Shesa's JULY 2015 INVESTMENT BLOG

19 July 2015

JULY 2015 Investment Blog

Shesa Nayak  

U.S. Stock Market Commentary

Hello friends. Welcome to my monthly investment blog. Let’s take a quick look to the U.S. Stock Market Indexes.

Last Friday, the Dow Jones closed at 18,086.45, down 33.80, S&P 500 closed at 2,126.64 up 2.35 and NASDAQ Composite closed at 5,210.14 up 46.96. NASDAQ is at all time high now. The current short-term bullish trend is likely to continue, probably till the earning season is over. However, I would watch the market with caution because sentiment Indicator is currently at extreme, indicating that the stock market is showing great complacency. As a matter of fact, the current long-term bullish trend may not continue.

Important Economy News

• Greece: After a series of negotiations with IMF and European Union; Greece's parliament voted to accept substantial economic reforms last week. They are expecting to receive bailout worth as much as $96 billion. Finally the chaotic situation seems to have abated. Let’s see how it turns going forward…
• Fed Testimony: Fed Chair Janet Yellen testified before Congress last Tuesday. In her words “the Fed is on track to raise interest rates "at some point later this year." She seemed to be upbeat in her speech, stating that U.S. economic activity was "solid," and that she expected employment to continue to improve..
• The Conference Board announced that its consumer confidence index improved to a 101.4 reading in June surpassing economists' expectations of 97.5. New home sales increased 2.2% while existing home sales surged 5.1%. This is the fastest pace of increase since February 2008. The unemployment rate fell to 5.3% in June from 5.5% while the consensus expected a decline to 5.4%.
• Second quarter earnings are already in progress. This will give us a barometer of how corporates will be performing.  Bank of America, JP Morgan, Netflix, Intel, Google etc. have come with better earning.

China Stock market: Remain invested or get out?

The readers may be aware that China stock market went as high as 5,166 point on June 12 and then plunged about 27% to 3,686 within 2 weeks before bouncing back. The market lost more than $2 trillion in value. This was really a scary situation, as market did not provide any respite for the investors despite Chinese Governments best effort to keep the bull market alive. Since I have been investing in Chinese ADR and have added many stocks, ETF and Mutual Funds in my Blog portfolio, I would like to provide my perspective whether it’s a buying opportunity or time to pull the trigger and get out of it.

28 June 2015: The People’s Bank of China cut its one-year benchmark loan interest rate and deposit rate by 25 basis points. The lending rate now stands at 4.85%. This is the bank’s fourth consecutive rate cut since November 2014.

Jun 29: China allowed its 3.5 trillion yuan pension fund to invest up to 30% in the Shanghai and Shenzhen stock markets. That’s about 1 trillion yuan of new liquidity into the stock market.

July 1, 4: The China Securities Regulatory Commission lowered its stock transaction fees and relaxed margin financing rules. It also suspended the initial public offers (IPOs). Major brokers and fund managers pledged to invest at least $19 billion of their own money into stocks.

My perspective: China has been a driving force behind global growth for decades. It’s a clear sign that Beijing wants the bull market to continue by taking a series of measures. U.S. and other developed economies in the West have been running current account deficits since long before the financial crisis of 2008, whereas China has been running a massive current account surplus. China's model for growth has been to reinvest GDP into assets expected to stimulate growth. It has responded to equity pullbacks with easy monetary policies like USA, Europe, Japan. Its national savings rate is among the highest in the world, a large proportion of that is made up of household savings. The people in China are afraid to spend money for fear they will need it in the event of an emergency. By spending money on safety-net programs and other forms of fiscal stimulus, China would not only help to build its consumer economy but it may give its citizen to invest in the stock market and that’s what the government is trying to do. China stock market may be down but “not out”. Hence, I still think that China is a good place to remain invested and accumulate the good companies, ETF and Mutual Funds. However, if I feel that it’s scary and does not worth the risk then I may certainly re-visit and cut my investment. If that happens, I may also provide an update on my shesagroup_invest googlegroups. At present, I would be careful in putting additional money. The situation could change very fast and we should be prepared to take quick action.

Please note that, down-turn in Chinese market could potentially provide some in-flow of funds to Indian stock market as investor’s rotate their investment to the fastest growing GDP emerging economy - INDIA.

Risk: As we know China market is highly volatile and that’s true for most of the emerging markets. It makes big swing up or down. I am not investing in China directly but through the ADR. So it needs caution on how much money to allocate from our portfolio. It all depends on each investor.

Is it time to buy GOLD related equity?

Gold and other commodities have been going through a rough phase since last couple of months. One of the primary reasons for gold prices coming down has been due to the strength of dollar. As we know, when dollar value goes up all commodities prices (gold, silver, oil; etc.) comes down as they become expensive for other currencies.

