Make money regardless which way the bond market goes

In December last year, close to $2 trillion was wiped out within a month time. Who could afford this kind of gigantic loss? Of course no one, not even people as rich as Bill Gates or Buffett! It was a loss occurred in the bond market due to violent short-term interest rate hike in the past couple of months. If you don’t know, the bond market is the biggest market, much bigger than the stock market. Therefore the money flow is huge more than you can imagine!

The bond market has enjoyed nearly 4 decades of bull run non-stop, which has brought down the long term interest rate to below 2% that has never been so low in history. But I think the epic bull run for bonds has come to its end. We are probably witnessing a historical moment for the turning point of the long term trend for bonds, that is a decades’ long bearish trend for bonds may has started in front of our eyes. Of course, only history can tell if I’m right. Apparently there is still a lot of uncertainty which way bonds will go, especially in the short term. With huge trading flows moving the bond market up and down, the risk is obviously high if you bet on the wrong direction. This prompts me to explore ways to try to make money regardless which way the bond market will go. I think I have found one. 

First think about for a moment, regardless you bet for up or down for bonds, what service you must use for making such trades? Yes, you definitely need a trading platform to execute your trading orders no matter how you bet for it. Nowadays, virtually all the trading platforms are electronic. MarketAxess (MKTX), is just such an electronic trading platform for investors worldwide to trade corporate bonds and other fixed-income instruments. As a middle man to bring both sides of traders together, MKTX is a very cost effective business that can make money whether the traders make or lose money, as long as they have to trade. What a genius idea to set up such a business model!! At a price tag close to $200 per share, MKTX is by no means cheap with a PE near 60. For most stocks, this is kind nose-bleeding expensive valuation but you have to understand it is not an average stock earning a low profit margin like 5-10%. Its profit margin is nearly 40%! That’s why it is a money gushing machine without costing too much to maintain, a capital efficient business. That’s probably also the reason why it does not need to borrow money to run its business. It holds tons of cash on its book with zero debt. It is also a very stable stock comparing with other stocks in the market with a beta as low as 0.54. In other words, MKTX is almost 50% less volatile than S&P 500. Holding MKTX is virtually like investing in bonds without holding bonds.

Pay attention to MarketAxess!

Buffet’s big speculation

Monsanto (MON) is a dominating seeds and pesticide company, an important agriculture player in the world. But people around the world have virtually polarized view on it. Those who like it think MON has helped to solve one of the most challenging problems facing human beings, the shortage of foods with increasing population. On the contrast, those who hate it think MON is an evil that is destroying human beings due to its gene-modified products. As always, you take your side as you see fit and it’s none of my business. What I’m talking here is not about like or dislike of MON but what a potential opportunity we may see with Monsanto. I think there is a big speculative opportunity for MON at the moment. It is called arbitrage trade (AT). If youdon’t know what an AT is about, take a look here as I talked about it before. Now I think the master investor, Warren Buffet, is making a big AT bet for MON. Let me explain.

Last May, the German chemical/agricultural giant Bayer announced to acquire Monsanto with a 45% premium in the price tag, making MON worth $128 per share if the deal goes through. At that time, MON was trading around $90 and immediately its stock prices shot up to $110 or so. But without going into details, there is a huge uncertainty whether this deal could go through even though now both companies’ boards have approved the merger. That’s why an arbitrage trade opportunity is emerging with a 15% up or down range for a profit or loss. If the deal goes through, MON will be worth $128 per share at closing, a jump from the current $110ish price. If fails, it will likely go down towards where it was before the MA announcement around $90. We now know that Buffett is betting big for a successful merger of MON with Bayer. Per the regulatory filing, Buffett’s Berkshire Hathaway bought 8 million shares of Monsanto worth about $1 billion as of end of 2016. It’s worth noting that he bought the MON shares apparently after the MA announcement, meaning he must be more confident than not that the MA will prevail. Otherwise, he will immediately lose about 15-20% of its MON holdings on the paper. 

While there is no way to know the exact intention of Buffett with this trade, I bet Buffett is making a short term trade with a long term perspective in his mind. After all, MON is a very good long term dividend grower by itself. If the MA fails, Buffett will likely just hold the MON shares to earn its good growing dividends for long term. The short term paper loss is not a concern at all for Buffett as we all know as long as he sees the long term value of it. If the MA succeeds, Buffett will make a quick 15-20% profit! If you understand this, you can again see how smart Buffett is as a master investor. While this TA is quite risky for most of people out there, it is a win-win deal for Buffett apparently!!

Go with FBI

By now I guess everyone knows what President Trump stands on regarding national security. He is taking some extreme measures with an executive order temporarily banned U.S. entry to persons from Iraq, Syria, Iran, Sudan, Libya, Somalia, and Yemen until “extreme vetting” is implemented. Yes, this is going well till now as it has been blocked by the Court. But at least this demonstrates how serious he is about doing something regarding the national security. Don’t get me wrong! I’m not talking about politics here and ask you to go with or against Trump on this. It is really none of my business where you stand on. No interest for me. But I think there is something interesting you may consider from the investing perspective, regardless which side you are standing by.

