Shesa's FEBRUARY 2018 INVESTMENT BLOG

                  Feb 11, 2018

FEB 2018 INVESTMENT BLOG

Shesa Nayak

U.S. Stock Market Commentary: As the month of February started there is tremor in the stock market. The question being asked is “What the hell is happening to the stock market?”. It has been on a roller coaster since 2^nd February. The smooth sailing that investors experienced over the past few years ended abruptly over the past week. As we know, everything was going on smooth sailing till the end of January and then the market suddenly took a U-turn. It scared the investor because they think inflation will pick up and “Fed will increase interest more quickly than anticipated, triggering market sell-off never seen since 2008”. It was shocking because nobody anticipated the stock market making a sudden reversal - lack of volatility to unbelievably rocky ride.

All other stock market across the world followed the same path of U.S stock market. Since January 2017, stock market was going up and up without any major down-turn. It was easy ride for the investors and possibly many of them were not used to such roller coaster volatility. During 2017, DOW went up almost 5000 points followed by another 1430 points in January 2018. So, all in all, it went up about 6430 points in 13 months. That was simply incredible! Now there is blood bath on the street days after days. Nobody knows what is going to happen after a day or even in an hour. This has created chaos across the global market. But the question comes in mind is, why did the sell-off happen? What lies ahead? Is it time to deploy more cash or remain on the sideline? We can discuss all these but before that let’s see the stock market roller coaster index.

U.S STOCK MARKET INDEX

	2018
Indexes	1/2/18	Friday Close (2/9/18	Change this Year	% Change in 2018
DOW Jones	24,719.22	24,190.90	-528.32	-2.14
S&P 500	2,673.61	2,619.55	-54.06	-2.02
NASDAQ	6,903.39	6,874.49	-28.90	-0.42
BTK (Biotech)	4,222.21	4,424.38	202.17	4.79
NBI	3,356.61	3,325.72	-30.89	-0.92

Update on Interest Rate 

The Fed meeting on January 31^st was the last meeting of previous fed chairwomen Janet Yellen. The interest rate was left unchanged in the range of 1.25-1.50%. Fed also said that the inflation will remain around 2%. Now, the market is anticipating next interest rate increase in March. As you may be aware Jerome Powell has taken over as new Fed Chairman.

Economy news:

The U.S government officially shut down a couple of times failing to pass the spending bill, but it ended early on Friday after Congress passed a funding bill that will keep the government open through March 23. Looks like this government is going like bi-weekly payroll processing:):. Let’s hope that next time they get approved for whole year.

For more U.S. Economic news and data please look at here: http://www.marketwatch.com/economy-politics/calendars/economic   

Source: Marketwatch.com

Q4 Earnings (S&P 500)

For Q4 2017, about 70% of the companies in the S&P 500 reported results for the quarter, 74% of those have reported positive EPS surprises and 79% have reported positive sales surprises.

Earnings growth: Earnings came 14.0% more against projected 11% for the quarter.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.3. This P/E ratio is above the 5-year average (16.0) and above the 10-year average (14.3).

Why Stock market plummeted?

• Unemployment came down to 4.1% which is 17 years low.
• Nonfarm payroll employment rose by 200,000 in January vs. projected 180,000.
• For private sector employees the average hourly earnings were up 2.9% in January year-over-year, the biggest increase in 8.5 years. It can be noted that wages were stagnant for more than a decade in many sectors.
• 10-year Treasury note hit 2.85% on Friday which was around 2% in September.
• All the above good news became bad news as it scared the investors that there will be more inflation and Fed will increase interest rate more quickly than anticipated, triggering the market sell of never seen since 2008.

Here is how the market performed since the beginning of Feb’18:

DATE	DOW	S&P 500	NASDAQ
9-Feb-18	330.44	38.55	97.33
8-Feb-18	-1,032.89	-100.66	-274.82
7-Feb-18	-19.42	-13.48	-63.90
6-Feb-18	567.02	46.20	148.35
5-Feb-18	-1,175.21	-113.19	-273.42
2-Feb-18	-665.75	-59.85	-144.91
1-Feb-18	37.32	-1.83	-25.62
TOTAL Points	-1,958.49	-204.26	-536.99
% age from  52 week High	-7.36%	-7.11%	-7.15%

You can see the volatility of the market on the above table. In my view, the big tech companies completed reporting their earnings on Thursday, 1^st February. After that, there was no major market catalyst ahead which opened the door for money managers and financial institutions to take profit. It also triggered stop losses resulting in more sell. If the economy is not good that’s a genuine reason but I do not think that's the case. Why do I think so? I will tell you in a minute. But I think this could also be a move to scare small investors and then the big fishes can buy it cheaper. I may be wrong but that’s my perspective.

