A double from a crisis trade

It is really an unbelievable journey for this crisis speculation I made early this year. If you have followed my blog, you should know that I did a quite "risky" (at least seemingly) speculation for a turnaround for the deeply troubled stock, Rite Aid (RAD) (see here). Back then, nearly everyone was betting for its bankruptcy but I saw its underlying value. So I did a crisis speculation with its call options. Glad I did so! While most of the time my calls were deeply in the water, all of a sudden, Bomb! It's exploding.... and to the upside. Within a month, RAD is shooting up 120% as its recent earnings were 18 times better than expected (and 90+% up just this week)!! You probably can never guess what has made so much contribution to its great earnings for the quarter: ice scream!!! My wife said their ice cream may be containing cannabis that hooks people into "addiction" 💤👀
Sounds crazy how could all the Street experts so much having mispriced this company, right? So don't listen to the so-called WS analysts but to me . See the RAD one month chart below:

While my timing was not great as I was way too early but I'm still glad to have mad the bold bet with a double by now. Since my calls will expire in Jan, I won't risk anything but took my profit and watch now. I think RAD will still have a great potential after it is cooling off a bit.

Today, I have another idea similar to RAD's crisis. It is about the U.S. Steel (X), which is currently priced for bankruptcy.  Last Friday, the company surprised the Street by updating its fourth-quarter guidance with a significantly bigger projected loss than Wall Street had previously expected. It really sucked and spooked investors! No surprise for the reaction: X fell more than 10% on the day. But the company is currently trading at just 0.3 times price-to-book ("P/B"). At those valuations the company's assets alone  (the book value) should offer a floor to valuations. And even X can not earn as much as expected, the company has no real risk of bankruptcy in the near term, with no debt maturities and significant flexibility around their obligations. So here is the point good investors ought to learn: when a company starts to trade at a significant discount to its assets this tends to serve as a "floor" for valuations. That's kind of crisis speculation all about: something priced in for a bankruptcy but the actual chance is low and even so, its underlying assets can easily cover its liabilities. This kind of hidden value requires some gut to explore but you don't need to bet the farm for a good profit. Of course buying its stock directly is an easy way to do the crisis speculation, although the risk is quite high for sure. But I have an idea that can bet for it for long term with no cost upfront. That's what I'm sharing with my Family for X and more.  

If you are interested, send email to dwmt19@gmail.com

Two doubles in a week

I got two doubles this week, a bit unusual ways. Let me share with you one today and the other one tomorrow.

As you know by now, the Christmas online sales were great, shooting up by 3.4%, a testimony for the red hot booming economy thanks to Trump's super business-friendly policies. By the way, I still hear some pigheaded leftist talking heads claiming that the current US economy booming is due to Obama's economic policies. How laughable, isn't it?! When people got some strong opinions, they would just fool and blind themselves regardless how wrong they are. That's OK with me as long as I won't be fooled!! 😇😎

Of course, when people get more money in their pocket, they spend more. This is especially true in the US. Actually they will spend more in generally for Americans by borrowing more. So it is great news for retailers in generally, but especially for e-commerce like the giant Amazon, which shot up nearly 5% on Thu after the news breaking out. Great for Amazon but the problem for me was I was shorting Amazon with a bearish call spread due for today. Ouch!! I opened this trade last Friday when its TA suggested Amazon could be struggling in the near term. A bad trade indeed to start with. But here is the thing as I have said from time to time: For investing and especially trading, one has to be flexible and change his mind when facts are changing. I was clearly wrong by betting bearish for Amazon with the great sales data just coming out, so why should I stay with my short position like those pigheaded people who never change their mind regardless of the facts? Not me for sure. So I closed my short arm quickly after yesterday's opening. Glad I did so as Amazon was red hot with the news and just kept going up without looking back. After just an hour or so, I locked in a net profit for a double for a trade which would have been a totally loss for me.

Retrospectively I was too nervous and was way too early to lock in the profit! If I just let it run for a while, I could easily make 4 times more money than "just a double". But I have learnt in a hard way many times before that a successful trader should never be too greedy in taking profits, especially for options. No one can consistently buy at the exact bottom and sell at the exact top. For my options expiring in just one day, I could easily see my profit being wiped out if the tidal wave suddenly changed for Amazon and potentially I could see double loss for my trade. That's not the sensible way to speculate in the market. I'm happy with a double for a week although I missed the 4 bagger in hand.


