How to beat inflation?

I'm writing this from the overnight ferry from Helsinki to Stockholm and will be relaxing for the next week in this part of the north Europe (Stockholm, Tallinn and Helsinki). This is kind of retirement life I'm working and heading into: travelling around the world while still doing what I like most: investing, trading and writing regardless where I'm. ✈🌇⛱

So today let me talk about something related, one of the most vicious killers of your wealth for your retirment: inflation! I’m sure you have already felt in your daily life that inflation is on the rise. I think it will probably rise a lot more in the years to come. Although the manipulated CPI is still trying to convince us that the inflation is just around 2% at the moment, I think the real inflation for our expenses is way higher than that. After all, I’m paying more and more each passing day for my daily expenses. Tell me what magic you have if you are not!

So a big question for all of us is how we can fight with the fast rising inflation moving forward. Leaving the money in the bank will definitely not save you from inflation. You will only become much poorer with losing purchasing power if you do so, believe me! Of course, there is no golden standard how to fight inflation as different people may have different strategies. Personally I have two major strategies working well for me: investing in quality dividend growth stocks with reinvestment (DRIP) and “save” money in the high yield tax-free cash value growing life insurance that is not stock market-dependent. I firmly believe these two will benefit me tremendously in the long run.

Today, let me share with you one think-out-of-box idea to fight against inflation: owing farmland. Here is a good report on a research why farmland is the best way to hedge inflation:  Not in every year, certainly, but over time, no investment offers the correlation with inflation that farmland does—not the stock market, not the bond market, not even gold. Although I’m not a farmer, intuitively I think it makes sense as not only the farmland itself may increase in value over time, more importantly the products it produces will be priced withy adjustment per the current monetary value. So owing farmland is a good way to save the value of your money. But obviously it is not practical for most of us to go out buying farmland. It is easy to buy but it will be a big challenge how to maintain its productivity. Fortunately I have found a way to own farmland easily with just one click. Yes, via a fund called Gladstone Land (LAND). LAND owns more than 67,000 acres of U.S. farmland (nearly 80 farms in 9 states) worth $558 million and they produce a wide variety of crops, well diversified. It is structured as a real estate investment trust ("REIT"). As such it is legally required to pay out at least 90% of their net earnings in the form of dividends. So usually REITs pay higher dividends. LAND is paying dividends on a monthly basis, a great feature for DRIP, and is paying 4.5% at the current price. The beauty of buying LAND now is that it is trading below its underlying value, i.e. it is about 10% discounted from its NAV, a good bargain for me! One great benefit to own LAND is that you are basically sharing the same interest as its CEO, David Gladstone, as he is a large shareholder and he definitely wants to see its dividend keep growing. Here is what he said in the recent earnings call: 

• We recently raised the dividend again... Over the past 40 months, we raised the dividend 10 times...
• Our goal is to continue to increase the dividend at a rate that outpaces inflation. As you know, I'm a large shareholder and I'm definitely liking dividend increases, and even if it's only a small amount or a quarterly change.
• Since 2013, we've made 63 consecutive monthly distributions to stockholders. It's [about $3.51 per share] total distributions.
• Paying distributions to shareholders is our paramount business. We are in essence a dividend-paying company and want to remain so.

Clear what you will get from LAND? A farmland company with an objective of not only just paying dividends but also growing dividends for shareholders. It’s a great music to my ears! And hope it is also for you guys!! On top of that, lining up with the CEO of the company for the same interest is generally a good thing for the safety of your investment.

Read this before buying

I will be travelling on Friday and therefore thought to post this blog as I have been asked about this by a few friends. The market is still holding up well this week and even trying to make a new high but failed on the closing basis. While it is just a matter of time to break out, I still think the downside risk is high for a swift flash “crash” in the weeks ahead. As such, I’d still advise not to be too complacent even if S&P breaks out to the new highs. A non-sustainable new high may just be a bull trap for the near term. I believe high volatility will continue to stay in the months ahead.

