Diary Archives

What?s Going on With the VIX?

After crawling off the mat at the 12% level, and rising all the way back up to 19%, traders are wondering if the Volatility Index (VIX) is finally coming back to life. Or is this just another dead cat bounce?

It wasn?t supposed to work that way. Falling markets should send investors scrambling to buy downside protection in the form of put options, which would automatically send the (VIX). Except when they don?t.

I spoke to over 30 market participants yesterday attempting to root out the cause of this seeming anomaly. All I got was shrugs or idle speculation. A (VXX) at this level, the ETF for the (VIX) assumes that the complacency now endemic in the market will continue for several more months. It is betting that the S&P 500 will continue moving sideways or up with no pullbacks greater that 2%. Oh, really?

It is also discounting a rise in the (SPX) to 1,750, based on a multiple expansion from 16 to 17, while corporate earnings are falling. This will see confirmation when Q3, 2013 earnings start to hit in October. Oh, really, again? It will do this in the face of economies that are dramatically slowing in both Europe and China. Oh, really, a third time?

I finally got through to some friends in the Chicago pits who explained what was going on. A sizeable portion of the trading community believes that we will see a rise in volatility someday, but not in the near future. So they have been buying September call options in the (VIX). To pay for these and hedge out their risk, they have been selling short calls in the front months of December and March at much higher implied volatilities.

Since the (VXX) focuses on only the front two months of the options calendar, it has taken an inordinate brunt of the selling. This is why the (VXX) has continued a rapid decent even on days when the (VIX) was stable and the Dow was down. Needless to say, it has been a huge money maker for the early participants.

How does this end? At some point we do get a serious sell off in the stock market, and the (VIX) rockets back up to 20%, or higher. That means that anyone who initiates this position now will get slaughtered. But the long term players will simply write those losses off against the substantial short dated premium they have taken in in the meantime.

As long as this dynamic is in place, there really is no limit to how far the (VXX) can fall. As traders roll from one expiring month to the next, they will continue to hammer volatility.

Markets Can Remain Irrational Longer Than You Can Remain Solvent

Connecting Up America

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Until now, the country?s power grid has been divided into three unconnected, noncompetitive kingdoms (in the spirit of Game of Thrones), making transnational transmission impossible, leading to huge regional mispricing. While California and New York suffered from periodic brown outs and sky high prices, electricity was given away virtually for free in Texas.

A group of power companies is now proposing to build the $1 billion Tres Amigas superstation in Clovis, New Mexico that would connect all three grids. The plant would use advanced superconducting technology that will send five gigawatts of power down cables cooled at 300 degrees below zero. Construction is expected to reach completion in 2014.

The facility would solve a major headache of alternative energy planners, and will no doubt accelerate development. It would allow the enormous wind farms in the Lone Star State to ship energy to the power hungry coasts. Ditto for the mega solar projects proposed in the Southwest deserts, and the big geothermal plants being built in Nevada. With the Department of Energy having already sent tidal waves of government cash towards the sector, the timing couldn?t be better.

The Mystery of the Brasher Doubloon

Diary, Newsletter

I?ll never forgot when my friend, Don Kagin, one of the world?s top dealers in rare coins, walked into the gym one day and announced that he made $1 million that morning.? I inquired ?How is that, pray tell??

He told me that he was an investor and technical consultant to a venture hoping to discover the long lost USS Central America, which sunk in a storm off the Atlantic Coast in 1857, heavily laden with gold from the California mines (for the full story click following link: ?http://www.sscentralamerica.com/). He just received an excited call that the wreck had been found in deep water off the US east coast.

I learned the other day that Don had scored another bonanza in the rare coins business. He had sold his 1787 Brasher Doubloon for $7.4 million. The price was slightly short of the $7.6 million that a 1933 American $20 gold eagle sold for in 2002.

The Brasher $15 doubloon has long been considered the rarest coin in the United States. Ephraim Brasher, a New York City neighbor of George Washington, was hired to mint the first dollar denominated coins issued by the new republic.

