. Right now I think it may be the best time to buy TEVA for a very likely successful turnaround in the next 1-2 years. For two reasons: TEVA is still a profitable company and with a PE just around 6, it is extremely cheap by any means. This may start to attract value investors to come in, even potential acquirers for a takeover (of course pure speculation). More importantly, TEVA has just got a new CEO and the new management has started to do something really drastic to find funding to pay down their debt. TEVA just announced that it will cut 14 000 jobs, or around 25 percent of its global workforce, over the next two years as part of a restructuring plan and will eliminate all its dividends.  It will close most of its domestic manufacturing activities and reduce the size of its remaining operations in the country.  Under the plan, production will be transferred to China or India. It has already managed to sell other assets starting last year for their top priority of paying down the debt. It is definitely a very painful process and period for the company but it is essential for their survival.  With the company becoming more lean to focus on their core business and substantially reduced debt load, it may become a real interesting target for acquisition. But from the investment perspective, you don’t need to bet on an M&A. The market has a forward looking ability and its share price may go up substantially from the current very depressing level if the market foresees its future success of the turnaround.  The stock jumped 14% after the restructuring announcement and it has already come up a lot from its low of $11, trading hands around $18. Technically it appears to form an inverse H&S, often a bullish sign for reversal.  Even if it double from here, it is still 50% below its peak. I feel safe to buy TEVA now when hardly anyone is interested in it. To me a good turnaround story may be just starting now.

A state of FOMO

Have you heard the word FOMO? If not, here it is: Fear of Missing Out. This usually happens when  something is going up crazily to the point that almost everyone wants to get in with a fear of being left behind.  When there is no fear of buying something too expensive and only fear of not getting enough, it is often the time to be afraid of.  This is what we are seeing at the moment for cryptocoins. I said not to chase bitcoin when it was around $10000 just a couple of weeks ago and now it has touched $20000. I’m really looking like stupid in the hindsight but I’d still like to say, don’t chase it, period! This really looks like a mania that all the sudden everyone is talking about bitcoin now and wants to get in regardless. This is a very risky time to buy it with a serious amount of money. If you do so, you can be easily shaken out if it drops down 20-30%, which can very easily  occur at any moment.  Of course, don’t get me wrong as I’m not talking about the ultimate top for bitcoin that will not happen years later. I’m only taking about a short term risk for it and I could be wrong of course. Maybe this time is different and  bitcoin simply goes up nonstop from here. No one has a crystal ball when it will correct but I’m very sure a more serious correction can happen sooner rather than later. If you are good at short-term trading, this could be a great time to trade but for most long-term investors,  it is better to wait for a better entry.

 

With enough warning about the short term risk, what is a more fundamental risk for bitcoin? I think the regulatory risk among the top for the bitcoin future. While as I said before, I don’t think it is feasible for any government to totally ban bitcoin as long as there is the Internet and countries where one can trade bitcoin, it could threat to the pace of its adoption  if a major country like US government wants to totally ban bitcoin. The good news is that this risk in the US appears to have substantially reduced now.

 

Early this week,  U.S. Securities and Exchange Commission ("SEC") Chairman Jay Clayton talked about the crypto market and ICOs. He was clear that the agency is closely watching the space for violations of securities law and potential consequences for companies using ICOs.  Of course, it is widely expected the SEC will eventually put in some regulations to regulate the ICO market, which in the long run actually is good for its smooth development. But the really fear has always been that the US government will try to

 "ban" ICOs or even cryptocurrency trading. Well, Clayton actually offered his support to the trend and he even encouraged investors to learn more... Here is what he said:

 

    We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.

 

I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so. When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years.

 

This sounds to me really positive and not a SEC chair who was thinking of banning ICOs as what China did a while ago. I feel more confident that bitcoin/cryptos will continue to develop becoming a widely recognized vital component of our life, just like what the Internet means to us. Of course, it is a long-term trend for years to come.

How banks will react to Fed rate hike next week?

Next week will be one of the biggest days this year for the market: Fed will meet and decide if they will raise the interest rate. Until now, it is widely expected that Fed will raise it as they are repeatedly hinted for months. It is almost a done deal. The big question is how bank stocks will react to the final decision.


Well, as a general rule, higher interest rates are good for banks and therefore their trend is definitely going up. This general trend will likely continue when all the other conditions keep constant. But this dose mean the immediate reaction must also be positive. Actually I think the chance is high that bank stocks may fall and probably hard. Here is why: Since Fed has telegrammed the rate hike intention for months, this possibility should have already been priced into the bank stocks as we have seen them moving up quite nicely in the past few months. When the final decision confirms the rate hike, the market often "sell the news". Actually this is what has consistently happened for bank stocks following Fed's decision to raise interests. In a less likely but still possible scenario that Fed surprises everyone without raising the interest, bank stocks will tank more severely. So I think bank stocks next week will likely be doing badly. If XLF goes up early next week before the Fed meeting, buying some puts could be a winning trade!