Just for fun, here is the gain I could have made if not locked in too fast, 400% with nearly $20K from the long arm by closing yesterday. And it would have been 600% gain by this morning when AMZN shot another $30 up (although it gave back all and some by closing). Of course this kind of gambling is dangerous and it can quickly wipe out potential gains and turn to big loss easily. Don't feel sorry just because your gain is not at its maximum but be happy as long as you can make some money at least!

春药下的半高潮 （Half climax under aphrodisiac)

They did it! As I hypothesized last time that DEMs as whole were on aphrodisiac to be self stimulating in trying to reach their climax. And finally they did it. The DEMs in the House accomplished their pre-play and collectively masturbated to try to climb to the pinnacle with impeachment. But, unfortunately their climax has been half halted by the old woman who is apparently not satisfied enough with the climax and is trying to prolong the course to get even more highs. OMG! How old is she now? Still so hyped in trying for more intensified climax? I really feel the pain for DEM now. Clinically we all know that half way halted climax is not healthy at all and even worse than no climax at all!😇😋😎

Meanwhile, Senate Majority Leader Mitch McConnell (R-KY) was entirely unmoved by Pelosi's tactics: "I admit, I am not sure what leverage there is in refraining from sending us something we do not want," McConnell said with a wry smile from the Senate floor. "But alas, if they can figure that out, they can explain it. Meanwhile, other House Democrats say they would prefer never to transmit the articles. Fine with me!"  What a fun saga to watch!

In the meantime, cross the pond, something very interesting is also happening.  As I talked about a while ago, the UK Brexit saga would likely end up peacefully and the UK turmoil had likely reached its bottom a few months ago. That's why I called "The worst is likely over"! Indeed, the UK new election has decisively voted to allow the Conservative Party led by Johnson to exit the EU as planned. While the exact date of the Brexit may still be up in the air, the uncertainty that has haunted the UK for 3 years has finally be resolved and eradicated! As the result, my bullish bet for the UK Pound has paid off nicely. But not only that of course. For investors, any decisive resolution is certainly a very positive development and Johnson's election has resolved the uncertainty surrounding Brexit, with which all British assets - the pound, British shares and London real estate - are rebounding very well and will likely continue. Glad I shared a couple of ideas with my Family about these assets prior to the vote and indeed all are moving along well so far.

Apart from investment perspective from the Brexit, I think the election result in the UK is also a big warning for the Leftists here in the US. You see, whether pro- or anti-Brexit, the prospect of Labour victory was terrifying to U.K. businesses. The leader of the Labour Party, Jeremy Corbyn, is a Sanders/Warren-like character. His vision for the Labour Party nothing but left extreme. Under his leadership, the Labour Party's platform included massive tax increases, the nationalization of utilities and the expropriation of landlords by tenants. And now, Brexit or no Brexit, British voters made it clear they had no appetite for Cuban-style socialism. The U.K. economy dodged a fatal political bullet as the result. Good luck for the UK!

 

Using the slogan of Bill Clinton's 1992 election campaign, it is "The economy, stupid!" 

I do hope the DEMs won't be so stupid to endorse the left extreme policies that will surely bring down the US economy to a halt. Most Americans are smart enough to understand this and just as what the UK voters have done, such stupid ideology will be surely left in the dead cradle if it has ever get a chance to surface.   

  

Will Santa Claus still come?

In the past 10 years or so, the Santa Claus is the most reliable guy to come almost always around this special period of the year, from the Christmas eve throughout a few days post New Year's day to end. The trading volume is usually very light as most of the Street traders are gone for the year but still, the Santa Claus wants to send a rally to end the year and celebrate the new year! Even last year was no exception when the market had relentless declined day after day (the exact opposite of what is happening now) to culminate to the abysmal point of the deep 20% decline right on the Christmas eve, Dec 24. The sentiment was so depressed that the world seemed to be ending in front of us. In that week, 47% of AAII respondents were bearish, and only 25% of them were bullish.  And of course nearly no one thought Santa Claus would come. That was the moment that I wrote: "The world will not end" on the Christmas eve last year. Very lonely I predicted the Santa Claus might still come by saying "...don't be surprised for a "rip your face off" kind of rally in the final days of the year". Sure enough, the Santa Claus did not disappoint us and did show up with a strong rally for a 8.5% rebound to finish the year (about 200 points jump for S&P)! 

