September 12, 2019

Global Market Comments
September 12, 2019
Fiat Lux

Featured Trade:

(FB), (AAPL), (AMZN), (GOOG), (SPOT), (IBM), (MSFT)

September 9, 2019

Global Market Comments
September 9, 2019
Fiat Lux

Featured Trade:

(FXB), (M), (XOM), (BAC), (FB), (AAPL),
 (AMZN), (ROKU), (VIX), (GS), (MS),


August 27, 2019

Global Market Comments
August 27, 2019
Fiat Lux

Featured Trade:

(AAPL), (AMZN), (SQ), (ROKU), (MSFT),

How to Execute a Vertical Bull Call Spread

Running this again to inform the latest batch of new subscribers.

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 small in price over a defined limited period of time.

It is the perfect position to have on board during markets that have declining or low volatility, much like we have experienced in 2014, 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 this year.

To understand this trade, I have used the example of the Apple trade, which I executed on July 10, 2014.  I then felt very strongly that Apple shares would rally strongly into the release of their new iPhone 6 on September 9, 2014.

The same play had started to kick in for the iPhone 7 released in September of 2016.

So followers of my Trade Alert service received text messages and emails to add the following position:

Buy the Apple (AAPL) August, 2014 $85-$90 in-the-money vertical bull call spread at $4.00 or best

To accomplish this, they had to execute the following trades:

Buy 25 August, 2014 (AAPL) $85 calls at………………$9.60

Sell short 25 August, 2014 (AAPL) $90 calls at..…….$5.60
Net Cost:…………………………………………………………..$4.00

This gets traders into the position at $4.00, which cost them $10,000 ($4.00 per option X 100 shares per option X 25 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 (August 15, 2014) and only different strike prices ($85 and $90).

The breakeven point can be calculated as follows:

$85.00  Lower strike price
+$4.00    Price paid for the vertical call spread
$89.00  Break even Apple share price

Another way of explaining this is that the call spread you bought for $4.00 is worth $5.00 at expiration on August 16, giving you a total return of 25% in 26 trading days. Not bad!

The great thing about these positions is that your risk is defined. You can’t lose any more than the $10,000 you put up, the $1,000, or the $100.

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 spreads so much.

As long as Apple traded at or above $89 on the August 14 expiration date, you would have made a profit on this trade.

As it turns out, my read on Apple shares proved dead on, and the shares closed at $97.98 on expiration day, or a healthy $8.98 above my breakeven point.

The total profit on the trade came to:

($1.00 X 100 X 25) = $2,500

This means that the position earned a 25% profit in little more than a month.

Occasionally, these things 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. On 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.

That stop loss us usually at the lower strike price when there is still a lot of time to run to expiration, as the position still has a lot of time value, and the upper strike price when there is only days to go to expiration.

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 own online platform, please click here.



Vertical Bull Call Spreads are the Way to Go in a Flat to Rising Market


August 22, 2019

Global Market Comments
August 22, 2019
Fiat Lux

Featured Trade:


(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),

What the Next Recession Will Look Like

The probability of a recession taking place over the next 12 months is now ranging as high as 40%. If the trade war with China escalates, you can mark that up to 100%.

And here’s the scary part. Bear markets front-run recessions by 6-12 months, i.e. now. The bear case is now more persuasive than at any time in the last decade.

We’ll get a better read when the Chinese announce their retaliation for the last American escalation of tariffs on September 1, or in eight trading days. The timing couldn’t be worse. The bad news will come over the US three-day Labor Day weekend, allowing market volatility (VIX) to bunch up, setting up an explosive Tuesday, September 3 opening.

So, it’s time to start asking the question of what the next recession will look like. Are we in for another 2008-2009 meltdown, when friends and relatives lost homes, jobs, and their entire net worth? Or can we look forward to a mild pullback that only economists and data junkies like myself will notice?

