Q1 2017 Performance: Equity/Commodity Trading

In the previous two articles, I wrote about my forex trading and equity investments performance for the first quarter of this year. In this article, I will talk about my 1st quarter performance for equity/commodity trading.

For the first quarter of 2017, my active trading performance for equities and commodities (commodity ETFs) was up 3.51%.

Equity/Commodity Trading Portfolio (Robinhood) P/L
The white line represents the start of the year.

For years, I could not trade equities and commodity ETFs due to commissions. Thanks to Robinhood, I’m not able to trade for free.

My first loss came from the first trade of the year. I thought energy, especially oil would go up over the next few hours, but I was wrong. So I closed my long position on Direxion Daily Energy Bull and Bear 3X Shares (ERX) at 2.13% loss (everything was tweeted out)

A month later, I made another call on oil. This time, short oil. I went long inverse oil ETF. Here’s why I thought oil would drop;

I closed the SCO position a month later at 22.55% gain, the biggest gainer of all positions closed during the first quarter of this year.

My biggest loss came from VelocityShares Daily 2x VIX Short-Term ETN (TVIX). I thought volatility would pick up in the coming month (and it did a little bit). However, after they underwent 1:10 reverse split on March 16th, I did not want to risk having the ETN go to single digits once again, so I indeed closed the position at 17.27% loss.

In nominal terms, the 22.55% gain on SCO is 3 times larger than the 17.27 loss on TVIX.

There are other positions that made and lost money. But overall, my portfolio was up 3.51% in the 1st quarter.

Current Positions:

I can only go long securities on Robinhood. My current positions are SPXS, WFC, LULU, DIS, EXPE, VRX.

I went long on Direxion Daily S&P 500 Bill and Bear 3x Shares (SPXS), which is inverse of S&P 500, because I believe investors are underestimating the negatives of Trump’s policies. Once investors realize the negatives of Trump’s fiscal policies and/or his actual policies are less stimulative as he proposed, the market will take a dump.

A lot of people think tax rate will be reduced to 15%. I have been watching some of Trump’s TV interviews, especially on Fox News, and it seems Trump himself does not believe tax cut will be 15% or lower. He basically said it might have to be little higher, say around 20%.

I also watched Trump’s body language and I believe Trump is not confident in what he’s saying about his fiscal stimulus plan as he was during the campaign.

So when the actual plan is released, investors will be disappointed.

SPXS is also a small hedge for my portfolio as I’m long individual U.S. stocks.

I’m also long on Wells Fargo (WFC), Lulelemon Athletica (LULU). I believe the plunge on LULU is overdone and could fill half of the gap. WFC fell after the earnings report last week. General bank earnings are trending higher and Well Fargo is no different. I went long on WFC also due to technical purposes.

I’m also long on Disney (DIS). I bought just at the start of rumors that Apple (AAPL) would buy Disney.

I’m also long on Expedia (EXPE). See this awesome tweet thread.

And finally, I’m long Valeant (VRX). I went long on the pharmaceutical company the day after Bill Ackman revealed he cut his $4 billion loss.

Valeant recently extended the maturity of their debt until the early 2020s, which gives them about 5 years to restructure their capital and the company. Plus, they have over $5 in cash for each share.

Just because Ackman lost big on VRX does not mean he’s not a great investor. He is a great investor (that’s why he’s rich?). If you watch his presentations and talks, he knows about he’s talking about. He does his research and deeply cares about other people. At least that’s what I think.

The current positions I mentioned above can change at any time or reverse. Thank you.

FinTech To Halt Or Grow After Brexit?

Silicon Valley is the fintech capital of the world. London is the fintech capital of Europe. After the Brexit vote, the rise of fintech in UK might be under a threat.

Total venture capital investment in technology for UK increased to over $3.6 billion in 2015, 71.43% increase from 2014. Of that, London-based tech start-ups accounted for 62.55%

Total VC Tech Investment Amounts UK/London 2010-2015
Total VC Tech Investment Amounts UK/London 2010-2015

In the last 5 years, UK technology companies have collectively raised $9.7 billion, with London-based companies accounting for 54.52% of it or $5.3 billion.