What I want to briefly talk about is the pitfalls of leveraged ETFs.  You may have heard some "experts" talking about buying JNUG (3 times leverage for junior gold mining stocks) or other leveraged ETFs for long term as a value play but this could be very dangerous if your timing is not perfect. I have heard a few sad stories, including some friends I know of. They bought JNUG last year when it was about $25 (split adjusted) when some "guru" recommended to buy and hold because it was "undervalued". Some folks did so even with fairly large amount but it has been a heartbreaking experience in the past year that JNUG has lost more than 2/3 of its value from $25 to now about $7. If one really understands the structure of such leveraged ETFs, it should be well understood that there is no intrinsic value for them and by design they are doomed to lose money over time. See what JNUG has performed since its birth about 4 years ago. Again based on its split-adjusted prices, it has come down from its beginning price about $800 to now less than $10! Where is the value? If you look at all the leveraged ETFs, most if not all behavior the same, as by design, they must lose money, if held for long term.

Actually I have talked about this two years ago about NUGT, a sister leveraged ETF for gold stocks (see here). Basically, leveraged ETFs are usually tracking futures of the underlying sector and as such they have to rollover month by month by selling lows and buying highs. So mathematically they have to lose money if you hold it for long term. The multiple coefficient (2 X or 3 X) is a bit misleading. You may think it should increase (for bull) or decrease (for bear) 2 or 3 times against the underlying sector and don’t do much if the sector stays sideways, right? Big mistake and that’s where many people get hurt badly. The leverage only works on the daily basis but long term, it will keep losing money in general due to the rollover (or the tracking error). The only time it may work well is your timing is perfect and the sector moves up strongly in the time period you are holding the ETF. That’s why leveraged ETFs are really only good for short term speculation for traders and is a worst idea to use it for long term investment. Even your direction is right but the trend is not so strong in your direction, you can still lose big money with them! 

So remember this: even if the sector is really cheap and great for long term investment like precious metals now, don’t be fooled by “experts” to buy leveraged ETFs for long term. There are simply no intrinsic values for them!

I have never been so expensive

“Hey LG, see what I bought for you?” I was woken up by my wife and was “shocked” by what I saw.

We had a good friend coming to the US for a short visit and we flew to Seattle in May to meet her and also took the opportunity to drive her to Vancouver for a quick trip. On the highway 5 to the border, we saw a huge outlet mall for all kinds of brand names. Naturally our friend was very interested to stop by and buy something. Since I was not so interested in shopping, I was dozing in the car while my wife and her friend went for shopping. Then I was waken up by my wife and saw a beautiful wallet in her hand. It is a Coach wallet costing $50 (half price already) and I was “shocked” because I have never been so luxury to buy such a “costly” wallet in my life! You see, all the Chinese friends in our generation must understand we were all in extreme poverty when we grew up before 1980s. Basically we didn’t have any money to buy anything beyond basic life, period! So frugality has been engraved onto our bone I suppose. Buying luxury goods or brand name stuff has never made us happier and we are always looking for cheaper alternatives whenever possible. Even nowadays money is not an issue anymore and we basically could afford to buy anything we want, but it is still a waste for us to buy more expensive brands if we can buy something cheaper. And we hate waste in all aspects, even wasting anything not belonging to us!  This is how cheap I’m but I feel no shame at all and actually enjoy very much whenever I can find something cheaper. My wife has a famous saying that I like enormously: As long as I know I can afford it, I don’t need to own it but will just be happy and satisfied to leave it in the store where I can go to see it when I like. That’s why I love my wife so much as she never looked down at me when I could not afford to buy a ring for her when we married and even till now I still haven’t bought any stone ring for her. But we have happily married for nearly 35 years by now.👫😇 A frugal life style has never diminished our happiness. Instead it has strengthened our marriage life in many aspects. Now back to the wallet. I had been used my old wallet for over 10 years which costed me about $10. While it looked not pretty anymore, I still liked it and didn’t want to change it. But my wife had laughed at me for quite a while and kind of forcing me to change to a new one as she thought I was worth a bit more now.😎 😎So she bought this “expensive” wallet for me without asking for my “permission”. Thanks, Honey but I wish it could be a bit cheaper!😏

