Saturday, February 28, 2015

Brief market outlook

For the last few years, most market predictors have their crystal balls broken. It is due to the excessive supply of money that leads to a non-correlation of the economy and the stock market. It cannot last forever. It will correlate again when the money supply is reduced.

2015 will be a tough year to predict. I will predict a gain of 7% if the market does not plunge. As usual, there will be two camps in opposite directions.

Good News
·         The interest rate will start rising. However, 2015 is the year before election and no politicians will risk their chances by raising the interest rate.
·         The market is slightly over-priced.
SPY’s P/E is about 18 vs. the normal 15.
·         The economy is improving slowly.
·         Energy cost is reducing (bad for the energy sector).
·         Most corporations have good profits especially in the first and second quarter.
Bad News
·         Margin debt is in the record high. The market would usually plunge the next year after that year.
·         Interest rate will climb after the mid year of 2015.
·         The national debts and obligations are high as a percentage of the GDP. If we legalize 4 million illegals, how many will give up their work and collect welfare?
What should we do
I would watch how the above will materialize. The weather man can predict the weather in the next few days better than the next month.

When the market is down, we need to know whether it is a correction or the start of a market plunge. For a correction, you want to buy stocks as in Oct. 15, 2014. For market plunges you want to sell. For me, I prefer to ignore corrections these two years as it could be the start of a market plunge.

Most predictions from analysts and fund managers are rosier than they actually are. Accept their ideas that make sense. Written 12/1/2014.

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Friday, February 27, 2015

On shorting

Shorting should be avoided for most people for the following reasons:

·         Could lose more than 100% of the investment.
Actually, in theory, there is no limit. If the shorted stock price rises by 10 times, the loss is well over 10 times the money invested.

·         Need to pay dividends and interest for the shorted stock.
The higher the dividend rate for the stock, the more you have to pay. The experienced investors would avoid high-dividend stocks to short.

Need to pay interest for ‘borrowing’ the stocks to sell. Brokers charge interest rates differently and it could be a huge saving to shop around if you short stocks a lot.

·         Need both fundamental and technical analyses.
From my experience, technical analysis is more important than fundamentals in shorting.

·         If shorting a stock is successful, the gain is subjected to the short-term capital gain taxes which are typically higher than long-term capital gain taxes.

·          Not all the stocks can be shorted.

·         Selling short is not allowed in retirement accounts as of 2013. However, you can buy contra ETFs for a group of stocks to bet against the market or a specific sector, but not on a specific stock.

·         The following sectors are riskier: the drug, mine, bank (unless you know the quality of their mortgages) and insurance sectors. A single drug approval could drive the stock price up by more than 25% in one day.

·         There is no perfect timing. Some stocks fluctuate a lot with no rational reasons. Some stocks could be manipulated.

·         Watch out for short squeezes when the short percentage approaches over 25%. In a nut shell, the stock is running out of shares to be shorted. As a result, it would rise in price especially on any good news.

The above is from my book The Art of Investing.

Thursday, February 26, 2015

Dump Apple


I have been contrarian several times and most times I made good money. We need to have good arguments to be contrary. Otherwise, we’re committing financial suicide.

Many investors commit the same error: Invest in a company because they love the company’s products. We need to check out the fundamentals of the company and its prospect. I have nothing against Apple. Actually I recommended Apple before based on its great fundamentals while everyone was dumping it. Where were today’s enthusiastic analysts on Apple then?

Why Apple is successful

Peter Lynch taught us to look for stocks in the mall. In this case, you do not even have to leave home.

I have a comparison of how the successful technology stocks performed in the first ten years and then the next ten years. If they survive in the first few years, most of them did incredibly well in the first ten years and not too good in the next ten years. Apple is the only profitable exception in the entire 20 years in my test. Apple had its bottoms many times and then miraculously came back stronger and better. Luck cannot be the only reason. To me, it is due to:
·         The vision of the late Steve Jobs.

Apple is not the first one to introduce most products we use today. Jobs had the passion to make them useful and affordable. He was the slave master to drive his employees to the next level. These engineers and programmers are the best from our colleges and some are on H-1B visas. He knew how to play his China card described next.