Since 2010, investment in the British firms soared over 12-fold, while investment in the London-based firms soared over 53-fold.

Brexit can halt the growth of UK fintech industry.

Why is that? UK could lose its “passport.”

Many companies in EU, including fintech, use mechanism known as “passporting” to access Europe (European Economic Area) by getting licensed in a EU nation and be able to sell their products/services across the bloc. If the passporting privilege is lost, companies will have to submit application in every single country it wishes to operate in, which is time consuming and cost prohibitive.

Not only fintech companies, but also international banks would have to find a new legal home base. Large U.S. banks, such as Goldman Sachs (GS), Citi (C), and JP Morgan (JPM), employing thousands of people, would have to move its operations to other cities, such as Paris or Frankfurt.

Fintech companies could take the same direction as the banks. It is possible they will move to Ireland (Dublin). Ireland is European home (EU base) to Apple (AAPL), Google (GOOGL, GOOG), Microsoft (MSFT), Dell, Twitter (TWTR), Airbnb, and more. The corporate tax rate, which is one of the most important part of Irish investment attraction, is 12.5%, one of the lowest in Europe. That’s very low compared to United Kingdom’s 20% rate and Europe average of 20.24%.

One other important part of Irish investment attraction is its KDB (Knowledge Development Box). Certain intellectual propriety income, such as patent/copyright, are subject to just 6.25% tax, half of its famous 12.5% corporate tax rate. Not only that, but there is also 25% tax credit for research and development spending.

The KDB is clearly aimed at incentivizing innovate R&D. It provides 50% deduction in tax rate from qualifying profits. In other words, 50% allowance. No wonder so many U.S. tech companies are using Ireland as their European base.

In Europe, overall fintech investment increased 120% between 2014 and 2015. The number of deals increased by 51%. Both should continue to increase as states like Ireland continue to attract start-ups and talent. However, if UK files for Article 50 and other EU members plans to follow the same path, it is very possible the increased uncertainty over the EU cartel will scare away start-ups and international investors.

There’s also the issue of free movement of labor. One in three UK start-up workers are outsiders. Of the 34% workers from outside the UK, 20.7% are from the EU. 66% hold UK passport. The most common non-UK nationalities were Irish, American, and Spanish.

Brexit is likely to make it costlier and complicated for start-ups to attract and retain talent. Will the UK allow the free movement of labor? I don’t think so. One-third of leave voters stated the main reason for wanting to leave the EU “offered the best chance for the UK to regain control over immigration and its own borders.” Plus, other EU members, such as Ireland, probably want start-ups and talents to come to their cities, not stay in the UK.

In 2014, financial and related services employed nearly 2.2 million people, 7% of the UK workforce. The industry contributed 11.8% of UK economic output in 2014. London, the financial center of the UK and the world, accounted for 714,000 of the employment.

The British fintech firms employ about 61,000 people (2015 data), 2.8% of the financial and related services employment and 5.7% of financial services employment (both of which 2014 data).

The stakes are definitely high here.

Peer-to-peer (P2P), money-transfer and payments start-ups would be hardest hit by Brexit and by the end of EU passporting.

In April 2015, London-based P2P lending company, Funding Circle secured the largest single deal of the year with a $150 million funding, valuing the startup at over $1 billion, going straight into the “unicorn” club, private companies valued at $1 billion or more. The company is online marketplace that allows investors to lend money to small and medium-sized businesses.

European Investment Bank (EIB) recently announced it would the platform to make 100 million pounds ($133.3 million) loans to UK firms. 20% of UK’s fintech firms focus on credit and lending, which P2P falls under. UK has 74.3% share of the whole EU alternative finance market, which particularly includes online alternative finance, from equity-based crowdfunding to P2P business lending and more.

In 2014, UK P2P business lending market size was 998 million euros ($1.1 trillion), 42.70% of total UK alternative finance market size. As I said above, “The stakes are definitely high here.”

Brexit could reduce lending, especially to 5.4 million small businesses in the UK accounting for 99.3% of all private sector business. Collectively small businesses account for 50% of GDP (Gross Domestic Product) and 60% of employment.

