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.