·         The China connection.
o   Apple is the master of outsourcing. How can you find obedient workers to assemble Apple products at very low cost? These workers are better than robots. They can be trained to assemble new products in very short time and work long shifts without notice. Our unions, regulations and high living standard do not allow ‘slave workers’ here. Actually the ‘slave workers’ are quite educated and young. While many companies find defective products from Chinese factories, Apple so far finds few if not none.
o   Where can you find 40,000 technicians? Not from the USA at any cost.
o   It also depends on China for the rare elements that cannot be obtained economically from other sources.
o   The large potential market. Chinese can buy similar products produced locally, but the selling point is the prestige of Apple to boost up their social standing. China will open up 4G LTE for iPhone line in more cities.

·         Marketing.
The long-line waiting for a new iPhone or iPad is the best ad money can buy and even better when it is free. Can the trick still work in the future? It will as long as we have silly folks wanting to be the ones in his/her block to own a new gadget.

Scoring Apple

When I was writing the book Scoring Stocks, first I used IBM but its low score would not be a good example. Then I switched to Apple (AAPL). It scored almost the highest. I recommended AAPL at $55.72 (split adjusted) in April 19, 2013, the date the book was published. It is another example that fundamentals work. However, when we’re swimming against the tide, we need to be patient. At that time, the media and institution investors ignored fundamentals. The best argument of not buying Apple was “Apple has turned from a growth stock to a value stock”. They think they cannot get fired by thinking the same as the herd. Just garbage talk from the smartest folks!

Fundamental analysis as of 02/10/2015

[Sorry, the blog does not port my table. Until they fix my Instablog in Seeking Alpha, you have to buy my book  "Complete The Art of Investing" from Amazon. The book is about the size of 3 books with many of my original ideas such as Pow PE taking care of cash and debt, Adaptive Stock Score System (ASSS - no kidding, Coconut Theory, Market Timing that worked... All for $10 on the Kindle version. It is interesting that this article recommended to dump Apple when it was $132. Its per share price loses more than the cost of the book.]

Ø  The first scoring system incorporates many vendors’ grades. The second scoring system is from my book Scoring Stocks using metrics available free from many web sites.
Ø  Pow EY – Earning Yield (E/P) takes cash and debt into consideration.
Ø  Expected EY, Debt/Equity, ROE, SMA-200% and RSI(14) are obtained from
Ø  Analyst Rating is from Fidelity. If Fidelity is not your broker, use Recommendation from
Ø  EB/EBIT and F-Score are from

How Apple scores
It scores fine but not spectacular. The score from my book in April, 2013 was 5 and now it is 2. Fundamentally it is not as good as before.

P/B and P/S are usually not useful for high tech companies. However, Apple’s P/B at 6 is exceedingly expensive as compared to Google’s 3. When most analysts like the stock, usually it will rise in the short-term. RSI(14) shows it is overbought. To conclude, its fundamental score passes but not in flying colors.

The brief Fundamental Analysis should be followed by the following:

Intangible Analysis (described next).

Qualitative Analysis includes articles for Apple. First, start looking for articles in Seeking Alpha. Large companies like Apple are hard to manipulate, so most articles are not ‘pump and dump’.

Technical Analysis detects the trend and overbought condition. Many investors do not buy a stock that is in its downward trend. SMA-200 is a good trend indicator. Its price should be above the SMA-200 (same as SMA-200% is positive).

Intangible Analysis

Apple has lost a visionary leader Steve Jobs. I hope he was not replaced by similar managers at Microsoft, who are responsible for Microsoft's lost decade with few innovative products. Apple has a lot of cash to finance new projects. High tech business is tough as they need to build a better mouse trap continuously. When the mouse trap becomes a commodity, it will not have a good profit margin. That’s one reason that Buffett does not invest in Apple. If he read my book in May, 2013, he would buy Apple instead of IBM and saved his company millions minus $10 for the book.

There are bright spots and bad spots for Apple:

1.       Apple Text Book. Imagine all students carry iPads instead of text books. Several educational apps have been created for iPads.

2.       Apple TV.
It is a loser so far with a lot of risk and potential competitors. However, the potential is great. It could give all cable companies a run for the money. Wider internet channels would make it more feasible. Will the cable companies provide these speeds to allow Apple TV and similar products to step into their turfs? Do Apple or Google have secret projects to by-pass cables’ internet?

3.       While the iPad and iPhone are peaking in the hardware, iTune, software and contents for these devices to access have no limit. We have witnessed how iPad helps the folks with autism and iPhones for the blind. I can envision many other similar applications.

