An opportunity from a deep crisis?

I wish I had a means to bet for this country with all-around disaster that is still ongoing! This once was richest country in the region but has managed to become one of the biggest economic catastrophes in modern history with a total humanitarian crisis that is worsening each passing day. You probably can guess by now which country I'm talking about, yes, it is Venezuela!! Over two decades of real life experiment with socialist policies, the once oil-rich exporting country has become the biggest export of.....guess what?  Its people! Over 3 million Venezuelans have left the country, amounting to about 10 percent of the population since 2015 and fast increasing. It is just a unlivable country now with 90% of its population under the poverty line. Its inflation had surpassed 1 million percent last year and is on its way to reach a mind-boggling 10 million percent. To put things into perspective, generally a 15% inflation will already be considered a nosebleed catastrophe.  I just cannot think about anything self-made that is worse than this one. You may think Greece is already bad enough. Not at all and it is like a rose garden when compared to Venezuela.  See the GDP chart below.

So why I will be even thinking to invest in Venezuela at its darkest period with no hope in sight? It is so called crisis investment. Although a crisis looks and feels terrible, which usually drives people away, it often also contains opportunities for risk taking people. The best time to make money is not when things have already become rosy and great; rather at the time when things become "less bad" from bad. I think Venezuela is on the verge of a turning point. The situation is becoming so bad that can hardly let people feel worse anymore. They either die from the extremely poverty with hunger or they may simply fight for survival. The international pressure for a drastic change, especially from the US, is mounting and increasing. I think the Maduro regime is numbered by now. Venezuela can simply not continue like this under Maduro for too long. That's the potential opportunity arising from the heat of the Venezuela crisis.     


Unfortunately I don't know any way that can help to directly invest in Venezuela. If you know, please let me know! But indirectly one may consider a few companies that are still doing business in Venezuela. One such company I like is Chevron (CVX), a well-managed oil company at a reasonable valuation and with a good dividend history. At the moment, its business in Venezuela is probably losing money and hurting its bottom line. But if the situation there starts to improve, it may boost CVX bottom line. In the meantime, you can still enjoy its good dividends and the recovering oil sector.


By the way, Venezuela's today may become US tomorrow to some extent if the current socialist movement gains traction. The "free everything for all" socialist ideas have really attracted a lot of people into believing that there is indeed free lunch and money can be simply printed from the thin air without consequence! I do believe that the risk is not small that some day US may truly become a socialist country. We will have a lot more to talk about this alarming trend later.  For now, let's just focus on what is in or around our real life and trying to make some money from the emerging opportunities. I do wish Venezuelans have already seen the deep bottom of the black hole imposed on them and from now on, their life will start to turn around to become better!

Are we seeing a top?

What a crazy market at the moment! No one knows for sure what it will do in the next move. It has been 12 weeks for the year and the market has been virtually a straight line up. Just a couple of times when it seemed to be on the verge of tipping over, buyers emerged to save it at just exactly the right moment. So the mood has become enormously hyped and euphoric and there seems nothing that can stand on its way to go up and up nonstop. Yesterday the happy sentiment seemed to reach it climax as we saw enormous buying pressure stepping in for a market started with a sharp selling opening but to end up with a new high for this year, a truly capitulation day for bears, a moment that even pig can fly. That's when I told my friends last night I saw a top being formed as the euphoric mood had become so intensive that I could feel not only on the TV hearing the talking heads' ecstatic joyful calling for new highs soon to come, but even in virtually all the chat groups I'm seeing (over 10) with very similar jubilation everywhere. For quite some time I haven't got this kind of extreme feeling but I got it yesterday. As a contrarian, I never want to chase highs with herds and I have been increasingly cautious about this market move for some time. As I said, I feel it is becoming quite tired and difficult to maintain its momentum on the way up. Yes, it is difficult to be bearish in this setting. Even with today's one day 50+ plunge for S&P, the worst day we have seen for this year, I still don't know if it indeed has turned around for a sizable correction that I have been expecting for some time. It may just jump back more next week to further lure people in. What I can tell you is that its technical momentum has already weakened quietly for some time. Experience has taught me that this is not a good set up for a sustainable up move. While no guarantee for sure, the chance is much higher to see a much lower market in the weeks ahead than higher. My advice remains the same for weeks that if you have the urge to go FOMO to join the crowd or herd to chase highs, just watch your rug below. It can be suddenly pulled out at any moment without any notice! If you think you can handle the sudden shakeup that make turn you upside down, then by all means to join the happy crowd to ride the uptrend to the last moment. Good luck for you! For most people, I bet it will be a very painful journey with FOMO. We have seen many times before that months of gains can be wiped out just within days at the top when the tidal wave changes.