Well, we are getting into this SC rally time again next week. But the situation has totally changed. Not only the S&P has easily beaten my 20% increase target for 2019 that I made last day of 2018, it is relentless making new highs day after day in the past few weeks. Now it seems the sky is too low for the market and the world is full of roses everywhere. The investors' sentiment is a mirror image of what we saw last December, with more than 44% of investors being bullish and only 20.5% of investors being bearish per the latest AAII survey! If you randomly ask anyone, probably over 90% will tell you the Santa Claus will continue to come with a rally to end the year. How can he not be!! 

I'd also agree for such an almost sacred annual event that the Santa Claus must come religiously. But then I hear another voice warning me the unbelievably low Put/Call ratio around 0.6 now. You see, P/C is consider low already at 0.8 that often triggers a short term market decline. So it is kind of conundrum moment right now with two conflicting indicators flashing loudly. It seems to me that something must give. If we still want to see a strong Santa Claus rally, then the chance is high to see a quick swift market mini crash probably right away. Maybe we will see that moment Monday/Tuesday and followed by a rally? That seems the most logic telling as far as I can see.  

Expect a quick volatility shooting up in the next few sessions!  

It is special day for another milestone!

This is a special day for our family, especially for our son, Lucas! Today is the day for their graduation ceremony at INSEAD, the world top business school based in France. So officially my son has completed his study and earned his MBA today!


Congratulations, son! Another important milestone for you to have reached.


Eight years ago, I posted a note here to summarized his major lifetime milestones till his college graduation (see here). Time has passed so fast. With just a blink of eyes, he is approaching the 而立之年. While he had always been working in the top financial companies, first the top bond company PIMCO and then the top investment bank JP Morgan, he knew the 12 hours a day intensive office work was not what you really enjoyed and he needed a change. That's why he decided to quit his JPM job and pursed a new career path via MBA. As parents, we of course will always be ready to support him whenever he needs us but he didn't ask anything from us. Rather, thanks to the special Whole Life Insurance he has set up for "saving" his earnings over the years, he has fully funded his MBA study by himself by using his policy.  This by itself is a great achievement as it demonstrated he has managed his work, life and personal finance optimally even though we have witnessed how stressful his life had been!


This MBA is a one year program, a very productive and efficient one but also quite intensive one. But Lucas has not only successfully completed his courses, he has even partnered with friends to start a blockchain company, which has successfully got their first funding via seed financing. At the end, he has successfully demonstrated his ability via the summer interim job and has been hired as the VP for Business Strategy for a fintech company. This fits into his dream job profile as he is always excited and wishing for being a diplomat of some sort. This role may be type of a diplomat in finance that may maximize his full potential in life! While Lucas is still young and has a long way to go in his life, we are extremely happy for what he has accomplished so far. As parents, nothing is more important and happier to see our kids to be happy in what they are pursuing in their life!


Son, we are proud of you for what you have achieved to date but don't stop here. There will be more challenges ahead but we know you will, as always, try your best to overcome any difficulties that may arise and to reach to the next top in your life.


GO GO Lucus!!💃💪💪

Boeing's correction may continue

You probably all know that I love Boeing (BA) and it is a great dividend growth stock for DRIP. I first talked about BA 6 years ago when it was going through another nightmare and it was trading hands around $80 or so and no one was interested in it (see here). That was the first time I suggested to buy BA and since then it shot up all the way to about $450 before this nightmare came. Although I have no any concern about its long term fundamentals and this saga is just a noise that will pass sooner or later (although I did feel it would have already passed the worst period by now), I still prefer to buy BA as cheap as possible. The pass two days over 15% crash seems to have pushed it down to the bottom. I was asked if it is a good buy around $330 now? I don't feel so. You see, the initial crash down is often not the only leg down. Most likely, after some attempted bounce back, another leg down will follow, which could be even worse than the initial one. Purely from the TA perspective, indeed BA appears to have further room to drop. I think there is a good chance to see it bottom around $300,which is a very strong support. I don't think BA will decline much from 300 if it indeed goes down that much. At that time, it will be a much better place to do bottom fishing.

