Suicide attempt saved?

What a master of teasing and mocking for the Market God! It is apparently enjoying playing its tricks with traders by making unbelievably wide swings and letting every trader wonder where it wants to go next. I have made a case for a suicide kiss days ago against its 50 DMA. After initial failed challenge, it has made several attempts to challenge it in the past two days and finally today, it seems it has successfully broken out this strong resistance. In the normal circumstance, it would be obvious that the correction is likely over and it is on its way to recover and ready to make new highs. But these days, the market is anything but normal. You see, in two consecutive days last week, the market were opening high but closing low. In a normal situation, it should be very bearish and the immediate trend would be going down.  But it has been going up. So would a seemingly bullish move Friday be necessarily indicative of a real uptrend? I'm not convinced either. Nevertheless, for now we have to give the bulls the benefit of doubt and I have to give a medical diagnosis for the case as Suicide Attempt that has been saved for now.


More seriously, if history is any lesson to learn, it is useful to look at the past similar situations to see how the market behaved. While there are many 10% plus corrections in the past, there are not many with the severity of the oversold condition and speed of the plunge comparable to the current one. I can think about two in the past 30 years or so based on my reading and memory: one in Oct 1987 and the other in Aug 2011. In both situations, the S&P recovered about 50-60% in the following several weeks and both had retested the lows during the period, which could occur up to 6 weeks later. In other words, the market could make people feel like a smooth recovery with a seemingly new uptrend in the making for weeks, then all the sudden it strikes again to make a new low to surprise everyone. Am I sure we will see something similar this time? Of course not and the market may very well just go back to new highs without hesitation. But as Mark Twain put it,  “History doesn't repeat itself but it often rhymes”. Market has a strong tendency to go against the crowd. Just remember this. Now let's objectively review the chart of S&P to see where it stands.

On the bullish side, the daily MACD is moving up with the up moves in the past week. And today's closing price has broken out its 50 DMA. If it can stay above and stabilize for a few days, it is bullish. On the bearish side, the current up days were not supported by strong volumes. And it has several important resistances to overcome before it can finally breakout to new highs. Right now, it is still roughly about 50% of the recent decline if using its intraday low of 2530 as the base. So it is still pretty much within the historical normal rebound range in the few weeks immediately after the plunge. Only the time can tell if it will repeat the history by retesting its low in the weeks ahead. I personally believe the chance is still high and therefore structure my portfolio as such. I'm holding my shorts as hedge for possible another panic selloff that can come without warning, while I can still enjoy the recovery with my long positions (long term holdings and recent buys during selloff) that I'll keep anyway. Ultimately I have no doubt the market will fully recover and make new highs this year although I'm not so convinced a V shape recovery is in the work as of now.

It's too hot and crowded now

Early this months, I told you that the decades' long super bull market for bonds has finally ended and we are getting into a bearish bond market with increasing long term interest rate. As I said, the 10 year Treasury yield, which was about 2.75% then, would likely go up to 3% this year and if so, this would not be great for the stock market. It is a timely call as interest rates indeed have kept going up and bond prices kept going down but the speed of the interest rate increase is certainly beyond my expectation. Just within 2 weeks, the 10 year Treasury yield has gone up as high as 2.91%. You may think this is a tiny move but for long term bond yield, this is enormous within such a short period of time. Actually this fast interest rate increase has really made stock investors nervous and has definitely a lot to do with the recent stock market plunge. All the sudden, virtually all the bond traders have become extremely bearish, betting for further decline of bonds or increase of interests. As a long term trend, I'm all for it since we are definitely going into a higher interest rate era moving forward. But nothing goes a straight line, either up or down. The bearish trade for bonds are simply too hot and crowded for me for now and I think we can expect some significant retreat of the short trades on bonds. As I said, I played TBT for shorting long term bonds, which have already given me good profits within a short period of time. But I have sold all long positions with TBT and now holding TBT puts to expect meaningful decline of it due to strengthening of long term bonds in the next few weeks. It is a contrarian trade for short term and I think the winning odds are high for me against the herd again!