If the Trump administration wants escalating the security measures, there are many aspects involved but there is one thing that will certainly be more enhanced and used. That’s the biometric fingerprinting. By now, each of us coming into the US via airport must have fingerprinting done. I think the trend is clear that demands will be substantially increasing under this administration to help identify potential terrorists efficiently. One tiny company is in a unique position to benefit from this trend. I’m taking about BIO-key International (BKYI), which only has a market cap of just $181 million. Since the company is tiny and small, it is virtually unknown. Probably even more unknown is the fact that BIO was the only company chosen by the FBI a few years ago to help implement a biometric fingerprint databases capable of handling in excess of 200 million prints. Believe or not at that time, it was the only company that could meet the very stringent FBI requirements. Nowadays, there are a few more but still very few that have this kind of capability. Here are a bit more details about BIO: BIO-key International, Inc. develops and markets fingerprint biometric identification and identity verification technologies, cryptographic authentication-transaction security technologies, and related identity management and credentialing software solutions. The company markets its products through its direct sales force of professionals, as well as through resellers, integrators, and partner networks to government and corporate customers primarily in North America.

Of course, be aware that penny stocks are very risky even for speculation purpose. While the upside potential could be big if the bet is right, the downside risk is also great, potentially down to zero. Don’t go crazy regardless how much you love it and always assume first that you may not see your money again by buying this stock.

Where dollar will go?

Over the past half a year or so, US dollar has had a fantastica run and has significantly strengthened due to expectation of higher interest rates and risk of inflation. But as any assets that have gone virtually one way up, dollar has been a bit ahead of itself and sooner or later it would have to at least take a rest. This is what has happened in the past couple of months, during which dollar has declined quite a bit. Since dollar is the currency used to price virtually all the commodities in international trades, its valuation has a huge impact on the prices of commodities. The obvious question interested to traders and investors is where dollar is heading. I wish I knew but I don’t. However, we may get a hint from the dollar’s price action to get an educated guess.

Technically, the US dollar is at an important juncture but shapes up in a bearish fashion. See the chart below for the US$ ETF (UUP). As you can see, dollar is in the process of forming a head and shoulders pattern. While there is no certainty, this pattern most often is bearish, leading towards more downside ahead. So watch this closely in the next days or weeks to see if dollar can overcome this bearish formation and break out to the upside. If not, then watch out below. A weakening dollar often leads to the strengthening of precious metals, which technically is indeed shaping up in a bullish fashion.

Bad price action for Alexion

I became bullish for Alexion (ALXN) two months ago when it crashed down to $110. Luckily it was a good timing. Very soon, it started to fly and within a few weeks, it went up to over $140, a good run in such a short period of time.


Today, it reported its earnings. The initial reaction was quite good as it opened as high as +$5. If it could hold the gain, it would be a great momentum for it to run further higher but it didn't. Quickly its hype faded and more badly it ended up losing $1.6. This is a very bad price action, a textbook bearish indicator with open-high-low-close. I think it is heading down towards $120 probably in the weeks ahead. If you already got a good profit, it is the time to take the chips off the table for now. Long time Alexion may still go up but near term the downside risk is very high!

If you want to own Internet

Can you survive now without Internet? I cannot and I guess not many people can these days! Internet has penetrated into almost each angel of our life, it will become a nightmare if Internet is not available anymore, even temporary like a power outage. As Jack Ma once said, people now live, eat and sleep on Internet! So true!!

So have you ever thought about own Internet? You must think I’m out of mind of even asking about this. Indeed I’m kind of kidding but I’m also serious in that there is a way you may virtually “own” Internet. Here is how.

If you have never heard about Verisign Inc (VRSN), you should know it. Briefly, VeriSign is a provider of domain name registry services and Internet security, enabling Internet navigation for domain names and providing protection for Websites and enterprises around the world (Registry Services). In other words, if anyone wants to have a website, they must first register to get a domain name. Otherwise you simply cannot create your website. Verisign basically controls the Internet registry services and a legal monopoly. As such, it virtually owns the Internet. Due to its unique dominating power for the Internet, it essentially can make money while sleeping without much competition. Therefore you can imagine how profitable it is as it takes in about 70-80% of each registration fee without doing much work. No wonder its profit margin is close to 40%.  And do you know who is its largest shareholder? Warren Buffett! Yes, Berkshire Hathaway owns about 12% of its shares.

So if you buy VRSN, you kind of own some Internet and will likely earn money in years to come as long as Internet is part of our life. Be aware though, I’m not saying you should back up your truck to buy aggressively as it is not really so cheap at the moment around $83. But at least you should keep this in mind and if ever there is a good selloff to bring down its price, get on board!

