“The best way to predict the future is to create it.” – Said American Writer Peter Drucker
Global Market Comments
November 10, 2023
Fiat Lux
SPECIAL VETERANS DAY ISSUE
Featured Trade:
(A TRIBUTE TO A TRUE VETERAN)
Global Market Comments
November 9, 2023
Fiat Lux
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD),
(AAPL)
We have recently had a large influx of new subscribers.
I have no idea why. Maybe it’s my sterling personality and rapier-like wit.
For whatever reason, I think it's time for all to undergo a refresher course on how to most efficiently go long the market with the best possible risk/reward ratio.
I’m talking about buying vertical bull call debit spreads.
Most investors make the mistake of investing in positions with only a 50/50 chance of success, or less. They’d do better with a coin toss.
The most experienced hedge fund traders find positions that have a 99% chance of success and then leverage up on those trades. Stop out of the losers quickly and you have an approach that will make you well into double digits, year in and year out, whether markets go up, down, or sideways.
For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted a training video on How to Execute a Vertical Bull Call Spread.
This is a matched pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down in price over a defined limited period.
It is the perfect position to have on board during markets that have declining or low volatility, much like we have experienced for most of the last several years, and will almost certainly see again.
I have strapped on quite a few of these babies across many asset classes this year, and they are a major reason why I am up so much this year.
To understand this trade I will use the example of the Apple trade, which most people own and know well.
On October 8, 2018, I sent out a Trade Alert by text messages and email that said the following:
BUY the Apple (AAPL) November 2018 $180-$190 in-the-money vertical BULL CALL spread at $8.80 or best
At the time, Apple shares were trading at $216.17. To accomplish this, they had to execute the following trades:
Buy 11 November 2018 (AAPL) $180 calls at….……..…$38.00
Sell short 11 November 2018 (AAPL) $190 calls at…...$29.20
Net Cost:…………………….………..…...............……….….....$8.80
A screenshot of my own trading platform is below:
This gets traders into the position at $8.80, which costs them $9,680 ($8.80 per option X 100 shares per option X 11 contracts).
The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (November 16, 2018), and only different strike prices ($180 and $190).
The maximum potential profit can be calculated as follows:
+$190.00 Upper strike price
-$180.00 Lower strike price
+$10.00 Maximum Potential Profit
Another way of explaining this is that the call spread you bought for $8.80 is worth $10.00 at expiration on November 16, giving you a total return of 13.63% in 27 trading days. Not bad!
The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,680 you put up.
If Apple goes bankrupt, we get a flash crash or suffer another 9/11-type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like vertical bull call spread so much.
As long as Apple traded at or above $190 on the November 16 expiration date, you will make a profit on this trade.
As it turns out, my take on Apple shares proved dead-on, and the shares rose to $222.22, or a healthy $32 above my upper strike.
The total profit on the trade came to:
($10.00 expiration - $8.80 cost) = $1.20
($1.20 profit X 100 shares per contract X 11 contracts) = $1,320.
To summarize all of this, you buy low and sell high. Everyone talks about it but very few actually do it.
Occasionally, Vertical Bull Call Spreads don’t work and the wheels fall off. As hard as it may be to believe, I am not infallible.
So if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a LOT, you will lose money. In those rare cases when that happens, I’ll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.
I start looking at a stop loss when the deficit hits 10% of the size of the position or 1% of the total capital in my trading account.
To watch the video edition of How to Execute a Vertical Bull Call Spread complete with more detailed instructions on how to execute the position with your online platform, please click here.
Good luck and good trading.
Vertical Bull Call Spreads Are the Way to Go in a flat to Rising Market
“Semiconductors are the new industrials,” said Josh Brown of Ritholtz Wealth Management.
Global Market Comments
November 8, 2023
Fiat Lux
(I HAVE A NEW OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(TESTIMONIAL),
(RIGHT SIZING YOUR TRADING)
Global Market Comments
November 7, 2023
Fiat Lux
MY BEN BERNANKE INTERVIEW
Featured Trade:
(COFFEE WITH BEN BERNANKE)
During 2008-2009, when the financial markets completely fell to pieces, and credit froze up, I thought, “Great, I am going to have to spend the rest of my life reliving my grandparents’ Great Depression.