Nvidia Insider Selling

Nvidia (NVDA) has been the Street darling for 3 years for a good reason: it is by far the leading chip company for automatic car and artificial intelligence, the two hottest areas for now and future.  As such, its stock has been almost in a vertical uptrend since 2014, jumping 10 times from $20 to a recent new high of $220. While there are certainly good reasons to expect NVDA could continue to march high in the years ahead, its near term prospect could be questionable. Technically its weekly trend starts to weaken and if indeed it wants to get more rest, it may go down towards $150, its weekly 50 DMA, a very reasonable support level. I just happened to see a post from someone taking about NVDA CEO’s insider selling, which seems consistent with its technical trend. So I thought to share with you here:

 

“In a case of do as I do, not as I say, we are presented with CEO Huang. Huang has rarely sold above $10 million worth of his company's stock. In fact, the only other time that he did so, was in August and November 2007. In August 2007 he sold $30 million worth of stock and in November 2007 he sold another $15 million. With the benefit of hindsight, his timing was impeccable as the stock would not return to those heights for approximately another 8 years. Now, more recently in September 2017 CEO Huang has started once again selling large amounts of Nvidia stock, worth $18 million. Wise investors, should at least, pause and consider, whether, in time, Huang would prove to be prescient this time around too?”

 

Don’t get me wrong, I’m not bearish for NVDA at all for its fundamentals and long term outlook. I’m also holding long positions. But I’d not immediately add new positions at the moment until its technical trend turns to positive again.

Buy when no one wants

There are few major companies that are in such an abysmal situation as General Electronics (GE). You see, it is a global leader in a wide ranges of sectors including appliances, aviation, healthcare, transportation, energy, water technologies, cable, film, consumer electronics, lighting, electrical distribution and finance. It is one of the American icons that used to make Americans proud of but its stock is touching 6 years low as of now. It was especially painful for GE investors in the past 2 weeks or so as it has been basically in a free fall, after very poor earnings report. It’s situation is so bad that GE has to cut its dividends in half. This is how a capitulation looks like. But this is when a value investor may consider to buy when almost no one else from the herd is interested.  Let’s face it, GE is still the global leader in man of the sectors and is still a profitable company. The recovery of the economy around the world will be a positive force for GE to get on its foot again to revive. It is just a matter of time. I believe GE is very close to its bottom, if not yet in as the current price of around $18. One important sign for a stock to reach its important bottom is the insider buys. You see, no one else knows the real situation better than those who are intimately involved the business of the company, especially those at the senior levels who are actively managing or managing the business activities. We have got that for GE. Just in the past two weeks during the free fall of GE, its CEO and other directors have bought millions of GE shares around $17-18. Interestingly, Director James Tisch, the CEO of Loews and a famous value investor even bought more aggressively of 3 million shares worth over $50 million. What kind of a vote for confidence from those insiders in GE! There is no better sign than this to get a reasonable assurance that GE is a very good value stock at this price, even if not exactly at its bottom! Even after a 50% dividend cut, its dividend is still yielding 3%. Consider this as an early Santa Claus gift if you are a long term value investor.  

It is definitely in a bubble

I was travelling in Europe in the past two weeks and constantly on the road. So I did not want to stretch myself too much by closely watching the market. Therefore a two weeks break for my blog. Now I'm back and trying to catch up. The stock market is fascinating that it reaches new highs almost every day. The bullish momentum is simply too strong at the moment. But there is something that is even more crazy that I'd like to comment now.


I'm talking about bitcoin or and other cryptos. As you may still remember, just a short while ago in less than 2 months, the sentiment for bitcoin was totally different and I could even called it abysmal like the end of world for it. At that time, the JP Morgan CEO Dimon openly called it a fraud and it would not survive for too long. China announced a total ban of it. Indeed it seemed bitcoin would crash and even disappear soon. You know I don't believe it at all and I even wrote a long blog to provide rationale why Dimon's fraud claim was laughable and why bitcoin would go much higher during its life.  But to be very honest, even with my very strong belief in it, I thought it would probably take a year or two to reach new highs. Of course I was totally wrong. Just within 2 short months, the sentiment has drastically shifted towards a super bullish mood as I'm writing. Bitcoin is indeed making new highs every day in the past week or so and has reached its all time high at $9700. Suddenly it seems everyone is getting very excited about it and wants to get in. This is typically when a bubble is formed, although a temporary one. If you are also getting exciting and want to buy now, my best advice is NOT CHASING IT! I believe bitcoin may very soon top over the $10,000 mark, probably within a week or two. Dec 11 is a historical day for bitcoin as its first ever futures will be available for trading. This is likely one of the major catalysts that pump up bitcoin right now. But we may very well see "Buy the rumor and sell the news" phenomenon. I think the chance is very high that after bitcoin breaks out over $10K, and then a rather severe correction may follow. It is generally a loser's game to follow the herds, either chasing up or down for anything. No difference for bitcoin!


For myself, I'm certainly happy to see bitcoin or other cryptos make new highs constantly but I'm not naïve enough to believe the uptrend will simply continue without breaths. I'm even hoping bitcoin can be cut in half to shake out weak hands and allow me to buy more. For now I'm just holding my coins and at the same time also enjoy accumulating my coins via the digital renting business I've got in. It is a great feeling to know that every hour my cryptocoins are getting more without me doing anything. It is a very slow process of course but over a long run, it could become a phenomenal asset for me if bitcoin and the cryptos become the mainstream technology just like what the Internet is for our lives now.   

Stocks are poised for a swift decline

The market has been hitting new highs almost daily and there is widespread complacence that any significant decline seems unthinkable. But I think the market is now sending 2 warning signs:

• Vix call/put ratio hits extremely high level, over 20 times more expensive for calls than puts. This has been a pretty accurate indicator in the past year, usually leading to a jump of volatility with a quick market correction.
• The high yield bonds are breaking down and currently sitting on its 50 DMA. If breaking down that level, more selling will follow. Usually such bonds are leading the market by a few days to weeks.

