While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
Global Market Comments
October 2, 2013
Fiat Lux
Featured Trade:
(TEXAS TEA TAKES A DIVE),
(USO), (UNG), (SCO), (DTO),
(A SPECIAL NOTE ON EXERCISED OPTIONS)
United States Oil (USO)
United States Natural Gas (UNG)
ProShares UltraShort DJ-UBS Crude Oil (SCO)
PowerShares DB Crude Oil Dble Short ETN (DTO)
Take a Look at the chart below and you will see that the price of oil is breaking key support. Texas tea has now backed off $13 since the end of August, and lower prices beckon.
It turned out that oil made an initial peak with the Egyptian Army?s ferocious and bloody attack on the Muslim Brotherhood. I hate to sound cynical here, but count the daily bodies in the street, which has been trending down sharply since the 1,000 plus tally. Fewer bodies mean lower oil prices. This broke the back of the fundamentalist opposition movement, which has accounted for the $20 spike in oil prices since June.
We then saw a secondary peak at $112.50 with Secretary of State John Kerry?s harsh reaction to the Syrian gas attack. We were a day away from launching the missiles when the Russians delivered a last ditch compromise peace offering. That firmly put Syria on a back burner for several months at the least. Oil has been falling ever since.
This returns us to the longer-term fundamental trend for oil, which is sideways at best, and down big at worst. The US is flooding the world?s oil markets with energy in all its many forms. The driver here is American fracking technology, which will continue to upend the traditional energy markets for decades to come.
It?s just a matter of time before fracking goes mainstream in Europe, especially in the big coal countries of Germany, Poland, and England. Then they can thumb their noses at Russia, a major gas supplier over the last thirty years. China will follow. You could even frack in the Middle East.
In a crucial news item that wasn?t reported nationally, the California legislature voted down a measure to ban hydraulic fracturing in their state. It was defeated in a democratically controlled body. As the Golden State is the most anti energy state in the country, this gives the state a flashing green light to move forward against environmentalist opposition. There is a ton more of new supply coming. This is what the weakness in the price of natural gas is telling you (UNG).
We also received a new negative for oil this month, the collapse of the emerging market currencies, stock markets, and bonds, especially the Indian rupee. This reduces their international purchasing power in US dollar terms, thus raising the cost of oil in local currency terms. You see, oil is priced in dollars. As the emerging markets have seen the largest growth in demand for oil in recent years, this can only be bad for prices.
In terms of my own trading portfolio, I wanted to have a ?RISK OFF? position, like an oil short, to hedge my existing ?RISK ON? positions. US stock markets could be weak into October, and they will take oil down with them.
The energy inventory figures are another enormous tell, which indicate that the industry is choking on excess supplies. The summer driving season is now a distant memory, and winter has yet to hit. These are grim tidings for oil.
Finally, there is that last resort, the charts. Check out those for the (USO) and oil and it very much looks like we have a classic head and shoulders top in place. That is the straw that breaks the camel?s back.
The only way I am wrong on my oil call is if the Chinese economy is about to take off like a rocket. They are the marginal big swing player in this market. But there is absolutely no sign of that happening in the economic data. If anything, the collapse in emerging markets suggest that conditions in the Middle Kingdom are about to get worse before they get better.
This is not an ideal place to initiate new shorts, unless you are a died-in-the-wool momentum player. But we are only one headline away from more bad news from the Middle East, which would deliver an instant $5 pop in oil prices. That?s what you want to sell into.
I don?t have any brilliant option plays for oil here. So better to play the leveraged short oil ETF?s. Those would include the ProShares Ultra Short DJ-AIG Crude Oil ETF (SCO) and the PowerShares DB Crude Oil Double Short ETN (DTO).
For further explanations of the fundamentals here in eloquent and florid detail, please read ?Why I Sold Oil? and ?Why I?m Keeping My Oil Short?.
Do I Hear a Bid?There are only 13 days left to the options expiration on October 18. The Mad Hedge Fund Trader?s model trade portfolio has six positions that are deep in-the-money that expire that day. So, it is important that we tread carefully to get the bull benefit.
I received a few emails from readers whose option holdings have already been exercised against them, and have asked me for advice on how best to proceed. So, here we go.
The options traded on US exchanges and referred to in my Trade Alerts are American style, meaning that they can be exercised at any time by the owner. This is in contrast to European style options, which can only be exercised on the expiration day.
The call option spreads that I have been recommending for the past year are composed of a deep out-of-the-money long strike price plus a short portion at a near money strike price.
When stocks have high dividends, there is a chance that the near money option you are short gets exercised against you by the owner. This requires you to deliver the stock equivalent of the option you are short, plus any quarterly dividends that are due. Don?t worry, because your long position perfectly hedges you against this possibility.
You usually get notice of this assignment in an email after the close. You then need to email or call your broker back immediately informing him that you want to exercise your remaining long option position to meet your assigned short position.
This is a gift, as it means that you can realize the entire maximum theoretical profit of for the position without having to take the risk of running it all the way into expiration. You can either keep the cash, or pile on another sort dated option spread position and make even more money.
This should completely close out your position and leave you with a nice profit. This is not an automatic process and requires action on your part!
Assignments are made on a random basis by an exchange computer, and can happen any day. Exercise means the owner of the option that you are short completely loses all of the premium on his call.