IT IS NOT THE TIEM TO TAKE TOO MUCH RISK!!

It is official

It is official now that FED will not raise interest rate for 2019. This was announced following the FED meeting today. This may not seem a big surprise by now as FED has been increasingly dovish in the past two months, but I'm not so sure about it back in late Dec. At that time, the market was so nervous about FED's hawkish tone with widely popular expectation that FED would raise at least two times of interest rate! That was the time I made a bold prediction: "But I think the FED may likely yield to the market pressure and may not raise rates at all in 2019." I'm sure not many people would take my word seriously and I even got some immediate feedback from friends that it sounded crazy to expect no rate hike for the year! Here we are now and I'll even go further by predicting that we may see another round of QE in the next 1-2 years. FED is projecting one rake hike next year but I'm not so sure. We'll see how it will turn out to be.


Normally a dovish FED would be music to the market and indeed the initial reaction was quite bullish following the FED announcement. Unfortunately the euphoric mood quickly faded and turned down again by closing. I won't argue that a dovish FED is quite positive for the market in general and that's why this was one of the two reasons why I predicted a 20% upward move in 2019 for stocks. But nothing is moving in a straight line. The market has been basically moving in a straight line up for 11 weeks now and it is becoming increasingly tired. You have heard me "talking down" the market for some time by now and I will continue to sing the same bearish song for the near term. I simply cannot believe the market will just go up from here for new highs without first a sizeable correction. The underlying technical indicators are sending more and more signals for a turn of the tidal wave. The poor price action following extremely bullish news today  is another big warning sign. 


I could be wrong of course but I'm happy to accumulate more cash these days and will be only doing extremely short term swing trading  to bet for the extreme conditions, e.g. shorting FDX and long BA.   

This one has nowhere to go but down

In this market with high headline risks we are facing daily, you got to have some short positions in place to protect. Yes, it seems difficult to think about the downside for many when the market has been in a virtually vertical straightline up nonstop for 10 weeks. But believe me, the rug will be pulled again by the market suddenly when no one feels the risk. It is not a matter of if but just when. So for myself, I always try to look for some short targets as one of ways to hedge. What’s is a good target, you may ask? Well, one easy target will those dying businesses that are maintained status quo when the world has already changed fast. Just give you some famous examples. Remember the used-to-be very famed brand Kodak? It fell apart within just a few years after the digital photo era emerged! Or Blockbuster (the video renting business) that was so popular less than 10 years ago? It has disappeared after failing to compete with Netflix! More recently the toy giant, Toys R’Us? Bankrupted last year due to unbearable debt burden in facing declining business as the result of aggressive invasion of the online e-commerce. The theme for these failed businesses is amazingly common: a dying business with leveraged debt, a recipe for disaster!  If you can find such a business, it is very safe to short it as far as I can see. This is especially true when the general market is in a correction mood, then bad stocks often fall much harder than others. Today, let me share with you one such stock which I believe will soon crash. It is also a famous name and many of you must have heard it: Discovery Inc (DISCA). Yes, this is the company that owns the very popular TV channel, Discovery. Even now it is still quite popular I think. The company also owns other real-life entertainment channels like the Travel Channel, the Food Network, TLC, and Animal Planet. But do I need to tell and convince you that TV business, especially the pay-TV subscriptions, is a declining business and in a slow dying mode with an accelerating pace?  How many of you will sit in front of a TV to search for the content you want to watch these days? Virtually everything is available on YouTube or something similar and largely free of charge. For quality contents, Netflix is offering really good ones with very low fees. While you still can argue Discovery may continue to offer something unique, one thing is very clear that it cannot compete with booming Internet mobile services and its traditional audience is disappearing and very fast! So how the Discovery management is dealing with the challenge? In the same old fashion way as those which have already died: loading up debt to buy more average TV channels like Scripps Networks (like HGTV), the Food Network, and the Travel Channel. Its debt load has jumped by 5 times in the past 5 years and it can never pay it back I think! This outdated business model can never effectively compete with the fast changing mobile world and is doomed to die. While I cannot tell you the exact date but I won’t be surprised to hear a bankrupted Discovery in not so long time.