Treasury secretary Alexander Hamilton was so impressed with his work that he appointed Brasher as the official American assayer. The coin is now so famous that it is featured in a Raymond Chandler novel where the tough private detective, Phillip Marlowe, attempts to recover the stolen coin. The book was made into a 1947 movie, ?The Brasher Doubloon,? starring George Montgomery.

This is not the first time that Don has had a profitable experience with this numismatic treasure. He originally bought it in 1989 for under $1 million, and has made several round trips since then. The real mystery is who bought it last? Don wouldn?t say, only hinting that it was a big New York hedge fund manager who adores the barbarous relic. He hopes the coin will eventually be placed in a public museum. Who says the rich aren?t getting richer?

July 12, 2013

Diary, Newsletter, Summary

Global Market Comments
July 12, 2013
Fiat Lux

Featured Trade:
(JULY 16 BERLIN STRATEGY LUNCHEON),
(WHEN THE DEMOGRAPHIC HEADWIND BECOMES A TAILWIND),
(AN AFTERNOON WITH ACE REPORTER HELEN THOMAS)
(STOPPING BY OBAMA?S HOUSE)

July 16 Berlin Strategy Luncheon

Diary, Lunch, Newsletter

Come join John Thomas for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Berlin, Germany, at 12:00 noon on Tuesday, July 16, 2013. A three-course lunch will be followed by a PowerPoint presentation and an extended question and answer period.

I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $219.

The lunch will be held at a downtown Berlin hotel within sight of the Brandenburg Gate, the details of which will be emailed with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.

Stopping by Obama?s House

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During my recent quick run through Chicago to visit clients, I couldn?t resist the temptation to stop by President Obama?s house and see how close I could get.

Nestled on Greenwood Avenue and 50th street in up and coming Hyde Park, I was thwarted by two concrete crash barriers, 16 cop cars, and army of elderly Chicago police happily pulling overtime. Shifty looking characters wearing long overcoats and sprouting wires out of their ears were everywhere. Needless to say, I did not get invited in for tea and cookies.

Every neighborhood bird nest, flagpole, and chimney sported video cameras, and Google Earth has wiped the block off the map. Not wanting to risk my valued Secret Service clearance, I scuttled out of there before anyone started asking questions.

The nice thing for Barack and Michele is that the house has probably doubled in value since he came into office four years ago. And who knows how much of a premium they will be able to command when it is designated a National Historic Site?

Instead, I settled for a visit to the delicious Valois Cafeteria around the corner, the president?s favorite diner, and his preferred bookstore at 57th Street Books. They carried all of his publications. Amazing!

I managed to run into someone, who knew someone, who once babysat Obama?s kids. Need, a presidential pardon, a cushy ambassadorial appointment, a new alternative energy program, or a juicy government contract? I?m now your ?go to? guy! Just make a discreet donation to my favorite 501 (3) (c) and it?s a deal.

When I lived on New York?s Sutton place overlooking the East River, my next-door neighbor was UN Secretary General Javier Perez de Cuellar. The Secret Service maintained a permanent box in front, and as a result, we had the only crime free block in the city. This was at a time during the early 1980?s when crime was raging in the Big Apple.

I bet Obama?s Chicago?s neighbors are now getting the same great deal.

Checking Out the Neighborhood

July 11, 2013

Diary, Newsletter, Summary

Global Market Comments
July 11, 2013
Fiat Lux

Featured Trade:
(JULY 19 FRANKFURT STRATEGY LUNCHEON),
(COFFEE WITH DR. ROBERT SHILLER),
(INVESTING IN DINOSAUR POOP)

July 19 Frankfurt Strategy Luncheon

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Come join me for lunch for the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Frankfurt, Germany on Friday, July 19, 2013. A three course lunch will be followed by a PowerPoint presentation and an extended question and answer period.

I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $239.

I?ll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at a prestigious private club not far from the Botanical Gardens, the details of which will be emailed to you with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.

Investing in Dinosaur Poop

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The dinosaur bone market has crunched. Once a favorite collectible of high-flying hedge fund managers, the prices of everything from tyrannosaurus rex to brontosaurus fossils have skidded. A recent auction of a triceratops skeleton failed to reach its minimum bid of $1 million. Even prices for fossilized dinosaur excrement, a popular niche market, have gone down the toilet.