For now, it is a better trading opportunity than long term buy for BA.  Of course, one can also consider dollar cost averaging by buying a little now and buying more as BA further declines. In any respect, BA is a great long term investment, especially for DRIP! 

It can be worse

It has never happened to me in the past 20+ years but it occurred two weeks ago. I got a car accident and it was due to my fault! This year, I got 3 car accidents and in the two previous ones I was the victim, hit by someone in the rear (quite mild though). But this time I hit someone from behind and was somewhat more serious for the damage of both cars. Since I started to drive over 20 years ago, I had never hit anyone before but I did it this year. Quite a terrible and depressing experience for me obviously. However, I'm quite grateful for this bad incident for a couple of reasons:

• It could be much worse but at least no body injury was involved although both cars were seriously damaged superficially. So I still could drive back for two hours without any problem instead of being totaled and needed a towing. 
• I was fully covered by my insurance for the damages I caused except the small amount of deductible that I need to pay. More importantly, given my impeccable driving history in the past, I got a forgiveness for this incident, meaning my insurance premium should not increase due to the accident. 
• What is even more beneficial for me is the fact that I was apparently too complacent in my driving after such a long time of no accidents. In hindsight, I was apparently too relaxing while closely following the car in front and could not stop when he suddenly stopped for a yellow light. A big warning sign for me that I really should always be prepared for the worst in my life regardless how comfortable I'm for my current situation. 

This very last point is also very relevant to investing and trading actually and hence the reason I'm sharing this accident with you today. You see, people can become enormously complacent from time to time, especially after a long time of gains again and again, which will make them feel this is the norm of investing and nothing bad could happen. I share the chart below with my group, asking if anyone could tell what it is for. No one could (for all fairness, I couldn't myself without the explanation for it). 

It is called Investment Turkey. Ironically my car accident happened the day after the Thanksgiving when I was driving back home from our vacation home!  It was first described by in Nassim Taleb's bestseller, The Black Swan: The Impact of the Highly Improbable. As Taleb wrote about the life of the Thanksgiving turkey...

Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race "looking out for its best interests," as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.

Imagine you found an investment that generated steady, predictable returns with no drop in the value of your portfolio. (This is the promise that attracted investors to a fraud like Bernie Madoff.)
As it turns out, there are legitimate investment strategies that offer just that... until the day they don't. Then panic will hit and everyone is running for safety but more often than not, most people will suffer due to being too late, just like the turkey to be slaughtered.  

Let me share with you another real story. Heard about Seth M. Golden from Florida? He was a former Target logistics manager and he managed to grow his net worth from $500,000 to $12 million in five years by shorting the CBOE Volatility Index (VIX) using various exchange-traded funds, primarily via XIV, the VelocityShares Daily Inverse VIX Short-Term ETN, which has ceased to exist now.  This was an enormous gain with an annual return nearly 90%. He was so successful year after year that he planned to launch a hedge fund based on this impressive five-year track record. But in hindsight, he was apparently too complacent with his long term incredible success without knowing that his turkey moment was coming. That was on February 5, 2018, XIV lost 15% of its value during regular trading hours and lost an additional 96% in the aftermarkets.  Instantly Golden's five years of gains were wiped out and some more....Golden's "short VIX" trade turned out to be a real-life version of the turkey problem.

Lesson we can all learn from Golden's real life investment turkey? 

As Taleb puts it..."Consider that [the turkey's] feeling of safety reached its maximum when the risk was at the highest!"
Just because what you've been doing has brought positive results for years, don't read that as a guarantee it will continue to do so. Situations change - in an instant, sometimes - and what was working like a well-oiled machine can suddenly become a ticking time bomb. Or a hatchet that turns a well-fed turkey into Thanksgiving dinner.

My car accident has definitely reminded me of this investment turkey risk that we may all face, not only in our daily life but also very well relevant to our investing life. That's why I try to be more bearish when there is widespread euphoria and more bullish when there is abundance of pessimism. As I alluded to yesterday, I'm never solely bearish or bullish in any situation. Even when I'm very bearish for the market, I'm still buying but just very cautiously and selectively. I'm trying all my best to not become an Investment Turkey! Hope you too!!

