An American first stock

As we all know by now, Trump’s No 1 presidency slogan is “American First” by encouraging American companies to invest more directly in the US than outsourcing. One major approach he is promoting is to create a “border tax” that will tax those products manufactured in foreign countries but sold in the US. If this is indeed implemented, companies with major international business will certainly be impacted and potentially in a major way. It is probably difficult these days to find out pure companies that are not outsourcing in their business. Putting politics aside and regardless if you like or not, as an investor, preparing for the potential impact won’t be wrong and hurt you. If you can find stocks that are only or largely doing business in the US, logically they should not be affected much, if any by the border tax. If somehow this tax is not implemented at all, then there should also just be business as usual for them. Finding such a stock is not easy and it is more difficult to find one that has proven itself to be thriving almost in all business environments it has gone through.  And even better, it is a great dividend aristocrat that will pay you very well for long term! I have found one that happens to have already treated me extremely well over a long haul but it is a “dirty and sin” stock that not necessarily everyone will like. I’m talking about a smoke stock, Altria (MO).

 

I have started to own MO since 2008 when it got crashed with all the other stocks. I have talked about the rationale why I like it so much a few years ago and you can find it here. No need to repeat myself as nothing has changed why it will continue to be a great dividend stock. But it happens also to be a pure US only company. It used to have international business as well but it has spun off the international business years ago, through which I luckily have also got a free stock, Philips Morris (PM), another extremely performing well stock that is paying me increasing dividends non-stop for years. Back to MO, honestly it is not really cheap but you probably won’t get a great chance to buy it cheaply unless the overall market gets another serious crash like in 2008. After it reached all time high at $75 a few months ago, MO has been in a small correction mode at the moment. I don’t know if it will happen but if it indeed goes below $70 in the weeks ahead, I think it will be another good opportunity to get some shares of MO as it will be relatively cheap and fits well with the American First theme. I suggest you add MO into your watch list and don’t miss the opportunity when it comes!  

A subprime loan crisis is looming

We all know what triggered the 2008 financial crisis that cut over half of the stock market values. The culprit was the large scale delinquencies of subprime housing mortgage loans that almost brought down the whole banking industry. You probably would think that everyone should have learnt the lesion and won’t repeat the disastrous mistake again. Actually not at all and another subprime loan crisis is already brewing and quickly worsening. This time it is not the mortgage loans but the subprime auto loans!

 

Subprime auto loans, defined by those with a credit score below 620 at origination, have become extremely popular and quickly catching up with the prime loans. As you can see below, the total amount of outstanding subprime auto loans has already surpassed the peak in 2008, worth $300 billion by end of 2016.

 

The concerning trend ongoing is the increasing rate of delinquencies of the subprime auto loans that is worsening each passing day. Back in Feb 2016, Experian, one of the big three credit bureaus, already reported auto loan delinquencies had hit a six-month high. Of those loans, nearly 5% of subprime loans were delinquent by 60 days or more – the highest level since 2008 at that time (see below). One year later, Experian just reported again that the delinquencies of such loan are even higher than they were before the financial crisis in 2008.

You have to understand, this is just the beginning. One major factor that causes sharp increases of auto loan delinquencies is the increasing loan costs due to the Fed interest rate hike. People holding subprime auto loans are those with very little budgetary buffer pay their loan interest. Any inch higher of the interest will be a hit to their capability to serve the outstanding loans on time. Now more interest rate hikes have increasingly become the certainty in the years ahead and late payments from such subprime auto loan are spiraling and become really dangerous to those institutions that lend out such loans. The bank industry is certainly one of them but I think the entire auto industry may face the risk of collapsing if the worsening situation truly gets out of control in the next couple of years. Three major forces will hit the auto industry particularly hard: many auto companies are lending out subprime loans by themselves in order to boost their car sales. They will obviously lose big when such loans become delinquent and at the same time their car sales will also get hit due to decreasing demand from such buyers. Then the used cars taken back from such bankrupted car owners will increasingly become a financial burden as well due to fast depreciated values of such cars. I think one auto company is again in the center of this looming crisis.