But betting for a decrease of interest rate/rising of bond prices is just a short term speculation. Nothing has changed my mind about the higher interest rates in the long run. I'm convinced we will get to 3% for the 10 year interest this year and a lot higher next year and years ahead. If you don't know how high interest rates will impact on the stocks, just think about what has happened in the past two weeks: merely a fast move towards 3% has already tanked the market. So what will happen when the rate goes to 4%, 5% or even higher in the years ahead? It won't be pretty!!

A suicide kiss?

When making a call against the crowd, it requires some braveness and courage. When everyone stepping on one side of a boat, it is always a bit challenging to stay on the other side lonely, even if the chance of survival for the lonely one is statistically higher. This is especially true when doing this in public as I have to grasp sufficient facial tissues with me, preparing for wiping off eggs on my face if I’m wrong.  

I was lucky I got one right a couple of weeks ago when I made a bold call to buy when everyone was panic selling. Then I’m making this one again calling for shorting when everyone is busy buying, a FOMO moment as I have called it. It seems like I’m just making a random call simply to go against the crowd but to tell you the truth, I’m not. Actually I’m based on some technical insight that I believe in. For one, whenever a big market decline happens, it is quite often to see a quick “dead cat bounce” to recoup about 30-50% of the initial loss, enough to make people feel safe to get in and lure naïve traders to chase high. That will create enough overbought condition for the market to launch another surprising attack. That’s one reason why I made a call to pinpoint the likely bouncing range up to 2730 last time. More importantly I think what we are seeing now for the market is likely a bearish phenomenon; I call it a “suicide kiss”.

For the past two years, we haven’t seen a 10% drop but only a straight line up for the stock market. Due to this enormous bullish trend, people have been so used to the uptrend that it is almost taken for granted to see market keeping going up without a stop. As such, S&P (same for other indexes) has gone way up from its long term trend line, the 50 DMA. But everything has it weight and sooner or later, it will be pulled back due to its gravity towards the 50 DMA, so-called return to mean. Two weeks ago, finally the moment came and the market crashed by 10% within 2 days, something rarely happened. It happened so fast and so surprisingly that had caused sufficient panic selling to push it down sharply below its 50 DMA. When this happens, it usually quickly changes the market condition to deeply oversold, allowing for a quick bounce back, but likely a dead cat bounce for the initial try. When I looked at the chart of S&P, it just happened to be that a 50% bounce back was also lined up nicely with its 50 DMA around 2730 (but changing of course). If S&P indeed bounces back towards its 50DMA, it is facing a quite strong resistance actually. Quite often, although not always, when it “kisses” its 50 DMA from below, it will turn back and initiate another more severe decline, hence the name of “suicide kiss”. The past two days of open high but close low seems quite bearish to me and you may have noticed that S&P has turned back from its resistance line of the 50 DMA and is trading now around 2700. It is too early to say I’m right but I think the chance is increasingly high that S&P may be on its way to retest its recent low around 2580 or even lower if severe enough. Stay tuned for the possible fire selling!


As always, try to stay away from chasing high or being part of FOMO. Most often, it will end up badly and painfully!! Kissing may make one feel great and sweat, but kissing at the wrong time and wrong place can be suicidal!!!

Buffett is seeing what I have seen

I’m flattered by Buffett after he saw my blog and decided to also put money into my idea to support me! What a Valentines and Chinese New Year gift from Buffett :).

I’m talking about Teva, the world largest generic pharmaceutical company that has been beaten down to nearly death but I saw a great turnaround potential from it. See here if you don’t believe. Following its initial fast up run, I said: “Teva is bumping up against its resistance and is very overbought short term with clear negative divergence in many technical indicators. A pause or even retreat from this level is quite possible near term.” The fast advancing TEVA did pause for a while after my writing, coming down almost by 20% towards $18. With Buffett’s big news broken out, it jumped over 10% immediately and now is trading around $21. The million dollar question is if TEVE will start to move up from here towards my next target of $30? It is certainly possible but I doubt about it. While I have no doubt that TEVA will be on its way for a historical turnaround in the long run that is now vindicated by Buffett, I’m afraid Teva may still struggle for a while before definitely mounting its next leg up. It is more technical than anything else. The recent jump due to Buffett’s effect is not supported by its daily momentum as it still looks very vulnerable to me. I think there is a good chance that TEVA may come down again at least one more time before accumulating enough strength for a more sustainable uptrend. It will be interesting to see how Teva will behavior moving forward with Buffett’s support in hand.