The easiest way to make money in the market

Anyone can tell me what's the easiest way to make money in the market? I'm pretty sure not many can comfortably tell what is the best way to make money. After all, you will say, it is awfully difficult to make money in the market. Who has the magic for an easy way to make money? I know one and it is 100% surely an easy way to do so: Buying lows and selling highs!!😎😛


Don't you agree this is the easiest way to make money if you can buy something low and then sell it high? Of course, in theory it is but hardly anyone is willing to buy lows these days in the market. That's the most odd thing in the stock market. Normally everyone is interested to buy something cheap for anything else in their daily life. That's why people love to shop at Walmart, Marshall, Dollar Trees etc, which can effectively compete with Amazon. But rarely you will find someone who can tell you that they love to buy stocks cheaply. It seems it is a fashion in the market to chase highs and hardly anyone is looks for bargains, especially those great gems but left dead for months or even years without much buying interest for them. As I have often used as an example, my beloved MSFT had been left for dead for at least 10 years before people suddenly found that it was so easy to make money from it when it was deadly cheap. But I got numerous notes from friends telling me they were sorry that they didn't listen to me to buy when it was in $30s to $50s even when I was pounding the table many times here arguing how great its value was! But now when it is clearly very expensive at $150, it seems everyone is interested to buy it and thinking they can make great money from it regardless. I doubt buying MSFT at this level can truly make good money relatively speaking although I have no doubt MSFT is still and will continue to be a great stock to own. The reason for my suspicion is simple, it is against the easiest money making modus: buying lows and selling highs!


Now the more relevant question is what is really cheap to buy at the moment when the market as a whole is red hot with widespread FOMOs. As you can imagine, I'm not a fan of chasing at all and I love to buy lows. Let me share with you one sector that appears to have a lot of value in it when nearly everyone is hating it, a truly left dead one for now. It is the energy sector. You can hardly find anything that is more hated than energy stocks, not only for this year but for the last 3-4 years. Indeed who wants to touch it when oil and gas have been in a relentless downtrend for years and it is hard to see any light at the end of tunnel, right? But if you believe stock prices should in general follow the earnings, then I can tell you per the current estimates I have seen, the Energy sector is projected to have a an earning growth more than 30% for 2020, nearly double that for the second sector, Industrials. Believe or not, the red hot sectors for now, Information Technology and Healthcare are only projected to grow at around 10% for the next year. So Energy sounds to be really an area for my money to be for next year!


I know I'm a bit to generic as it is not an easy task to find a diamond among pebbles, especially in a dead sector like energy. Well for the fairness for my Family, I cannot talk specifics here but I did share several ideas already with my Family. Some of them have already gone up quite a bit and I have even closed a 50% profit for my calls for one of them. I'm pretty sure there are more profit potential in Energy and I'm planning to share more ideas with my Family. By the way, in the past few months,  I have been labelled as a permabear as if I only wanted to short everything. I can only laugh when I see this kind of laughable note. Just ask my Family members how much I have bought vs shorted. I'm just highly cautious at the moment and extremely selective but I'm never afraid to buy when there are bargains. The energy sector is one of them to buy for long term as well as for trading for me! 


If you are interested to learn more, send email to: dwmt19@gmail.com.

Benefit of playing options

I assume you would agree with me that most people have no idea about stock options, especially how to safely play with it. Generally, people will turn off whenever option is heard. “It is too risky”. This is likely the general reaction about playing options. Indeed, options can be very risky as it can easily go down to zero if the trend and timing are not right. But as a matter of fact, option is designed to reduce risks, not increase them, believe or not!   If you play with it appropriately, it is a great and very safe tool to substantially reduce your trading risk while giving a good leverage power. Here is the real life example I just got.

