Shesa's OCTOBER 2018 INVESTMENT BLOG

OCTOBER 2018 - INVESTMENT BLOG

By Shesa Nayak

U.S. Stock Market Update  

Last couple of weeks have not been very entertaining for the stock markets across the world. Market volatility have been the name of the game. It seems investors/traders are being controlled by computerized algorithm-based trading rather than real fundamentals and substance. There are wild swings in the stock market indexes in just a matter of minutes. That’s the way of life, to be challenged and dealt with current market volatility. The third quarter earnings season has already kicked-off a week ago. For the next few weeks, we are going to see flood of earnings announcements from corporate America. The earnings and future projections from corporate sector will determine the course of future stock market direction. The elephants in the market like APPLE, AMAZON, Google, Facebook, Microsoft and other tech giants’ earnings will be the impetus for stock market going forward. Most of the stock markets across the world have lackluster performance this year but U.S market has done much better comparing to others. China stock market has been bleeding for past few months and China related ADR stock listed in U.S. stock exchange have been hammered. Geopolitical situations have been deteriorating due to trade war, tariff and other political situations. Despite all these, U.S. economy remains robust barring some weaknesses in home sector and retail sales. October volatility has no doubt caught up investors, but historically speaking, is it really that bad of a month? Why so much of volatility in the stock market? Is the economy weakening? is it time to bail out of the stock market now? I will share my analysis and view on all these but before that let’s take a quick glance of the U.S stock market major indexes.

	2018
Indexes	2-Jan-18	Friday Close (8/10/18)	Change in 2018	% Change in 2018	All Time High
DOW Jones	24,719.22	25,444.34	725.12	2.93	26,769.16
S&P 500	2,673.61	2,767.78	94.17	3.52	2,940.91
NASDAQ	6,903.39	7,449.03	545.64	7.90	8,133.30
BTK (Biotech)	4,222.21	4,883.66	661.45	15.67	5360.22
NBI	3,356.61	3,496.93	140.32	4.18	4165.86

Some important Economy News

Interest Rate - Fed raised rate in September?

FOMC met on September 25-26 and decided to hike interest rate by 0.25%. This is the third increase in 2018. It also raised its expectations for economic growth for this year and next. The Fed is expected to increase the rate again in December. Current Fed rate stands at 2.25%.

U.S. Unemployment at 40 years low: Unemployment numbers in U.S is the lowest since December 1969, as employers added another 134,000 jobs to payrolls. Though the number was below expectations but mostly it was due to bad weather in Florida and surrounding areas. However, it was enough to send the overall unemployment percentage lower. The current unemployment rate in U.S is 3.7%. Moreover, wages were up 2.8% year over year.

Is the U.S. stock market over valued?

I do not think so. If you see the forward 12-month P/E ratio for the S&P 500 is 15.7. This P/E ratio is below the 5-year average (16.3) but above the 10-year average (14.5). Since corporate earnings are rising at a fast pace the market is not really overvalued, as I perceive.

Retail sales in September edged up 0.1% month-over-month, but much below market expectations of a 0.6% increase. If you recall, it happened the same way last month (August). It can also be noted that holidays season is approaching, so consumer spending should pick up in the last two months of the year. I am anticipating a great holiday day season this year for retail sector due to low unemployment and increase in wages.

Q3 projected Earnings Growth: As I said in my last blog, the estimated Q3 2018 earnings growth rate for the S&P 500 is expected to be 19.9%. If 19.9% is the actual growth rate for this quarter, it will mark the third highest earnings growth since Q3 2010, which was 34.1% after the recovery from financial collapse.

China’s GDP growth Slowed down: China’s GDP growth for third quarter of 2018 came at 6.5% below the expectation of 6.6%. Though it was less still it was good visualizing current situation. Though, we can always debate on how good and factual Chinese data are…

IMF downgraded global growth forecasts for 2018 and 2019: The downgrade came in view of ongoing trade tensions between U.S, China and other nations that could hurt confidence. IMF also said that Chinese economy is expected to grow 6.6% this year maintaining an earlier forecast but slashed the country's 2019 growth estimate to 6.2%.

President Trump’s remarks on Federal Reserve – Fed has gone crazy!

President Trump blamed the Fed saying it is causing the turmoil by increasing interest rate through there is hardly any inflation. I believe he is right to some extent as current inflation rate is only 2.3%. Here is what Trump said "I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy”. Last Tuesday, on 16 October, he also said “Federal Reserve, is his biggest threat. Fed is raising rates too fast. And it's independent, so I don't speak to him", Trump said in an interview with Fox Business, referring to Fed Chairman Jerome Powell. Later on, Jerome Paul said that Fed is going to do what they are expected to do. What it means is, we can expect another interest rate hike in December. Let’s wait and see..

