Shesa's AUGUST 2018 INVESTMENT BLOG

AUGUST 2018 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update: Q2 earnings season will be concluded in next couple of weeks. Corporate earnings have been nothing less than spectacular. Thus far, 91% of the S&P 500 companies have reported their earnings. Out of which, 79% companies reported positive earnings surprise and 72% companies have reported positive sales surprises. The U.S. Economy remains strong. Second quarter U.S GDP grew 4.1%, a fastest pace in four years. A few weeks ago, president Trump said, “We are on track to hit the highest annual growth rate in over 13 years”. Time will tell whether we are on tack or not! But Trade war continues and will continue for a foreseeable future. President Trump has recently threatened to impose a new round of tariff on $200 billions of Chinese products unless China changes its intellectual property practices. Obviously, China may try to defend its pride and retaliate by imposing new tariffs. The months of August and September are notoriously unpredictable for equity markets. As a matter of fact, one question comes in mind, “will the February volatility repeat again?”. Apparently, I am not a fortune teller to predict the future, but I will do my due diligence to analyze in my blog. Before I do that, let’s take a quick glance to the U.S stock market major indexes.

	2018
Indexes	Jan 2, 2018	Friday Close (8/10/18)	Change in 2018	% Change in 2018	All Time High
DOW Jones	24,719.22	25,313.14	593.92	2.40	26,616.71
S&P 500	2,673.61	2,833.28	159.67	5.97	2,872.87
NASDAQ	6,903.39	7,839.11	935.72	13.55	7,933.31
BTK (Biotech)	4,222.21	5,132.76	910.55	21.57	5203.13
NBI	3,356.61	3,677.63	321.02	9.56	4165.86

Next Investment Meet

Our next investment meet is planned for Saturday, August 25 in Fremont, California. Those who are in the Bay Area can plan to attend. We will discuss current economic situation, market conditions, what can we expect in the stock market, discussions on some equities, Questions and Answers.

Q2 Earnings update (S&P 500)

Earnings and Sales: As stated above, 91% of the companies have reported earnings so far, 79% companies reported positive earnings surprises and 72% have reported positive sales surprises.

Earnings Growth: S&P 500 recorded an earnings growth of 24.6%. It would be the second highest earnings growth since Q3 of 2010 which was 34.1%. 

Valuations: The forward 12-month P/E ratio for the S&P 500 is 16.6, which is above the 5-year average of 16.2 and 10-year average of 14.4.

Some important Economy News

Interest Rate - will Fed raise rate in September?

Based on Fed fund futures trading, there is 91% probability that Fed will increase rate in September during FOMC meet on September 25-26. Current Fed rate stands at 2%. If rate is hiked it could go to 2.25%. However. I am not very convinced with the consensus visualizing very soft housing data released earlier. Last month Commerce Department announced that housing starts plunged 12.3% in June. This was the biggest percentage monthly drop in housing starts since November 2016. Housing starts are now running at the lowest level in nine months and building permits have declined for three straight months. Since the housing market is such a key driver to domestic economic growth, this latest reading on housing could possibly give the Fed reason to pause on a September rate hike. Current inflation rate is just 2.9% so that’s not a concern for the Fed. I may provide further update in my next month’s blog.

China loses status as world's second largest stock market: As the trade war between U.S and China continues; China stock market has been going down-hill. Based on Financial Times data as of 2 August, U.S stock market was valued at $31 trillion, Japan $6.16 trillion and Chinese stock market was valued $6.09 trillion. It can be noted that Chinese stock market is down 15.48% so far this year.

Tesla could go private: On Tuesday, 7 August Tesla CEO Elon Musk said on Twitter that he was hoping to privatize the company at $420 a share. If that happens, Tesla’s value would be about $71 billion with $420 a share. Based on the CNBC news, Saudi Arbia’s Public Investment Fund (PIF) who was supposed to finance said it’s it was not getting involved in any funding process. Anyway, let’s wait and see whether it materializes.

Apple became the first U.S Company to reach $1 Trillion-dollar market capitalizing

On August 2, Apple hit a market cap of $1 trillion just a day after announcing its quarterly result. The only other company who reached this status was Chinese Oil and gas company “PetroChina”, which reached one trillion-dollar market cap in 2007 but fortune did not favor long as oil prices collapsed. It can be noted that Amazon is also getting closer to this milestone with market cap of $920 billion till last Friday. I am hoping it could happen sooner than later.