I’ll paraphrase one of my favorite Russian authors, Fyodor Dostoevsky, who in Anna Karenina might have said, “all economic expansions are all alike, while recessions are all miserable in their own way.”

Let’s look at some major pillars in the economy. A hallmark of the last recession was the near collapse of the financial system, where the ATMs were probably within a week of shutting down nationally. The government had to step in with the TARP, and mandatory 5% equity ownership in the country’s 20 largest banks.

Back then, banks were leveraged 40:1 in the case of Morgan Stanley (MS) and Goldman Sachs (GS), while Lehman Brothers and Bear Stearns were leveraged 100:1. In that case, the most heavily borrowed companies only needed markets to move 1% against them to wipe out their entire capital. That’s exactly what happened. (MS) and (GS) came within a hair’s breadth of going the same way.

Thanks to the Dodd Frank financial regulation bill, banks cannot leverage themselves more than 10:1. They have spent a decade rebuilding balance sheets and reserves. They are now among the healthiest in the world, having become low margin, very low-risk utilities. It is now European and Chinese banks that are going down the tubes.

How about real estate, another major cause of angst in the last recession? The market couldn’t be any more different today. There is a structural shortage of housing, especially at entry-level affordable prices. While liar loans and house flipping are starting to make a comeback, they are nowhere near as prevalent a decade ago. And the mis-rating of mortgage-backed securities from single “C” to triple “A” is now a distant memory. (I still can’t believe no one ever went to jail for that!).

And interest rates? We went into the last recession with a 6% overnight rate and 7% 30-year fixed rate mortgage. Now, overnight rates are at 2.25% and the 30-year is at 3.6% with both falling like a stone. It’s hard to imagine a real estate crisis with rates at zero and a shortage of supply.

The auto industry has been in a mild recession for the past two years, with annual production stalling at 16.8 million units, versus a 2009 low of 9 million units. In any case, the challenges to the industry are now more structural than cyclical, with new buyers decamping en masse to electric vehicles made on the west coast.

Of far greater concern are industries that are already in recession now. Energy has been flagging since oil prices peaked seven years ago, despite massive tax subsidies. It is suffering from a structural over supply and falling demand.

Retailers have been in a Great Depression for five years, squeezed on one side by Amazon and the other by China. A decade into store closings and the US is STILL over stored. However, many of these shares are already so close to zero that the marginal impact on the major indexes will be small.

Financials and legacy banks are also facing a double squeeze from Fintech innovation and collapsing interest rates. There isn’t much margin in a loan where the customer is paying only 3.6%, and 2% in a year. All of those expensive national networks with branches on every street corner will be gone in the 2020s.

And no matter how bad the coming recession gets, technology, now 26% of the S&P 500, will keep powering on. Combined revenues of the four FANGs in Q2 came in at $118.7 billion and earnings were at $26.5 billion. That leaves a mighty big cushion for any slowdown. That’s a lot more than the “eyeballs” and market shares they possessed of a decade ago.

So, netting all this out, how bad will the next recession be? Not bad at all. I’m looking at a couple of quarters small negative numbers. Then the end of the China trade war, which can’t last any more than 18 months, and ultra-low interest rates, will enable recovery and probably another decade of decent US growth.

The stock market, however, is another kettle of fish. While the economy may slow from a 2.2% annual rate to -0.1% or -0.2%, the major indexes could fall much more than that, say 30% to 40%. Don’t forget, we already saw a horrendous 20% swan dive in the run-up to last December.

Earnings multiples are still at a 17X high compared to a 9X low in 2009. Shares would have to drop 47% just to match the last low, and earnings are already falling. Equity weightings in portfolios are high. Money is pouring out of stock funds into bond ones.

Corporations buying back their own shares have been the principal prop from the market for the past three years. Some large companies, like Kohls (KSS), have retired as much as 50% of their outstanding equity in ten years.

So get used to the high market volatility (VIX) we have seen in August. It could be only the trailer for the main show.