When these two lining together, it is not a good sign, at least for the near term. I think the market can suddenly plunge any days now. How much is anyone's guess, but at least some panic may show up. Be ready!

You could be rich if you could go to this country

I'm sure you know Zimbabwe in Africa, one of the poorest countries in the world. You must ask, are you kidding me that one could be rich if he or she could go to Zimbabwe? Yes, I'm serious but not in a way you would think about. Of course I know how poor it is and there is virtually no hope in the sight for it. Its inflation is probably the highest one in the world, so much so that it even issued a 100-trillion-dollar note, which was worth only 40 cents when it went out of circulation. I bet this is likely the only money in such a big number. It has become a collectible now and I found it on sale in eBay for $53.


So why on earth that I'd think I could be rich if I could go to Zimbabwe? You may recall what I said why bitcoin will not die as predicted by many pundits. One of the reasons: the widespread acceptance by third world countries where they are facing increasingly severe inflation problems with their official currencies. I just read a report that bitcoin is trading around $12,000 in Zimbabwe as they are begging their money with US$ now but there is huge shortage of US$ for them. For those very few people in Zimbabwe who are much richer than general people (probably due to corruption or few successful businessmen), they for sure will not keep their bank notes. When difficult to exchange to US$, they turn to bitcoin, causing a huge demand for it, much more than in the other countries. As a result, we are talking about a difference over $5000 as bitcoin has just reached it new high over $7000 now. If I could go there to open a bank account, I could easily make thousands of dollars per coin by buying a bitcoin here and selling it there. Of course I couldn't but I thought it is  interesting evidence how bitcoin can preserve value for poor countries. I think we will hear more such stories moving forward.


One caution note to finish my writing: bitcoin is a bit crazy at the moment and I think it is short-term bubbly that may easily go down sharply any time. Buying now will be rather risky as a 30-50% haircut is not out of touch.

Will Heinz surprise the Street?

Kraft Heinz (KHC) is an iconic American food company, manufacturing many popular brands like Velveeta cheese, Oscar Mayer hot dogs, Maxwell House coffee, Jell-O and Kool-Aid. While they are still famous and popular, they have started to lose their competitive edge in the fast changing world with new generations and new eating habits. Its revenue has been in constant decline in the past 3 years. This dire trend has finally hit its stock prices. After reaching the all time high at $95 early this year, KHC has lost a third of its value and is trading around $75 as of today. It seems KHC has nowhere to go but further down. I do believe KHC has a lot more to go down from the current level in the long run. The question is if a short term miracle may save it for now. I think it is possible from the speculation perspective.




KHC will be reporting earnings on Thu after close. It has just reached its new low for the year and the expectation for it is extremely low obviously. This is often the time when a surprise may strike. If the earnings are just a little bit less bad than expected, it may trigger a revenge bounce, causing a huge short squeeze. We have seen this kind of surprise moves many times this year and there is a reasonable chance we may see it again for KHC. Its momentum indicator MACD seems also to agree with this speculation as it has shown a clear negative divergence on its daily chart. But let me be clear, this is purely a speculation and there is no guarantee whatsoever! KHC may tank further after its earnings. So don't touch it if you cannot lose for the speculation!

Dimon is suffering from Default Bias

As you most likely have already known that the JPMorgan CEO, Jamie Dimon has famously claimed that bitcoin was a fraud and would soon collapse and disappear. I just read something about Default Bias (DB) and I think Dimon is among those suffering from DB!

 

So what is DB? Just ask yourself what you will do when you get a new iPhone. Do you change a lot of settings yourself or just go with the default setting? I bet most people (me included) will only go with the default setting or at least most of the default setting. Why so? Because this is driven by a fundamental psychologic nature of human beings: we believe the pain of losing is greater than the joy that comes from gaining. Default is usually the most common choice with much lower risk of failing or losing than a new setting. This is especially true when we are facing life-changing but brand new technical innovations, more so if they are extremely early and poorly understood. Bitcoin and the underlying technology, blockchain (BC), is at this stage. We have seen almost identical reactions when the Internet was newly born.  Here's a quote from U.S. astronomer Clifford Stroll in 1995: “Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic. Baloney.”

 

Even the inventor of Ethernet, Robert Metcalfe, didn't believe in the Internet. "I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse,"  

 

Sounds familiar? Next time when you hear something like that about bitcoin/BC, just laugh. I will for sure!  

Be happy with today’s selloff

Over the last few years, it is almost a clockwise occurrence that the market will go higher over the Christmas time, so nicknamed the Santa Claus rally. Now we are moving into Nov and it is the time again to consider a SC rally. The question is: is it as sure as it was in the past years? Certainly it is too early to be sure with anything but my thinking would be it depends on how the market will behavior in the coming days or weeks prior to Christmas.

 

The market usually sets itself up for a SC rally, in a way to gain enough technical strength and energy by experiencing some selling first to cause enough panic with oversold conditions. Then a SC rally ensues. It is almost always set up that way. This year, I was not so sure before today. You see, for months the market has again and again reached its new highs and we are hardly seeing even a 1% decline, not mentioning 5-10% decline that is quite normal in any bull market. If this continues towards the Christmas with the market steady going up or sideway moving without much downside, I can hardly see any major rally to be seen during the Christmas. We may even see a SC selloff instead!