Healthcare Cost

As we all know, healthcare costs are rising rapidly despite many promises by the governments (democrats and republicans), the costs are shooting up.  For example, in 1960, the average person spent $146 per year on healthcare. Today that number is more than $10,000. Even if we adjust inflation then also the cost has gone up about 900%.

Major Stock Market Performances across the world

Dow Jones	2.40%
S&P 500	5.97%
NASDAQ	13.55%
China Shanghai Index	-15.48%
India BSE Sensex	11.19%
Japan Nikki	-2.05%
Hongkong Hang Seng	-5.19%
Germany: DAX	-3.82%
UK: FTSE 100	-0.27%

Sectorial Performances (1 month, 3 month, Year to date)

SECTOR	Performance			Price per Earnings	Price to Sales	Dividend Yield
	1 Month	3 Month	YTD
Consumer Discretionary	+0.35%	+7.26%	+12.16%	16.5x	1.0x	1.27%
Consumer Staples	+0.79%	+7.35%	-6.23%	15.1x	1.0x	2.86%
Energy	-3.38%	-1.83%	+4.56%	14.0x	1.2x	1.74%
Financials	+2.27%	-0.75%	+0.74%	15.2x	2.1x	1.91%
Health Care	+2.59%	+9.71%	+10.30%	18.2x	1.2x	1.86%
Industrials	+1.85%	+1.79%	-0.09%	15.7x	1.1x	1.85%
Information Technology	+1.72%	+4.58%	+16.54%	14.8x	2.1x	0.90%
Materials	-1.64%	-0.48%	-2.81%	13.2x	1.1x	1.79%
Telecommunication Services	+1.19%	+6.70%	-7.04%	22.6x	1.3x	4.83%
Utilities	+1.55%	+5.22%	+1.21%	17.1x	1.3x	3.78%

Source: Bloomberg.com

Will stock market Volatility return after Q2 earnings?

Q2 earnings are nearing completion. Most of the companies have reported their earnings. NASDAQ has hit new all-time highs in the past few weeks. S&P 500 is almost at 52-week high. But the trade war continues and president Trump keeps talking about fair trade. But China has no interest in talking about fair trade with the U.S, at least not in a foreseeable future. As per the latest reports, U.S. and China trade officials have taken a pause on further negotiations, having hit a deadlock. The Chinese central bank is being charged with manipulating the yuan lower in order to mitigate the impact of tariffs. Since May 2018, U.S. dollar has been going up and it reached a new 52-week high against some major currencies. Strength in dollar is impacting crude oil, copper, gold, and other commodities. It can be noted that, I do not hold any gold stock at this point of time.

President Trump has recently threatened to impose a new round of charges on $200 billions of Chinese products, unless China agrees to change its intellectual property practices and high-tech industrial subsidy plans. The list comes after warnings by Trump that he may implement tariffs on at least $500 billion, which is very close all the export from China to U.S. Trade war could impose new tariffs that exceed $700 billion but if we consider global economy of $80 trillion then it’s less than 1%, which is very negligible. So economically speaking, that’s really nothing. However, what it could do is slowdown the manufacturing in different segments where tariffs are being imposed. This may impact many companies and result in lower profitability, less Capital expenditure, lay-offs etc. This in turn could dampen investors sentiment. Economy do not change overnight but as we have seen the stock market could get wildly volatile and create panic in the investment community forcing them to sell stocks. Ultimately it may bring market correction. In addition, August and September are not very investors friendly period, so the money managers and institutional investor can get the opportunity to scare individual investors like us. Investors may get concerned over the implementation of the next round of tariffs which is expected to kick-off early September. There is also FOMC (Fed) meeting scheduled for September 25-26, bond traders are predicting with 91% probability that the Fed will raise interest rates. This may cause market volatility, particularly in September.

Furthermore, many traders in U.S and Europe goes on vacation during summer resulting into thin trade in the market. It creates more volatility in the market particularly when there is no major market catalyst. And now that trade war is a subject of discussion, I anticipate that the institutional investors and money managers may scare the individual investors and create panic. August and September being the weakest months in the stock market does not necessarily mean that correction will take place every year. But what I want to emphasize is that, there is higher probability that it could happen. So, it’s better to be prepared. Under such circumstances what should be the strategy?