 

It is General Motor (GM), once the American glory icon that collapsed and bankrupted in the 2008 financial crisis. With the government help, GM got back, seemingly strong but only on the surface. Fundamentally GM is still under the enormous financial burden due to the super large pension obligations that they cannot get rid of, thanks to the OB government. Basically GM is still hijacked by the strong union that virtually controls the company at the current state. To meet their pension obligations, GM has to boost their car sales aggressively by any means they can find. Selling cars to people with poor credit scores is one of a major source of revenues for GM. It is one of the largest owners of subprime auto loans, believe or not. GM Financial, the integral part of GM for auto loans, is holding $54.3 billion in debt related to financing, of which 64.7%  are categorized as subprime at present. In the near zero interest environment, GM may survive well by holding such junk loans to boost their car sales. But the alarming uptrend of subprime loan delinquencies is not their friend at all and the situation will only become critically worsening in years ahead. I obviously don’t know when the 2008 type of crisis will hit GM but I think the risk can only go up, not down as long as the Fed is keeping their rate hikes. If you hold GM shares allured by its high dividend yield (4.4% as of now), be careful. I’m not sure you will be happy to still hold them in a few years from now. If the subprime auto loan crisis follows the same path as the subprime home mortgage crisis 8 years ago, it is not unthinkable that GM may go belly up again. I personally even start to buy long term deep out of money GM puts that cost very little but could be hugely profitable if the worst do come for GM down the road.

 

At least you should not be complacent if you are holding or considering to buy GM now. Considered you are warned!!

This IPO stock is poised for a big jump

Trading for stocks on their IPO date is just like gambling but many people do love to do that to buy highly inflated IPOs in the first few days, afraid of being left behind. Most often than not, it is usually a heart-broken experience as those chasing IPOs often see their share prices dropping like a stone very soon.  The most recent example is the famed IPO SNAP. Just within days, anyone who bought the stock on the first 2-3 days are still feeling the pain of bleeding. Other famous examples are Facebook and Alibaba. Of course, what I’m talking here is not about the eventual success or not of such companies but rather the initial chasing of IPOs. The risk is supper high! A better strategy to trade or invest in IPOs is to be patient to wait for the initial hype faded away and most of the IPOs will follow the same pattern: jumping 30-50%+ higher in the initial days, followed by relentless sliding down of the prices that often will be significantly below the IPO price in the weeks or months ahead.  When that happens and you still like the company, then it will be a great time to get in. This brings me to today’s idea.

 

Apptio (APTI) is a cloud-based resources management company that enables companies to analyze, optimize and plan technology investments. For sure many of you know that cloud-based technology is a hot spot at the moment with great potential. APTI is a fast growing company. While it is still not yet profitable, it is on a right track with rapid growth of revenues. Its 2016 revenues were 40% jump over 2015 and the latest quarter earnings also beat expectations. Per the company, it is expected to become profitable in later this year or early 2018. But this is not what interests me for now. Rather, APTI is following the text book pattern for IPOs, which jumped to $23 on the IPO date last September with an IPO price of $16 and then quickly got sold off thereafter. It is now trading around $12 as I’m writhing. One thing that likely bothers investors about IPOs is the potential share-dumping of insiders after the “lock-up” date. You see, those insiders who have got original shares prior to IPO are usually not allowed to immediately sell after IPO. Often there is a few months of lock-up period during which their shares cannot be traded. A common phenomenon is to see a huge shares released into the market when the lock-up date is passed. But logically this dump-effect should often occur when the stock price is well above the IPO price so that early investors can take the advantage to profit. Mar 22 was the lock-up expiration date and  there were 34 million APTI shares that could be dumped immediately. But the thing is APTI is currently 25% below its IPO and I highly doubt that those early investors would like to sell their shares all at once. In other words, we may not see a massive selling for APTI in the days/weeks ahead due to the lock-up expiration. At least we haven't seen this in the past few days, a good sign! The technical setup may also tell this story: while APTI has been relentlessly sold off in the past few weeks and has kept moving lower and lower, its momentum MACD is now showing up strong positive divergence, suggesting the downtrend of APTI may be coming close to its end. I’m interested in APTI at the current depressed price but I’ll certainly have a clear exit strategy in case I’m wrong and APTI continues to be sold off hard. 

A beautiful retail company chart rarely seen

If I don’t tell you which company it is and ask you to guess which sector this company belongs to purely based on its chart below, you probably won’t think about a retail company at all.

Due to the aggressive expansion of Amazon’s online business and the historical change of customers’ shopping habits that more and more go online than to physical stores, most of the retail companies are really struggling to say the least, or even fighting for survival for many. So when I happen to see the chart of Ulta Beauty (ULTA), a beauty products company, I initially thought there might be something wrong with the chart but then realized this is indeed a long term chart for ULTA.