The Next Bear Market is Not Far Off

August 21, 2019

Global Market Comments
August 21, 2019
Fiat Lux

Featured Trade:

(AAPL), (AMZN), (MSFT), (NVDA), (TSLA), (WFC), (FB)

August 8, 2019

Global Market Comments
August 8, 2019
Fiat Lux

Featured Trade:

(FB), (AAPL), (AMZN)

The Tale of Two Economies

I’m looking at my screens this morning and virtually every stock sold short by the Dairy of a Mad Hedge Fund Trader cratered to new six-month lows.

Call it lucky, call it fortuitous. All I know is that the harder I work the luckier I get.

If you are in the right economy, that of the future, you are having another spectacular year. If you aren’t, you are probably posting horrific losses for 2019. Call it the “Tale of two Economies.”

I suspected that this was setting up over the last couple of weeks. No matter how much bad news and uncertainty dumped on these companies, the shares absolutely refused to go down. Instead, they flat lined just below their 2019 highs. It was a market begging for a selloff.

When the Facebook (FB) hacking scandal hit, investors were ringing their hands about the potential demise of Mark Zuckerberg’s vaunted business model and the shares plunged to $123.

However, while analysts were making these dire productions, I knew that Facebook itself was signing a long-term lease for a brand new 46-story skyscraper in downtown San Francisco just to house its Instagram operations.

Months later, and the company that misused Facebook’s data, Steve Bannon’s Cambridge Analytica, is bankrupt, and (FB) is trading at $185, a new high. Facebook was right, and the Cassandras were wrong.

Amazon was given up for dead during the February melt down as the shares withered from a daily onslaught of presidential attacks threatening antitrust action. Today, the shares are up a mind-blowing 38% above those lows.

And when Apple announced its earnings, the shares tickled $222, putting it squarely back into the ranks of the $1 trillion club ($949 billion at today’s close).

It turns out that technology companies are immune from most of the negative developments that have caused the rest of the stock market to drag. I’ll go through these one at a time.

Falling Interest Rates

Tech companies are sitting gigantic cash mountains, some $245 billion in Apple’s case, which means that as net lenders to the credit markets, they are beneficiaries of the credit markets. This makes tech companies immune from the credit problems that will demolish old economy industries during the next rate spike.

Rising Oil Prices

While tech companies are prodigious consumers of electricity, many power these with massive solar arrays and they sell periodic excess power to local utilities. So as net energy producers, they profit from rising energy prices.

Rising Inflation

Since the output of technology companies is entirely digital, they can handily increase productivity faster than the inflation rate, whatever it is. Traditional old economy companies, like industrials and retailers can’t do this.

Remember that while analogue production grows linearly, digital production grows exponentially, enabling tech companies to handily beat the inflation demon, leaving others behind in the dust.

Share Buybacks

While technology companies account for only 26% of the S&P 500 stock market capitalization, they generate 50% of the profits. Thanks to the massive tax breaks and low tax repatriation of foreign profits enabled by the 2017 tax bill, share buybacks are expected to rocket from $500 billion to $1 trillion this year. Companies repurchasing their own shares have become the sole net buyers of equities in 2019.

And companies with the biggest profits buy back the most stock. This has created a virtuous cycle whereby higher share prices generate more buybacks to create yet higher share prices. Old economy companies with lesser profits are buying back little, if any, of their own shares.

Of course, tech companies are not without their own challenges. For a start, they have each other to worry about. FANGs will simultaneously cooperate with each other in a dozen areas, while fight tooth and nail and sue on a dozen others. It’s like watching Silicon Valley’s own version of HBO’s Game of Thrones.

Also, occasionally, the tech story becomes so obvious to the unwashed masses that it creates severe overbought conditions and temporary peaks, like we saw in January.



August 5, 2019

Mad Hedge Technology Letter
August 5, 2019
Fiat Lux

Featured Trade:

(AAPL), (NVDA), (INTC), (MU), (WDC), (BBY)