Why is U.S. dollar rising?

It’s because of unstable European economy resulting from Greece situation and Federal Reserve statement that it would raise interest rate later this year.  If you recall my January blog, I had mentioned to reduce my exposure to the commodity sector. However, I think now it’s time to re-think as I sense better opportunity now than before.  As we all know, the Federal Reserve has come off its historic monetary easing programs, the Bank of Japan, European Central Bank, People’s Bank of China are still pursuing them. China is in the process of easing monetary policy with many rate cuts. Those actions should cause higher and that may not be too far. However, we have not seen that inflation yet! The International Monetary Fund estimates that nearly every developed economy is on the verge of accelerating inflation. On Friday, China released data on its gold holdings for the first time in about six years. Its official gold reserves stood at 1,658 metric tons in June, less than what market expected. I believe that China has more gold reserve than what is projected. Please note that, China is undertaking economic reforms and    persuading the IMF to include Yuan as a reserve currency (like USD, Yen, Euro), anticipated to be announced by the end if this year. If that happens, U.S. Dollar value could come down as many countries trading in U.S dollar may start using Yuan. This may be good news for gold/silver and other commodities.

With all these phenomena, an investment in gold would have seemed to be a "no-brainer". Rather, gold price has come down to around $1,133 per ounce as I write this blog. It’s more than 5 years low. Hence it may be the time to give gold a fresh look. The fundamental drivers seem to be in place for long-term upside, and technical support could provide a near-term catalyst. The investor sentiment might already be returning to gold. First quarter of 2015 saw the first net purchase in gold exchange-traded funds since Q4 2012. The World Gold Council reports that ETFs added 26 tons of gold to storage after eight consecutive quarters of decline. The 2^nd quarter of the year has always earned better for gold. It also reported that global gold supply dropped 4% sequentially in the first quarter of 2015. The shares of gold mining companies are also selling at steep discounts. Indian gold demand would be seen around September after the monsoon season ends and flurry of weddings and festivals to follow. Gold is completely out of favor now but it may not be very far from bouncing back. I do see gold more as a trading strategy. I would try to keep it within 5-10% of the total portfolio value and may dispose some when market bounces back. There are still a lot of risks in the gold market. But the most uncertain periods often offer the biggest profit opportunities. Hence, this month I am changing all Gold and Silver equity from Hold to BUY.

Why I am still holding NUGT? NUGT has gone down almost 80% since I mentioned in my blog. It’s crazy idea to keep an equity falling so much.. No one wants to see such loss! I absolutely agree.. I am not trying to justify here why I am holding. However, I can at least tell my readers what I do:

·      I have been doing dollar cost averaging and accumulating it without going beyond my investment limit

·      I have hedged it with DUST and JDST

·      Buying some LEAPs

·      Taking Profit/loss to buy on further dip, if required.

Risk: If dollar keeps rising and the interest rate uncertainty remains then gold could come down further. I am neither trying to catch the falling knife nor trying to be extra smart. There are high risks, as no body knows how much bottom it could go.  However, if we keep long time horizon in mind and have patience then it may worth the risk! At the end, I may be wrong on my analysis, future is always uncertain. Each reader must do his/her own due diligence before taking any action. 

Keeping in view of above, this month I am adding a small cap gold miner stock in my July blog portfolio.

Eldorado Gold Corp. (NYSE: EGO): The Company is headquartered in Vancouver, Canada and it’s the largest foreign gold miner operating in China. This company is one of the lowest-cost producers in the industry costing around $780 per ounce as of 2014, comparing to an industry average of around $956 per ounce. Why is it able to produce so cheap? It focuses on less-developed regions in Greece, Brazil, Turkey and China. Currently, gold prices are around $1133 per ounce. EGO shares have been hit hard due to an adverse ruling by the Greece government regarding a mine that is supposed to start producing gold in 2017. However, looking to the current Greece situation the government may re-consider, as they need more employment and foreign investment. Even if it does not happen then also its shares trade for just 2.5 times the trailing sales compared to an average multiple of round 8.3 times over the last five years. Recently, the company has received the project permit approval for China Eastern Dragon project in the region where it can produce gold at a very nominal cost. Now let’s take a quick look at the fundamentals:

Current Stock Price: $3.40

Market Cap: $2.43 Billion

Revenue: $1.03 billion

Profit: loss of $7.8 million in Q1FY16

Earnings Per Share (EPS): $0.09

PE Ratio: 38.64  

Forward PE: 24.29 è PE is little expensive but PS is very reasonable

Price to Sales: 2.5

Institutional Holding: 73.9%

Return on Equity (ROE): 1.25%

Total Cash: 503.6 million

Risks: Eldorado carries increased geopolitical risks where it produces most of its gold. Gold prices are still going down. In addition, we are not sure how long it will take for the gold prices to recover. But keeping long-term trading/investment in mind it can be a good buy at current price. I would not put more than 2% on such volatile small cap stock.