Many of these businesses will encounter financial problems, leading to layoffs of employees and so on (domino effect).

In addition to above, money-transfer and payments start-ups could also be hit hard as they will lose their “passporting” privilege. 54% of UK fintech firms focus on banking and payments. To sum up what I said about “passporting” above, if you’re regulated in UK, you’re regulated across the EU.

Other EU members, such as Ireland, will try to use Brexit to their advantage. They will try to make its laws more attractive to entice fintech firms away from London.

There is also chance the UK will get to keep its fintech firms, only if it differentiates itself with streamlined regulation, tax breaks, and increased support for innovation.

The UK will have to renegotiate the financial regulation with the EU. But I don’t believe they will get what they want. EU is already playing hard-ball. UK has more to lose than the EU.

Article 50 won’t likely be triggered until late this year or early next year. If by then, anti-Brexit campaign gains momentum and the presence of pro-remain politicians increase in the UK government, it is likely UK will not leave EU.

Feel free to read my previous article, Pros and Cons of Brexit.

If you have any views, I would love to know in the comments below. If you have any questions about any issues related to Brexit, I would be happy to answer them ASAP. Don’t be surprised if the answer is 5 paragraphs long. Thank you.

GoPro: Speculative Buy, But Huge Rewards

Ahh! GoPro (NASDAQ: GPRO). A stock that gravity took over. It crushed from $98.47 (early October 2014) all the way down to $15.90 (mid December 2015). Boy, was Citron Research right, when they predicted share-price would drop to $30 within a year, in November of the last year.

And what now? Is this end of GoPro or is there more?

As for me, I’m very skeptical of the market. I’m someone who loves to go against the investments of the crowd.

For example, when the Alibaba (NYSE: BABA) was launched, I was convinced that the market was hyped about it and I didn’t find any intrinsic value in BABA’s share price. Recent market sentiment about GoPro is SELL SELL SELL!!! Me being the skeptic, I say BUY BUY BUY!!!

And it’s not just because of my skepticism of the market, but because of Karma and more.

Karma is coming in 2016 for the short-sellers of GPRO. So take your profit while you can. GoPro has planned to launch its first drone, Karma in 2016. The introduction of a drone will expand camera maker’s product line, beyond making action cameras.

The release of Karma is released, will launch GoPro into Unmanned Aircraft Vehicle (UAV) market. The Smart Commercial Drones Market is expected to reach $27.1 billion by 2021 from $3.4 billion in 2014, according to Wintergreen Research, Inc’s report, “Smart Commercial Drones: Market Shares, Market Strategies, and Market Forecasts, 2015 to 2021.” According to the report, “The commercial grade consumer video drone segment is the largest one in terms of revenue in 2015, and it is expected to lead over the forecast period.”

GoPro founder and CEO Nick Woodman said at the TechCrunch conference in September that the company is planning to launch a drone in the first half of 2016, “development is on track for the first half of 2016. We have some differentiations that are right in the GoPro alley.” Karma is finally coming.

Hollywood is eager to change the way they take aerial shots. Not long ago, they used helicopters (some still do) to shoot from bird’s point-of-view and it costs a lot. Drone makes it all cheaper. Not only cheaper, but also safer and opens more creative ways of shooting a video. In other words, drones can do what helicopters cannot do.

On May 28, GoPro announced at Google’s I/O conference that it will build a 360-degree camera array for stereoscopic spherical videos. With the help of Google Jump, Google’s virtual reality system,  GoPro’s camera array, Odyssey can make videos like this. I believe the Odyssey can be very useful for real estate market. “360-Degree Real Estate Tour – Brought to you by GoPro.”

Oh, did I mention Odyssey has 16 cameras that work together as one? I repeat, 16. Hey GoPro, why don’t you knock out your useless and wasteful $300 million buyback program out of the park? According to its third-quarter SEC filing (10-Q), GoPro stated,

“To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.”

They spend 345x more on buybacks than they do on research and development. So GoPro, eliminate your worthless buyback program. “Customize” the money into research and development, and acquisitions. Customize the Odyssey. 16 cameras? Really? Reduce the size and improve the quality.