Why there is so much Volatility in the stock market?

The volatility is mainly caused by high-frequency trading (HFT). It’s a type of algorithmic trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools using the computer systems. For example, on Monday, 2/5 the market dropped 800 points in just 10 minutes! Such wild fluctuation is beyond human control. HFT has been there since last few years but surprisingly these seem to me like a calculated move by the big financial institutions. The other day, I watched a program where the owner of a software firm was explaining how they develop the algorithm to benefit their institutional clients.

To take care of extreme market volatility Circuit breaker was instituted after the market crash of Oct 19, 1987. In the event of panic selling, the Stock exchanges halt trading for certain period of time to ease the situation. These moves are called market circuit breakers. The circuit breakers kicks-in when the index drops 7% - Level 1, 13%- Level 2, and 20% - Level 3 from the prior day's close. In such cases the stock or commodities exchange stop trading temporarily to smoothing the fear and uncertainty.

Is market correction a bad thing? I don’t think so. Some corrections are good for healthy stock market for long run. It never goes up on a straight line. In fact, we did not see any meaningful volatility for a long time. Last year was a great year and almost every investor made money. If there were significant gain, it’s OK to give back little bit. People my say “man, I made so much of money but now I am losing..”. I know losing money does not feel good but don’t to get too emotional about the market. We are all on the same boat. Whoever was invested in the market lost some money in the whole process. So, you are not alone. The only difference is that some investors could lose more than others depending on their portfolio allocation.

But if we think just about the positives, such correction provides a great opportunity to buy good equities at decent price. It’s healthier for the stock market in long term. If you had taken some profit and accumulated some cash, this is the time to gradually and slowly start deploying those in a phased manner. Hence, taking profit is of paramount importance as nobody knows when such correction will take place. In case of a correction, usually it takes about few weeks to months to recover. But in case of recession, it may take several months or even years to recover. But what is concerning about this correction? I can say that the market volatility was extreme which was never seen before. The high frequency trading is nothing new. But this time it caught many people unaware because lot of traders/investors were too much complacent since the stock market was just going up and up. Somehow, my feeling is that it was a coordinated effort by many big financial institutions. Otherwise, how come it started all of a sudden, a day after when all the big tech companies like AAPL, GOOG, MSFT, AMZN and FB reported their earnings! Anyway, what so ever it may be, we have no control and there is no reason trying to find out the root cause. Rather, we have to get acclimatized to such situations.

What to expect going forward?

With so much of volatility in the stock market what can we expect in the days, weeks or months to come? Frankly, it’s impossible to predict such market. Nobody knows what will happen in next hour, forget about days or months. If I predict, I am a fool. Last Friday, the S&P 500 broke 200 days moving average. After a sell-off like this, it typically takes anywhere from a few weeks to a few months for bull market to get back into a solid uptrend. So, let’s not expect an immediate bounce in the market. If it bounces back immediately then we can think it as a bonus. Under the current market environment, any unexpected thing can be expected. One should keep looking for new opportunities. 
Bargains exist and will always exist, but for those investors with insight, courage and cash to take advantage of them. Do you think that the economy took a U-turn all of a sudden? No, absolutely not! Economy is in a stronger foot now. Why do I say that? Let’s see.

Employment growth: January 2018 was the 88th consecutive month of job creation, the longest streak of continuous hiring on record. So, is higher employment a bad thing? Absolutely notJ. More the employment it’s much better for an economy.

Wages: The average hourly earnings for all private sector workers in January were up 2.9%. It was the biggest jump in wages in eight years, is this good news or bad? Tell me one person who do not want to see his pay increase?

Economic growth: It’s so strong that the Fed may have to raise rates sooner than later, is this good news or bad? Does anyone think that stronger economy is bad?

Earnings: Almost 70% of the companies have reported their earning and most of them have reported better growth in their top and bottom line. Is that bad? NO.