Let’s discuss about Stock Market October effect and volatility?

In stock market history the month of September is mostly negative. This year was little exception. However, October is considered to be the worst month. The reasons: there were many critical unforgettable events happened during the month of October - Black Tuesday (1929), Black Thursday (1929), Black Monday (1929) and Black Monday (1987). On October 19, 1987 Black Monday, Dow plunged horrifying 22.6%, the biggest one-day percentage loss in history of the stock market. Lehman Brother collapse happened on a Monday on September 15, 2008 which was possibly the beginning of great depression where financial sector almost collapsed. But it was not reported or noted by Wall Street as Black Monday. If we recall, during “dot com” burst nothing was really reported as black “xyz” day. Basically, Wall Street is no more reporting as “black day”. October is perceived by the investor as a horrifying month due to historical perspective but just to let my readers know that overall, it’s not a bad month for stocks as perceived. Since 1950, the market has averaged a positive 0.66% return in October. So, if history is an evidence then we should see some bounce back soon in the stock market.

My analysis about Current Stock Market Volatility – why such volatility?

As said above, the month of October has been very volatile as expected. A few days ago, there were a few rough days when major stock indexes plunged. In two days, DOW plummeted almost 1,400 points, NASDAQ fell from 8,100 to 7,300 and S&P 500 dropped from 2,925 to 2,725. If we see the above October correction it actually not a major correction in terms of percentage. However, any such correction becomes a painful experience for the investors. The current volatility could be attributed to the following major factors:

• Computerized algorithm-based or Rules based trading. Once a technical is broken, it can wildly swing as system goes and executes all stop orders in just a few seconds or minutes.
• Federal Reserve's interest rate hike - though it was expected, market can always have some excuses.
• Investors nervousness about the tariffs. As you know President Trump has implemented tariff on a number of goods with China being the prime target
• The benchmark 10-year Treasury yield spiked to a 3.25%, its highest level since 2011. 
• Suspected violent assassination of Saudi national journalist has increased the existing tensions between Saudi Arabia and the West causing some volatility in stock market.
• Some fund managers take profit during this period. But I don’t consider this as a major factor because the fund managers take some profit to show their performances and get hefty bonuses around thanksgiving time.

We can understand the volatility from aforesaid fact but is it a correction that we should be concerned? Let me analyze.

Is it a correction? What should be the strategy under such situation? – my perspective

What is a correction? When a market falls 10% or more from its pick that’s called correction. When market falls 20% or more it’s called as recession or bear market. The current situation can be termed as market pullback or market downturn.

As I keep saying, such market pullback or corrections are not bad unless it goes into recession. Because it provides an opportunity to the investing community to buy equity which they thought of buying but could not buy before. This is the time to keep accumulating the great stocks for long term. In addition, it also brings the new money into the stock market and becomes healthier for overall stock market to take it to new high. However, it’s difficult to know whether it’s a mere pullback or a correction or it may go towards bear market. Hence one has to be keep accumulating the equity in a gradual fashion rather than buying at once. A few days ago, I updated in my blog saying, it’s not advisable to take a hasty decision, or so called “panic selling” because it’s difficult to know when the stock market will bounce back. Also, it may not be advisable to put all the money as we never know the bottom. The Q3 earnings season has kicked-off. The banking sector has come with solid earnings. In next few days/weeks, the technology companies will start reporting their earnings. The current projection is that S&P 500 companies will report 19.9% earnings growth for the current quarter (Q3FY18) and that’s great. But we should not forget a few things:

• Stock Markets don’t go up in straight lines. 
• The market pullback was due and such occurrences are healthy for long term growth of the market. In a bull market pullback are normal. Just let the readers know that, during dot-com boom there were five declines of more than 10% during that run.

Last time the markets fell like this was January 2018, when the DOW plummeted nearly 3,300 points (from 26,600 to 23,300). And as you know it did hit new highs few weeks ago. I am very optimistic that technology sector will come with great earnings. The market direction will be determined based on the earnings and projections from the technology behemoth like Apple, Amazon, Facebook, Google, Microsoft, Netflix, Intel, Nvidia and Alibaba. I am anticipating another great earnings season and optimistic that these companies will come with great earnings and determine the next course of market direction. We should end the year with a positive note though the current market situation is rocky! Please note that economy is still strong with 4.2% GDP growth, unemployment is at 49 years low, consumer spending remains strong which accounts for 70% of GDP, wages are up 2.8% year over year, Business spending is robust. The only grey area is home sales which has subsidized a little bit. But let’s not forget that home prices had gone to the roof, so such mild corrections are healthy for long term. However, the question is, what should be our strategy at present to deal with current downturn.