The all-time high for these specimens was hit ten years ago when a T-rex named ?Sue? sold for $10 million, which, after much litigation, ended up in the Field Museum in Chicago. Floor traders in the pits should pay a visit to the museum to see what a real predator really looks like.

Dealers were hoping that the sale of a rare three foot tall, 18,000 year old possible pre human hominid, homo floresiensis, discovered in Indonesia, would help revive the market. Alas, the price came up short.

Meet ?Sue?

Coffee with Robert Shiller

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Yale professor, Robert Shiller, is the kind of imp like, peripatetic college professor you might expect to find in a Disney movie. Highly animated and jumping from one radical idea to the next it is hard to keep up with his stream of consciousness torrent of economic innovations. After a two-hour barrage, I was so intellectually exhausted that all I could do when I returned home was to plop down on the sofa with a Jack on the rocks and watch Fox News.

You know Robert Shiller as the creator of the Standard & Poors-Case Shiller Real Estate Index, which tracks 20 major residential housing markets around the US. His data was originally the domain of a handful of real estate brokers with a theoretical bent or securitizing investment bankers. But when the real estate collapse began to accelerate in 2007, it suddenly became the data point du jour for every property investor, business news network, and hedge fund manager.

Shiller is a devout non-believer of the efficient market theory espoused by Eugene Fama of the University of Chicago. He thinks that financial markets are so emotional that they are beyond rational analysis. The systemic vulnerability of financial markets was a major cause of the 2008 crash and is still not well understood. He argues that people should have a 100-year time horizon when making investments, because that?s how long today?s children will live. Does anyone have the trading call for the Spring of 2113? (No typo!).

He says that teaching finance today is about as popular as being the university Reserve Officer Training Corps (ROTC) instructor during the Vietnam War. People are angry at bankers, as the Occupy Wall Street crowd has so amply shown, which Shiller sees as our own ?Arab Spring?. Since 1990, the top 1% of the wealthy have seen their net worth soar by 60%, while it has fallen for the other 99%.

When Occupiers discovered that their movement could cause governments to fall, it rapidly spilled beyond its Madrid, Spain origins. But the financial industry is not all bad. Witness the miracle in emerging markets which has been made possible through new capital provided by western investment bankers.

Robert titillated me with some highly creative innovations which we may see adopted in coming years. I?ll give you the highlights.

*Options on individual real estate markets, now five years old, will go mainstream and finally become liquid as individuals seek to protect their home equity during economic downturns. This will become a major area of new profits for Wall Street.

*?Continuous mortgages? should be created whereby the debt is never paid off, but is assumed from one owner to the next in exchange for a higher interest rate. If you package many of these together and securitize them, it would be a major step towards clearing out the massive inventory of unsold homes.

*The government already issues plenty of bonds and next should sell equity in itself in one-trillionth increments. That puts the value of the government?s share price today at about $16.00. If the economy grows, the share price should go up.

*Tax rates for the wealthy should rise with inequality. The more wealth that is concentrated with the 1%, the higher the maximum tax rate should go. Remember, the maximum rate was 90% at the time of the Roosevelt administration during the Great Depression, nearly triple today?s 39% rate.

*The actual impact of high frequency traders, who he refers to as ?millisecond traders?, is vastly exaggerated.

*Although the new ?crowd funding? bill just signed by president Obama has been described as the ?Boiler Room Full Employment Act?, it will provide a valuable source of venture capital for micro startups. Those earning only $40,000 a year are limited to an $800 bet, with the maximum legal investment set at $10,000.

*Some 14% of the total economic activity of the US involves security. Just having people watching people is an enormous waste of resources.

*For profit nonprofits, called benefit corporations, should proliferate to advance specific social goals. These should work well as they pay little in wages and enjoy community support. They are already legal in eight states.

If you would like to attend one of Shiller?s classes for free and expose yourself to more out of the box economic thinking, you can do so through regular offerings of his online courses. To sign up for Open Yale University, which Time magazine lists as one of the top websites, please click the following link: ?http://oyc.yale.edu.