I strongly believe GoPro should acquire a small thermal imaging company. Thermal imaging can be a perfect fit for drones. I suggest GoPro acquires Seek Thermal, designer and manufacturer of high quality thermal imaging products. If GoPro acquires Seek Thermal or a different thermal imaging tech company, they will be able to reach sectors such as firefighting and agriculture. Diversified!

Partnership with Rollei – a German manufacturer of optical instruments and a seller of GoPro compatible accessories – might be helpful.

Another great acquisition can be Vuzix (NASDAQ: VUZI), a Google Glass rival, and a leading developer and supplier of smart glasses and video eyewear products in the consumer enterprise and industrial markets. Vuzix holds over 41 patents and 10 additional patents pending. Market cap. is currently $104.39 million. With $513 million cash on hand, GoPro can afford the acquisition. In January, Vuzix received a $24.8 million investment from Intel (NASDAQ: INTC). Intel bought preferred stock that is convertible into common shares equivalent to 30% of Vuzix.

In the third-quarter, GoPro’s revenue increased 43% year-over-year (Y/Y) to $400.3 million. On non-GAAP basis, its net income, operating income, and operating expenses increased 103.9% Y/Y, 71.7% Y/Y, and 44.3% Y/Y, respectively. On GAAP basis, it increased 28.58%, 105.36%, and 43.78%, respectively. The growth isn’t bad for a company with a market cap. of $2.49 billion. However, its inventory days increased 80.6% Y/Y from 67.7 to 122.3.

There are buyout rumors and one of the potential suitors being Apple (NASDAQ: AAPL). While this is a great news, it is not likely to happen in the first half of 2016. I believe the management of GoPro would not want to sell the company until they see the outcome of Karma. If the outcome is positive, the company will not be sold next year. If it is negative, the company will be sold unless they have something up in their sleeves. Management’s actions should a sign of what’s to come.

I’m confident the founder of GoPro will turn things around next year. GoPro can be a leader in its field if it eliminates the buyback program and invests into the future. According to Futuresource Consulting, the global action camera market grew by 44% Y/Y in 2014. It is expected to grow at a compound annual growth rate (CAGR) of 22.2% between 2014 and 2019. GoPro should target not only sport enthusiasts, but the film and television industry, real estate, and other sectors such as, firefighting and agriculture. In order to do that, GoPro should first create a product that suits the sector’s needs. First impressions are important.

Disclosure: I’m currently long on the stock, GPRO, at this time (December 26, 2015).

Note: All information I used here such as revenue, net income, etc are found from GoPro’s official investor relations site and its SEC filings.

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

Global Markets Crash + Asian Crisis Part 2

Global markets crash. Currency wars. What’s next? Good buying opportunity?

US markets: Markets plunged dramatically on Friday. The Dow Jones Industrial Average fell 530.94 points (3.12%), the worst one-day loss since November 2011 (on a % basis). The index is now down 10.2% (correction territory) below the May 19 closing and all-time high of 18,312, for the first time since 2011. For the week, the index is down 5.8%, the steepest decline since September 2011.

S&P 500 fell 64.84 points (3.19%), the worst one-day loss since November 2011 (on a % basis) and falling below 2,000 level for the first time since February. For the week, the index is also down 5.8%, the steepest decline since September 2011.

NASDAQ fell 171.45 (3.52%). For the week, the index is down 6.8%, the biggest weekly decline since August 2011.

European Markets: European stocks fell into correction territory on Friday. The Stoxx European 600 1.3% to 368.59. The index is down 11% from April 15 closing and all-time high of 414.06. For the week, the index is down 4.6%, the worst weekly performance since December. Other indexes fell into correction territory also. Germany’s DAX Index is down 18% from its highs. So far, 13 out of 18 western-European markets have lost 10% or more from their highs.

US oil prices fell just below $40 for the first time since February 2009, due to demand concerns and increasing supplies. US oil prices fell for their 8th consecutive week, the longest losing streak since 1986.

The CBOE Market Volatility Index (VIX) (also known as “Fear Index”) jumped 46.45% to $28.03 on Friday. For the week, the index rose 118.47% (from $12.83 to $28.03), largest % move ever in a week.