One of the great policy minds of our generation, Ben Bernanke, single-handedly made sure that didn’t happen. He knew what he needed to do, was creative, and took bold action, even though he was well aware that it was diametrically opposed to his own political party’s principles.
An uproar ensued.
Now a fellow at the famed think tank, the Brooking Institution in Washington DC, Ben passed through town recently to promote his latest book out in 2022 entitled “21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19.”
For eight years I watched Bernanke speak at press conferences in the most careful, restrained, cautious manner possible. After all, as the governor of America’s central bank, a mere slip of the tongue could cause panic and financial destruction. Each one was like attending a graduate class in economics. I learned from all of them.
Today, he is a completely different man. Voluble, opinionated, and even sarcastic, he let loose with one blockbuster revelation after another. It was like the dam broke, and he was making up for lost time.
Today, Bernanke counts time in terms of Federal Open Market Committee meetings (the FOMC).
He describes the week that Lehman Brothers went bankrupt as the worst panic in American history. He tried to sell it to Bank of America or Barclays Bank. But when they discovered a whopping great $70 billion hole in the balance sheet, the wheels fell off.
The bailout of insurance giant AIG was an easier sell to President George W. Bush. Although it was $85 billion in the hole, it had $1 trillion in assets, which could eventually be liquidated. They were, creating immense profits for the government.
Ben describes the TARP bank rescue package as the least popular, most successful government program in history. It was the first time the federal government took equity ownership in private banks, some 5% of the top 20.
Totally against the president’s own ideology, and voted down by his own Republican Party, it ended up generating a profit of almost $100 billion.
Oh, and it saved the global financial system too.
The key to the economic recovery was for the Fed to aggressively cut interest rates, while Europe was raising theirs. US stock markets certainly believed in it, nearly tripling off a March 2009 bottom, while the continent stagnated for six more years.
No money was ever printed during quantitative easing, contrary to popular belief. The Fed simply bought $8 trillion in bonds from the Treasury and will run them to maturity.
It’s as if they never existed. Money simply went out of one pocket into another, and the broad monetary measures were left untouched by human hands.
Ben believed he could pursue such an aggressive stance because inflationary concerns back then were “complete nonsense.”
The former Yale professor concedes that the Fed underestimated the impact of the crash. The GDP growth rate since then has been lower than he anticipated, but unemployment fell faster than thought possible, from 10.2% to 3.8% as of today.
The Fed also kept the economy from falling into the kind of liquidity trap that has mired Japan for 33 years. When prices fall, consumers hold back, knowing they can get a better deal, sapping the life out of the economy.
In the meantime, lenders are punished, as the collateral backing their debt declines as well. This is why almost all central banks are deliberately targeting a 2% inflation rate today, including ours.
Ben noted that the technologically uneducated have suffered more in this recovery than in past ones, as the rate of innovation has been so frenetic, and is accelerating thanks to AI.
This has particularly disadvantaged blue-collar workers the most, where job gains have been the weakest. Hence the recent United Auto Workers strike.
Bernanke was the smartest kid in rural Dillon, South Carolina, who, through a series of improbable accidents, and intervention by a local black civil rights leader, ended up at Harvard.
He built his career on studying the Great Depression, then the closest thing to paleontology economics had to offer, a field focused so distantly on the past that it was thought to be irrelevant.
Bernanke took over the Fed in 2006 when Greenspan was considered a rock star, inhaling his libertarian, free-market, Ayn Rand-inspired philosophy in great giant gulps.
Within a year, the economy had suddenly transported itself back to the Jurassic Age, and the landscape was suddenly overrun with T-Rex’s and Brontesauri.
He tried to stop the panic in 150 different ways, 125 of which were terrible ideas, the remaining 25 saving us from the Great Depression II.
The Fed governor is naturally a very shy and withdrawing person and would have been quite happy limiting his political career to the Princeton, New Jersey school board.
To rebuild confidence, he took his campaign to the masses, attending town hall meetings and pressing the flesh like a campaigning first-term congressman.
The price tag for Ben’s success has been large, with the Fed balance sheet exploding from $800 million to $9 trillion. The true cost of the financial crisis won’t be known for a decade or more.
