Tuesday, January 26, 2021

The Story of Short Squeezes Repeats Itself - Volkswagen (2008) and Gamestop (2021)

John Keynes once said that the market can stay irrational longer than most retail investors can stay solvent.

Well, we'll add hedge funds and institutional funds to that lists.

In case you have not heard of the hottest town talks surrounding the market in the recent days, shares of several counters (I purposely mentioned counters rather than companies because it doesn't matter anymore, they are treated as a pawn right now) such as Gamestop, AMC, BB, Nokia, KOSS have rocketed to escalating levels due to strong ongoing retail demand pushing up the stock.

Yes, you heard it right.

It's not big institutional controlling it (though I would argue there might be small hedge funds perhaps who are participating in the party), but rather retailers who lurked around forums such as Reddits, and StockTwits nests and consolidate their purchasing power by pushing up the price.

Now, let's just take Gamestop for instance.

The company has been a target for short-sellers for a number of years now, and the amount of short-selling volume amounted to more than 140% of the entire floating shares available. The company has started its buyback program for a number of years in the past and therefore has only some 70m floating shares lurking around.

If you theoretically take the number of forumers - Reddit/wallstreetbets/StockTwits users/followers, which is likely to amount to more than 20m, you can essentially have a coordinated orchestra to move the markets.

Retail investors, including members of the Reddit forum r/wallstreetbets, have made concerted efforts to drive Gamestop shares higher and squeeze short-sellers such as Melvin Capital. These people helped to drive the share price up as much as 145% on Monday, then as much as 95% on Tuesday.

And then, of course, you have the backing likes of Elon Musk and Chamath, who is playing around with their tweets to send frenzy followers to drive the fuel further.





Back In 2008 - Volkswagen Case Study

This is not the first time nor likely the last time we'll see a case of a short squeeze and this is usually the cause of a faulty system in the trading world where regulators allow short-selling to exceed the amount of available floating shares out there, hence causing the spike when these short-sellers have to recover their position.

One of the most fascinating case study we can look back to as a precedent was back in 2008 when an event created an enormous short squeeze in the stock price of Volkswagen which briefly took the company at one point as the largest market cap in the world at that time.

It goes like this, and ends up like this:


In 2008, when the world was still licking the wounds from the fallout of the Lehman Brothers, short-sellers began to target a company they thought was going bankrupt at that time - Volkswagen.

When a press release came out that Porsche was taking bailout for most of the outstanding - 74.1% of the ordinary shares using cash-settled options, plus the fact that 20.1% was already owned by the state of lower Saxony, it essentially means there are only 5.8% of floating shares available out there to "play around". It was mathematically impossible for every short-seller to cover their positions.

The massive squeeze fueled the share price up to EUR999 at one point, briefly making Volkswagen the largest company in the world until the price went back all down again and only settled by December 2018, taking the whole sage up and down in a period of 2-3 months.

There was big wealth distribution - some became a millionaire, some hedge funds went on liquidation, while there are probably some who went on "harakiri" mode.

How Do You Position for Gamestop?

The best advice is to probably sit away, especially if you are a relatively new beginner in the market.

If you are someone who'd like to go long on participating in the current run, it is best to position via a long call option than a straight direct long as you limit the amount of loss with the premium you are comfortable to lose. Then you can ride the upside with your wild card all in the world you want. But do remember to only put in the money you are comfortable to lose all in your premium.

The premium and IV are also getting a lot more expensive now than in the past few weeks due to fueled market participants already in the market, so it is best that you take that into account to see if it is still worth the risk/reward.

If you are someone who'd like to go short on the company, there are unfortunately no available shares available out there in the market to short. Even if there is, the interests to borrow are crazy high at this point as it is a very highly sought commodity in the market right now.

The alternative, and what many are doing right now, is to purchase a put option with your variable being the strike price and time expiry. The time decay is something you would want to pay attention to so it is recommended that you take a timeframe longer than March (I recommend at least March because that's when GME will publish its quarterly earnings). Obviously, the longer the timeframe and the higher the strike price, the more expensive your premium will be. 

Personally, I have taken a small position in purchasing a put option at a strike price of $60, with the expiry of 19 March 2021. The premium is not cheap but is relatively stable, even when GME share price was hovering in between $85 and $140. 