What should an investor do (strategy) under current situation?

(i)              It’s better to review the portfolio and identify why did I buy the stock and whether to keep it or discard it before making further losses. Maybe, we bought an equity for some specific reason but if it’s not materialized then there is no point keeping that stock and losing money. It’s not only for stock the mutual funds or ETF have to be revisited and losers who does not have major potential should be sold from the portfolio. You can notice many changes in my blog portfolio this month.

(ii)         Make a shopping list and execute the plan. It may be time look into those stock which we thought of buying but could not do so because it went up and away -or- we wanted to buy some more but could not able to buy. During panic-selling, all companies gets hammered regardless of fundamentals or potential. One should take advantage of such situation. We have to be vigilant and take a proactive decision at some point of time on when to buy or add more. Usually, individual investors think of buying a stock but when market goes down, they tend to get scared and do not buy. When the stock bounces back, they think “oh man I wanted to buy at that time but I did not, now it has gone up, let me wait for this to come back..”. But it may not come back. As a matter of fact, they lose the real opportunity to buy.  As Warren Buffet said, buy when there is blood on the street. I know current situation is much better than the “blood on street” but I see some great stocks have been hammered and I can see real value in longer term.

(iii)        Don’t catch the falling knife. It seems contradictory to above point (ii). Do not buy a stock when it keeps falling continuously and do not recover even when the market bounces back. So, it may be advisable not to buy everything at once rather keep buying/accumulating in a phased manner to mitigate major risk. Because nobody knows how low it can go! Again, one should know how far to keep buying and when to stop. It would depend on so many factors viz. comfort level, risk tolerance, available capital, market situation, %age of allocation in a particular equity, patience to hold for long term and so on. There is no bullet proof answer to this question.

(iv)      Be careful about stop loss orders: As I said, the volatility caused by algorithm-based trading cleans all the stop orders, hence it’s advisable to avoid such orders. Rather, I will prefer to put a limit or market order to sell whenever needed. Putting a trailing stop is good but under such environment it can be risky.

What may derail the strong economy growth?

While rising interest rates amid a strong economy are good, eventually it could put a halt to the nearly decade-long economic growth cycle. In addition, Trump administration's trade dispute with China, Brexit, the unwinding of bond-purchasing programs by central banks around the world, as well as geo-political situation across Europe, Middle East, Latin America, Italy, Turkey, Saudi Arabia can be deterrent to market. It also depends on how the corporate world comes out with their earnings and provide guidance for the next quarter. I guess most of the companies would remain cautions on their outlook due to tariff’s future impact and geopolitical situations. Lackluster retail sales during holiday season could be another factor.

What to expect going forward?

As I said, corporate earnings from the big companies could be the impetus for the stock market direction. The earnings from Netflix, Apple, Amazon, Facebook, Google, Microsoft, Intel, Nvidia etc. are the major market drivers. In addition, let’s not forget the big giant Alibaba (BABA) the biggest eCommerce Chinese company. Last Tuesday, Netflix kicked-off with great earnings from tech sector. For the future direction, this is what I pinged to my WhatsApp group “Ups and down in the stock market continue to be there. But as long as it keeps pulling up, it would be good. As such, earnings result from the tech giants are immensely critical. The market may remain volatile till the end of mid-term election. If Republicans lose then there may be some panic in the stock market, but I feel that would be temporary. As we approach to the holiday season, focus will be shifted to the holiday sales. I do expect another blockbuster holiday sale this year and that should pull the market up till the end of the year. Please note that mid-term elections in the United States will be held on Tuesday, November 6, 2018, wherein 35 seats will be contested. Let’s wait and watch. Also, next year would be third year of presidential election, if history is any evidence, usually market tend to go up. I will write more on this some other time.

Two Stocks of my Blog Portfolio that interest me the most at this time

Alibaba (BABA) and iQUIYI (IQ) are the two stock that I am excited for long term growth. It’s not because they will bounce back on next few days or weeks but because of their immense future potential and their growth prospects. These two Chine stocks have been decimated due to trade war between U.S and China. BABA has come down from $211 to $142, losing almost one third of its value. It’s the ecommerce leader and command about 60% of the ecommerce market in China. Also, its cloud business is booming, it has many new ventures, revenue grew unprecedented 61% in last quarter and not to forget that Alibaba’s one day sale event is coming on November 12. So overall, I feel if an investor has long time horizon in mind then I believe it’s one of the best buys at this time. We will see when it comes with its earnings on November 1. One can wait till then to get more visibility. However, I have been accumulating.