• It may be judicious to trim a little bit from current portfolio and have some cash reserve before volatility starts, in order to capitalize on any eventualities. Taking some profit is always helpful.
• One should not get panicked and sell stocks arbitrarily, rather think and act diligently.
• Knowing the reason of sell-off is very important. Is it because of sectorial rotation, economic data, global events or any other reason? The decision has to be made based on the root cause of the event. If it’s weakness in the individual stock, then re-evaluate about its prospect, take profit/loss and redeploy the cash.
• Review the portfolio holdings and eliminate the losers. It’s always better to put the money with other equity where better ROI is expected. Never get emotional about a stock. Selling a stock of a company does not mean that we divorced the company, it can always be bought later with better price.
• Have a strategy: Just because a stock came down one should not buy/sell without evaluating the facts. It could give us the opportunity to accumulate at a lower price or take loss and get out rather than hanging in hoping that it may recover someday.
• If there is any correction, it may give opportunity to buy some superior stock with better potential as I expect to see some rally towards the end of the year. Please remember that economy is still in great shape.
• Since dollar is rising it’s better to invest selectively in health care, small cap/small-medium companies since they do not have too much exposure from income abroad.

Why is U.S stock market still going strong?

I can summarize in three words “Strong U.S. Economy”. Let’s discuss:

Wages: Since the great Recession of 2007-08 there were not many changes in the wages. However, the scenario is finally changing now. According to the Department of Labor, average hourly earnings increased 2.7% in June from a year earlier. And wages have risen around 2.5% for 16 of the past 17 months. Obviously, higher wages give consumers more purchasing power and willingness to spend money. That's a good thing since consumer spending represents roughly 70% of U.S economy.  But higher wages generally result in higher inflation, though I am not too concerned because inflation is just 2.9% at present.

Retail sales were up in May, June and July. U.S. retail sales recorded their biggest increase in seven months in July as consumers boosted their purchases. According to the U.S. Commerce Department, retail sales were up 0.6% for July 2018. That means retail sales were up more than 6.6% year over year.

Q2 GDP growth fastest in 4 years: U.S. GDP grew at a solid pace of 4.1%. This is the best pace that we have seen since Q3 2014, when GDP grew @4.9%. Just reminding the readers that this is the third-best growth rate since the Great Recession of 2008-09. Thanks to Donald Trump for his tax cuts, budget increase and federal spending. Tax reform has increased business spending and more importantly consumer spending which accounts for 70% of U.S GDP. All these have contributed to great GDP growth. Moreover, it’s anticipated that GDP growth could average 3.3% during the 2^nd half of 2018. But the trade war and weaker global economy may play a role next year and gradually slow the economy to below 2.5% by the end of 2019.

Corporate profits are still strong in Q2. Almost 90% of the S&P 500 companies have reported earnings so far. Out of which, 79% companies reported positive earnings surprises and 72% companies have reported positive sales surprises. Particularly technology and consumer discretionary sector have been doing very well. Please note that, some of the earnings surprise could be attributed to shares buy back due to tax cuts. Now let’s take a quick look at the profit and sales growth for S&P 500 companies.

	Profit Growth	Sales Growth
Q1 2018	22.2%	8.6%
Q2 2018	24.6%	9.9%
Q3 2018 (projected)	29.4%	13.5%

Shares Buy back: Due to corporate tax reform, companies are buying their shares at a rapid pace. It’s estimated that U.S corporations have $2.1 Trillion dollar of cash reserve and this year they have bought shares of their own companies worth about $450 billion, twice the pace of last year.

Unemployment rate which hit a high of 10% in 2009 has now fallen to just 3.9% in July 2018. American companies are hiring their quickest in nearly two decades.

Export & Import: The exports reflected a 9.3% gain in shipments abroad and a 0.5% increase in imports. Government spending increased at 2.1%.

Housing Market: Currently this is one of the weak points in the economy. Residential investment fell to a 1.1% rate, the fourth decline in five quarters. However, I do feel that some consolidation is required in the housing market as prices have sky rocketed in most of the states since 2012, particularly in San Francisco Bay Area. Real estate prices have gone astronomically high and certainly need some consolidation for better future growth. Many friends keep asking me whether it is right time to invest in real estate in Bay Area. Keeping in view of the escalating prices, I am apprehensive investing in real estate at this time. Well, if somebody is looking for a home to stay for long term then any time is good time in Bay Area. But I am not in favor of ‘investing” at the current price.

To conclude, we may see stronger growth going forward, but the stock market may take a little breather for next month or two. 