Of course, I’m not here to try to instill my life style onto anyone else. This is a very personal choice. As long as you are happy with it, nothing wrong to go either luxury or frugal. It’s none of my and anyone’s business. My real point here is to talk about the company for my new wallet, Coach. If you are not yet aware, the company has changed its name recently to Tapestry (TPR). I assume there in no need to say too much about Coach but briefly,  Tapestry, Inc., formerly Coach, Inc., is a design house of luxury accessories and lifestyle collections. The Company's product offering uses a range of leathers, fabrics and materials. The Company's brands include Coach, Kate Spade, and Stuart Weitzman. Coach has been around since 1941 and is a globally well-known and recognized luxury brand. It has gone through some tough time in the recent years but has definitely recovered in the past 2 years. While its market in the US may be already mature and has less room to grow, its international footprint has been expanding quite aggressively. The Coach brand is especially loved in major emerging markets like China and India where the market is massive and growing when their middle class is expanding. I like its prospects and also its fundamentals. With a good recovery in the past 2 years, it is not really cheap at the current price but still reasonable considering how profitable its business is. Its forward P/E is 18 with a massive gross margin of 65%. Its debt is negligible and is generating half billion free cash flow. It pays a respectful dividend yield nearly 3%. Although its dividend history is not long (starting from 2009), it has grown its dividend at an annual rate about 4%. On top of that, it has also consistently bought back shares, an indirect return to long term shareholders.  I don’t see it will slow down in growing its business as well as returning to shareholders in the years to come. Coach just reported its recent earnings the passing week and investors were apparently excited to see its results and shot up its share price by 12% on the day.

Although I’m not a good customer for Coach and probably will never be since I’m cheap, I like Coach for the stock for its long term prospects!   

Remember this Wall Street adage

What a rollercoasting week! You must have felt the firework I was talking about, especially on Tue of this week when S&P tanked to almost touch 2800 with VIX jumping 30% within the day. I honestly believe it could plummet to below 2800 but then bottom fishing came in to float the market up for now. If you look at the chart, S&P has clearly in an uptrend since Apr. As I said, S&P will likely touch new highs this year and its weekly momentum is indeed quite healthy to support this trend. Having said that, its near term (next few weeks in Aug/Sep) could be challenging and may be even struggling for a while. With today’s closing high at 2850, it is showing a bearish H&S on the daily chart with a clear negative divergence for the MACD. Considering Aug/Sep is typically the weakest season for the market, don’t be surprised to see S&P tank again in the next few weeks and plunge below 2800. It will line up well with its 50 DMA around 2790 or the lower channel band around 2775.

If you are wondering why I’m keep warning you for the potential downside risk, just remember this famous Wall Street adage,  “The market loves to do what hurts the most people the most”! Don’t be one of those victims and always remember, when you feel great, it is usually a dangerous time, at least from the short term trading perspective!