The company must have got the message

I'm definitely wrong about Gilead (GILD), the leading biotech company regarding its bottom. I was thinking around $80 when I wrote about it in Jul last year would be its bottom of the ongoing correction. Unfortunately it continues to disappoint the Street and the passing week, it posted another dismal earnings. It has dropped another 20% for the bad news. It is of course really a pain for shareholders, especially if the expectation is for some short term return. But for long term, I still hold a lot of hope for GILD. After all, it is still one of the most successful biotechs in the world and is still generating tons of cash quarter after quarter. As I said, it is just a victim of its own success as the huge windfall from its hepatitis C drugs has raised up the expectation for it to an unbelievably high level. It is just now sustainable for any companies to continue to meet ever increasing expectations when the hope is too high. No exception for GILD.


Now after a hair cut of almost 50% from its all time high, GILD becomes an incredibly deep value stock. Given how much money it can generate from its existing portfolio, it won't go anywhere fundamentally. It is still a cash cow with P/E just about 6 and is having an enormous amount of cash in the book around $5 billion. The biggest problem for GILD is the concern about its lack of promising developmental candidates. I believe the company management has clearly got the message that it needs to do something with its cash hoard to boost its portfolio. One recent hiring could be a sign that it may soon make a move to buy something in the oncology business. A couple of months ago, they hired the formal global head of Oncology Clinical Development and Medical Affairs from Novartis. Currently GILD has virtually nothing interesting in this area. Could it mean that GILD may be thinking to do some bolt-on deal in oncology, especially the hot area of immune-oncology? I bet this is very likely. If that happens, it may become an important catalyst for it to run again. After all, it is such a deep value stock and at this cheap level, I'd think the downside risk is much smaller now. Of course I'm not saying it is the time to back up trucks to buy. Short term it can still be very volatile. But if you are a value investor with a long term horizon, starting to accumulating GILD shares could be a good idea. It is also paying you to be patient with a respectful dividend yield. Its tech pattern is also telling a bullish story. Even after such a huge selloff, its weekly chart is consistently showing a bullish positive divergence with MACD, suggesting the long term momentum is behind it for moving higher.

Tesla's survival may be at the mercy of Trump

Elon Musk, the founder of Tesla, is no doubt a genius. Here is his CV from Wikipedia;


Elon Musk is the founder, CEO, and CTO of SpaceX; co-founder, CEO, and product architect of Tesla Inc.; co-founder and chairman of SolarCity; co-chairman of OpenAI; co-founder of Zip2; and founder of X.com which merged with PayPal of Confinity. As of June 2016, he has an estimated net worth of US$11.5 billion, making him the 83rd wealthiest person in the world. In December 2016, Musk was ranked 21st on Forbes list of The World's Most Powerful People.


With this kind of unbeatable achievements and experiences, very understandably he is very much admired by investors. This is probably one of the key reasons why Tesla (TSLA) is so much loved by the Street, even though Tesla has never made any money since its inception. On the contrary, it is bleeding heavily quarter after quarter big time. Will Tesla ever be able to make money? Based on what I know, I don't see any hope in the foreseeable future. So the question is whether TSLA can be still so much loved and be kept at this nose-bleeding expensive level in the future? It could be, as we all know that the stock market is not rational and can stay as such for longer than you believe possible. But there is one thing TSLA investors should be aware of that may potentially turn it upside down. Even its survivability may be questionable if this happens.


Anyone follows the solar energy stocks? Solar stocks were the Street darling as well a few years ago even though they could not make any money due to the natural limit defined by the physics. For example, First Solar (FSLA) reached its all time high at $300 in 2008 but since then it has come down year after year and is traded at $30s right now. What happened to solar companies before and after 2008? Well, since solar companies cannot make money by themselves, they have to rely on something to continue their business. The major source of funding before 2008 was the incentives from the governments around the world. Germany used to be one of the major governments supporting solar companies. But such kind of critical incentives came to it end in the past few years that pushed the solar companies onto the deadly path. Believe or not Tesla is in a similar situation as Musk is heavily relying on the government incentives for manufacturing the electric cars. But this may change overnight. We all know that President Trump is very sensitive to the incredibly high government expenditure and he wants to cut down all the costs as much as possible. We've already seen what he did to Boeing for the costs of Air Force One and to Lockheed Martin for F-35. Different from Boeing or Lockheed that are producing something the government really needs but just need to cut down the costs, Tesla is producing luxury cars that are only needed by affluent guys, not ordinary Americans. With so much money Trump needs to fund his ambition of rebuilding the US infrastructure, I bet the last thing he wants to see is the big money spent mainly just for a small group of rich people. Based on the pattern we have seen, Trump will likely target those companies that cost a lot of money to the government. Tesla will logically be one of them and I think it is probably just a matter of time that the day may come when Trump will call or Twitter to Musk to get off the government funding and just rely on its own. If that happens, watch how TSLA will react. A 50% haircut may be a light reaction.  I even think it is probably like a death penalty to make Tesla's survivability into question.


If you own TSLA, just keep this in mind. If you are thinking to chase the stock now, think twice!