 

Having said that, the past few days a divergence between the market new highs vs increasing VIX was sending us a hint that some sort of one or two day panic selling was on the way. We have seen this kind of divergence back in April and August when VIX started to move up from its extremely low (<10) while the market was happily moving up every day. Then all the sudden out of blue, VIX shot up 50-60% with a couple of days and the marketed tanked by 2-3% plunge. Today’s selloff that hopefully can last another day or two will actually nicely set up a stage for the market to go into the SC rally by the year end. I hope we can see more downside with elevated panic from this selloff! Be happy if you are waiting for a Santa Claus rally.

A revenge of the US dollar is coming?

The US$ has not had a good time this year and has lost its value over 10% in less than a year, a rather significant weakness for any major currency. As I said, I think this year's weakness for US$ may be a major trend change for it and may last for several years. But nothing goes in a straight line either direction. About a month ago, I noticed that US$ appeared to be forming a bottom. Checking back now, it seems more clear that it is indeed bottomed for now. It is showing a textbook inverse Head & Shoulder pattern, a bullish setup often leading to an upward breakout. If it can decisively break out the resistance around $94, very likely it may go up to challenge its next major resistance at the 200 DMA around $97. If this happens, some pain will be felt for other currencies, mainly Euro, Canadian $ and Aussie $. As of now, you may want to short Euro, e.g. buying EUO, an inverse ETF against Euro. It is too early to call when this US$ revenge will end but I think it will likely stops around its 200 DMA and resumes its next leg down again. I still believe it is a multi-year's downtrend for US$ but at the moment it is just taking a breath.

A 75%+ dividend yield

Dividend yield has an inverse relation to the underlying stock price. If the dividend payout is constant, then the higher the stock price, the lower the dividend yield, and vice versa. So as a general rule, don’t be lured into some high dividend paying stocks, especially those with very high yields. It often means the stock price is declining fast that usually suggests something wrong with the company. So I’m hardly interested in such kind of very high yield stocks. But this one has some interesting wrinkles with it. Let me explain.

 

The company I’m talking about is EP Energy (EPE), an independent exploration and production company for oil, natural gas and natural gas liquids in the United States. It is going to pay a quarterly dividend of $0.575 with an Ex-date of Oct27 (i.e. you must own the stock at least on Oct 26 to qualify for this dividend). With share price around $3, the annual dividend yield will be about 75-80%. Here are few things you need to understand:

• The dividend EP pays out cannot be covered by its cash flow, meaning it is paying out the dividend on debt. Indeed it is true that EPE is heavily in debt that is a big risk for long term holders.
• EPE share prices have been extremely volatile and in a big downtrend in the past 3 years since it became listed. Understandably this is not unique to EPE but for the whole sector as the past 3-4 years have been the most brutal period for the oil sector. In the past year, it has declined 25%. But lately the oil sector appears to have been stabilized and may have reached the bottom. Oil stocks are accordingly showing the early sign of recovery. EPE may be also in the same bottoming process and its weekly technical is promising. In other words, unless the company has something terribly wrong that is unknown to investors yet, its downside risk is probably limited and may even start to move up moving forward.
• The most intriguing part is its unbelievable track record of hiking dividend consistently in the past 5 years during the worst period of its business era. It has increased its dividend each quarter for the past 21 quarters (at an average rate of 9.1% per quarter and 35.7% per year) and the current quarterly amount ($0.575) will make the annual payout to $2.30, an extraordinary 75%+ forward dividend yield based on the current stock price. 

So what’s the take from the above information and what will be risk if one wants to earn this 70% dividend? As I said, normally I won’t even look at such a trade given the inherent high risk involved for stocks with extremely high dividend yields but this one may be worth a try.  You see, EPE has a good track record of boosting dividends  consistently for 5 years during the worst period and now it has good sign that the energy sector is stabilizing and may even start to move up in the next few years. So it may be reasonable to bet that EPE is less likely to cut its dividends in the next year regardless if it will continue to increase it. If the latter that seems also quite possible, then it’s a bonus for traders. If this expectation holds true, then traders will have at least 70% downside risk protected if you hold it for at least a year to get the full annual dividend. Again, if the sector is stabilizing, such drastic stock plunge seems also less likely unless EPE surprises everyone with some really bad news not publicly known up to now. But let me be very clear, this is risk-reward probability game. Even though the odds is quite favorable to me, the worst case scenario may still come that could wipe out most of the invested capital if not all. Only trade with what you can lose if you want to bet for it!

My adventure in digital renting

I don’t know if there is formal name called digital renting but if no,  let me be the first one to name it. And I think this will likely be the future rental business in the making to at least go together with the centuries long physical rental business, most famously like house or car rentals. So how do I define the digital renting? Well, roughly anything that one can rent out digitally without the need to deal with the physical properties could be a form of digital renting. In this sense, I assume the already popular renting business for movies and ebooks is one of them. But what I really means here is more for individual digital assets that can be rented out, just like you own a house and you rent it out at the personal level. So far it is still too imaginary for most of people I guess but I have already started one with good progress that I can share with you today. With last week’s topic about bitcoin, you may guess now that I’m talking about something related to bitcoin and its underlying technology. More specifically the digital mining business for now.

 

As you may surely know by now, I’m a huge fan of this new technology, blockchain (BC). More I learn it, more I become convinced that the next 20 years will become the BC era. While it is still too hard for most people to imagine what is coming with BC, soon you will suddenly find that a lot of our assets will be digitized that will allow us to openly save and transact them via BC-based technology without fear of being hacked or stolen. You can pass this blog now if you think I’m too crazy to talk about this but just be aware that it will be your loss, not mine, if you don’t start to educate yourself about BC and be open-minded for something life-changing that is coming. Let’s get into some meat how my first adventure with digital renting tastes like.