The best part is you limit the maximum amount you can afford to lose too, so you won't burn a hole in your pocket with the unknown factor.

It's still early days, so I am sure it gets a lot more volatile once it is nearer to the decay period.

I trust that GME will go back to settle down at between $20-$30 once it settles down, which is right before the run-up. We just don't know when that will happen. The faster it goes up fueled by Reddit warriors, the faster it will go down when the bubble bursts. Fundamentals are unlikely to change much overnight or even in a quarter even as they signaled an intent to go into more online than brick and mortar.

It'll be a roller-coaster, so sit tight and watch it happen.

Thanks for reading.

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Thursday, January 21, 2021

Adopt The Action You Take By Using The Word "Because"

In a research study conducted by Ellen Langer, a professor of psychology at Harvard University, the word "because" plays an important role in the differentiation of the result in a sequence of different experiments that she conducted.

In the study, the word "because" did not need to be particularly meaningful, but just by including the word after a sentence being formed improves the intended result of the experiment.

For instance, if you see a man on the street tapping you on the shoulder and say: 

"Can I borrow your phone for a while?"

Your first reaction would be somewhat apprehensive at a glance because you don't know what this person is up to or why you should be lending your phone to a stranger on the street that you are not acquainted with.

But what if the man added in something like this.

"Can I borrow your phone for a while, because my phone's battery is flat?"

Well, the situation gets a lot clearer now on why the man is looking out for someone who can borrow the phone to him in this situation.

If the man further adds by saying:

" Can I borrow your phone for a while, because my phone's battery is flat, and I have an urgent need to call my parents/son/daughter to tell them/him/her that I'm here waiting by on the phone booth?"

Now, this definitely sounds a lot clearer and explain the entire situation very well on the objective of borrowing the phone.

The probability of borrowing for the phone is definitely enhanced and likely to succeed more than the former.


In Personal Finance (since this blog is catered towards ultimately achieving financial independence), it is the same thing.

Many folks started with the objective of trying to save 20% or 30% of their monthly take-home pay into their savings account. Once, they have accounted for enough emergency funds in their savings account, they would start to put some money into an equity fund for investing.

Many do not know why they are doing this or at the very least they do not think clearly why they should be doing this. A lot of things that most people are doing are simply because the majority of their friends or peers are doing.

They are herd saving, even with the same range amount as what their peers are doing, and herd investing, even with the same strategy and counters that their friends and peers are buying.

The objective is just not clear enough to justify the reason or action that they are undertaking.

For instance, if you are buying a company such as SEA Ltd at today's price, you should be able to justify it with a "because" so the objective and thesis are clearer.

"I am buying SEA Ltd at this valuation because their valuation still have room to run given the management revised guidance in Q4 FY2020". or

"I am buying SEA Ltd because consumers are still in the early phase of adopting e-commerce behaviour especially in the South East Asia region where market share is still up for grabs."

You don't have to know the full know-how-why but just by doing this, it tells you a lot of information on whether you actually know what you are doing, and this can be very impactful to the testament of your action.

It also gives us the ownership of managing our own money in a responsible manner because we are not swayed by emotions or something shallow that might put our position at permanent risk.

I'm going to consciously do this to change the way I do my things and see if it results in a better outcome after a few tries.

Thanks for reading.

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Tuesday, January 12, 2021

Jan 2021 - Portfolio & Transaction Updates

No.

 Counters

No. of Shares

Market Price (SGD)

Total Value (SGD) based on market price

Allocation %

Category

1.

Lendlease Reit

  85,000

S$0.79

     67,150.00

14.0%

Dividend

2.

Manulife Reit

  60,000

US$0.74

     59,490.00

13.0%

Dividend

3.

Starhill Reit

  90,000

S$0.52

     46,800.00

12.0%

Dividend

4.

Jardine C&C

    2,000

S$22.16

     44,320.00

12.0%

Recovery

5.

Ascendas Reit

  12,000

S$3.03

     36,360.00

10.0%

Dividend

6.

Prime US Reit

  30,100

US$0.80

     32,260.00

9.0%

Dividend

7.

Alibaba (HK)

       700

HK$219

     27,375.00

8.0%

Compounders

8.