I’m definitely not an expert on beauty products but based on what I read, Ulta has grown substantially since its debut in 1990 and has become the largest beauty retailer in the US, marketing 20000 products from over 500 beauty brands across all categories. I don’t know how they manage it in the e-commerce world led by Amazon that they can still grow rather fast and different from other retailers which are all in the mood of closing their physical stores, Ulta is still expanding. It is apparently very profitable with a lot of cash without debt. Looking at its 10 year chart, it is virtually a straight line going up with few hiccups. Actually you can guess that Ulta is a rather stable stock compared with others with a beta of less than 0.7, meaning 30% less volatile than S&P as a whole. Now it has just broken out over its all time high around $278, which is technically a good sign that it will continue to go a lot higher. Of course I’m not saying Ulta around $285 is cheap but you rarely get a cheap price for a great stock. Maybe just put Ulta on your radar screen and jump in if someday it gets sold, especially with the overall market selloff. It is definitely a momentum stock that may continue its uptrend for long time!

Waiting for a kiss from oil

I have been waiting for oil to break down for some time and for sure I was a bit early for the call. But eventually it did follow the “prediction” from commercial traders who have long provided hint that oil would drop from its recent high around $55ish. Again and again for various assets, it has been demonstrated that commercial traders (CT) do have an edge over speculative traders (ST). They tend to give you early warning about an upcoming change of the trend of certain asset when they go extreme bet: when ST becomes extremely bullish on something, it is usually when CT goes extremely bearish. This is the time you should think about going short for the asset, i.e. go with CT. You will get this kind of hint from the weekly government COT report. Of course keep in mind this is just an early warning, not an exact time indicator.

 

Now back to oil. As I said, a 15-20% drop of crude oil could be expected from its recent high, which could bring it down towards $45. The recent decline was quite fast, pushing oil down to $47 just within days. I think it is a bit too soon too fast. Oil has hit its 200 DMA which is usually a strong support.  It is reasonable to expect that oil will mount a dead cat bounce to move up towards its 50 DMA around $52, a strong resistance. When it does that, we will see a kiss to the resistance from below, which will most likely trigger another more severe decline. It is not unthinkable that oil may have to go down to low $40s to complete this leg down. It is too early to say how oil will end up this correction but at least I do believe more downside is still ahead.

 

I have already taken my profits by betting with SCO for its downtrend. Actually I've added a long position to anticipate a short term bounce of oil. I’m waiting for oil to kiss its major resistance line around $52. If that happens, I will certainly go short again for a bigger drop of oil.

An improved WeChat type App you don't want to miss

I'm not talking about an investment idea here but a unique App that may interest you.

When you use WeChat, I'm sure you love it for its powerful functionality that makes Wechat users life very easy. You virtually can do all the things within it that you will otherwise need to do elsewhere online at different platforms or websites. No wonder why WeChat becomes so popular among Chinese and has become part of daily life for many of us. But I'm sure many of you would complain for one thing: its lack of good search function and capability for archiving by topics. Just try to find an old posting or look for something interesting to you in your Favorite. It is almost like finding a needle in a haystack.

While almost all of us just feel frustrated and are complaining, one user has determined to change it! He is Dr. Lei Ding, my good friend who has spent his own money for several years to have finally developed a new App, called MyTwan (脉团）。This is a new social media App, very similar to WeChat in terms of its setting and functionality. So you will find it very familiar to you in using it but with one key improvement: Posting and Archiving by Topics. Within MyTwan, you can chat as like with WeChat but you can also post specifically for a topic. All the relevant chatting on the topic can be grouped for the topic and as such it will be really easily to find useful information later on for it. MyTwan has developed a powerful search capability and with any key words, the relevant postings can be easily retrieved. You can of course also archive your favorite information by topic and therefore allow you to look for it conveniently later. I'm certainly not an expert yet as this app is very new but I think you will love to use it due to its much improved and user-friendly functionality. I also copy the official introduction of this app in Chinese below.

I highly recommend you to download the app and start to use it. More people use it, more powerful it will become. You can scan my QR code below and take the following 2 steps in sequence:
- First please register yourself to get an account and

- Then download the app from Apple Store or Google's
- If need help, you can find Help Documents for frequent asked questions in Your Profile tag.

This way you will be automatically connected to me as a group and we can talk anything by topic individually for convenient future reference. Please take a minute to try. You won't be disappointed!