 

I have already talked about it a few times actually. It is about the Gaga Watt digital coins that I have bought a few months before. And now I have rented them all out and they are making money for me day and night, actually minute by minute more precisely! Briefly, this GW coin is issued by the company, Cryptonomos which owns and provides the infrastructure services for those who want to mine bitcoin or other cryptocurrencies. As the coin holders, I’m almost like owning part of the business as I have the right to use the services or rent my coins out for others to use the services. So far I can see 3 ways for me to make money or monetize my GW coins.

• The most direct way of earning money for me is obviously the “rents” I got from those who rented my coins. Initially I thought I’d get some cash directly from the renters but soon I realized what I’m getting is not cash, but the underlying cryptcoins that the renters mined. In other words, each time a renter mined a coin, I got a tiny fraction of the coin that was based on the open market price of the coin at that moment. This is really around the clock mining business as renters are not restricted to one area but across the globe. My account is updated every hour and indeed each hour I see some coins are credited to my account throughout the day. How much I get is totally dependent on the market price of the coin: I get more if its price gets lower and less if it is higher. So based on the market prices, I can estimate how much money I could get if I sold them at that point. So far I mostly get bitcoin and etherum, the two most popular cryptocoins (CC), and much less with litcoin. So I can easily calculate the return from them. Based on the past few weeks of what I have got, my annualized return is roughly about 30%, consistent with what the company has projected. There are 3 rental rates I can choose; the higher it goes, the harder it will be to rent out the GW coins. In order to make sure I always rent out 100%, I simply go with the lowest rental rate. This way, I know all my GW coins are working to accumulate cryptocoins for me without me doing anything. I’m really excited about this mode of online renting business. Little by little, I’m increasing my hoard of cyptocoins that could be very valuable down the road, similar to getting dividends from stocks!
• While I can easily sell the coins I’ve got now for immediate cash return, I think the future potential return from the CCs could be much bigger and even huge, if my vision turns out to be true that the BC based technology will become the mainstream widely used application just as what the Internet is doing for us now.  I’m betting this future return could be moonshot if I’m lucky enough as an early crab eater.
• The final potential has less certainty but I think it is quite possible as well. That is to openly trade my GW coins if I want to sell them, if their demand is high with inflated prices. I talked to their representative and they informed me that indeed this is also in their plan, probably in 2 years from now. So far they want to focus on what they have promised to the GW coin holders to allow them to rent out their coins with sufficient mining services available. When the business become more established in a few years, it will make more sense to let their coins be openly tradable. I like the plan.

Surely you have sensed my excitement about my adventure thus far with the digital renting. But I would be a big liar if I’m not talking about the potential risk associated with it. Actually it is a real risk that the BC technology won’t become the next Internet as I’m expecting and/or the CCs may be totally banned by governments around the world. While I don’t want to underestimate the potential risk, I truly don’t believe the likelihood of a total clasping of the BC/CC is high. It may take longer time than I thought but based on what I’m seeing every day, I even become more convincing that BC/CC world is coming to our daily life sooner than later. But still, as with any speculation, you need to manage your risk to the level that you can take if you are wrong. The money I’m putting into this adventure is a tiny fraction to my total asset and it won’t be any meaningful pain to me even if I lose everything from it. But the potential reward could be dozens or even hundreds of time if I’m right about the BC/CC that can indeed change our life like the Internet. That’s the risk-reward ratio I’m willing to bet on!

Will Amazon strike again?

It has become a norm these days that whenever Amazon touches something, the companies for the thing will falter. We have seen this again and again, mostly in retail business, especially those relying brick & mortar stores. It is truly disruptive! You may have also noticed that in the past week or so, pharmacy stocks have been hit hard. Yes, again, it is related to the rumor that Amazon may decide to get into the online pharmacy business in the next few weeks. You can imagine how retail pharmacy investors are worried about their companies’ future. They run first.

 

If indeed Amazon wants to get into the pharmacy business, how will it do it? Sure, Amazon may just want to set it up from scratch by doing everything by itself. But pharmacy business is a highly regulated one and it could be a huge challenge for Amazon to jump into it directly. After seeing what it has done with Whole Foods for the grocery business, I’m thinking loud that there is a reasonable chance that Amazon may also want to jump start by buying a retail pharmacy company. This will allow Amazon to take off the regulatory risk immediately and deep dive into the business much smoothly. If my speculation comes true, which one may be the target of Amazon? There are 3 major retail pharmacy companies coming into my mind immediately. The two pharmacy giants, CVS and Walgreen, are the most popular ones and they are available almost every corner of streets across the country. Both of them are very well run and very profitable but they are not cheap at all. I think it is less likely Amazon will take either of them but if you ask me which one is more likely between the two, I’d say Walgreens. While both companies are very comparable in almost all the parameters, Walgreens has much less debt on its book than CVS, roughly one time less. But anyway, I don’t think it is likely for either of them.