Yuexiu Trans. (HK)

  27,000

HK$5.15

     24,540.00

8.0%

Dividend

9.

Netlink Trust

  20,000

S$0.96

     19,200.00

7.0%

Dividend

10.

Comfortdelgro

  10,000

S$1.71

     17,100.00

7.0%

Recovery

11.

Bank of China (HK)

  30,000

HK2.69

     14,430.00

6.0%

Dividend

12.

Hotung

    9,000

S$1.68

     15,120.00

6.0%

Dividend

13.

GA Pack (HK)

    9,000

HK4.44

       7,160.00

3.0%

Dividend

14.

Ho Bee Land

       300

S$2.38

          710.00

1.0%

Leftover

15.

Warchest

          -

-

     20,000.00

4.0%

 

16.

Options (IBKR/Tigers)

          -

-

     40,000.00

8.0%

 

Less:

CFD@3.2%

 

 

(150,000.00)

 

 

 

 

 

 

 

 

 

Total

 

 

 

   322,015.00

100%

100%

Hola 2021!!!

Who would have thought that we have started the year with a big bang on the market worldwide?

Not only do we have the likes of bitcoin and other crypto-currencies mooning in the early part of the month, but the stock market worldwide has also continued its momentum very well.

In fact, STI alone is already up somewhat 7% just a few days into the year and is now near the psychological mark of 3,000 (I still can't believe it as I am writing this). The US market has continued to pounce its way forward with breaking all-time high records again.

Suddenly, it seems like making money in the stock market is the easiest thing in the world to do and almost everyone around me is getting more involved in the stock market now, more than ever.

This isn't good of course, as the market continues to suck in new participants who feel buoyant about making their bucks continuously for the past few weeks.

I am personally getting a bit cautious about this, as some of my past decisions about taking profits in the past few days are getting me more and more relief as I locked in those gains (nothing beats realized gains that you finally score).


First update - I have continued to trim down my position for Comfortdelgro at about $1.70-$1.72ish as STI is nearing the psychological 3,000 marks. While most of the gains have been pulled up mainly from the banking sectors, a dip in the overall index will impact the other stocks as well, and I think it is about prudent that my strategy entails taking profits off the table from time to time.

I have also trimmed down my position for Jardine Cycle & Carriage at between $21.66 to $22.16 after the shares break out from its 200 Moving Average resistance of $20.64, followed by 3 consecutive white candles. Again, there are no changes to the fundamentals at this point so the recent run-up entails some profits taking off the table to lock the gains in and recycle the capital as and when necessary. I'm still keeping the rest of the 2,000 in the CDP to try and wait for slightly longer-term recovery.

This month's portfolio addition - I have added new shares in Netlink Trust as well as Hotung, the latter after a conversation with fellow blogger, Silly Investor, in which I managed to look at the company a little deeper. Both companies are great dividend payers with solid cash flow generating ability, so this is likely a longer-term keep for me inside my CDP account.

I have also added more Alibaba (HK) shares to average down as the scandal regarding Jack Ma and its anti-regulation continues to rampage its shares. I've also traded in and out successfully a couple of fellow HK tech shares such as JD-SW, Meituan, and Tencent respectively in the past few weeks.

Apart from this, I have also been receiving and generating some income from some of the options play I had which has expired. They are not big needle-moving positions but something which can complement my trading strategy well, and earn me some good premium that I can use to generate for the portfolio.

If you'd like to follow some of these strategies or live trades which I show from time to time, you may want to follow me on my Facebook Page here.  


Networth Updates

The equity portfolio continues its good slow upward trajectory this month at $322,015, which is up from the previous month of $311,780.


The continued rotation off some of the recovery stocks means the portfolio is likely to benefit from time to time, while I continue to take profits off the table and switched into some less volatile dividend-paying companies.

The next upcoming earnings season will be very interesting and we are finally into the dividend season which I am very much anticipating, like many others.

The target for the portfolio will be at $350,000 at the end of FY2021 - I am not going to give myself too much pressure or take on too many risks at this point, so it'll be a continuation of the same strategy that has worked, and the results will take care of itself. I'll revise the year-end goal again should this year brings me plenty of luck.

Having said that, I am very much anticipating a pullback sometime in the next few months, so we should be seeing a dip before it continues its upward increase.

Hopefully, 2021 will be a good year for everybody.