Dividends have to be pretty high to make such a move economic, usually at least over 3% on an annual rate. But these days, markets are so efficient that traders, or their machines, will exercise options for a single penny profit.
Surprise assignments create a risk for option spread owners in a couple of ways. If you don?t check your email every day after the close, you might not be aware that you have been assigned. Alternatively, such emails sometimes get lost, or hung up in local servers or spam filters, which occasionally happens to readers of my own letter.
Then, you are left with the long side deep out-of-the-money call alone, which will have a substantially higher margin requirement. This is equivalent to going outright long the stock in large size.
This is a totally unhedged position now, and suddenly, you are playing a totally different game. If the stock then rises, you could be in for a windfall profit. But if it falls, you could take a big hit. Better to completely avoid this situation at all cost and not take the chance. You are probably not set up to do this type of trading.
If you don?t have the cash in your account to cover this, you could get a margin call. If you ignore this call as well, your broker will close out your position at market without your permission.
It could produce some disconcerting communications from your broker. They generally hate issuing margin calls, and could well close your account if it is too small to bother with, as they create regulatory issues.
It order to get belt and braces coverage on this issue, it is best to call your brokers and find out exactly what their assignment policies and procedures are. Believe it or not, some are still in the Stone Age, and have yet to automate the assignment process or give notice by email. An ounce of prevention could be worth a pound of cure here.
Consider all this a cost of doing business, or a frictional execution cost. In-the-money options are still a great strategy. But you should be aware of all the ins and outs to get the most benefit.
John Thomas
?Apple is the biggest no brainer in the history of the earth. It just makes no sense for it to trade where it is; seven times enterprise value to free cash flow, 14% free cash flow yield to enterprise value, and 10% simple free cash flow yield. If Apple were a junk bond it would trade 40% higher,? said Bill Miller, the legendary fund manager at Legg Mason
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
Global Market Comments
October 1, 2013
Fiat Lux
Featured Trade:
(JAPAN TO LAUNCH IRA?S),
(DXJ), (FXY), (YCS),
(KISS THAT UNION JOB GOODBYE)
WisdomTree Japan Hedged Equity (DXJ)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
The Japanese government is about to introduce Individual Retirement Account for individual investors for the first time. The move is part of prime minister Shinzo Abe?s multifaceted efforts to revive Japan?s economy, and could unleash as much as $690 billion in net buying into Japanese equities by 2018.
The move was inspired American IRA?s, which were first introduced in 1981. After that, the Dow average soared 25 times. It is amazing to what lengths people will go to avoid the taxman.
Starting October 1, individuals will be permitted to contribute up to ?1 million a year into Nippon Individual Savings Accounts (NISA) or some $10,200, while married couples can chip in ?2 million. These funds will be exempt from capital gains and dividend taxes for five years. At the same time, capital gains taxes will rise from 10% to 20%.
Thanks to a 22-year long bear market, only 7.9% of personal assets in Japan are currently invested in stocks, compared to 34% in the US. Individuals account for only 28% of the daily trading volume in Tokyo, while foreigners take up 63%. Still, that?s up from only 21% a year earlier.
Over the past 10 years, individuals sold a net $214 billion in equities, keeping their eyes firmly on the rear view mirror. Almost all of the funds were deposited into bank accounts yielding near zero. Even 10 year Japanese Government Bonds are yielding only 0.68% as of today, the lowest on the planet. That doesn?t buy you much sushi in your retirement.
Over the past year, Japan has enjoyed the world?s fastest growing industrialized economy. The latest data show that it is expanding at a white hot 3.5%, versus a far more modest 2% rate in the US, and only 1% in Europe.
Early indications are that the NISA?s will be hugely popular. Japanese brokers have launched a massive advertising effort to promote the program, which promises to substantially boost their own earnings. Firms have had to lay on extra customer support staff to assist with online applications, where clueless investors have spent two decades in hiding.
To get some idea of the potential, take a look at how Merrill Lynch?s stock performed after 1981, which rose by many multiples. The bear market has lasted for so long that many applicants confess to investing in equities for the first time in their lives.
Since Shinzo Abe announced his candidacy for prime minister and his revolutionary economic and monetary program nearly a year ago, the Japanese stock market (DXJ) has soared by an amazing 80% in US dollar terms. The Japanese yen (FXY), (YCS) has similarly collapsed by a huge 25%.
The need to bolster Japan?s retirement finances is overwhelming. It has the world?s oldest population, with some 26% of their 127.6 million over the age of 65. The average life span in Japan is 82.6 years. That is a lot of people to support for a $6 trillion GDP. Thanks to plummeting fertility rates, the population is expected to decline to 106 million by 2055.
By yanking $690 billion out of the banks and moving out the risk spectrum, Abe?s new IRA?s provide additional means through which the economy can permanently return to health. Higher stock prices will provide cheap equity financing for public companies, which can then reinvest in the domestic economy and create jobs.
I have written endlessly on the fundamental case for a strong Japanese stock market this year (to read my previous articles on yen, please click the following links: ??Rumblings in Tokyo?, ?New BOJ Governor Craters Yen" and "New BOJ Governor Crushes the Yen").
And thank the US congress for behaving like such idiots. Their standoff is providing a decent entry point for a position here.
So How Does This Order App Work?