Ben thinks that the biggest risk is that we grow complacent, having pulled back from the brink, and let desperately needed reforms of the financial system and the rebuilding of Fannie Mae and Freddie Mac slide.
Ben Bernanke’s legacy will be defined by how well his successors do their jobs. That’s when we find out who Ben Bernanke really was.
Unwind the massive Fed balance sheet too soon, and we go back into a real depression. Too late, and hyperinflation hits. They call this “Threading the needle.”
Yikes!
Today, Bernanke sees absolutely no signs of a coming recession whatsoever. Housing has yet to seriously join the party, but will.
This is big if you are a daily player in the stock market, such as myself. He is rightfully proud of the work he did restoring the economy.
Bernanke also voiced complete confidence in his hand-picked successor, and my friend, former Berkeley professor Janet Yellen.
Ben finished our meeting with a sigh of relief, saying he was “Glad he doesn’t have to do this anymore.”
I’m happy too that we no longer need a Ben Bernanke to save our bacon. There might not be another available.
Global Market Comments
November 6, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or VINDICATION WEEK)
(SPY), (QQQ), (IWM), (NVDA), (BRK/B), (TLT)
It was truly vindication week for the bulls. All major Indexes clocked their best week of the year
The patience was rewarded. The S&P 500 (SPY) gained an impressive 6.09%, the NASDAQ ETF (QQQ) 7.35%, and the small-cap Russell 2000 (IWM) 8.64%. A recent favorite of mine, mortgage REIT lender Anally Capital Management (NLY) soared by an amazing 21%
Better yet, all of my Mad Hedge forecasts came true. Big tech led the charge, with our long in NVIDIA (NVDA) up a gob-smacking 16.67%. Another long in Berkshire Hathaway (BRK/B) gained 7.5%. And our long in US Treasury bonds (TLT) picked up a welcome $6.00, dropping ten-year yield from 5.0% to 4.52%.
The 60/40 stock and bond/portfolio came back with a vengeance. This time, everything went up.
The harder I work, the luckier I get.
The markets accomplished these feats against a geopolitical background that couldn’t be worse. The Gaza War is lurching from one tragedy to the next. The Ukraine War grinds on (but without me). Saber rattling continues in China.
It just goes to show how far out on a limb the shorts had gotten and the extent of buying demand that was pent up.
It all sets up a nice year-end rally. We may not reach the $4,800 target I expected at the beginning of 2023. But a $4,600 hit is within range. Don’t expect a straight line move there. The world is still a pretty unsettled place. It's definitely going to be a stock pickers market (NVDA), (BRK/B), and (TLT) and not an index one.
Particularly fascinating is how Berkshire Hathaway absolutely Knocked it Out of the Park, with a 41% gain in operating earnings from companies like BNSF Railroad, Geico, and Precision Castparts. But Warren Buffet was noted in his weekend earnings report more from what he didn’t own than what he did.
The Oracle of Omaha unloaded $5 billion worth of global stocks in Q3, taking his cash position up to a record $157 billion. He can now earn a staggering $8.6 billion in interest in the coming year. His explanation is that stocks never really got cheap this year and high rates were just too attractive. Keep buying (BRK/B) on dips. And buy the things he buys.
And with the number of new investment opportunities and sectors to chase that almost can’t be counted, I will prompt you to look at some oldies buy goodies.
PC stocks are back in play, namely Dell Computer (DELL) and Hewlett Packard (HPQ). How about those for a blast from the past? I think it’s been 30 years since I touched these legacy tech companies.
The fact is that AI is rapidly moving downstream as far down as your humble PC, which in the meantime has gotten cheaper and much more powerful. PCs are now the dumb end of a link that can access the AI superheroes of the day, like ChatGPT. It’s a lot like the old Quotron used to be the access point to the New York Stock Exchange mainframes for current price information.
Dell shares have already outperformed, up 57% in just six months, while HP is just getting started. You might take a look.
So far in November, we are up +1.97%. My 2023 year-to-date performance is still at an eye-popping +68.15%. The S&P 500 (SPY) is up +14.21% so far in 2023. My trailing one-year return reached +75.21% versus +25.62% for the S&P 500.