Boring can also make you money

American Standard. Have you seen this brand? Probably everywhere you go in the US and likely in many other countries. If you are not sure, check out your air conditioner to see if it happens to be this brand. Chance is high it is. I’m talking about Ingersoll Rand (IR), the company selling, installing, and maintaining heating, ventilation, and air conditioning ("HVAC") equipment with well-known brand names like Ingersoll-Rand, American Standard, Trane etc. While the business is full of boringness, this kind of equipment is a key part of any home and all types of commercial properties. And Ingersoll Rand is the go-to company for HVAC equipment! I’d think IR is a recession proof business as we will still need HVAC regardless of the economic situation. While its stock price could tank as well if a recession hits us, it is much less likely to be permanently damaged due to the nature of its business. As such, IR can been a good candidate for long term holding, especially for dividend reinvestment. It pays a respectful 2.5% dividend with a very low payout ratio of only 40%, meaning it has a lot cash in hands to further increase its dividend. This is what it has done actually with an amazing record: it started to pay dividends in 1977 and has never missed it. Although its track record of increasing dividends is not perfect as it has cut down the payout a few times during bad business cycles, nevertheless, it has always made up by paying much more following the recovery. In fact, in the past 8 years, it has increased its dividend 25% annually, an extremely impressive record. Given the business is booming up along with the fast growing economy in the US, I think the chance is high that it will continue to pay much higher dividends in the years ahead.
Having said that, what really interests me now is its technical strength at the moment. IR has been in sideway moves for a year now after a amazing 5 times up move since recovering from the 2009 recession. Following a great earnings report on Jul 25, it jumped up and clearly broke out to the upside. While the momentum is strong, the breakout may be start of a long let up with a potential 30-40 points move. Why so? Well, IR has been building up a very long bull flag with a pole starting roughly at about $50. After a breakout, the stock tends to move in the similar scale to the flag pole, i.e. a 30-40 points for IR. Right now it is trading hands around $97 with a chance of cooling down a bit following a fast up move. I think it will be a great buy if it comes down to the area of $90-95. The prospect for IR is great for the next few years!

What a week!

How precisely one can expect for a market prediction? Five days ago on Monday, I predicted: I’m willing to bet that S&P may close below 2840 by end of this week before challenging new highs. If the firework plays out more violently, we may even see S&P below 2800 before marching onto to new highs in the next few weeks. Immediately the market continued to march higher with another 10+ points for S&P and within a spit of distance to its all time high (about 10 points away). The most of the week the market was rather bullish and appeared to have no sign to break down whatsoever. I was ready to raise my hands to wipe out eggs on my face. I was kicking myself why I should make such an exact prediction which was almost suicidal!😵 Then all the sudden today, the last day of this week, the market seems just want to prove that I'm right by plummeting 20 points to close below 2840 precisely. My suicide was saved!😇


This sudden mini crash seems to come from nowhere and the culprit was reported as due to the Turkish turmoil, a rather convenient explanation. Certainly this is the direct reason to cause the decline on the surface, but in reality as I said before, the market can always find a good reason to either jump or tank when it is at its extremes either way. If not the Turkish problem, it would be something else for sure as technically the market has to come down first before going any further up when it has been extremely complacent with a rather overbought status in the short term. I doubt it would just only be an one day decline and I won't be surprised to see it drop below 2800 (probably towards 2775ish) next week!


I was betting for a close below 2840 for S&P actually early this week using a bearish call spread (2840-2845). All the week it was purely under the water till this morning. Honestly I wish I could hold it till closing for a nice full profit but the market has been too unpredictable these days and I was afraid my trade would slip into negative again if S&P did not close below 2840. So I placed an order to close it  with about a half profit. It got filled this morning. While at a hindsight it was premature, as a trader it is better to be safe than sorry!

Be prepared for another firework

Are you going to challenge the all time high soon (for S&P)? It is very tempting to say that as we are only less than 30 points away from the old high (around 2887 I believe) in Jan of this year. Also I have been talking about new highs this year several times in the past couple of months. So why not to applaud for this possible new high soon to confirm my prediction? Well, you may already guess what I’m going to say. Indeed, not too soon to get excited and we may likely see another firework to the downside any day now!😩

The market sentiment is simply too complacent and even euphoric with the volatility touching new lows not seen since Feb and it is also sending another warning signal that it is ready to jump any time. While making specific prediction is always dangerous, I’m willing to bet that S&P may close below 2840 by end of this week before challenging new highs. If the firework plays out more violently, we may even see S&P below 2800 before marching onto to new highs in the next few weeks.