Three factors driving the free-fall of the global markets:

  • Growing concerns (or uncertainty) about China’s economy
  • US rate-hike uncertainty. Uncertainty is the market’s worst foe
  • Plunging oil prices

There are concerns about slowing growth in emerging economies, particularly China. Economic data from China showed manufacturing PMI in China fell to a 77-month low of 47.1 in August, down from July’s final reading of 47.8. A reading below 50 represent a contraction. About two weeks ago, China’s trade data showed that July exports declined by 8.3% year-over-year (Y/Y) due to a strong yuan and lower demand from its trading partners. Exports to the Japan, European Union, and United States fell 13%, 12.3%, and 1.3%, respectively. Exports are China’s strongest growth machine. The weakness in the fundamentals started (still is) putting pressures on policymakers. Then, a surprise move came.

On August 11 (days after the exports data), the People’s Bank of China (PBOC) made a surprising move to devalue its currency (so called “one-time” move), the renminbi (RMB) (or yuan), against the US dollar (greenback) by 1.9%, the biggest devaluation since 1994 and first devaluation since the yuan was de-pegged from the dollar in 2005. PBOC decided to lower daily reference rate – which sets the value of yuan against the greenback – to make yuan more market-oriented exchange rate.

Three reasons behind China’s move:

  • Weak fundamentals, including exports
  • Desire to be included in IMF SDR basket
  • Impending US rate-hike

China’s move increased concerns over the health of its economy (second largest economy in the world) and shocked the global markets which continues today. China’s devaluation signaled that the economy there must be worse than what everybody believes. Continuous slowdown as it shifts from an export-led economy to a consumer-led economy has led Chinese government (or PBOC) to help stimulate economic activity. Over the past year, they cut interest rates four times and cut RRR (Reserve Requirement Ratio) several times. The goal is to combat slowing growth by strengthening liquidity and boosting lending (so far, unsuccessful). The recent devaluation will make imports expensive and help boost exports (reminder: exports fell 8.3% Y/Y in July).

Another reason behind China’s recent move is its desire for the yuan to be included in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR), a basket of reserve currencies, in which the US Dollar, Euro, Japanese Yen, and British Pound are part of. Earlier this week, IMF decided to extend its scheduled revision of SDR basket (revision takes place every five years) by nine months (to September 30, 2016), giving China more time to make yuan (or Renminbi ) “freely usable”, a key requirement join the SDR basket.

Last reason behind China’s recent move is impending rate-hike in the US, which would support the greenback and would have consequences for China. The recent devaluation ended the era of Yuan appreciation which began in 2005 (reminder: yuan was de-pegged from the dollar in 2005). Ever since “Strong Yuan” policy began in 2005, Yuan (CNY) appreciated 28% against the US Dollar (USD), 30% against the Euro (EUR), and 65% against the Japanese Yen (JPY)

Rise of Yuan against most of its trading partners’ currencies has made its trading partners exports attractive. US rate-hike would have made China’s export rivals even more attractive. Now that China devalued its currency in the wake of falling exports (reminder: exports fell 8.3% Y/Y in July), its trading partners would want to protect their exports share. Therefore, China has fired the first shot to start currency wars.

Consequences of China’s actions:

Countries like Australia, Thailand, New Zealand, Malaysia and Canada are likely to suffer from China’s devaluation. These countries are largest exporter to China. Don’t also forget that these countries can affect other countries. Basically, it is “Domino Effect” economically.

Earlier this week, Kazakhstan – whose top trading partners are China and Russia – switch to a free float (which means that the central bank stopped managing the exchange rate), causing its currency, the tenge (KZT), to fall 25%. The move comes due to three reasons; crude prices (Kazakhstan is central Asia’s biggest crude exporter) fell 55% in the past year, Russian has allowed its currency (ruble) to depreciate significantly as commodity prices plummeted, and due to the yuan devaluation. The motivation for the move is to preserve its export competitiveness.