Of course, for our purpose to make money by shorting it, we don’t need to wait till the time actually comes. The market is a forward looking animal and it can see far ahead of time before the final disaster hits. What makes me very confident to say this is its technical set up. As you can see below, it is in a very bearish H&S formation, which to my eyes has nowhere to go but down moving forward! I think this is a perfect target to short for the sake of hedging in this volatile market. If the market indeed tanks, it will crash with it. Even the market is doing well, DISCA will still likely struggle due to its fundamental and technical problems!

“Take advantage of the Boeing snafu” again

This was the title I first introduced Boeing about 6 years ago in 2013 (see here). At that time, Boeing (BA) was quite unloved or even hated widely and it was trading around $80. Why? “......problems associated Boeing, the grounding of the problem-plagued 787 Dreamliner - the most technically advanced new model of commercial airplane manufactured by Boeing.” Sounds familiar? Indeed Boeing is facing a very similar problem today, worldwide grounding of its 737 Max 8 planes due to the recent two fatal accidents from this model within 5 months. It is a disastrous crisis for Boeing for sure and the negative impact will likely continue for a while before getting better.

Believe or not, while Boeing has being doing more than great in the past 6 years by jumping 5 times higher since I promoted it, the recent breakout over $400 was a bit too much too soon technically speaking. A clear negative divergence on its momentum indicator was sending a clear and loud warning that a turning point of the uptrend was coming. That was the time I told my friends to watch for the downside of Boeing at least for the near future and I was looking for a correction down toward the $375 level. Well, I couldn’t know what would happen to make the correction materialized, its TA did again prove the prudence of its forward-looking! So now BA has touched $362 within two days after the crisis breakout, shedding off about 15% from its peak. I’m hearing the talking heads calling for the bottom of BA correction and recommending to do bottom fishing. They could be right but I doubt. I won’t be surprised to see a fast rebound towards $400 after such a swift downdraft, but I think there is a high chance of at least another leg down to test its lows and it may even go down further towards $350ish level. At the moment, it is just too early to call where BA will land and for how long it will struggle. But it probably won’t be just in days to do a V shape recovery. Highly unlikely!

Having said that, my main point of this blog is to promote BA again to take advantage of the current snafu to pick up a few shares of Boeing for long term. Yes, it is not as cheap as it was 6 years ago but this sizable correction has knocked it down to a reasonably cheap valuation relatively speaking. The most important thing is that this crisis, regardless how abysmal it looks like for BA, is a temporary resolvable problem for a fundamentally solid company. This is a “dream comes true” moment for value investors as long as you have a long term horizon and are willing to hold it for long term. All the fundamental points I presented back in 2013 are still true in principle. The lower it goes, the better for BA investors! Remember what Buffett said: Be greedy when everyone is fearful!!

A hidden force is moving the market

The market has set a new record: 10 weeks straight-line up with Jan and Feb both in green. It is really an unbelievable bullish run, making a lot people believe that we are already out of the woods with a V shape recovery from the dismal Dec harsh selloff! As you all know, I'm not so bullish at least for now and expecting some sort of severe correction any moment by now. The past few days of weakness at closing may set up a stage for another leg down in the days ahead. Today I'm going to tell you another market force that is playing an increasingly important role in the market that may intensify the move for either direction. I'm pretty sure it is new to most of you. So keep reading 😅😎


