The main objective of the addendum is so that I can help you to take advantage of the current volatile situation. As I predicted, we had a ‘black Monday’ but this is nothing like the ‘black Monday’ we had in 1987. On 8/21/15 when the market closed, due to my hedges, my total portfolio had an increase of 1.6%, today it was 4.2%; and when the Dow was 1100 down, it was up 6.5%. A week ago I had a put that was expiring Sept 2015 on the NASDAQ worth 2cents. Last Friday it was worth 40cents and now it is worth $1.38!First let me say that it is 9pm on Monday the 24th of August and the Chinese market is up by 1.77% so this means that there would be a ‘relief rally’ tomorrow. Don’t fool yourself; this is not the end of the correction (or worse). If it goes up from here, we will be coming back to these levels within 12 months (or sooner). As soon as the market opened at 6.30am, within 5 minutes Dow was down 1100. Some very crazy things happened and I want to share my wisdom with you so you can take advantage of these situations.
Rule #1: Never, ever, place a ‘market order’. Always place a ‘limit order’. If you want to make sure you get your order filled, even if you pay a little higher price than the prevailing price, set the limit order to reflect that. For example, GM is tradingbetween ‘asking’ $25.80 and ‘bid’ $25.20, put the limit order at $27 but I think you should put it for $26 and you might still get $25.50.
Why did the Dow drop 1100 at the opening? Reason 1 : As one analyst put it ‘algorithmsfreaked out’ when the Shanghai market went down 8.65% in one day. The robots did not how to process this information! Remember, these robots were created by young people who spent their short lives watching transformer movies! I thought it was so funny that shortly after that CNBC had this commercial from IBM Watson, “Can a business have a mind? Can a business have a soul?” Apart from giving the dictionary description, can IBM Watson say what a soul is? Can IBM Watson create driverless cars so we can have a million auto accidents per hour! Reason 2: European stock markets were down 5% or so to meet margin calls they placed a lot of orders that hit our market at the opening. In my opinion, Jim Cramer saved us from carnage.
Some time ago, Tim Cook, CEO of Apple called in on Jim’s show and said, “I know that you say that you do not want friends but you only want to make money for others but I consider you as my friend”. Last night (Sunday, 8/23) Jim emailed Tim and asked about their business in China. This morning, Tim emailed Jim and said that IPhone sales have been accelerating in China over the past few weeks. This turned Apple around (-$7 to +$2) ina heartbeat and with it, the market. However I do not agree with this as the market trades on future conditions and not current ones. As another analyst said, “when the Greek crisis started, they were buying more cars”. Within that first 5 minutes when the Dow went down 1100, many good stocks tumbled. For example, Apple went down to $94, GM to $25, Exxon to $66.76, GE to $20.50,Verizon to $22.38, Facebook to $72 (it was $100 a few days ago) and the weirdest of all was Ford. Ford initially went down to $11.64! Then ‘panic buying’ took place and as it was shooting up because our regulators have put circuit breakers, on the UP side, trading was halted around $13!! Technically, you could have made an 18% profit in 2 minutes! Even more if not for those stupid circuit breakers! At this time I got a brilliant idea and I want to share that with you. It is very likely that we will have these crazy moves in the market till November or so. How to make use of these crazy situations to buy cheap? After the market closed, I placed order for the stocks I want at 25% to 50% below the current price so as soon as the market opens these will go in to effect. Now here is the secret, I am going to repeat this every day till November! One of these days I might get lucky!
Rule #2: As I indicated in my yesterday’s newsletter, during this time our #1 priority is to go after good stocks with high dividends.
During the first 5 minutes of the market open and Dow was falling 1100 points, minute by minute, CNBC gave quotes on Verizon. Their yield used to be close to 5%. CNBC did a study and found that all professionals were buying only high paying dividend stocks. Verizon fell sharply at market open and recovered within a few minutes but surprisingly AT&T which also has a high dividend did not do the same. I am assuming that a lot of foreigners own Verizon and not AT&T. What was the retail investor buying? Apple, Facebook, Amazon, Netflix and Biotech (way over-valued). Biogene dropped 24%! As I mentioned yesterday, Wall Street is taking the volatility index and calling it the fear index. The highest it was prior to today was 28 (on Friday) and this morning it went up to 58. Yet there was no fear.
Ordinary people will not be checking quotes on Apple, Facebook, Amazon and Netflix, if they had any fear-which they were doing this morning. This extreme bullishness among retail investors remind me of their counterparts in China. Another study done by CNBC this morning showed that only 4% of the retail investors were selling. That is not fear! All this shows that the probability is high that we will continue to have these corrections. Tomorrow (8/25/15) could be an up day.
In a ‘bear market’ (we are not in one, yet), the first leg down is followed by a rally to the upside; and then a severe a correction takes place. Let us say the first leg down is A, the rally is called B, and the 2nd leg down is called C. According to Elliot Wave Theory, most probably, C = (3/2)*A. 3/2 or 2/3 is called the ‘golden ratio’-if my memory serves me right! Also the rally B is called a ‘bear trap’. Investors think that good times are back again and then get caught to the bear!
Secret #1: At most times, and especially now, most mutual funds are fully invested so if redemptions come in, they have to sell stocks to meet redemptions. Mutual funds cannot hedge and only hedge funds can hedge. If a mutual fund does not meet its redemption obligations, it goes insolvent. Blame the regulators!
Secret #2: When people start taking money off mutual funds (401K funds and so on), they have to sell stocks indiscriminately. Today some had problems so imagine what would happen if the market keeps going down like this. WAIT FOR THIS TO NIBBLE!!
Myth #1: It is 100% safe not to sell during a severe correction and wait for the market to rebound. Since 1980, it has been so, but after the 1929 crash, inflation adjusted manner, you had to wait till 1958 to break even! Know your risk!
10 worldwide stock markets are in bear territory. Brazil is down 40%. As I have been saying for 2 months, Soros and Icahn are betting billions on a market crash and this is not what they are looking for. Since our interest rates went to zero around 2008, 90% of all emerging market debt has been in USD. Now as in 1997, currency crisis is expected to create a debt crisis and that would topple equity markets. When that happens, whether in 2015 or after, today’s 1100 drop would seem like a picnic. When people have to sell to make margin calls, and when they cannot sell what they want to, they sell what they have to. This is why gold is still down. I hope and pray that the Chinese and the Russians won’t dump their US Treasuries in our market as that would shoot up our interest rates in a flash. I can propose a solution; Feds can start QE3 and purchase them with printed money! Even today the Feds indicated that they might raise rates in September but Barclays announced that they do not expect the Feds to do it till March 2016. Feds care about ‘Main Street’ and not about ‘Wall Street’ so they might increase rates in September as they see inflation as a real possibility with the tightening of the labor market.