The big themes for the market in 2018

I saw this paper and thought it was something every serious investor or trader ought to read, not once but regularly throughout 2018. It is called: “BofA Predicted The Crash: Here's What It Thinks Happens Next”. Here are the big themes from BofA ML

Which brings us back full circle back to Hartnett key 2018 BofAML themes:

• big long = Volatility
• big short = Credit
• big top = Equities
• big rotation = Deflation to Inflation
• big risk = Equity Bubble

In practical terms, here is how the correction will play out in chronological terms:

Correction chronology: XBT…UTIL…GT5…VIX…JNK…EMD…SPX; last Feb dominoes to fall should be DXY, CNY, SOX & EEM.

Regardless what you are doing, please do yourself a favor by reading this paper very carefully and then save it to review it again and again later. If you have followed me for a while, certainly you should not be too surprised by the above themes, right? As I have said several times, investors have been too complacent for too long and high volatility is expected that may come suddenly (big long = Volatility). Right now we are just getting the first dose of high volatility and more sudden spike of VIX will come more frequently later this year and moving forward, especially when VIX comes down to its historically lows around 10 or below. Then the long-term trend for higher interests (big rotation = Deflation to Inflation) and  lower bonds (big short = Credit). All of the these are not good for stocks in the long run (big top = Equities & big risk = Equity Bubble). As I said, this historical bull market is entering into its last phase, the Melt-Up phase that will likely continue for a while. Either later this year or sometime next year, we may finally see its top, followed by a long-lasting bear market. Given how much money has been created by the Fed from the thin air in the past 10 years, the next financial crisis will likely make the 2008/2009 financial crisis like a baby play, which may cause a huge bear stock market for years! Friends, this is a macro trend I have seen and been talking about for some time now and I’m even thinking BofAML were stealing my thoughts (kidding).

Of course I’m not talking about something that will happen immediately but I think it is coming. Don’t take it for granted that we will continue to enjoy fantastic stock returns for another 10 years. It is simply not going to happen without us first experiencing an unprecedentedly painful financial crisis first. Be ready and start to be prepared for the inevitable if you want to survive the next crisis!!

Be ready for another panic selloff

I must say I'm really impressed by the speed of the sentiment change by traders. Just last week, it was universally depressed to the point almost like the end of the world. Almost everyone (excerpt me of course) was talking about new lows or a 20% correction. I went out on a limb to go against the crowd by saying a big rebound was coming. Here is what I said last week: The rebound could be fierce and powerful given how much panic we have seen. All the sudden there may be a FOMO moment (Feel of Missing Out) that everyone who sold hard due to panic wants to get back in, in fear of missing out the bottom or being left behind for the next uptrend. Look for the 2680-2730 band as the strong resistance for SP. If hit, especially around 2730, another big selloff may ensue towards 2600. Yesterday SP hit my upper target and closed at 2731. I was thinking today we could see a reversal. It didn't but almost. You see SP went up almost another 1% during the day and I was prepared to get eggs on my face. But the last minute selloff pushed SP back to 2732 at close. This is a very bearish price action folks. If you are a FOMO, trying to get back on the train for the next leg up, be ready to be disappointed and shaken out. It always amazes me by seeing how fast people can change their mood and now I'm hearing people talking about new highs soon. Of course they could be right and I could be wrong but I do believe it is an illusion to think a straight line up to new highs after such a historically severe and fast correction. The market simply does not behave that way. Instead, it is always doing its best to try to fool as many people as possible into one direction and without warning it suddenly changes its course and scares everyone out of chair. I suspect we are going to see this sudden shock again, probably starting next week.  BE READY!