Continue to stay safe and well.

Kaching!

Thanks for reading.

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Wednesday, January 6, 2021

Salesforce (NYSE: CRM) - Getting Paid While Waiting For An Opportunity To Buy

Salesforce Inc. is a leading dominant software-as-a-service (SaaS) player in the CRM market space.

The company has grown over the years and today they have product offerings in these four core verticals, gaining 18.4% of Global CRM market share in 2019 by sales revenue.

  • Sales Cloud
  • Service Cloud
  • Salesforce
  • Marketing and E-commerce Cloud
The other challengers are in single digit which is led by SAP, Oracle, Microsoft, and Adobe.



The company has a large and growing addressable market (TAM) amounting to $176 Billion spanning from FY2020 to FY2024. The 4 years CAGR is expected to grow at 14% per annum across many services platform.


Financial Analysis

Salesforce has been doing well, growing its topline revenue from just $6.7b in 2016 to over $17.1b in 2020, which translates into a CAGR of around 30% per annum. The trajectory forecast into the next 4-5 years is that the company is likely to grow at a slower rate but still within the respectable 20-25%.

Operating margin for Q3 was at 19.8% - best ever record!

The company also has a strong balance sheet with over $27b in net cash right before the acquisition of Slack.

The acquisition of slack in December 2020 recently was massive, as the company forks out $27.7b to acquire a work messaging app company they think would be massive.

Salesforce Co-Founder and CEO Marc Benioff were bullish about the acquisition and he thinks there are synergies for both companies that could shape the future of enterprise software and transform the way everyone works in the all-digital, work from anywhere world.

This is a direct challenge face to face to fence off competition from its most direct competitors, Microsoft with its Teams product.

The market clearly didn't quite like the deal, and the market showed vengeance through a sell-off from a high of $284 to the current $221, representing a 28% fall from the peak.

I believe this is just a short-term knee-jerk over-reaction from the market as I believe the deal will continue to be earnings accretive as the deals will be funded via internal cash and debt. Also, Slack is still growing at high double-digit and the acquisition allows Salesforce to increase its new customer acquiring and expand its direct customer facing volume.

At the current price of $221, this represents a P/Sales of just under 10x, and I believe this is a decent valuation for a company that's still growing at a sub-par 20% topline over the next few years.


Charts

CRM is heading into a beautiful set-up.

Immediate strong 200 days moving average support is at $215, and the share price tested this level twice recently on the 2nd December 2020 and 4th January 2021. On both occasions, the intra-day movement hits the $215 support level before bouncing off and closing at above $220.

The support level of $215 also coincides with the gap fill on the 25th August 2020. The next immediate support is at $210 right before the 25th August 2020.


RSI continues to be oversold at below 40.

MACD also crosses the signal red line, indicating crossover and bullish confirmation (ok, I'm still adapting on this part of divergence).



How I am Likely To Position My Play

I have opened the previous sell put positions at between $207 to $215 on several couples of occasions - two positions of the contracts have expired on the 31 December 2020, and another two positions will expire on the upcoming 8th January 2021 (still currently open).

The next projected full-year earnings are estimated to come in early March 2021 so we are likely to see consolidation for a while within these levels without any serious attempt at breaking up or down.

15 January (9 more days) put contracts at a strike price of $215 is available at $2.29 premium for 1 contract. This represents a $2.29/$215 = 1.06% return over a period of 9 days or 42% return annualized.

If you'd like something "safer", the $210 strike price is also available at $1.29 while we let the market dictates the next move.

There's also the longer runway for the 22nd Jan, 29th Jan, 5th Feb if you feel more confident about the long term prospect of the company.



I'm likely to take a direct long position on the company through my CFD should the price hits $215 during the intra-day movement for better risk-reward, and likely to put a stop-loss below the $210 mark.

I'm still experimenting on some of these in the last few months myself, so please do your own due diligence.

The market can suddenly turn south and wipe out the strategy you would have, whether long or short.

Thanks for reading.

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Monday, January 4, 2021

Starting Your January On The Right Track

Usually, at this stage of the year, many will be making a New Year resolution for 2021 (myself included) and all the goals they will be working towards for the year.

January is the best time to do that because we are starting a brand new year and we'd like to get ourselves pumped for the right reason, giving us the motivation to run for the rest of the months ahead.