Vietnam has also allowed its currency, the dong, to weaken further due to the recent devaluation by its biggest trading partner, China. Who will be next to devalue their currency in this crisis; Asian Crisis Part 2.

Commodities denominated in US dollars will become more expensive to buyers in China, the world’s largest consumer of raw materials. When China’s economy slows, demand for raw materials, such as copper, Iron-ore, etc decreases and the lower demand puts downward pressure on commodity prices.

China, second-largest oil consumer, is causing oil prices to drop non-stop, which will hurt oil exporters, such as Canada (possibly leading to another rate-cut).

Falling commodity prices mean one other thing; deflationary pressures.

Slow growth and lower commodity prices most likely will lead other central banks, especially large commodity exporters to maintain their easy monetary policies for longer. Countries with large current account deficits and/or corporations with large amount of debt denominated in US dollars could see their economic/financial conditions worsen, causing them to further increase/expand their easy monetary policy (rate-cuts, for example). Not only commodity exporters and emerging countries will suffer, but also US companies.

US companies with significant exposure to China will suffer from China’s devaluation. Such companies are Wynn Resorts, Micron Technology, Yum Brands, and Apple, accounting for China sales exposure of 70%, 55%, 52% and 30%, respectively.

When I noticed China economic getting worse earlier this year, I knew Apple depended on China a lot, so I said that Apple was overvalued as more competitors were emerging and China’s economy was about to get worse. Even though Apple’s earnings came out better than expected, I went ahead on twitter and responded to Carl Icahn’s comments on the Apple and the market. He expected (maybe still expects) Apple’s stock price to double, which I did not (and I still don’t). More competitors are starting to emerge and China’s economic conditions are getting worse (debt bubble coming).

Mr. Icahn believed the market was extremely overheated and expected market bubble. I have to agree with him. I preferred (still prefer) to use the term “correction”. At this time, I believe current market sell-off is temporary and the dust will be settled in a month (good-buying opportunity). I expect “market bubble” after the Fed raises interest rates to the range of 0.70% and 0.80% (early 2017?). That’s when market sell-off will be much worse than the current situation.

I’m calling Mr. Icahn to respond to my questions; how do you think China’s action will affect global economies (or markets)? Do you still think Apple could double in price?

Now, let’s get back to how else China can affect global economies (deflationary pressures). I expect Europe’s economy and Japan’s economy to slow down.

Europe’s economy will slow down due to export demand decreasing and the uncertainty created by Greece (Yes, they did get a bailout deal, but it’s not over). That’s why I believe European Central Bank (ECB) will either lower interest rates even further or they will increase current Quantitative Easing (QE) program, pushing Euro currency lower. Current falling prices in the European markets are a golden opportunity. Lower interest rates and/or increased QE program will send European equity prices higher>>>all-time highs will be made.

Japan, China’s largest trading partner, will also suffer due to export demand decreasing. The devaluation of yuan (or, Renminbi) will make Japanese exports less competitive. Japan’s economy is still suffering despite Abenomics (similar to QE). Recent data showed GDP (Gross Domestic Product) falling at annual pace of 1.6% in 2nd quarter, due to slowing exports and lack of consumer spending. Abenomics has failed. Additional monetary easing coming? If the economy does not get any better in the next several months, I expect additional monetary easing by the Bank of Japan (BoJ).

I don’t believe the Federal Reserve will stop its plan to hike the rates, but it will slow the pace of it. On Wednesday (August 19), Fed minutes of July meeting (leaked earlier) showed that Federal Open Market Committee (FOMC) members “…judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” They also said that “…the recent decreases in oil prices and the possibility of adverse spillovers from slower economic growth in China raised some concerns.” US dollar has been falling ever since the release of fed minutes, as expectations for September rate-hike decreased.

Now more troubles emerged, I wonder what the Fed will say or do. There are many US economic reports that will come until the Fed’s September meeting. The reports will decide the fate of rate-hike for September. At this time, I expect the Fed to hike the rates in September by 10 basis points (or 0.10%).

If the current China situation (or Asian Crisis Part 2) gets out of control, there will be no rate-hike for the rest of year even if there’s strong US economic reports.

All comments welcomed. Thank you.

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.