For myself, I'm ready for another big selloff as I have abundant puts in place after taking full profits from many of my put selling today. It will be fun for me to watch how the market sentiment will change fast again!

Is Tesla poised for a big move?

I was asked by a friend about Tesla and notice something interesting. But let me be clear upfront: I’m not a big fan of Tesla fundamentally and by no means I’m promoting TSLA for a long-term investment. Yes, Musk is a genius and visionary in many senses but I think TSLA’s business model is in a wrong footing. It seems, there is no chance for Tesla to ever make money regardless how much people love its cars. Actually more cars it sells, more money it is losing. That’s why you don’t need to expect any fundamental improvement for TSLA from its earnings. People are simply betting on Mousk’s visions to pump up its share prices but eventually it has to face its fundamental reality. So enough warning regarding its fundamental risks if you are thinking to buy TSLA for long term.

Having said that, I do see TSLA is quite attractive from the technical perspective. A while ago I said I was interested in TSLA’s technical and I’m still having money betting on it. Considering its wide swing potential, I’m holding TSLA via a bullish put spread $305/310 that is expiring this Friday. In other words, as long as TSLA can hold up above $310 by end of Friday, I’m making full profit from the trade. I think there is a good chance it will. Tesla had been in an up channel since Dec last year until its recent earnings a few days ago. It tanked hard by dropping over 30 points but since then has been moving up. What really attracts me most is its weekly charting. The recent hard crash didn’t damage its weekly technical much. Actually it is showing a very bullish positive divergence for its momentum MACD. More importantly, it is forming a gigantic bull flag with a huge pole beneath it. What does it mean? Well, while no guarantee, a bull flag often leads to a break out to the upside and if so, the next up-move often in the scale comparable to the length of the pole. In other words, if TSLA can break out its resistance around $360 as I’m writing, it has a potential to shoot up all the way to 100 points above, i.e. about $460 roughly. Given the bullish weekly technical pattern, I think there is a good chance TSLA may surprise and crash its bears in the next few months. Actually back in Nov last year, Tesla was in a similar setup and it indeed jumped about 100 points in the following months.  

Of course, any speculation equally carries its risk. If TSLA falls below the flag bottom around $300, then the bullish bet is off and TSLA may drop all the way down by 100 points as well. Regardless what you want to do, always consider the risk/reward ratio whether it is suitable for you!

Oil has hit my first downside target

Late Jan I advised that crude oil would likely come down based on the signal from the smart money: I think there is a good chance the oil will come down first before its next leg up. Technically, the most likelihood first stop will be the support level around $58 and if the correction is more severe, it could go down as far as to its 200 DMA around $52. Well, the smart money is correct again this time. Crude oil has been in a correction mode from $64ish when I made the call to now $59ish. Actually it did test the $58 support level and bounced off a bit as I'm writing. The question is if this correction is done. It is a tricky call at the moment. Technically it has to overcome some rather strong bearish hurdles before mounting its next leg up. Its momentum indicator MACD is clearly bearish in a downtrend and has not yet shown a positive divergence. It has breached its 50 DMA, which may takes time to recover and back up again. The overall market is not in good shape for it as well. So we have to see how its price action will shape up in the weeks ahead. If it can break out and come back  again above its 50 DMA ($61ish), it will be a bullish sign to resume its uptrend. If it fails to challenge this important resistance line, then watch below. Oil may really revisit its next support around $52.


I have a short position for the oil service ETF, OIH. I'm closely watching oil and will take my profit if oil starts to move up again.

The rebound target

Just a quick note what I think will be the most likely rebound target in the next few days. I think a big rebound tomorrow is a high probability thing based on the bullish price action last Friday (big reversal) and the extreme oversold condition. The rebound could be fierce and powerful given how much panic we have seen. All the sudden there may be a FOMO moment (Feel of Missing Out) that everyone who sold hard due to panic wants to get back in, in fear of missing out the bottom or being left behind for the next uptrend. Look for the 2680-2730 band as the strong resistance for SP. If hit, especially around 2730, another big selloff may ensue towards 2600. This rebound may take a day or a few days depending on how fast the market mood is changing. I’ll be aggressively taking my profits from numerous put sells from last week if the SP target hits .