4.       Apple moves to Kindle's market. iPad is too big to be used to read books during commute. You need to hold an iPad with both hands. The mini iPad, even making fewer profit margins, will be Apple’s answer to Kindle and a good addition to cover the lower end of its product lines.

5.       All the mobile phone technology is originated by the first generation (if not counting Motorola) that Apple has a lot of patents. Its lawyers will milk money from Samsung and prevent cheap mobile phones from coming to the USA.

6.       Apple Pay.
I saw a similar ad from a credit card company a while ago and not recently. Apple has a proven history of picking up some failed products and turning them into gold. It is a big test for Tim Cook. Hong Kong had a similar application many years ago. The advantage of that application is you do not have to carry changes. To me, this product could be the next innovative and most profitable for Apple. Apple Pay may not make a splash in the bottom line initially, but it is an important product.

7.       Apple iWear/ Apple Watch.
There will be cheap Chinese products flooded in our market. However, the selling point is the prestige of Apple and its integration to other Apple products. For a similar reason, my $50 Casio has no respect even it is more accurate and more functional than an Omega costing many times more. It will be successful, but will not make a big dent on Apple’s total revenue / profit. The major problem of Apple Watch is the short battery life. If you have to charge it one or even two times a day, it will not be too useful. Only social climbers would buy the $4,000 that does not function as a $10 watch. The other problem is how secured the data is.

8.       The major worry is whether they can maintain the urge of upgrade. If the new enhancements would not give me reason to upgrade, I would not be the one waiting in long line in bitter cold weather to upgrade my iPhone just for my dumb ego. It accounts the majority of Apple’s profit.

9.       Apple has a lot of cash. Dividends usually boost the stock price and the option values granted to the management. However, it is important to plow back to development and acquiring technologies. They may have paid too much for Beats.

2016 and beyond

Xiaomi, a Chinese phone maker, will most likely come to the USA in 2016 after conquering several emerging markets including India. Its phone is almost as good as the latest model of iPhone at about half the price. It also has a low-end version priced at about $100 that would set up a standard for entry smart phones.

Xiaomi prices the latest phone model barely above the manufacturing price and makes money in the decreasing component prices. It gains more profit by stretching the model to a longer life.

Apple’s lawyer will prevent its entry that Samsung found out the hard way. For starters, Xiaomi needs to modify the user interface to avoid some of the obvious lawsuits in the USA.

Even if Xiaomi will not enter the US market, it will steal more sales from Apple. Apple has to learn from Cisco. You do not want to make China angry. If they do, they may stop Apple from selling their phones in China. Hence, you may win the battle, but lose the war. Xiaomi could be one of the companies that would force the mobile phone to become a commodity product.

When the phone becomes a commodity, both companies have to make money in the content. Today Apple depends on iPhone for over 50% of its sales. In 2016, Apple stock may face some challenges even without Xiaomi entering the US market. Eventually the smart phones will become a commodity product and they may have to face Xiaomi or other similar companies.

It is one’s opinion and I would face a lot of opposition from the Apple lovers; it is the same when I recommended Apple in May, 2013 when no one wanted to buy Apple’s stock. Buy any stock depending on the potential appreciation (via individual analysis), not on the love of its products, the company or the management.
More on Apple.

As of 2/2015, one commenter of this article pointed out Apple is owned by most hedge funds and it is an indicator that it is at its peak. If you own it or similar high-flying stocks, use a mental stop loss and adjust the stop when it appreciates further.

This is a modified article from my book Complete The Art of Investing.

Monday, February 23, 2015



Almost everyone has an iPhone. Folks including myself in the lower class of the society carry imitators and/or those 'outdated' iPhones that are several months old.

My grandchild of just over one year old had a good time in playing with the iPad and it usually kept her busy for hours. Before she could say Mom, she said “I” for iPad. During my family gatherings, my cousins communicate with each other via their smart phones even when they sit next to each other. When they do not text messages, they play games with their smart phones.

Even with one pair of eyes and one pair of ears, they can play iPad, listen to iPod and text using iPhone at the same time. Thanks Apple for demonstrating what multi tasking really is. I prefer to do one task correctly than several tasks incorrectly.  Chinese and Indian students are leaving us further behind by spending more time in study. Do you believe those children spending extra 2 hours every day in games would accomplish the same later in life?

Some parents have a hard time to explain to their children that their existence was due to the blackout of the iPad and iPhone caused by the hurricanes.