Now let’s discuss about a small biotech stock that I have included in my blog portfolio this month, which I believe to have tremendous future potential.

Geron Corporation (GERN)

A couple of months ago, I pinged in my WhatsApp group about Geron. But obviously it was not part of my blog portfolio. I waited for the right time to come. I did the same when people were asking me about Amazon. I guess the time has come to include Geron in my blog portfolio.

Geron is focused on developing first-in-class therapies for the treatment of cancer. The company has collaboration agreement with Janssen (the pharmaceutical wing of Johnson and Johnson). Geron has a drug known as “Imetelstat” for hematologic myeloid malignancies.  Based on their agreement, Janssen is responsible for the development, manufacturing, seeking regulatory approval and commercialization of imetelstat worldwide. Janssen is conducting two clinical trials of life-threatening blood cancers known as advanced myelofibrosis MF (IMbark), and myelodysplastic syndromes, or MDS (IMerge). The MF drug is in Phase 2 trial and MDS drug is in a Phase 2/3 trial. Just to give little more insight, Myelofibrosis (MF) is a rare form of blood cancer in which extensive scarring in the bone marrow disrupts the normal production of blood cells, while MDS is the most common form of blood cancer in which bone marrow cells become abnormal or malignant, affecting blood cell production. The Development costs for these drugs are being shared between GERN and Janssen on a 50-50 basis. These drugs are anticipated to be at the fore of cancer research with many pre-clinical’s going on. In addition, there is another drug for Acute myeloid leukemia (AML) which was halted last year but there is a possibility that it could start again by Janssen. There were some rumors that Janssen has filled numerous patients for this trial.

Drug Trials: So far, the results seem to be very encouraging from the following aspects:

The data from IMbark's (MF) primary analysis with 170 patients were available to Janssen in late April this year. It’s already August and I assume it should not take more than one quarter to analyze the data in this computer age! I do feel that if the results were not good, then Janssen would have walked away by now. For iMerge (MDS), Janssen enrolled patients 5 months ago and this second trial has also never been halted. Recently it also enrolled additional 25 patients, which I believe is a positive sign.

Continuation Decision

Geron stock is hanging around whether Janssen will continue the partnership or abandon Geron. The deadline for Janssen to decide is believed to be next month, if I am not mistaken it’s September 30, 2018. Hence the announcement could to take place any day now. I assume that JnJ would like to delay as much as possible to collect more data before announcing Go/noGo decision about partnership with Geron. This decision is of immense significance for Geron’s stock movement north (up) or south (down). In my view, a continuation decision is very likely. Based on Janssen’s website they consider imetelstat to be a core part of its pipeline. The trial data so far is promising. It could generate billions of dollars in revenue, if it succeeds. Not to mention that, Europeans seems to be waiting on IMerge to fill a big Unmet need in MDS.

Financial updates: At the end of June, the Geron had a cash balance of $181 million. During Q2 conference call Geron CFO confirmed that they do not expect to raise any additional capital prior to Janssen's decision. I consider it as a positive sign, cause as a shareholder I would not like additional dilution at this point. Geron do NOT have any debt.

Risks:

As I have stated in my blogs, biotech stocks, particularly small biotech companies are speculative. There is not much financial information available to analyze. We can assess based on their drug potential and pipelines. As far as Geron is concerned, we may not know much about the trials before 9/30. Hence, there could be many speculations and obviously short-seller would try to manipulate the stock. Please note that, almost 41% of Geron stocks are shorted right now, based on yahoo finance. Do the short selles know something that we don’t know? Possible. But personally, I am not panicked with so much short position rather I visualize it as a buying opportunity.

Evidently, it’s NOT a done deal until deal is materialized. At this point it’s just a speculation and prediction about what may/may not happen. There may be circumstances under which it could be delayed, for example an unexpected FDA suspension of a clinical trial. But such things could happen to any biotech company so GERN is no exception.

What happens if the continuation decision goes positive or negative?

If negative: Janssen walks away from Partnership. In that case, GERN will get the drug back and all the patents and rights filed by JnJ will come back to Geron. It could potentially delay the process of going into phase 3 MDS for about 6 months. Janssen would also be obligated to assist Geron for 1 year with all ongoing trials. But GERN stock may take a huge dive and it could fall even 60—70%.

