Global Market Comments
March 7, 2019
Fiat Lux
Featured Trade:
(BETTER BATTERIES HAVE BECOME BIG DISRUPTERS)
(TSLA), (XOM), (USO)
Global Market Comments
March 6, 2018
Fiat Lux
Featured Trade:
(WILL UNICORNS KILL THE BULL MARKET?),
(TSLA), (NFLX), (DB), (DOCU), (EB), (SVMK), (ZUO), (SQ),
(A NOTE ON OPTIONS CALLED AWAY), (TLT)
With stock market volatility greatly elevated and trading volumes through the roof, there is a heightened probability that your short options position gets called away.
I have already gotten calls from holders of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) March 2019 $124-$126 in-the-money vertical BEAR PUT spread who have seen their short March $124 puts called away.
If it does, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position. You just won the lottery, literally.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money call option spread, it contains two elements: a long call and a short call. The short called can get assigned, or called away at any time.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it.
What your broker had done in effect is allow you to get out of your put spread position at the maximum profit point seven days before the March 15 expiration date.
All you have to do was call your broker and instruct him to exercise your long position in your March $126 to close out your short position in the March $124.
Puts are a right to sell shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations.
A call owner may need to sell a long stock position right at the close, and exercising his long March 15 puts is the only way to execute it.
Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, calls even get exercised by accident. There are still a few humans left in this market to blow it.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.
This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Global Market Comments
March 5, 2019
Fiat Lux
Featured Trade:
(THE BIPOLAR ECONOMY),
(AAPL), (INTC), (ORCL), (CAT), (IBM),
(TESTIMONIAL)
Corporate earnings are up big! Great!
Buy!
No, wait!
The economy is going down the toilet!
Sell!
Buy! Sell! Buy! Sell!
Help!
Anyone would be forgiven for thinking that the stock market has become bipolar.
According to the Commerce Department’s Bureau of Economic Analysis, the answer is that corporate profits account for only a small part of the economy.
Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly or are too small to have much of an impact.
Wages and salaries are in a three-decade-long decline. Interest and investment income are falling because of the ultra-low level of interest rates. Farm incomes are at a decade low, thanks to the China trade war, but are a tiny proportion of the total, and agricultural prices have been in a seven-year bear market.
Income from non-farm unincorporated business, mostly small business, is unimpressive.
It gets more complicated than that.
A disproportionate share of corporate profits is being earned overseas.
So, multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes.
They really get to have their cake and eat it too. Many of their business activities are contributing to foreign GDPs, like China’s, far more than they are here.
Those with large domestic businesses, like retailers, earn less but pay more in tax as they lack the offshore entities in which to park them.
The message here is to not put all your faith in the headlines but to look at the numbers behind the numbers.
Caveat emptor. Buyer beware.
What’s In the S&P 500?
S&P Top 10 Holdings 3-4-2019
S&P Top 10 Holdings 3-4-2019
Has the Market Become Bipolar?
I cannot give higher marks to John's style of approaching the market. My wife has learned so much from him that we are actually having conversations about the global economy. Wow! You will learn money management, the concept of risk versus reward, and how to take advantage of trades that are worth taking.
Thanks John!
Robert
“Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all,” said Oracle of Omaha Warren Buffet.
Global Market Comments
March 4, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or THE RECESSION HAS BEGUN),
(SPY), (TLT), (GLD), (AAPL)
I hate to be the one to fart in church here, but the long-feared recession has already started.
It’s not a conventional recession defined by two back to back quarters of negative GDP growth, although you have a tough time convincing anyone in the besieged auto, real estate, or agricultural sectors of that.
No, this is more of a growth recession. US GDP growth peaked at a 4.4% annualized rate during the second quarter of 2018. The third quarter came in at 3.4% and the four quarter at only 2.6%. Consensus forecasts for Q1 2019 are well below 1%, thanks to the government shutdown.
That means the growth rate has fallen by an eye-popping 76% in nine months! By the way, the government has told us that economic growth has been rising this entire time. But want the stimulus from the 2017 tax bill were spent, there were no more bullets left.