Blockchain Fakes?

While the crypto market is also undergoing some brutal correction, it has become a mainstream topic since last year. There is no lack of blockchain-related news these days and all the sudden, it seems blockchain has become a very fancy name and everyone is chasing it. While blockchain revolution is still in its early stage of infancy, we are already seeing dot.com type of euphoria emerging.  Early this year, we saw a few stocks jumping up 5 times or more overnight simply because they claimed to be doing something with blockchain, although laughably no one could figure out how their underlying business would have anything to do with blockchain.  For example Riot Blockchain (formerly Bioptix) markets biotech diagnostic equipment and then their CEO came up with a genius idea to change their name with blockchain in it that has substantially boosted their share price overnight. Even more bizarre was a Long Island Iced Tea company that changed its name to Long Blockchain to immediately see its stock prices moon-shooting several times up. And then a restaurant company,  Chanticleer announcing a “blockchain” customer loyalty program.  Of course, none of them have anything seriously associated with blockchain and those chasing them should be punished.  In the past few weeks, the reality has hit all of them and their stocks are dropping like stones with -30 to -50% haircut. I bet we will see more down to come for them.

 

Then about three weeks ago, we saw the launch of two blockchain ETFs: Reality Shares Nasdaq NextGen Economy ETF (BLCN) and Amplify Transformational Data Sharing ETF (BLOK). Let me be very clear upfront that I’m not saying these two EFTs are faked in any sense. Actually they are holding some great stocks that I’m also holding. So there is nothing wrong to buy the ETFs if you like the underlying stocks. But the issue for me is how they label them and consider them as blockchain-based ETFs. This to me is very misleading.  Why?

 

The biggest holdings of these ETFs are hot tech stocks like Intel, Microsoft, Nvidia, and Overstock. It is very true that all of them are spending a lot of money into the blockchain technology and will likely benefit from adopting the revolution.  But these companies have so many main businesses that have nothing to do with blockchain and the blockchain is so new in terms of its real life application and utility, it will be years before the blockchain-related business could have any meaningful impact on their revenues. Before that happens, their share prices will only be tied to the performance of their non-blockchain businesses. So buying the ETFs may very well be just like buying some tech ETFs and hardly any real exposure to blockchain yet. You see, right now, all the real blockchain companies are still very young and babyish and none of them are mature enough to issue stock shares. If you really want to get exposed to actual blockchain companies, you got to buy their cryptocoins (similar to the stock shares of a company).  Of course, these ETFs are not exposed to any cryptos, even the crypto gold, bitcoin.  More problematic is their holdings of some financial companies like Barclays, Goldman Sachs, Mastercard etc. You may ask anything wrong for these companies? Certainly not in the foreseeable future as these are also quality companies. But if we are talking about the future of blockchain, then you need to be a visionary  and be able to see what blockchain will eventually do to them. Put yourself in the shores of 10 years ago and think about what Amazon will do to the retailers in 10 years. With what you have already known today, it is very easy to get the right answer, right? This is exactly the type of vision you need to have when talking about blockchain, as it is a powerful disruptive force with much strength as Amazon to many businesses. The most disruptive effect will be to the financial sector.  You see, one of the main bread and butter for banking business is to earn commissions as a middleman for money transactions. We need a bank in between to transfer our money because it is at least reliable to ensure the transaction will be done without cheating between parties. But this is really where the blockchain technology will come in to make a revolutionary change as it allows trustable transactions of any digital assets between peers without a middleman. It may still take a couple of years before this can be widely adopted but it is coming. If the banking industry is not prepared, they will be just like what retailers have been going through in the past few years.  Yes, blockchain could also be beneficial to the financial sector for their cost cutting but they are going to meet some fundamental challenges from the blockchain technology in the years to come. I think we are going to see more and more challenges for the financial stocks moving forward when the BC technology becomes more and more matured and adopted. So keeping banking stocks in the blockchain ETFs now is similar to holding traditional retailer stocks in an e-commerce ETF and it is counterproductive in my mind.