This year, I'll do something a little different.

Instead of putting my own goals and resolutions for the year ahead, I'll pen some of the important things that I think it'll be good to revisit this month and instead of letting it procrastinate into the later months.



1.) To Figure Out Where You Are Financially

For those who are tracking their finances closely, this is probably your everyday bread and butter.

But for the large part of the majority, this is probably something which you tend to revisit only when you are financially in trouble. For example, when you see a dunning reminder from the bank asking for a follow-up reminder to make your payment, it's probably a little too late to evaluate your finances.

Take the early part of this month as an opportunity to reevaluate your financial conditions, debts, accounts, and cash flow and make a realistic assumption about what you might be lacking so you can remedy the situation and take the necessary steps.

2.) Review Your Discretionary Subscription Expenses

Like most functioning pair of adults in today's digital world, you are probably paying for some of the monthly subscription bills that are being charged out directly from your credit card.

The mechanics of the payment makes it so convenient for users that most ended up paying for things that they might even seldom utilize. For example, while the internet is probably something that commands a higher utilization because we used them every day, the same may not apply to TV subscriptions, especially when you are also paying for a similar alternative like Netflix.

You may also want to check your other subscription services like your recurring digital charges or gym membership.


Ask yourself this.

When was the last time you switched on your television to watch something that appeals to you, or when was the last time did you step into your gym and utilize the membership. Take the average of your number, and then divide them accordingly into a unit economic of $xx/usage. If that amount is still acceptable to you, then it'll make sense to continue with your subscription.

Do note that these monthly recurring charges can add up quickly once you have a few of them lying around.

3.) Opening a Supplementary Retirement Scheme (SRS) Account

The SRS is a supplementary retirement scheme which is a voluntary scheme to encourage Singaporeans and its Permanent Residents to save for retirement.

The immediate incentive for contributing to an SRS account is you get a deduction of tax relief from your chargeable income, so you would essentially pay for a lower amount of taxes.

The current statutory withdrawal retirement age is 62 years old, on which 50% of those withdrawn will be subject to tax.

One interesting thing to note is that the statutory retirement age prevails when you made your first SRS contribution and this means that if you are one of those who are concerned about the possibility of retirement extension age, you might want to contribute early, even if it just means a one-time transfer.

If you have done this previously, and have been contributing consistently to your SRS account, then you're ahead of the pack.

4.) Set S.M.A.R.T Financial Goals

Start applying and setting financial goals of what you think you wish to achieve at the end of the year using the 5 golden rules of S.M.A.R.T.


Specific

Measurable

Attainable

Relevant

Time-Bound

Set Specific Goals

Your goal must be clear and well defined.

Make it clear and concise such that it's easy to track and can be defined precisely when you look forward.

Set Measurable Goals

Your goal must be quantifiable in terms of amount, and which period it covers.

For example, if you are looking to attain a savings rate of 20%, do clearly indicate when you will try and achieve that, and if that savings do or do not include your CPF contribution rate for instance.

Set Attainable Goals

Do not aim for the sky but ended up falling to the ground.

Your goal should be realistic and attainable such that you can achieve the smaller milestones to celebrate your achievement.

For instance, if you are only earning $2k/month income, don't aim for an 80% savings rate because it doesn't make sense to do that. Go for lower but more attainable levels so you can celebrate the victory.

Set Relevant Goals

Your goal should be relevant in accordance with the objective you wish to achieve in the future.

For instance, if you are aiming for financial independence at the age of 35, you would need to set an expectation of saving at least 50% of your income for the next 10 years.

Setting inconsistent and irrelevant goals will set back and waste unnecessary efforts and time needed to attain the real objective.

Set Time-Bound Goals

Your goals must have a validity period and deadline.

Doing so will give you ownership of your own actions and increase your sense of urgency when doing matters.

Conclusion

It is important to start January on a strong footnote because this will set the right tone for the rest of the months.

Starting early on the right track will give us confidence, knowing that we have done something and setting things right in order for the rest of the months to follow.

If we continue to procrastinate into the following months, we might get bogged down by the many things happening in our daily lives and we will end up just delaying or postponing that one thing in our to-do list.

Start early, and tick your boxes as done.

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