 

I think the more likely target for Amazon is probably Rite Aid (RAD). Well, you may even have not heard of it or rarely seen it on the street. Indeed, it is a poorly run much smaller retail pharmacy and actually on the verge of bankruptcy to some extent. It is heavily in debt. So why am I thinking this is more possible a target for Amazon to take? Well, it all comes down to the reason why Amazon wants to buy a retail pharmacy in the first place. I don’t think Amazon is too much cared about the popularity and profitability of the pharmacy as it will make it popular and profitable. Due to the nature of the online business, it also does not need to have too many retail stores as it could be a huge management burden for Amazon. All it needs is to bypass the regulation hurdles as quickly as possible.  And for that purpose, a small and much cheap Rite Aid may service Amazon much better. Of course this is purely a speculation from my wild imagination and you don’t need to take it seriously. But also don’t be surprised if you suddenly hear the announcement that Amazon is taking over Rite Aid!

Bitcoin has been pronounced dead hundreds of times

It has been a brutal few weeks for bitcoin holders as bitcoin has got slaughtered harshly following the announcement of China that they are banning all the ICOs (Initial Coin Offer) and  also closing all the China-based cryptocurrency exchanges. The pain can be enormous for those who chased it and got in at its recent peak price around $5000. Honestly, even as a bitcoin big believer, I also think bitcoin is in a bubble, but definitely not in the sense of what those doomsayers have claimed. I think bitcoin is in a huge short-term bubble that needs to burst first before going up further. In the long run, I have no doubt it will be a great value player, a transformational wealth creator! Actually I like what is happening now for bitcoin and the like as it is the only way to allow me to get more of them cheaply when the dust settles. Let me share with you a few thoughts:

• Since its birth less than 10 years ago, it has increased its value from a few cents to now $5000 at the peak. Someone has counted that there have been at least about 200 times reflected in the major headlines news that bitcoin was called dead or something similar by various doomsayers, including many very influential bodies. The most famous one occurred about 2 years ago also following the announcement from China that they would ban any financial institutes to transfer funds for bitcoin exchanges. Bitcoin got slaughtered as well and crashed from over $1000 then to as low as about $200 at its bottom. Then it revived and came back astonishingly strong to reach the bubbly top at $5000.
• The Chinese government’s extreme action to totally ban bitcoin and the like may sound like the end of world for bitcoin but in reality there is little concern for it. There are several aspects on this:
  • Due to the nature of blockchains that is the cornerstone for bitcoin, there is no way to totally ban bitcoin, unless the Internet is totally blocked. For example, one can still mine bitcoin on the Internet and easily exchange it for money via foreign exchanges abroad either directly via Internet channel or even physically by mailing or carrying a physical bitcoin wallet to do so if the Internet access is blocked. It certainly make people’s life more challenging but believe me, people will find a way to survive as long as bitcoin is still increasing in value.
  • The Chinese government is notoriously extremely changeable in terms of regulations. I don’t think they will keep the current stance forever. More likely they will probably just take the time to start implement regulations that can be controlled by the government. After all, this is a transformational new technology that China does not want to be left behind. We have seen numerous times what the Chinese government has done and changed in the past in various areas that are new to them. This time is no difference.
  • Even in the worst case scenario that bitcoin is indeed totally blocked forever in China, it is still not the end of world. Many other countries and jurisdictions are more open to new technology and innovation and take a more supportive attitude for bitcoin.  For example, Sweden, Switzerland, and Canada are taking a more progressive approach. Canada has already treated ICO as securities that can be legally issued under regulations. Sweden has launched an ETF for bitcoin.  And Japan, which recently legalized bitcoin transactions, will soon launch an ICO platform, called COMSA ICO, that facilitates new coin offerings.  Australia is also considering to legalize bitcoin. The more interesting case is Russia which totally banned bitcoin in 2014. But now their financial minister has openly acknowledged that there is no point to block bitcoin and they will legalize bitcoin by the year end. The list will only grow as the time passes by.
  • So what happens in the US? It is too early to tell for sure but all the evidence suggests it will be a more adoptive environment. If you don’t know yet, the Commodity Futures Trading Commission – the CFTC, – that regulates futures and options trading just approved a trading platform called LedgerX for bitcoin options. This will allow big money investors to hedge their cryptocurrency risk the same way regular currency investors do. There is no reason to believe that the other government security regulator, SEC, will totally go to the other direction. It may take more time but I think eventually SEC will follow the CFTC lead, especially now it has a new head who is known to be more open to bitcoin.    
• You certainly have heard the influential financial heavyweight,  Jamie Dimon (CEO of JP Morgan), has called bitcoin a fraud. But interestingly, people immediately found that JP Morgan is actually buying bitcoin even after Dimon has publically denounced it. So the question is why JP is buying bitcoin in Europe while it is a fraud per their CEO? If you think about it further, what can you expect a head of a major bank will say about bitcoin when it is going to be a major threat to their core business? This is just like what you will hear from the head of Post Office about their opinion on email. We will certainly hear more such BS moving forward but I think it will become increasingly laughable jokes when bitcoin becomes more adopted by people around the world. What do you think about this quote? “For society, the Internet is wonderful, but for capitalists, it will be a net negative. It will increase efficiency, but lots of things increase efficiency without increasing profits. It is way more likely to make American businesses less profitable than more profitable. This is perfectly obvious, but very little understood.” Sounds pretty stupid, right? But can you believe this was said by one of the smartest investors, Charlie Munger, the buddy of Warren Buffet and the co-founder of  Berkshire Hathaway? I have no doubt we will feel the same in 5-10 years for what Dimon said now when we look back at that time. By the way, don't simply believe something just because he or she is big influential guy. Actually Dimon has already claimed a couple of years ago that bitcoin could not survive beyond $400. It is already 10 times higher now!!
• One evidence that bitcoin will go into the mainstream is the fact that retail business has already started to accept bitcoin as a legitimate payment. Two of the country’s biggest names in e-commerce, Overstock.com and TigerDirect.com, have started accepting Bitcoin as payment. Directly or indirectly bitcoin holders can spend their cryptocurrency in brick and mortar stores including Home Depot, CVS, Kmart and Sears as well as online at web retail granddaddy Amazon.com. The trend will only continue with more retail business to join the game. It is simply not stoppable!
• Last but not least, I recently heard another interest argument why bitcoin won’t die: the widespread acceptance by third world countries where they are facing increasingly severe inflation problems with their official currencies. You probably all know that Venezuela is collapsing and their official currency has become virtually worthless. Stories have emerged that bitcoin has become a life-saving vehicle for preserving their buying power for many people. I think this is indeed an interest but very logical argument for the utility of bitcoin and I also believe it will only become more so when the world has become increasingly more of turmoil in many countries. Since bitcoin is strictly limited in its supply to only 21 million coins possibly being mined and the population of the third world is so huge, this may create a vast shortage of the bitcoin supply down the road when so many people want to have it. I think it is just a matter of time!