 

Again, if you have bought BLOK or BLCN, I’m not saying there is anything wrong to keep them but just don’t expect to see them as being closely tied to the blockchain revolution, thinking you have got good exposure to the life changing innovation. No, you are not!

The correction target has been reached?

What kind of mood changes just a few days could make! Here is my note to friends sent about 10 days ago:

 

Jan 29 (Monday morning)

This market has done something really unprecedented, giving the herd the impression that it can continue with the parabolic move forever. But history has taught us any parabolic moves always end badly. It’s just when not if. No one knows for sure when this will happen but the market usually needs some catalysts as excuses to trigger the move. We have all sorts of potential catalysts this week. Trump’s State of the Union speech is on Tuesday. The FOMC decision on interest rates is Wednesday. There are about 100 companies reporting earnings this week. And, we get the jobs report on Friday.  Do I know if this the end of this run? I’m not so naive to say that. But some caution is definitely warranted as the black Monday for a 20% crash in 1987 didn’t give anyone a pre warning when it hit.  Again I’m not saying sell everything but just advising for caution.

 

A big drop of the marketed stated next day, Jan 30 and then really got intensified on Friday after the job report as it was interpreted as too strong for inflation and higher interest rates moving forward.  Since then, the market has lost 10% from its high, wiping out all of its gains of this year! The timing for my warning call seems perfect as if the market was whispering to me to give me a heads up. Of course, it was a pure luck but ultimately it was a contrarian call based on the extreme sentiment I had seen. It usually works but not necessarily always in the exact timing which is a lot to do with luck. So the million dollar question now is: Has the correction already done and passed by now? Of course I don’t have a crystal ball to call that but let me provide you a bold prediction: I think the correction target has been reached! Why would I think so? Well, it is again something to do with the contrarian thinking as well as the fundamentals. While I have expected for a severe correction for quite some time, I was only thinking about a 5-7% correction, not as much as 10%. While this 10% plunge is certainly painful for investors, the panic it has caused is quite extreme, felt almost like the end of the world. The fear index, VIX, jumped to over 40, a very rare occurrence in the history. All the sudden, there is a widespread concern that we may get another 10% drop to end this a decade long bull market and start a bear market. I really don’t believe so. Fundamentally the economy is doing very well and inflation is far from high enough to significantly dampen the stock market immediately. Yes, as I have said, we are now entering into a high interest rate era (see here) but at the moment it is still at the historically low level. The real impact may only start to come when  the 10 year Treasure yield reaches 4% and going up. My guess is that we are still about a year or so away from that and I think we will likely see new highs this year. With this consideration, I personally feel the current S&P level just below 2600 is likely the bottom area for this correction. Now it is a good time to start to do some bottom fishing.

 

Having said that, I don’t mean the correction is over. Rather it is still in the correction process trying to find the exact bottom as a support for recovery. Here is what I think may happen in the next few weeks: S&P will chop around in a wide range, e.g. a 100 points up or down but mostly sideway moves. During this period we will likely see at least one more test for its recent low, or probably more. This will provide a strong technical support for the market to accumulate sufficient strength for its new highs. That’s why it is a good time to start looking for good stocks you want to own for long term. Given the high chance of continuing great volatility in the next few weeks, using dollar averaging to gradually build up your positions is a wise way to do so. No one knows for sure in advance what is the actual bottom. So don’t try to go all in at once. For me, I prefer to sell puts for the stocks I want to own, which will give me good chance to buy stocks at the price I want to have and with much lower risks. I have already started the process. Yesterday when Dow plunged another 1000 points causing extreme panic with everyone running away, I happily sold a lot of puts for more than 10 stocks in a day, something I have never done before. I bet these will be big winners for me in the months ahead when the market calms down and start to move up again. As I have told friends, selling puts during high volatility, especially at its extreme level like over 30 or 40 is the best strategy for making money with much low risks. The key is to only sell puts for the stocks you want to own anyway and with appropriate position size. If you overleverage with naked puts, it may kill you. Just be aware!