That brings my 15-year total return to +665.34%. My average annualized return has rocketed to +50.85%, another new high, some 2.61 times the S&P 500 over the same period. I am at maximum profit on all positions and am looking to add more on a dip.
Some 47 of my 52 trades this year have been profitable.
Fed Leaves Rates Unchanged. It’s not the end of high rates, nor the end of the beginning, but the beginning of the end. Powell may contemplate actual rate CUTS in six months, driven by the certain slowing of growth and inflation in the current quarter. Markets will start discounting that now as seen by the 30-basis point back off in rates this week. No surprise then that there is a short covering buying panic across the entire fixed income front today.
Palantir Rockets on New AI Demand, up 20% at the opening, even though its substantial government business slowed. The company announced the fourth consecutive quarter of profitability and highest earnings since its founding 20 years ago. The Denver-based data analysis company said Thursday it expects 2023 revenue of about $2.22 billion. Buy (PLTR) on dips.
Buying Panic Hits All Fixed Income Markets, with falling Fed interest rates appearing on the distant horizon. (TLT) is up $1.60, (JNK) $0.80, and (NLY) REITS up $0.45. This could be the trade of the decade, with (TLT) targeting $110 by early 2024.
Homebuyers are Pouring into ARMs, or adjustable-rate mortgages, shunning 30-year fixed rates at a mind-numbing 8.0%. ARMs could be had at 6.77% last week. Overall, mortgage applications are down 22% YOY.
Panasonic Says EV Demand is Sluggish, taking Tesla Shares down 5%, and off 35% from the recent high. Elon Musk says the Cybertruck will take a year to 18 months before it is a significant positive cash flow contributor. Full disclosure: I am on the waiting list. The Street expects Tesla to hit 2.3 million vehicle deliveries next year, an increase of about 500,000 year over year. Buy (TSLA) on dips.
Bank of Japan Eases Grip on Bond Yields, ending its unlimited buying operation to keep interest rates down. Japan is the last country to allow rates to rise. Expect the Japanese yen to take off like a rocket.
Hedge Fund Pour into Uranium, as the nuclear renaissance gains steam. Prices have gained 125% in three years. The International Energy Agency says demand will double by 2050. There are 440 nuclear power plants in the world that represent a non-carbon source of energy and China plans another 100 coming on line. Buy (CCJ) on dips.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, November 6 at 8:30 PM EST, the US Loan Officer Survey is out.
On Tuesday, November 7 at 2:30 PM, the US Imports and Exports are released.
On Wednesday, November 8 at 3:15 PM, the Fed Chair Jay Powell Speaks.
On Thursday, November 9 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, November 10 at 2:30 PM, the University of Michigan Consumer Sentiment is published. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, I have been doing a lot of high-altitude winter mountain climbing lately, and with the warm spring weather, the risk of avalanches is ever-present. It takes me back to the American Bicentennial Everest Expedition, which I joined in 1976.
It was led by my old friend, instructor, and climbing mentor Jim Whitaker, who pulled an ice ax out of my nose on Mt. Rainer in 1967 (you can still see the scar). Jim was the first American to summit the world’s highest mountain. I tried to break a high-speed fall and an ice ax kicked back and hit me square in the face. If I hadn’t been wearing goggles I would have been blinded.
I made it up to 22,000 feet on Everest, to Base Camp II without oxygen because there were only a limited number of canisters reserved for those planning to summit. At that altitude, you take two steps and then break to catch your breath.
There is a surreal thing about that trip that I remember. One day, a block of ice the size of a skyscraper shifted on the Khumbu Ice Fall, and out of the bottom popped a body. It was a man who went missing on the 1962 American expedition. Everyone recognized him as he hadn’t aged a day in 15 years, since he was frozen solid.
I boiled my drinking water but at that altitude, water can’t get hot enough to purify it. So I walked 100 miles back to Katmandu with amoebic dysentery. By the time I got there, I’d lost 50 pounds, taking my weight to 120 pounds.
Jim was an Eagle Scout, the first full-time employee of Recreational Equipment Inc. (REI), and last climbed Everest when he was 61. Today, he is 92 and lives in Seattle, WA.
Jim reaffirms my belief that daily mountain climbing is a great life extension strategy, if not an aphrodisiac.
Mount Everest 1976
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