You may ask why I spend so much time to write on bitcoin. Well, for one it is my hobby to share my thoughts on something I think interesting. It is not a burden but fun for me to do so, especially I don’t need to put together all the details at once. I often joke by saying that writing this investment blog is an anti-depressant for me. On the other hand, I also want to leave my thoughts as a historical record here. I’m pretty sure there is some historical meaning with all the discussions about bitcoin now and I want to leave a trace here.  About 20 years ago when the Internet was still in its primitive stage in use, I was called by my boss (a Cornell professor) as a genius because I could use the Internet to look for some interesting information for him, in addition to just using it for sending emails. Now looking back, it was almost unthinkable how little people felt about the Internet’s utility back then. I wish you won’t be among those only calling me “genius” retrospectively in 5-10 years from now that I’m so enthusiastically talking about the future for bitcoin now. For sure, only the history can tell if I’m right but I firmly believe I am!

A new Celgene is shaping up?

You probably often hear the stories that some biotech stocks jump 50%+ in a day following some successful clinical trial results. But a 200% jump in a day is not something you often see in the stock market. It is very rare indeed! We just saw it last week. The company is Zogenix (ZGNX), a single drug clinical stage company focusing on CNS indications.  Zogenix shares skyrocketed after it reported success in a Phase III trial for Dravet syndrome for its drug ZX008. Dravet syndrome (DS) is a rare, catastrophic, lifelong form of epilepsy with high mortality up to 20% with no effective treatment till now. So ZX008 will be an orphan drug that will be competing with another successful to-be-approved drug by GW Pharma. So why its story has excited investors so much? Two reasons I think: for one the expectation for ZX008 was too low (more below) that its success in the Phase III trial got virtually everyone a big surprise. Relatedly, there was a huge amount money in shorting the stock prior to the study result that has caused a gigantic short squeeze. Even as I’m writing now, the short float rate is still has high as 15%. Now back to my topic, why do I think Zogenix may become another Celgene, one of the most successful biotech companies. To answer this question, we need to learn a bit about the medical history and how Celgene started to be so successful.

 

In short, Celgene basically started with a single failed drug and revived it to be a multibillion dollar drug. The drug is called Thalidomide which has a very dark and painful history due to its safety problems. The thalidomide disaster is one of the darkest episodes in pharmaceutical research history. The drug was marketed as a mild sleeping pill safe even for pregnant women. However, it caused thousands of babies worldwide to be born with malformed limbs. Naturally the drug was pulled out from the market for the indication. But amazingly scientists later learnt that thalidomide has an anti-angiogenesis effect and Celgene took the opportunity to develop it to become an extremely successful anti-cancer drug for multiple myeloma (MM). Since then Celgene has evolved to become the insurmountable biotech giant that continues to be the No 1  leader in the MM area. With this short history in mind, let’s see how similar ZX008 is to thalidomide.

 

The generic name of ZX008 is called Fenfluramine. You may not know what it is but you probably have heard an anti-obesity medication, Fen-phen, another drug with a very painful history in the drug development. For relatively mild indication for overweight, the drug was found to cause heart valve disease and pulmonary hypertension, including cardiac fibrosis and therefore was withdrawn globally in 1998. Obviously Zogenix is trying to following the footprints of Celgene and is exploring this drug in more severe indications as it has shown to be able to control seizure to some extent. Due to its notorious safety profile, apparently most people did not believe this drug prior to the results from the Phase III trial. Now it turns out that ZX008 with a low dose of fenfluramine appears to be effective in DS patients with a quite acceptable safety profile at least based on the trial data. No wonder all the sudden everyone was chasing the stock or covering their shorts, which shot it as high as 200% in one day. In the short term, definitely it is risky to chase it now but long term, I think Zogenix has the potential become another very successful biotech either stand-alone or being acquired. Of course it is way too early to be sure about its future as a successful clinical development does not always guarantee the success of the company commercially. The drug’s cardiotoxicity is still a big concern and will likely lead to some limitation in its immediate potential. Having said that, the company is very small in size as of now and any commercial success, even limited, from ZX008 will provide it with a strong foundation for further growth. Maybe someday, Zogenix will really become another Celgene!