If it were just the GDP data that was falling off a cliff, I wouldn’t be so worried. However, the weakness is confirmed by a raft of other data. The ten year US Treasury bond (TLT) remains stuck around 2.75%, an incredibly low figure given that we are ten years into an economic recovery.
Corporate earnings growth forecasts going forward are now at zero. To see a market multiple of 18X for stocks with no growth and prices that are just short of all-time highs defies belief. This will all lead us to a REAL recession sometime in the near future.
What we are left with is a market of very low return, high-risk trades, not the kind you want to pursue, let alone bet the ranch on.
I believe that when the BIG ONE finally arrives, it won’t be all that bad. I’m looking for a short, sharp recession of maybe six months in duration. There really isn’t that much leverage in the system that can blow up. It might even not be worth selling out all your stocks to avoid it, especially if it results in a giant tax bill.
You would also be selling in front of my coming Golden Age for the United States when a huge demographic tailwind brings a new era of prosperity. If you are smart enough to get out at the top now, will you also be clever enough to get back in at the bottom? Or will you sell more instead, like you did in December?
Merger fever hit the gold industry with Barrick Gold (GOLD) taking a run at Newmont Mining (NEM), the world’s first and second largest producers. It’s all about efficiencies of scale. Take this as a long-term bottom in gold prices.
The China tariff hike was postponed indefinitely, and Chinese stocks love it. Import duties will stay at 10%, instead of rising by 25% starting last Friday. We knew it was never going to happen.
Some 95% of the China trade deal is now already priced into the market. If a deal DOESN’T get done and goes the way of the North Korean negotiations, the market will very quickly back out that 95%.
Poor economic data was to be found everywhere you looked. Wholesale Inventories rose sharply, up 1.1% in another recession indicator. US Factory Orders came in incredibly weak at 0.1% in December when 0.6% was expected. Recession indicator number one million. Limit your risk.
Our friend Jay stayed dovish again, but markets yawned this time. How much mileage can you get from the same vague assertion? Shorts are about to swarm the market. Take profits on all longs.
The US Dollar hit a three-week low. The Fed’s dovish leanings are hammering the buck. Keep loading the boat with weak dollar plays, like emerging markets (EEM).
Bonds got crushed delivering their worst week in five months, down three points as the great “crowding out” begins. Massive corporate borrowing can’t compete with government borrowing, so rates are rising sharply. This is the beginning of the end. Sell short the (TLT).
February came in at a hot +4.16% for the Mad Hedge Fund Trader. My 2019 year-to-date return ratcheted up to +13.64%, a new all-time high and boosting my trailing one-year return back up to +31.90%.
My nine-year return clawed its way up to +313.78%, another new high. The average annualized return appreciated to +33.94%.
I am now 80% in cash, 10% long gold (GLD), and 10% short bonds (TLT). We have managed to catch every major market trend this year, loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD). I am trying to avoid stocks until the China situation resolves itself one way or the other.
As for the Mad Hedge Technology Letter, it is short Apple (AAPL).
Q4 earnings reports are pretty much done, so the coming week will be all about jobs, jobs, jobs.
On Monday, March 4, at 10:00 AM EST, December Construction Spending is published.
On Tuesday, March 5, 10:00 AM EST, December New Home Sales are out.
On Wednesday, March 6 at 10:00 AM EST, the February ADP Employment Report is out, a measure of private sector hiring.
Thursday, March 7 at 8:30 AM EST, we get Weekly Jobless Claims.
On Friday, March 8 at 8:30 AM EST, we get the February Nonfarm Payroll Report is released. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’m taking the kids to see Hello Dolly in San Francisco. This was one of my parents’ favorite Broadway musicals, and they used to sing the songs around the house all day long. However, it won’t be the same without the late Carol Channing.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 1, 2019
Fiat Lux
Featured Trade:
(OH, HOW THE MIGHTY HAVE FALLEN),
(BRK/A), (AXP), (AAPL), (BAC), (KO), (WFC), (KHT),
(AMGEN’S BIG WIN), (AMGN), (SNY), (REGN)