It’s officially over

You hardly hear it mentioned in the media or by the talking heads at CNBC but a history was just made in the past week that can have profound impact on all of us, regardless if you realize it or not!

 

The bull market lasting for 40 years long for bonds is officially over by now!

 

How do I know, you may ask? Of course there will be no official announcement on it and we have to rely on some technical measure to tell us. The most relevant indicator is the monthly 10-year Treasury yield that is based on the data points at the end of each month and can reliably tell us if a long term trend for the 10 year interest rates has changed. As you can see below, for over 40 years starting from late 1970s, the 10 year interest rates have always shown consistently lower highs and lower lows, a gigantic downtrend for the long term interest rate, or inversely, the gigantic uptrend for the long term bonds. If you ask any bond traders or analysts starting after the 70s, no one would know what a bear market for bonds would look like as for them, it has been a straight line up for bonds (or down for interests).  But finally, for the first time in 40 years, we are seeing a higher high in the monthly 10-year Treasure yield chart logged in on Jan 31, 2018. This is a clear technical indicator that we are moving into a higher interest era.  If a bond trader or analyst only knows how to trade for higher bonds, he or she will soon lose their job! If you are still thinking you will continue to enjoy low interests for your new mortgage moving forward, it is nothing less than illusion!

 

So what’s the big deal with this new emerging trend, you may ask next? Well, you probably won’t feel much immediately and that’s why no one is even interested to talk about it. Be aware, when the bond establishes its trend, it is usually a very long term trend that may continue for decades. We have just witnessed the end of the super bond bull market for 4 decades and very likely we are seeing the start of a super bond bear market in the years to come. For a once-in-a-generation change in trend that will last for decades, it will be very slow but consistent and as such, minimal immediate impact will be felt for most people.  But gradually, its impact will be profound and eventually will be very painful or exciting depending on which side you are sitting. Just imagine what were the interest rates back in 1980s. A 30-year fixed mortgage rate topped out at 18.45% in early 80s! Believe me, while it is unthinkable at the moment, we are moving towards very high interest rates in the coming years.  If you need to borrow, obviously it will be very painful when such a day comes. Conversely, if you can earn interests, then you will be a happy guy! Since this is a blog for investment, I have to say we need to be prepared for poor returns from stocks as a long term trend. When interest rates go up, the costs for companies to borrow money will shoot higher logically. After a decade of great bull stock market, people are very used to great profits from their stocks. While I do believe we probably will still have a year or two to go for the final melt-up phase to run through for the stock market, we’ll start to feel the negative impact from higher interests more and more moving forward. It is a general consensus that when long term interest rates go above 3%, which I believe is likely to occur this year, the stock market may start to get nervous. After that and if I’m right with interest rates consistently going up, we will likely go into a very prolonged bear stock market as well.  That’s why I have said many times, it is a great time to set up your life insurance especially those based on floating dividends in addition to fixed interest return.  Whole life (WL) is the best well-established dividend based life insurance that I know of, which can greatly benefit from increasing interests that can lead to increasing dividends for the policy holder. I know whenever I’m talking about WL, I’m often challenged by friends questioning about the cost-reward for WL. But virtually everyone I have talked about, their concern is always based on their understanding about the high cost (something like 80-90% or even higher of the commission going into the agent’s pocket for the first or second year premium). I understand this but believe me there is a way to substantially reduce the cost if the WL policy is set up right, at least 50% or even more reduction of the cost and then you can enjoy secured return for life with a potential of increasing dividends (up to 10% dividends for my policy per its historic records during 1980s-90s). All of the fast accumulating cash value is tax-free and can be used during your life if you want for any purposes. You just need to find a good agent who can really work for your interest, not just his/her commission. That’s how I have set up my WL policy and my kid’s and even looking for buying more (as a way of diversification of my assets due to its security and tax-benefits) along with a clear high interest trend emerging.  I know the hot life insurance almost every agent is promoting is the Indexed Universal Life (IUL), which indeed has great years in the past decade due to the gigantic stock bull market. I don’t want to argue with anyone promoting it as it could be a good one for some people. Personally though I think IUL’s good time is quickly coming to its end. If I’m right about the general bond and stock market long term trend, we are going to enter into a very tough prolonged bear market for stocks that may come in 1-2 years and if so, IUL policy holders will start to feel the pain as their stock market-based return could become very miserable but their premium could shoot up very high due to aging. Don’t need to argue with me but just take it a second opinion and do your own research about the nature of IUL and how it may perform if the market is not doing well.