If Positive:

Geron will receive an upfront payment of $65 million from Janssen (JnJ). Geron could get another hundreds of millions of dollars in additional milestone payments. If successful, Geron can get up to $900 million in development, regulatory and commercial milestone payments form JnJ. In addition, it could get royalties on sales which are not accounted above and that could be very significant.

My final thoughts: For last few weeks Geron stock has been hovering between $3.20 - $4. As I always say, biotech stocks are highly volatile and speculative. There are significant risks associated with the stock in case of a failure. The assessment and research could possibly go wrong. Having said that, why am I am still buying? Apparently, I have done my due diligence and extensive research. As a matter of fact, I am comfortable in taking calculated risk. Currently the stock is trading at $3.77. I have been accumulating this stock since it was around $2.50 and continue to do so. Before 30^th September, we would know the outcome and valuation where it goes! There is a risk that the stock could come down to $1 level, coincidentally if it goes well, I believe the upside could be very significant. It could go up 100, 200 or 300% from here as we can see flood of short coverings. But it’s just a speculation at this time. One has to be diligent in taking risk rather than being blindfolded. Risk averse investors should stay away. For me, I strongly feel that it’s worth considering a small %age of my portfolio in this stock. Only time will tell where it goes.. It’s a calculated risk and I believe some risk and patience is warranted sometime. Rest, I have to wait and see as time recons…

Note: As the readers know, I do not recommend to buy/sell any stock. These are purely my own opinions.

Shesa’s Blog Portfolio (As of August 12, 2018)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	207.53	1/25/13	302%	BUY on dip
BIDU	86.43	220.1	4/18/13	155%	HOLD
FB	47	180.26	11/13/13	284%	BUY on dip
TSLA	135	355.49	11/13/13	163%	HOLD
MA	77.18	202.65	12/12/13	163%	BUY on dip
AMZN	311.73	1886.3	4/12/14	505%	BUY on dip
BABA	67.28	180.01	2/21/16	168%	BUY on dip
JD	23.45	35.79	5/22/16	53%	HOLD
XON	26.37	15.05	7/4/16	-43%	BUY on dip
RIO	36.41	49.53	12/18/16	36%	HOLD
PVH	92.82	153.74	1/22/17	66%	HOLD
EXEL	26.33	20.4	8/20/17	-23%	BUY
MOMO	32.14	42.28	11/25/17	32%	BUY on dip
BRK-B	206.96	206.63	3/18/18	0%	HOLD
NVDA	228.71	254.79	4/22/18	11%	BUY on dip
EDIT	36.53	29.64	5/28/18	-19%	BUY
JKS	14.04	15.84	7/4/18	13%	BUY
GERN	3.77	3.77	8/12/18	0%	NEW ADDITION
ETF
INDA	31.94	35.29	3/15/15	10%	HOLD
INCO	34.46	47	5/15/15	36%	Accumulate
IHF	139.1	189	8/16/15	36%	BUY on dip
XLY	77.76	112.72	8/16/15	45%	HOLD
EEM	32.3	43.19	11/15/15	34%	Accumulate
IYG	112.03	135.43	3/19/16	21%	HOLD
EMQQ	32.65	34.23	5/21/17	5%	HOLD
KWEB	58.52	53.19	2/11/18	-9%	HOLD (Trimmed)
MUTUAL FUND
FBIOX	11.46	23.29	3/1/13	103%	Accumulate
PRHSX *	47.25	79.53	2/2/14	68%	Accumulate
FSCHX *	12.7	16.3	4/12/14	28%	HOLD
FSCRX *	24.3	26.38	10/25/14	9%	HOLD
PRMTX *	59.45	107.19	12/20/14	80%	Accumulate
MINDX *	26	33.9	6/14/15	30%	Accumulate
MCDFX *	12.37	17.34	12/9/15	40%	Accumulate
FSRPX *	9.05	15.99	1/15/16	77%	Accumulate
FBSOX *	37.32	63.9	3/20/16	71%	Accumulate
FSMEX	43.66	52.1	9/24/17	19%	Accumulate
* Indicates dividend adjusted

NOTE: In next 1-2 weeks, once the earnings season is over, I will be providing earnings update for some of my blog holdings.

Positions closed in July: NONE

That’s all for today. Wish you great investing! Stay tuned for my next blog. Thanks for your time. If you want to get alert on my action, then please subscribe to shesagroup_invest@googlegroups.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 charge any fees or commission by writing the blog except anything from Google AdSense. 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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