Have you heard CTAs? It stems for Commodity Trading Advisors, which are a class of asset managers whose investing models are based on momentum algorithms. Their investment style is driven by "trigger" levels in the stock markets. So, when the market is rallying, it sends their models signals to buy stocks, and, when the market is falling, it sends the same models signals to sell stocks. In other words, they are purely TA driven largely based on the resistance or support lines such as major trend lines or moving averages. According to Wall Street Journal, CTAs have controlled assets worth $360 billion now, a humongous money animal that can easily move the market. The problem with CTAs is that it is mechanically operated based on algorithms without manual intervention, or said in another way, a blindly trend follower. When a signal triggered, it pours in billions of dollars to buy or pulls out billions by selling without thinking and that's often resulting in overkill for the underlying direction. That's likely one of the major reasons why the Dec selloff was so devastating and seemingly unstoppable. That's also likely why the past 10 weeks of bull run has been so strong and seemingly unstoppable as well.  My source tells me that a downtrend signal may have been triggered now for CTAs. If so, be prepared for more selloff!
If indeed we are going to see some sizable selloff, what are the most likely trend lines that CTAs may be looking at? For S&P, the obvious major resistance is around 2815ish. Since last Oct, four attempts of challenge have been made but failed to breakthrough it. After few days of bearish price action, the near term trend is turning to bearish. Today's closing was right around the 200 DMA which could be a support. So some buying early next week is likely but I don't think it will last. More likely it will turn down again quickly and moving towards its next support around the 50 DMA (2670ish and changing) but again may likely fail. The most possible strong support for this phase of correction is the trend line around 2600. If this support can hold, the chart will create a bullish inverse H&S pattern, which may pave the way for the next leg up for new all time highs later of the year. But if that line cannot hold, then watch for a low test all the way down towards 2350ish, an ugly prospect! It is too early to tell which is more likely as it all depends on the TA and the sentiment at that time. For now, be very cautious and don't be fooled by any near term rally. Its TA is really not looking pretty right now. Any rally will likely just be a bull trap for those who are doomed to buy highs and sell lows. Don't be one of them!  

The Best Stock to Own for this Season

If you live in the US, what is the thing you must do in the first few months of each year? It is annual routine that no one can get rid of and must do to avoid being either fined or even jail time if not done properly. Yes, the tax filing by April 15 each year for all who live here! Or even living abroad for US residents. This reminds me the time over 20 years ago when we were in the Europe. Our neighbor, Catherine, was an elderly lady, very kind and friendly and she gave us a lot of useful local information that helped us a lot when we initially settled down in the city. One topic she frequently talked about was her routine to prepare for the tax filing. It was a year long effort that I initially really couldn’t understand why so complicated. You see, there was no such thing as filing tax over 20 years ago in China and I didn’t have any sense what it meant to file tax back then. And that was the time I first heard such a saying that for everyone, only two things that no one can escape, tax and death. So Catherin was really my first mentor about tax. She was an American and that’s why she religiously started to prepare her tax filing in the first few months every year. It was really not an easy task for her as she did her tax filing all manually on paper. So the first 4 months were her busiest season with top priority! And then she said she had to use her computer to make a category where she had archived her tax-related documents throughout the year since at her age she could easily forget where to find them when needed. What a life as an American, I made a joke with her. “Don’t laugh at me. It is part of everyone’s life if you want to live peacefully. If you ever go to the States to live there, then you will become its slave and milking cow as well!” She calmly replied with smile. “It does not sound like a good place to live,” I was thinking at that time and thought I was lucky that I was not living in the US.

 

Fast forward, I’m now living in the US and I have to follow the same annual routine to file our tax regardless where we go. The complexity of the tax code is nothing less than a PhD thesis, I think. Since it is so complex, it is a daunting tax for most people if without some sort of help, either professionals like accountant or quite popularly the tax filing software or services. So you don’t need to be a PhD to understand that this is a good season for the tax-related business, right?!   And this year, it may turn out to be even the busiest tax season in decades. Why so? Well, 2018 was the first year after a significant reform made to the tax regulation in decades and substantially and numerous changes have been made for this tax season. For most Americans or residents, it is a massive headache and professional help is very much needed. One company is definitely on top of the list for tax service business. That’s H&R Block Inc. (NYSE: HRB). Probably many of you are very familiar with it and even have used it, including myself that I had used for many years in the past. In major shopping malls, you probably will see many HRB cubicles during the tax season. It started its business in 1955 and has over 12000 tax offices not only in the US but also around the globe. It sells software and allows users to file their taxes electronically with the support of accountants and other tax professionals. Virtually by any metrics, HRB is quite cheap at this price around $24, with a P/E just 8.08. Compare that to the industry average of 44.4 times. Its price to cash flow sits at just 6.47, which is nearly a third of the industry average of 18.76. Even more impressive, HRB is a good dividend grower with its current dividend of 4.18%. While HRB is definitely not a growth stock and don’t ever expect it to fly in the sky, it is clearly a seasonal stock price-wise. Logically it will be doing great to generate good revenues during the tax season and that may likely be reflected in the stock price each year around this time.

 

I’m sure no one likes paying tax. But H&R Block may turn out to be the only thing that may let you feel a little bit better about tax!