Over half a year ago, through my connection I got a hint based on their analysis that a small biotech Audentes Therapeutics (BOLD) could fly soon. It is a small gene therapy company that may attract big boys to buy it. From its TA, it seemed ready to break out. So I decided to give it a try. Well, again, timing-wise I was quite early as the stock went sideways for a while and then declined a lot, over 25% at one point. If I had played with the stock itself, I would have been stopped out. Fortunately I didn’t. Rather I played with its calls. The beauty of options is that you can pre-determine the max loss you may incur for a trade and as long as you play within your comfortable zone of the position size, you don’t need to worry too much about stop loss as the cost is usually a fraction of the stock price. In other words, even if I lose 100%, I may still lose much less than the 25% of the stock value if I use a 25% stop loss for protection. Glad I stayed on with it. As you may know, BOLD indeed got bought out by Astellas for a 110% premium. My call options got a moonshot with a 3 times gain as the result. Sure it is a pure luck to hit a MA deal as no one can really predict this kind of outliers but it does help to verify the safety of playing options for risky trades. The key is how to play it appropriately! The problem for most people is that they use option as a leverage tool to bet excessively on something but most of the time buying options (calls or puts) will lose money (purely based on the statistical probability as options are wasting assets) and with that they can easily be killed financially. Don’t be one of them!!

Why focusing on risk is more important for long term success in the market

Apparently it is not only me who stands on the bearish side against the mainstay in the past few weeks. My trading friend forwarded me a note from a very successful trader who makes his living by trading and has retired by age 40. Here is what he said in the context of his bearish view for the market in the past few weeks and being obviously also too early timing-wise:  

“But, being a successful trader over the long run isn’t about maximizing profits. It’s about minimizing risks… Rather than trying to squeeze the last penny out of a profitable trade, traders are usually better off moving to the sidelines when the risk of an adverse move outweighs the potential reward.

Most folks lose money in the stock market because they let their emotions dictate their trades. They buy stocks into overbought conditions because they fear they’re missing out on potential profits. Then they end up selling stocks in a panic when the market falls because they fear the world is ending.” 

As I’ve acknowledged, I was too early for sure this time. I basically started to actively short the market when S&P reached 3030ish as I doubted any gain above that was sustainable. I was wrong of course in terms of timing and S&P kept moving up all the way to 3150. It seems I have not only missed the opportunity completely for the up move but could have lost hefty for my shorts. NOT AT ALL! Here is the note I sent to my Family group Tue:

First of all, it is a great day for me when the market is "plunging" (although just a mini crash so far). As I have said, when I'm looking increasingly foolish by betting for the downside while the market is making new highs every day, I know the turning point is not far away. I have been experiencing this many times before. No difference this time. Yes, I have been too early by many weeks but given my conviction of the downside risk, I was also increasing my short positions when the market kept increasing. So my average cost for the shorts was substantially reducing as well. That's why such kind of fast downside move, even a bit tiny from the overall perspective, is still very meaningful for me, especially I'm playing with options. That's why I'm taking many gains off the table today given the short term nature of my option trades.

Basically I was doing two things in the past few weeks when being “foolishly” betting against the FOMOs: I was adding more and more shorts to have my average costs cut down. This has allowed me to make some good short term gains when the market finally shot down with VIX jumping up about 50% within two days early this week. 

 I was also adding some value dividend stocks for DRIP that have been beaten down but showing a good sign of bottoming. While for such long term DRIP stocks, short term gain is not really what I’m looking for but some of them have also been brought up quite nicely along with the euphoric market. No complaints here as well!

I’m glad that I took off my gains from the short term shorts quickly as the past 3 days of rebound has been enormously strong. I expected there would be a good rebound to climb above 3100 again but I doubted it could straightly make new highs without another leg down first. Oh, boy, today’s frenzy buying was unbelievable! S&P is just a spit distance from its all time high. We are quickly approaching the seasonally bullish period with a Santa Clause Rally brewing. While I’m still not totally convinced about the sustainability of this rally, as a trader, I don’t want to blindly fight against the seasonal trend. Right now the market is driven by two major tailwinds: the very strong jobs report (you really need to thank Trump for his pro-business policies regardless you like him or not) while still no inflation in sight and an olive branch from China by waiving the tariffs on soy beans and pork, which may hint an anxious desire on the China’s part to get the phase one deal done by Dec 15. I’m cautiously playing the long side now betting on some stocks that are seasonally bullish in the next few months. I’m also very selectively betting on the short side on those overbought stocks showing technical weakness. If the market itself goes into extremely overbought condition, I will then also short it outright but this time I want to be patient and don’t want to be too early as I tend to be.