Market melt-up and melt-down

Check the melt-up in 2000 and 2008. The market surged to the highest and followed by a steep plunge.

You need to buy stocks in order to move them up. Now, the cash in US is pretty much exhausted and followed by a record-high margin debt.

Be careful.I will dump more stocks after the settlement of the trade war and even more after the election that is too far away though. '

From past performance, the crowd is usually wrong. Hence, act opposite to the crowd. Now the crowd believe the market will rise endlessly. At least, move some risky stocks to safer investment such as CDs.

The market is fundamentally VERY unsound but technically sound as illustrated in my blog.tonyp4idea.blogspot.com/...

State of the market cycle from Fidelity

Fidelity thinks we're in the late phase of the market cycle. It is also called "melt up" for some, which means it would be huge market profit but followed by a market crash. Personally I have a lot on CDs and would move more after the trade settlement with China.

Check out my book  "Profit from coming market crash" from Amazon.

Be warned that all markets are different and past performances do not guarantee future performances.

Here is the Fidelity link. Also check it out which sectors are favorable and unfavorable in different states of the market cycle. In general, the essential sectors are better during down markets such as health care and consumer staples.

Trade war between US and China (updated)

As of 4/2019, I predict the trade war would be ended soon while President Trump may want to postpone it to the election. Trump-made problem would be fixed and Trump would declare victory. Trump cares about his election in less than 2 years and Xi’s 10-year term has plenty of years left. A full-fledged trade war could not be good for both countries and the rest of the global economies.

I expect the forced transfer of technologies will be eliminated. It is an unfair bait for gaining the Chinese market. We have to blame the U.S. CEOs signing these agreements for their bonus consideration. So far, both sides have lost a combined total of 6 billion. Many long-term harms have been done to the U.S. Here is a summary of the actions and counter-actions from China.

	U.S.	China
Tariff	Will not gain a lot of jobs as other countries and robots would fill the gap.	Will pass tariffs to the consumers. Will have less profits. Will lose the market to some countries.
Barriers	Would open the market to more US products.	Patriotism would discourage citizens to buy US products.
Unfair rules	This is a bright spot for US.	Could have more impact 5 years ago.  China depends less on foreign technologies than before.
Internal market	Will be reduced.	Will be expanded.
Treasury	Interest rate will be higher.	Reduce owning US Treasury.
Depreciation of the Yuan	Harmful for export goods to China.	Make Chinese products more competitive.
Core technologies	Will lose these sectors to China eventually. Intel, Micron… have suffered already.	China will concentrate research on CPU and memory. China may limit rare earth export to US.
US allies	Eventually they will be sided with China due to economic reasons.	Eventually will gain more.
US Corporation	Many will suffer such as Apple.	Less FDI.
Soy	A direct blow.	Will switch to other countries at higher prices. Soy will be reduced in the mix for feed.
Education & tourism	Will be decreased from China.	More universities and more tourists to Europe.
Subsidy	Hard to enforce

 
The above are my opinions of the outcomes. However, It is good for China in the long run as the huge deficit will not be sustainable. I expect there are winners with the settlement.

·         Farmers will gain; the loser are the replaced countries such as Brazil.

·         Boeing will gain despite the recent problem of the 737 Max planes.

·         Some selected drug companies will gain. I am looking for the life-saving drugs that Chinese do not have.

·         Energy will gain such as LNG; the losers are countries being replaced such as Australia’ LNG.

·         S.E. Asia countries will be benefited as many Chinese factories will move there.

Tech stocks in the last 20 years

I tried to use my historical database to test out NASDAQ 100. The return is great. To illustrate, from 1/4/1999 to 6/6/2001, the annualized return is 54% vs SPY’s 1.6% without considering dividends.

Do not ‘wow’ too early. The reason of the high performance is due to the survivor bias. Many internet companies were taken out from the index and/or the database, and hence the performance as a group is deceivingly high.

The following chart is for the popular high tech companies for the selected 10 years. For every one of the following successful high tech companies, there must be many that do not make it.

	1990-2000	2000-2010
	Annualized Return	Annualized Return
Microsoft	940%	-4%
EMC	7500%	-7%
Apple	20%	65%
Dell	8200%	-7%
Average	4000%	12%

The above figures are estimates for demonstration without considering dividends and compounding. Dell has been privatized today. Now, we can draw some conclusions.

·         Tech stocks usually beat the S&P500 index. Risk usually pays.

·         1990-2000 are the golden years for tech stocks.

·         2000-2010 are not so good for tech stocks due to the crash of 2000. If it is not for Apple, the return of this portfolio would be negative.

·         Except with Apple, it indicates the first ten years (or the early phase) of the tech stocks give the best returns. After they become mature companies, they seldom maintain the same growth rates. The worst of the group in the first 10 years become the best after 2000.

Buy when the market does not favor this sector

Interestingly, you should buy when the institution investors are dumping such as buying Apple in May, 2013 as recommended in my book Scoring Stocks. Ensure they have value first by scoring them fundamentally and allow at least one year for the market to recognize the values. 

I reviewed my old blog and found some bargains I described in 12/03/2012. Here is the performance summary. Again, all performance returns are annualized.

The stocks are AAPL, CSCO, INTC, MSFT, XRX, STX, WDC and ALU.

	One year later	Two years later
Ann. Return	84%	59%
SPY  Ann. Return	28%	23%
Beat SPY by	200%	157%

Interestingly, AAPL is the weakest performer in both tests. It must start with a high price.

Why the tech companies perform worse after the first 10 years? Most likely it is due to poor management:

·         When they are rich, they lose their entrepreneur spirit.

·         They care about enjoying their options and do not want to take risk in new and better products. Besides Xbox which was almost cancelled by the management, how many successful new products Microsoft has after Office?

·         Many of them were wrongly promoted from marketing and sales. They are NOT the ones who create innovative products such as Apple’s products.

·         Losing the visionary leaders such as Steve Jobs.

·         Other companies, foreign and local, are catching up.

Tech companies need to make better mouse traps continuously and with enthusiasm.