As far as iQUIYI (IQ) is concerned, I included this in my blog portfolio last month. My view has not changed at all. Rather, I have further loaded to my position. Again, we do not know the short-term consequences because of tariff and bust in China stock market. The stock may come down further and there is no guarantee. However, my point is, if we are thinking of long term then I guess it’s time to start accumulating. And that’s what I am doing. I do not recommend what to buy or what to sell. I am just talking about my plan. I may be right or wrong. Only time can tell..

Major Stock Market Performances across the World so far in 2018

	As of Today (% age change)	As of my last Blog
DOW	2.93%	8.19%
S&P 500	3.52%	9.58%
NASDAQ	7.90%	15.70%
China Shanghai Index	-22.88%	-15.41%
India BSE Sensex	0.76%	8.18%
Japan Nikki	-1.02%	4.85%
Hongkong Hang Seng	-14.57%	-6.57%
Germany: DAX	-10.56%	-3.77%
UK: FTSE 100	-8.30%	-2.57%

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

Sector	Performance			Price per Earnings (P/E)	Dividend Yield
	1 Month	3 Month	Year-To Date
Communication Services	-2.39%	+4.46%	-6.64%	22.6x	4.83%
Consumer Discretionary (3rd)	-9.09%	-6.74%	+4.90%	16.5x	1.27%
Consumer Staples	+0.32%	+3.71%	-3.92%	15.1x	2.86%
Energy	-4.18%	-4.68%	-0.04%	14.0x	1.74%
Financials	-7.30%	-4.25%	-4.72%	15.2x	1.91%
Health Care (Top performer)	-2.94%	+3.41%	+11.31%	18.2x	1.86%
Industrials	-8.74%	-3.32%	-4.20%	15.7x	1.85%
IT (2nd)	-6.26%	-4.33%	+11.08%	14.8x	0.90%
Materials	-11.82%	-10.25%	-12.46%	13.2x	1.79%
Utilities	+3.13%	+3.41%	+4.23%	17.1x	3.78%

Source: Bloomberg.com

Now let me discuss about this month’s inclusion to my Blog Portfolio.

Fidelity OTC Portfolio (FOCPX)

The Fidelity OTC Portfolio fund invest at least 80% of assets in securities primarily traded on NASDAQ or an over-the-counter market, which has more small and medium-sized companies than other markets. It invests in "growth" stocks or "value" stocks or both. This mutual fund also invests more than 25% of total assets in the technology sector.

Why do I like this fund? As we know stock market has not been very kind in last few weeks and volatility in the market continues. Thus, I made some research and found this fund to be a good fit when the market is down, as several great technology stocks are beaten down. The fund is primarily a large cap growth fund having Net Asset of more than $22 Billion. Almost 40% of this fund is invested in large cap technology stocks. Its major holders are AAPL, AMZN, MSFT, Facebook (FB), Nvidia (NVDA) and Activision Blizzard (ATVI). What it means is, if an investor does not want to take major risk in investing these technology companies then this is a great fund to look for. This fund has an amazing return over last several years. Even though, stock market is down still it has 10.81% Year-to-date. Moreover, if we see the history then we can find that this fund has given spectacular return. So, let’s take a look at the ROI for this fund. It has beaten NASDAQ over a long haul.

FOCPX performance as of 9/29/2018: (Before Tax).

	YTD	1 Year	3 Year	5 Year	10 Year	Life (since 1984)
FOCPX	10.24%	28.10%	25.07%	19.23%	18.27%	14.11%
NASDAQ	7.90%	25.17	21.70	17.72	15.72%	-

FOCPX is a Morningstar 5-star rated mutual fund with great return, low expenses and consistent performer. The current NAV of the fund is $11.72 with a 52-week high of $13.40. I believe it’s a better choice in the current market condition as the mutual fund has taken some haircut.  I already invested in this fund and keep accumulating with recent pull back. One should think seriously about putting money in this fund rather than QQQ. You can see on the above table that it has beaten NASDAQ return consistently. In last 10 years, since 2009, there was no down year except in 2011 when the fund had a negative return of mere -0.42%. Hence, if we consider all these, then certainly it looks compelling to me to invest in this mutual fund for long term growth and return. Please note that, I have cleaned some of the under performer mutual funds from my blog portfolio and making a re-balance to accommodate this great fund. As an investor, we have to revisit our portfolio and do necessary adjustments from time to time otherwise it would be difficult to get better return on investment.