Also, there is a laptop version of Mytwan, which is very powerful for text and photo editing. Just go to www.mytwan.com and download the laptop version.

应用描述
“脉团”，“脉” 象征着人脉，关联， “团”象征着团体和团结。其目标是为了让全球每一位会员可以互相帮助，增加人与人之间的信任，方便自己，做更好的自己，让世界更美好。

脉团有20多个功能，它融合和链接了其他主流社交平台的部分功能，比如微信，百度，Facebook，PayPal， Uber等

在脉团，每个人都可以
1. 根据你的专业和爱好建立一个团
2. 聚集你的同行，有相同爱好的人和好友，别人也可以搜索加入你的团
3. 向公众传播知识，同时提高自己的知识。
4. 帮助那些需要帮助的人
5 让这个世界更美好

通过脉团 组织者可以得益于
1. 做你自己专业的组织者， 带头人。
2. 结识更多的朋友，更多的专业人士并得到认可
3. 自我充实和提高
4. 跟微信和Facebook不一样，我们每个团都有一个团长管理的经济账户，可以接受他人支付，提出请求的人可以这个咨询， 公司和广告也是私人来源，团长可以像管理公司一样运营自己的团，并得到回馈。

It’s the time to EAT?

Most of people probably have never heard about the company name I’m talking about, Brinker International. But a lot of people are actually the customers of the company without knowing it. Do you know Chili or Maggiano’s Little Italy restaurants? I’m this sounds very familiar to many of you, right? I have never dinned in either of them but have seen Chili everywhere along the ways I pass. Binker with a stock symbol of EAT is the owner of the restaurants. Actually Brinker is one of leading causal-dining companies in the world. It owns or franchises close to 2000 Chili’s and Little Italy restaurants with operations in over 30 countries! In other words, this is a very well established dining company. But as with many good companies, it has run into some rough patch in the past few years. Since the financial crisis in 2008 with increasing financial challenges facing most of people, causal-dining customers tend to cut down their eating habits in more formally served restaurants like Chili or Little Italy but more go to fast foods like McDonald or Wendy. As such, it same-store sales have declined for many quarters in the roll.  Accordingly, its share price has declined over 30% from its peak two years ago.

 

But here is the thing. If you are not looking for short term return but rather a long term investor, values of good companies can only be found when they are facing short-term difficulties. The management of Brinker is not just sitting idle for the challenges. Rather they are actively working on something to improve their operations, e.g. offering value meals such as a three-course dinner for $10,  and they are also adapting to the trend by enhancing its online ordering process to boost its takeout business. A little secret not known by many investors is that close to 20% of their restaurants are located in oil-producing regions. The past few years have definitely been touch for these regions but with a good chance of recovering in the oil sector in the next few years, more people there will EAT again in Chili’s or Little Italy I think. Another gem Brinker has is its real estate holdings, which is definitely a good valuable asset adding to its fundamentals. With its price at low $40s, I think EAT is a good value stock for long term. It is also a very good dividend growing stock with a current yield of 3%+ at the moment and the company is aggressively buying back its own stock, a great piece of music to my ear! I think it is the time to EAT!!

Macy’s future

Like all the retail stores, Macy has been hit hard in recent years due to the shopping habit changes of customers. Less and less people will go to shopping malls or stores but rather will simply take the convenience of shopping online. With very slow adaption to the new trend, Macy is really struggling. Following the poor earnings a couple of weeks ago, Macy has crashed to $30ish but then the outgoing CEO announced that Macy will be available for sale. Regardless how much it is struggling, Macy is still generating good cash flow and at this price, it is really cheap valuation wise. It is paying over 4% dividends. As such, deal hunters will come to buy Macy at a discounted price. Sure enough, the Canadian company, Hudson’s Bay said they would be interested to buy Macy. Macy’s price immediately shot up to $35. But then last week, it was reported that Hudson Bay may have some troubles in financing for the deal. The poor Macy got hammered hard, back down to $30 again.

 

I certainly don’t know if the Hudson Bay’s deal will go through or not but regardless, a no deal has already been priced in and Macy is out there again looking for being sold. At this very cheap valuation with such a good dividend, I don’t think its downside risk is big prior to its next earnings. And the MA expectation will also support its current price at the moment. If the current potential deal revives or another new deal is popping up, Macy will shoot up easily for 15-20%. While there is no guarantee, I think this is reasonable speculation for risk takers.