The Intercept Snafu

A 50% haircut is no fun for anyone, especially for those who have been heavily tied into it. That’s what has happened for Intercept (ICPT) and is still ongoing. Intercept is a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat progressive non-viral liver diseases. It is a quite successful company with at least one approved drug in the market, called Ocaliva for the indication of primary biliary cholangitis (PBC). Ocaliva is also being evaluated for potential indications across a variety of additional chronic liver diseases, including a very lucrative indication, nonalcoholic steatohepatitis (NASH). The hope was very high for ICPT, reflected in its stock prices constantly above $100 in the past year. Then a sudden blow hit it without notice.

 

On September 12, Intercept disclosed that it released a "Dear Doctor" letter warning of cases of "about 10 cases" of liver failure and related deaths, a the majority of which were said to have occurred in patients with severe PBC who had been treated with higher-than-indicated doses of Ocaliva. Well, it turned out that the safety risk was more than that as per the FDA, they have received a total of 30 reports of serious liver injury, including 19 deaths –and at least five of the cases occurred in PBC patients with no or mild decreases in liver function prior to initiating therapy. The panic hit the ICPT investors and they dumped its shares like the end of the world, wiping out its market cap by 50% just within days. The question is if this is an overreaction?

 

My initial contrarian feeling was Yes that this was an overreaction. You see, serious liver injury is already noted in Ocaliva’s label although it’s almost certain the recent fatality data will need to be added to the label, even a black box warning. The updated new serious safety risk for Ocaliva will certainly impact on its sales but PBC is a chronic liver disease with no cure and eventually patients will progress to cirrhosis that is fatal unless with liver transplantation. Such patients also have high risk of liver cancer. Given the limited treatment options available for PBC, the company will overcome the short-term setback to gain its market share again soon. But after the second thought, three more significant concerns came up that stopped me from jumping into it immediately.

• The unintended overdose leading to death may trigger a much more severe action mandated by the FDA that could be potentially fatal for the drug. The FDA may mandate a Risk Evaluation and Mitigation Strategy (REMS) for any drug that is deemed to have some specific serious safety concerns. For most of drugs that require a REMS, it only involves the basic requirement that requires the company to update the label and also distributes so-called educational materials that will inform physicians, pharmacists and/or patients regarding the risks involved and how to manage to minimize them. This is not so much a big deal and ICPT has already announced to take such actions immediately. But the real concern is the more stringent measures for drugs that have the risks so severe that the basic label plus education won’t be sufficient per the FDA. Then they may mandate a certification process for health care providers like physicians and pharmacists to study the educational materials and pass a test before they can prescribe a drug. More brutally, it can even go so far to impose a limited supply of the drug to only those who are deemed safe to get access to the drug. If such things happen, the sales of the drug will dive to the hell. What’s the chance for Ocaliva to get such stringent REMS measures? Probably not very high as the initial mandate from the FDA but the risk is still there that I cannot totally discount it.
• As I said, the NASH indication is more lucrative as there is no approved treatment yet and the market is huge for it. The expectation for Ocaliva was high before the snafu but with such a serious fatal risk involved, it will at least slow down its ongoing trials for NASH and may also make it less competitive due to the safety concern.
• Then I saw an interview with the CEO of ICPT. It is no surprise that he was defending their drug but the way he did it was really surprising and unethical. He told the reporter that these patients who died of the overdose were very sick and would die anyway. I almost fell off the chair when I saw this. I must say he is really stupid to say this in public and I’m almost sure that there will be a flood of lawsuits for ICPT in the months ahead.

 

In short, it is still too early to tell whether ICPT has already priced in all the potential risks. It is not a good idea to catch the falling knife even though it could turn out to be a good entry point. Better to let the dust settle before jumping in.

A double in the work

This is year is a year of semiconductors as the whole sector has been on fire continuously, thanks to the fast advancing in the life-changing technologies such as mobile computing, auto-driving, and artificial intelligence etc. All of them will need chips. Micron (MU) is one of those high-flying chip stocks and has almost doubled this year. It is making a new high as I’m writing following another strong earnings report and forward guidance. Some analyst has upgraded it with a price target double from the current level around $38. I agree that MU will double in the next year or so but jumping in immediately may not be a great idea and here is why.

 

You see, as with all the tech stocks during the dot.com bubble, MU had a moonshot run to almost touch $100 back in 2000. Following the bubble burst, it crashed down to low single digit in 2008 and started to move up nicely after the financial crisis, reaching $36 in 2014. But it didn’t hold. Rather it got killed again with a 50% decline in early 2016. So with the current price about $38, it is just making a 2 year high, which is impressive. The thing is, the $40ish price is a strong resistance, a 15 year high that it has to break out. While anything is possible, in general, it is quite difficult for a stock to challenge its 15 year long resistance successfully with just one attempt. More often than not, a few attempts will be required to gain sufficient momentum to  break it. I think this is likely the case for MU as well. Its technical setup has also given some hint on this: there is apparent negative divergence with MACD in both of its daily and weekly charts. It often suggests that MU has not gain enough momentum at the moment to push through the overhead resistance right now. I think the more likely scenario will be that MU may lose its momentum for now and then declines towards its breakout level around $32 to test the support. That will be a more favorable price to get in to me. With this plan in mind, I entered a $37/32 bearish call spread, wishing to make some money if it indeed follows the downward path as I expected. If I’m lucky enough, I will use the gain from this short-term shorting to fund my next long position for MU.