Blog Portfolio

Note: It’s always better to keep taking profit when a stock goes up certain %age. I may not able to remove from my blog portfolio if I hold some position but I try to take profit/los whenever I feel the stock has gone up/down certain %age point.

Equity	Suggested Price (USD)	Current Price (USD)	Suggested Date	% Changes	My Opinion (see disclaimer)	Earning Date
STOCK
AAPL	56.12	129.62	1/25/13	131%	BUY	21-Jul
BIDU	86.43	198.44	4/18/13	130%	HOLD	27-Jul
GOGO	14	19.7	9/1/13	41%	BUY	3-Aug
SLW	22	13.69	10/1/13	-38%	BUY	11-Aug
FB	47	94.97	11/13/13	102%	HOLD	29-Jul
TSLA	135	274.66	11/13/13	103%	HOLD	N/A
AGNC	18.02	19.04	12/14/13	6%	BUY	27-Jul
MA	78.7	96.08	12/12/13	22%	BUY	29-Jul
NLY	9.52	9.78	2/2/14	3%	BUY	N/A
KO	37.33	41.25	3/9/14	11%	HOLD	22-Jul
AMZN	311.73	483.01	4/12/14	55%	HOLD	23-Jul
BAC	14.64	18.1	5/11/14	24%	BUY	Announced
BX	33.33	41.6	8/24/14	25%	HOLD	Announced
VIPS	22.68	21.68	11/23/14	-4%	BUY	N/A
GILD	102.21	118.26	1/11/15	16%	BUY	27-Jul
ALNY	89.1	136.55	2/6/15	53%	BUY	N/A
IBN	10.5	10.46	4/12/15	0%	BUY	N/A
CIM	15.9	14.19	4/12/15	-11%	HOLD	N/A
SFUN	9.95	7.53	6/14/15	-24%	BUY	N/A
EGO	3.4	3.4	7/17/15	0%	NEW BUY	30-Jul
ETF
GDX	27	15.42	4/1/13	-43%	BUY
NUGT	27.38	5.21	9/21/14	-81%	BUY (see my blog)
INDA	31.94	31.4	3/15/15	-2%	BUY
ASHR	36.66	43.46	3/15/15	19%	HOLD
USO	16.8	16.99	3/15/15	1%	HOLD
INCO	34.46	35.42	5/15/15	3%	BUY
MUTUAL FUND
FBIOX	124	295.41	3/1/13	138%	Accumulate
PRHSX	55.17	84.65	2/2/14	53%	Accumulate
FSCHX	141.21	141.99	4/12/14	1%	BUY
FSCRX	27.3	29.4	10/25/14	8%	BUY
GASFX	29.71	28.71	12/20/14	-3%	HOLD
PRMTX	63.52	73	12/20/14	15%	BUY
FHKCX	30.52	33.7	2/8/15	10%	Accumulate
MINDX	26.94	28.82	6/14/15	7%	BUY
** DIV are included in suggested Price after end of the year. Hence price is adjusted.

Company Updates

Bank of America (BAC): It reported a profit of $5.32 billion, or 45 cents a share, solidly beating estimates of 36 cents a share, up from a profit of $2.29 billion, or 19 cents a share, in the same period of 2014. Revenue also beat expectations coming in at $22.35 billion compared to analysts’ consensus of $21.32 billion, and up from $21.96 billion a year ago.

Blackstone (BX): It missed by $0.01, net income of $0.43 per share; revenues fell 46.3% year/year to $1.2 billion vs. $1.15 billion consensus estimate.

Major Economic Report next week (week 07/20/15)

Wednesday (7/22):            Existing home sales

Thursday (7/23):                Weekly jobless claims

Friday (7/24):                      New home sales

Also you can go to the following URL for more updates:

http://www.marketwatch.com/Economy-Politics/Calendars/Economic

Source: Marketwatch.com

That’s all for today. Wish you good investing! Stay tuned for my AUGUST 2015 blog. Thanks for your time. If you want to get alert on my action then please subscribe to shesagroup_invest@googlegroups.com. Please feel free to send me your comments and suggestions or alert request to shesa.nayak@gmail.com

Disclaimer: This blog is meant to provide my personal opinion rather than professional recommendation to buy/sell any stock, ETF, mutual fund or any other security(s). As an investor, it’s your hard earned money and you decide what is best for you. The above are merely my own opinions. Please contact a professional money manager to buy/sell any security. I do not earn any commission by writing the blog. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow.

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