An idea you probably will never think about

This is not a “normal” idea you may hear about anywhere else and you may even think I’m crazy about such an idea. Indeed, this is especially unusual. OK, enough pre-warning  before I start the story.

 

I have recently read a report regarding a crisis happening in Japan. It is kind of bizarre situation that related to the famous Japanese aging problem. We all know that Japan is probably the most aged country with nearly one third of its population over 65 years old. There are many problems associated with aging populations but one big problem that Japan is witnessing is probably beyond anyone’s expectation: crimes committed by elder people. So you may ask, what’s the  big deal about the elderly criminals? Well, it is nothing unique that there are elderly criminals but the increasing trend that more and more elderly are arrested for crimes in Japan has reached a crisis point: 10 years ago, only less than 6% of criminal arrests in Japan were involving those 65 years or older. But now, it is 20%! Almost 4 times more increase in the last decade!! So why such a drastic increase in Japan with elderly criminals? I’m pretty sure the sociologist can come up with many reasons but one important aspect is certainly the financial stress the Japanese elderly are facing. It is reported that the average income for Japanese workers 65+ is less than $30,000 and they also don’t have much to save for their retirement. As such, prison has become a better place to stay for many elderly because at least they can have a room to sleep, have meals to eat and even have free medical checkups and treatment if needed. No wonder the story further goes with the fact that among those elderly criminals, 70% will commit crimes again within 5 years. Prison just becomes a better place for them.

 

Then you will certainly ask why this is anything relevant to the US? Well I can say we have some quite similar characteristics with respect to the elderly population in the US. We all know that the US baby boomers are entering the elderly ages, fast! We also know that the US economy as a whole in the past decades is going down also fast! The average income for the US elderly income, while I don’t have the exact stats, won’t be much better than the Japanese counterparts and we also know the average income as a whole is trending down in the past decades. Then the shock reality is that American baby boomers are notoriously bad savers and Half of American Baby Boomers Face a Frightening Retirement Reality: But There's Worse News Incoming! When you put all these together, do you see some similarity between the Japanese vs the American elderly in terms of their financial situation? I do and actually we are already seeing some frightening uptrend regarding the US elderly crimes: Between 2007 and 2010, the number of state and federal prisoners age 65 or older grew 94 times faster than the overall prison population. Between 1981 and 2010, the number of state and federal prisoners age 55 and over increased from 8,853 to 124,900. By 2030, that number is projected to grow to 400,000, an increase of 4,400 percent from 1981.

 

So if this trend continues, who will be the logic beneficiary? The prison facilities, right? If you are not aware, there is a dual system in the US that while the majority of prisons are managed by the governments, private prisons are also a vital player in housing criminals. With the Trump’s administration very much focused on cutting down the government budget as much as possible, I think the private prisons will become more and more important in the US legal system and they may even be thriving moving forward, when the demand may increase fast! Believe or not, the prison stocks have already jumped high since Trump’s winning and The GEO Group, Inc. (GEO) is one of them that has doubled since Nov last year. It is not cheap for sure at the current price but longer term, I think GEO will have much brighter future. Keeping GEO in your watch list may be a good idea!

Don’t go with Buffett

I know it is a bold call but I don’t think you should go with Buffett on this stock at least for now. I’m talking about Apple.

 

I like Apple for years and I have advocated it as a long term value stock many times here (see an example here). Have I changed my mind? Certainly not!! Apple is still one of few best value stocks out there that may bring you fortunate over time. We just learnt that Buffett has put big money into Apple, the 2^nd largest holding for Buffett’s Berkshire Hathaway as of now. This is a big long-term confidence from Buffett as when he puts money into something, his holding period is “forever” as he has said. I certainly agree with him but it does not mean it is a good time to buy Apple for now if you are thinking to follow Buffett’s footsteps.

 

After more than a year in virtually a very depressing status for Apple with more and more people not believing it anymore, suddenly the faith for Apple has come back in the past 2-3 months, so much so as if everyone loves Apple now! That has pushed Apple to an euphoria status as of now and the bullish sentiment for Apple has rarely been so much. Buffett’s buying is certainly turning more people into Apple’s lovers. If history is any guidance, when Apple has such a high heightened sentiment, a double digit decline may likely follow in the months ahead. Apple is trading hands around $140 but it won’t surprise me to see Apple come down towards $120ish in the next few months. I’d not chase Apple up at this level regardless how much I love it. I’m happy with what I have for now and will only add more if it loses some lovers if I’m right!