As always, no guarantee and I could be wrong but I’m confident for the call!😉

No one, even Amazon, can disrupt this business

Can anyone tell me which businesses Amazon cannot disrupt anymore? Nowadays it seems Amazon is omnipotent and can destroy anything as it would like to. But there are a few things even Amazon cannot do much to change. Today I’m telling one, which involves something we all need in our daily life but cannot be dealt with via online service. So what is it? Waste Services! Every day, tons of wastes are produced that must be processed and disposed. Amazon cannot collect your waste for processing, right? That’s why it is safe to bet waste service companies are Amazon-proof ones that can continue to survive in the Amazonization world. Waste Management (WM) is such a company, one of the largest in this business. Here is a brief introduction to WM:  

 

Starting with a single garbage truck in 1968, Huizenga, a college dropout, built Waste Management Inc. into a Fortune 500 company. He bought independent sanitation engineering companies, and by the time he took the company public in 1972, he had completed the acquisition of 133 small-time haulers. By 1983, Waste Management was the largest waste disposal company in the United States.

 

After reaching all time high early this year, WM has stagnated and trended lower for a few months since Feb. As a contrarian investor, this has made me interested in it and I started to look into it a few weeks ago. What I found out was nothing short of amazing. Here are a few key stats that demonstrate how fundamentally great WM is doing:

• WM's P/E Ratio (13.9) is lower than 68% of other companies in the Environmental Services & Equipment industry.
• WM's Gross Margin (46%) is more than 85% of other companies in the Environmental Services & Equipment industry, which means it has more cash to spend on business operations as compared to its peers.
• The Return on Equity stands at a massive rate of 48% for WM, showing that it is able to reinvest its earnings more efficiently than 100% of its competitors in the Environmental Services & Equipment industry.

 WM is paying a reasonable dividend yield at 2.1% with a payout ratio only at a very low level of 28%, meaning its dividend is very safe and has more room to grow. It started to pay a dividend of $0.02 in 1998 and has increased it to $1.7 in the past 20 years, a massive 84 times increase. But I have to say, its track record isn’t perfect in my book. While it has never missed dividend in all these years, it did cut the divided a few times. But given its healthy cash flow and stable business, I bet it will further increase its dividend in years to come. I think this is really a recession proof business that can survive financial crisis much better than many other businesses and I don’t see how Amazon can disrupt it in anyway.

 

Of course, the best time to buy WM is when no one is interested in it. Since it reached the all time high end of Jan, it crashed together with the market and has been in a months-long sideway consolidating till its latest earnings report on Jul 25. I got it a few weeks ago and was thinking to write this up then. But I got distracted too much by too many other more interesting topics. After all, who really cares about the garbagy business!😉 😉 For me do caring it, I was lucky for a good timing as it has jumped over 10% following the latest good earnings report and it appears to try to break out through its peak around $90. Clearly it has broken out from the long sideway channel, a very bullish sign suggesting it is ready to move a lot higher from here. But short term, it is quite overbought and may cool down a bit. I think any dip (e.g. $85 or below) should be a great buy for long term.

 

The Ghost Month is coming

I’m not a superstition person, so I don’t believe ghost or something like that. But there are many people do believing it and believe or not, superstition may influence investing decisions. If you are Chinese or knowing the Chinese culture, you must know Feng Shui is big in the Chinese culture. I just learnt something interesting and thought to share with you.


Little bit embarrassing to acknowledge that this is the first time I heard there is a so-called “Ghost Month” per the Chinese Buddhism and Taoism. It is the 7th month each year per the Chinese Lunar Calendar, corresponding to August usually. For those who believe it, ghosts and spirits will roam around during the month and may cause bad luck for believers. It is said, people tend not to make any significant decisions during the month to avoid back luck. What I found is really interesting is that the stock markets are indeed doing poorly in average during August/September in Asia where Chinese people are popular. For example, in the past 9 years, the stock market’s index average return was all negative around -2 to -3% for Shanghai, Hongkong, Singapore and Malaysia during the Ghost Month. Amazingly, the return in the following 3 months was all positive (3-8%). 

 Of course be clear that I’m not suggesting that this is a rocket science proving the causal relationship between the two. But at least I believe there might be some psychic influence for poor return from these markets in the summer. If you are thinking to put money into the Asian markets in the next few weeks, be aware this superstition theory! Maybe you want to hold off till the Ghost is gone.😏😏