 

Lastly, for anyone interested to short the long term bond market, TBF (or more aggressively TBT) is the easy way to go against the long term bonds.  The 10-year Treasury yield has moved up very quickly in the past two weeks with fast downdrafting of the 10 year bond. My TBT has shown a great profit already within weeks but it is possible to see some retreat of the interest (strengthening of bonds) in the near term. So I’m taking some TBT profit off the table with the intention to add back if TBT indeed comes down in the days ahead. Overall, I think we are going to see a lot lower for TLT (long bond) and a lot higher for TBT (short bond) in the next 10 year s or longer!

A threat to the human beings

First just a quick word on today's selloff. I don't recall we have seen a one day 2% selloff for the market in the past year and probably even longer. People are just used to the one way up for too long and have forgot all the risks in chasing the market. So it is a long overdue for such a hard drop to punish the herd and I think more downside is very likely in the weeks ahead. Having said that, I think the market is extremely oversold in the very short term and I sense quite some panic we haven't seen for long time. As a contrarian I think there is a high chance for it to have a "dead cat bounce" next week. So I opened speculative trading today to bet the market will go up and the volatility will come down next week. It is just for a short term speculation. Will see how it goes. Now for today's topic.


What are the big health threats to our human beings? I guess the easy answers will be something like cancer and cardiovascular diseases as they are associated with the leading causes of deaths. Rarely people will even think about bacterial infection as there are so many antibiotics available easily accessible by patients. But this is exactly where the biggest challenge we are facing now. On one hand, since antibiotics are so widely available, there is not much profit margin as incentives for pharma companies to develop new ones. On the other hand, since antibiotics are widely abused with unnecessary treatment and uses frequently applied, we are facing shortage of effective antibiotics for increasing numbers of drug-resistant bacteria. Here is the NATURE report highlighting the severity of the issue: “The drug-resistant bacteria that pose the greatest health threats”. One common threat is from multidrug resistant Gram-negative bacteria (MDRGN bacteria) that are a type of Gram-negative bacteria with resistance to multiple antibiotics. They can cause bacteria infections that pose a serious and rapidly emerging threat for hospitalized patients and especially patients in intensive care units. Although companies engaged in developing antibiotics against MDR infections are by no means of any sort of darling for Wall Street, I think they may provide some unique investment opportunities. Achaogen (AKAO ) may be one of those that can add significant value to the human beings in fighting against the threat from the MDR infections.  

 

AKAO is a late-stage biopharmaceutical company. The Company is engaged in the discovery, development and commercialization of antibacterial treatments against multi-drug resistant (MDR) gram-negative infections. The Company is involved in researching and developing plazomicin, its lead product candidate, for the treatment of serious bacterial infections, including complicated urinary tract infection (cUTI), blood stream infections and other infections due to MDR Enterobacteriaceae, including carbapenem-resistant Enterobacteriaceae (CRE). We may expect some better days to come for AKAO pretty soon. Achaogen submitted a New Drug Application (NDA) to the Food and Drug Administration for antibiotic plazomicin in October last year. The FDA recently granted priority review status for the submission. An approval decision is expected by June 25, 2018.

 

Plazomicin targets treatment of multidrug-resistant Enterobacteriaceae bacterial infections. Patients with these infections in their bloodstreams or urinary tracts currently have limited or no treatment options available. There are at least 70,000 such patients in the U.S. diagnosed annually -- and that number is projected to double within five years. Market research firm EvaluatePharma estimates that plazomicin could generate sales of $313 million by 2022.  This is definitely not a blockbuster drug compared to other fancy drugs in IO or alike but it will be a significant boost to AKAO as it is very depressed at the moment.