NAV: $11.72 (Current price).

Net Asset: $22.04 billion.

Fund Inception:   12/31/1984.

Morningstar Rating:  ***** (5 Star).

Minimum Investment: $2500.00. Note: It says 0 but I am not sure if that’s right info. Please check.

Load: No Load and No Transaction Fee in Fidelity. Other broker may have transaction fees.

Expense Ratio: 0.88% (LOW).

Beta: 0.16.           Risk: This is little more volatile than the market move.

Fund Managers: Christopher W Lin and Sonu Kalra since 9/16/2017.

Risks: The mutual fund invests in stock primarily on technology sector. Any market downturn or sell in technology sector could impact it adversely. Under such circumstances, I would re-visit the fund. However, keeping in view of the future, this is one great mutual fund which can be reliably invested for long term with solid return on investment. 

Shesa’s Blog Portfolio (As of NOV 4, 2018)

Equity	Suggest Price	Current Price	Suggest Date	% Change	My View (see disclaimer)	Earnings Date
STOCK (All prices are in USD)
AAPL	51.63	219.31	1/25/13	325%	BUY on dip	1-Nov
BIDU	86.43	191.92	4/18/13	122%	HOLD	24-Oct
FB	47	154.05	11/13/13	228%	BUY (Added more)	30-Oct
TSLA	135	260	11/13/13	93%	HOLD	30-Oct
MA	77.18	203.06	12/12/13	163%	BUY on dip	30-Oct
AMZN	311.73	1764.06	4/12/14	466%	BUY on dip	25-Oct
BABA	67.28	142.93	2/21/16	112%	BUY (Added more)	2-Nov
JD	23.45	23.01	5/22/16	-2%	HOLD (Trimmed)	12-Nov
XON	26.37	13.95	7/4/16	-47%	HOLD	7-Nov
PVH	92.82	121.21	1/22/17	31%	HOLD	27-Nov
EXEL	26.33	16.27	8/20/17	-38%	HOLD	1-Nov
MOMO	32.14	30.46	11/25/17	-5%	BUY on dip	26-Nov
BRK-B	206.96	209.83	3/18/18	1%	HOLD
NVDA	228.71	229.17	4/22/18	0%	BUY on dip	15-Nov
EDIT	36.53	27.49	5/28/18	-25%	BUY	5-Nov
JKS	14.04	9	7/4/18	-36%	BUY (Added more)	5-Dec
GERN	3.77	1.67	8/12/18	-56%	HOLD (Trimmed)
IQ	26.13	23.57	9/18/18	-10%	BUY (Added more)	N/A
ETF
INDA	31.94	32.6	3/15/15	2%	Sold @32.60 on 9/24.
INCO	34.46	38.54	5/15/15	12%	HOLD (Trimmed)
IHF	139.1	193.41	8/16/15	39%	HOLD
XLY	77.76	106.34	8/16/15	37%	HOLD
EEM	32.3	39.67	11/15/15	23%	HOLD (Trimmed)
IYG	112.03	138.89	3/19/16	24%	HOLD
EMQQ	32.65	27.84	5/21/17	-15%	HOLD - Trim
KWEB	58.52	41.36	2/11/18	-29%	HOLD (Trimmed)
MUTUAL FUND
FBIOX	11.46	21.83	3/1/13	90%	HOLD - Trimmed
PRHSX	47.25	79.08	2/2/14	67%	Accumulate
FSCHX	12.7	15.8	4/12/14	24%	Sold @15.80 on 10/1.
FSCRX	24.3	24.64	10/25/14	2%	Sold @24.64 on 10/23.
PRMTX	59.45	100.72	12/20/14	69%	Accumulate
MINDX	26	27.82	6/14/15	9%	Sold @27.82 on 10/23.
MCDFX	12.37	15.42	12/9/15	25%	Added more
FSRPX	9.05	15.23	1/15/16	68%	Added more
FBSOX	37.32	62.5	3/20/16	67%	Added more
FSMEX	43.66	51.95	9/24/17	19%	Added more
FOCPX	11.72	11.72	10/21/18	0%	NEW ADDITION
* Indicates dividend adjusted

Positions closed since last blog:

Equity	Sales Price	Buy Price	Date Sold	Gain / Loss (%)
INDA	32.6	31.94	24-Sep	0.66%
FSCHX	15.8	12.7	1-Oct	19.60%

Plan to Sell Monday (10/22): FSCRX, MINDX.

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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