Tax cut: Higher tax cut for corporation, down from 35% to 21% is that bad? As I said in my January blog, this will result in increased dividends, share buyback, mergers and acquisitions, more employment, better salary. Are these bad? Absolutely not in my view.

So, from economy perspective nothing really has changed, and we are in a strong economy environment. However, the good news became bad news for the market because market has gone up significantly in last few years. In a saturated bull market, good news becomes bad news. Since January 2017, DOW has gone up almost 6400 points, about 37%. That’s an incredible run! As a matter of fact, investors are/were looking for opportunity to cash in.

To conclude, the fear of wall street is increase in interest rate. For a moment, let’s assume that Fed will increase interest rate 4 times rather than anticipated 3 times. So, is the earth falling if they increasing additional 0.25% or 25 cents?? Absolutely not. Hence in my view, the economy is strong and ultimately market will realign again. But it’s just a matter of time when. I may be wrong but personally I would like to gradually and slowly deploy the cash on those equities which are in my shopping list. But nobody knows how much down the market will go before recovering. Hence, it’s better to have plan B. Never forget to take profit because you never know what is going to happen in next day or even next hour! One should not catch the falling knife but coincidentally I prefer to keep accumulating stock which I think are good and can recover fast. One should not forget to hedge the portfolio in order to protect from heavy loss. Every investor should evaluate their own situation and determine what is best for them. It all depends on the risk they want to take, available cash, time horizon and so on. 

This month’s Blog Portfolio

OK, now it’s time to discuss about this month’s inclusion to my blog portfolio. Before I write specifically about the ETF let me through some light on why I am including this Chinese ETF. As we know China is one of the emerging economy and 2^nd largest economy in the world. Currently, it’s undergoing the same massive transition which U.S. went through during the Internet boom during late 1990’s.

U.S. now has a population of 326 million and 88.5% of those have Internet usage. In contrast, China’s Internet population passed 730 million which is more than double of entire U.S population. However, at this time only half of China’s 1.3 billion people have Internet access. Just to keep things in perspective, 43 million new Chinese Internet users got online in 2016. That’s amazing! As a matter of fact, there is humongous user growth expected in the foreseeable future. With the ever-increasing usage of smart phone, more and more people are having Internet access which can bring explosive growth for online shopping, job search, dating, travel booking and so on.  China’s biggest online shopping day, so called 11.11 Shopping Festival is four times bigger than Black Friday Sale in U.S.

The analysts anticipate that e-commerce revenue to grow by a compound annual growth rate of 30% a year for next several years. So, there is enormous opportunity for investment in the Internet sector as the user growth, Internet adoption and access continue to explode. It’s estimated that by 2022, there will be 600 million Chinese online consumers. That’s twice of the entire U.S. population. In order to take that opportunity, I am including one excellent ETF this month.

KraneShares CSI China Internet ETF (KWEB)

KWEB is a capitalization-weighted, non-leveraged, passively managed equity ETF with the benchmark index of CSI Overseas China Internet Index. The ETF's objective is China with a focus on Technology Sector, Multi Cap companies. This is an ETF and traded in U.S stock exchanges. The most important and exciting thing about this ETF is that it has all the great Chinese technology companies in its holding. There are situations when it’s difficult to determine which company will do well and what is the risk involved. As a matter of fact, one can include this ETF in the portfolio to take advantage of the growing Chinese economy without taking major risk. It’s not only that it has great companies in its holdings, the performance of this ETF is nothing less than spectacular. So, let’s take a look of its holdings and performances.

Net Asset: $1.43 Billion.

Expense Ratio: 0.72%.

Top 10 Holdings of KWEB as of 2/7/18:

Stock Symbol	Company	% of Holding
Tencent	Tencent Holding	10.08
BABA	Alibaba	9.12
BIDU	Bidu Inc.	7.39
JD	JD.com	6.13
NTES	NetEase Inc.	5.79
VIPS	Vipshop	5.16
WB	Weibo Corp	4.32
ATHM	Autohome Inc.	4.15
MOMO	MOMO Inc.	4.11

Performances:

	YTD	1 Year	3 Year	Life
KWEB	2.45%	74.24%	26.70%	24.87%

Currently, the ETF is trading at $58.52. It has a 52-weeks high of 68.39, meaning 15% discount to its 52-weeks high. Now that the market has come down, I think it’s a good opportunity to add it to the portfolio. Nobody knows how far market will go down, hence my principle is to gradually keep adding the equity to my portfolio in a phased manner. I have already bought some and keep accumulating with further correction. When the market bounces back it can substantially outperform the market.

Risk & Opportunity: In order to take the opportunity of growing economy and exciting growth in China, this is one of the best ETF which embodies all big tech Internet giants. I do see great opportunity for long term investors. In case the stock market tanks further or Chinese stock goes down due to any unforeseen reason then obviously this ETF may also go down. But for long term investors I see it as a great opportunity.

Shesa’s Blog Portfolio (As of 2/11/18)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View (see disclaimer)
STOCK ( All prices are in USD)
AAPL	51.63	156.41	1/25/13	203%	BUY
BIDU	86.43	215.67	4/18/13	150%	BUY around 200.
FB	47	176.11	11/13/13	275%	BUY
TSLA	135	310.42	11/13/13	130%	HOLD
MA	77.18	165.2	12/12/13	114%	BUY on dip
AMZN	311.73	1339.6	4/12/14	330%	BUY on dip
MO	50.05	64.03	9/13/15	28%	HOLD
BABA	67.28	176.64	2/21/16	163%	BUY
JD	23.45	42.93	5/22/16	83%	BUY
XON	26.37	12.37	7/4/16	-53%	HOLD
LUV	36.89	55.5	9/5/16	50%	HOLD
RIO	36.41	53.72	12/18/16	48%	BUY on dip
PVH	92.82	144.09	1/22/17	55%	HOLD
JUNO	23.13	87	2/19/17	276%	Bought by CELG @$87 on 1/22/18.
EXEL	26.33	28.21	8/20/17	7%	BUY
GBTC	7.71	12.52	10/21/17	62%	SOLD (1:91 split)
MOMO	32.14	27.65	11/25/17	-14%	BUY on dip
CELG	104.36	92.51	1/1/18	-11%	BUY
ETF
GDX	26.88	21.68	4/1/13	-19%	HOLD
INDA	31.94	35.36	3/15/15	11%	HOLD
INCO	34.46	46.69	5/15/15	35%	Accumulate
IHF	139.1	158.15	8/16/15	14%	Buy on dip.
XLY	77.76	100.83	8/16/15	30%	Buy on dip.
EEM	32.3	46.43	11/15/15	44%	Accumulate
IYG	112.03	131	3/19/16	17%	Buy on dip.
EMQQ	32.65	37.14	5/21/17	14%	Buy on dip.
KWEB	58.52	58.52	2/11/18	0%	BUY - NEW ADD
MUTUAL FUND (Dividends for 2017 Adjusted to buy price)
FBIOX	114.64	224.4	3/1/13	96%	Accumulate
PRHSX *	47.25	70.39	2/2/14	49%	BUY
FSCHX *	120.74	170.34	4/12/14	41%	Accumulate
FSCRX *	24.3	28.86	10/25/14	19%	HOLD
GASFX *	28.04	29.06	12/20/14	4%	SOLD at 34.72
PRMTX *	59.45	97.58	12/20/14	64%	Accumulate
MINDX *	26	33.45	6/14/15	29%	Accumulate
MCDFX *	12.37	17.13	12/9/15	38%	Accumulate
FSRPX *	90.53	137.65	1/15/16	52%	Accumulate
FBSOX *	37.32	55.64	3/20/16	49%	Accumulate
FSMEX	43.66	43.91	9/24/17	1%	Accumulate
* Indicates dividend adjusted

Positions closed in 2017:

Equity	Sales Price	Buy Price	Date Sold	Gain / Loss (%)
GASFX	29.06	28.04	9-Jan	4%
GBTC	12.52	7.71	2-Feb	62%

That’s all for today. Wish you great investing! Stay tuned for my MARCH 2018 blog. Thanks for your time. If you want to get alert on my action, then please subscribe to shesagroup_invest@googlegroups.com. Also, feel free to send me your comments and suggestions or alert request to shesa.nayak@gmail.com. You can also join my WhatsApp group, if interested.

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do not provide any 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 and some of the information provided may not be accurate. 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. Anybody buying or selling the equities mentioned here would do it on their own risk.

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