Global Market Comments
July 21, 2023
Fiat Lux
Featured Trades:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
CLICK HERE to download today's position sheet.
Tag Archive for: (GS)
The probability of a recession taking place over the next 12 months is now low ranging as high as 20%. If it reaccelerates, not an impossibility, you can take that up to 100%.
And here’s the scary part. Bear markets front-run recessions by 6-12 months, i.e. now.
We’ll get a better read on the inflation numbers over the coming months. If inflation turns hot again, the Fed will be forced to raise rates to once unimagined levels.
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 of the economy. A hallmark of the 2008 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 is 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 as 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 a 7% 30-year fixed rate mortgage. Here we are once again.
The auto industry has been in a mild recession for the past two years, with annual production stalling at 15 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 18 months ago, despite massive tax subsidies. It is suffering from a structural oversupply 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. All of those expensive national networks with branches on every street corner will be gone later in the 2020s.
And no matter how bad the coming recession gets technology, now 30% of the S&P 500, will keep powering on. Combined revenues of the “Magnificent Seven” in Q1 are at records. That leaves a mighty big cushion for any slowdown. That’s a lot more than the “eyeballs” and market shares they possessed 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, like two back-to-back -0.1%’s. Then we’ll see a 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%.
Earnings multiples are still at a 19X high compared to a 9X low in 2009. Shares would have to drop 53% just to match the last low. Equity weightings in portfolios are low. 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.
The Next Bear Market is Not Far Off
Global Market Comments
July 12, 2023
Fiat Lux
Featured Trades:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
CLICK HERE to download today's position sheet.
Global Market Comments
April 13, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE SUMMIT VIDEOS ARE UP),
(THE BULL CASE FOR BANKS),
(JPM), (BAC), (C), (WFC), (GS), (MS)
CLICK HERE to download today's position sheet.
Banks have become the call option on a US economic recovery.
When the economic data runs hot, banks rally. When it’s cold, they sell off. So, in recent months bank share prices have been melting up.
If we are falling into a recession, then unloading banks here is the right thing to do. If we’re not, and this is really a fake out, then you are looking at the buying opportunity of the decade for banks.
I fall in the latter camp.
There also is a huge sector rotation issue staring you in the face. Where would you rather put new money, stocks at all-time highs trading at ridiculous multiples, like energy stocks, or a quality sector in the bargain basement?
Big institutions have already decided what to do and are buying every dip in financials.
Banks certainly took it on the nose in 2022. Loan default rates soared, demanding a massive increase in loan loss provisions.
Much more stringent accounting rules also kicked in known as “Current Expected Credit Losses.” That requires banks to write off 100% of their losses immediately, rather than spread them out over a period of years.
So what happens next?
For a start, fall down on your knees and thank that Dodd-Frank, the Obama-era financial regulation bill, was passed.
Banks carped for years that it unnecessarily and unfairly tied their hands by limiting leverage ratios to only 10:1. Morgan Stanley reached 40:1 going into the Great Recession and barely made it out alive, while ill-fated Lehman Brothers reached a suicidal 100:1 and didn’t.
That meant the banks went into the pandemic with the strongest balance sheets in decades. No financial crisis here.
Thanks to government efforts to bring the pandemic hit to the economy to a quick end, generous fees have been raining down on the banks from the numerous loan programs they helped to implement, such as PPP.
And trading profits? You may have noticed that options trading volume is up a monster 100% so far in 2023. That falls straight to the banks’ bottom lines. If you’re wondering why your online trading platform keeps crashing that’s why.
I list below my favorite bank investments using the logic that during depressions you want to buy Rolls Royces, Teslas, and Cadillacs at deep discounts, not Volkswagens, Fiats, or Trabants.
JP Morgan (JPM) – is the crown jewel of the sector, with the best balance sheet and the strongest customers. It has over reserved for losses that are probably never going to happen, stowing away some $25 billion in the last quarter alone.
Morgan Stanley (MS) - Brokerage-oriented ones like Morgan Stanley (MS) and Goldman Sachs (GS) are benefiting the most from the explosion in stock and options trading. Morgan’s focus on asset management has made it the first pick among investors demanding a high multiple. I’ll pick my former employer (MS), where I once accounted for 80% of equity division profits.
Bank of America (BAC) - is another quality play with a fortress balance sheet.
Citigroup (C) – is the leveraged play in the sector with a slightly weaker balance sheet and a more aggressive marketing strategy. It seems like they’re always trying to catch up with (JPM). This is the high volatility play in the sector.
And what about Wells Fargo (WFC) you may ask, the cheapest bank of all? This year, it has shaken off hair suit because of its many regulatory transgressions, before, during, and after the financial crisis so I’ll give it a miss.
Here's My Pick
Global Market Comments
March 29, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT VIDEOS ARE UP!)
(Trade Alert - (GS) LEAPS – BUY)
CLICK HERE to download today's position sheet.
BUY the Goldman Sachs (GS) June 2024 $320-$330 at-the-money vertical Bull Call debit spread LEAPS at $4.50 or best
Opening Trade
3-29-2023
expiration date: June 24, 2024
Number of Contracts = 1 contract
The brokerage sector has been beaten like the proverbial red-headed stepchild this year, with plunging stock market prices and volumes. However, it should be at the core of any long-term LEAPS portfolio.
If you are looking for a lottery ticket, then here is a lottery ticket.
While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is 13:1. That is the probability that Goldman Sachs shares will rise by 7.14% over the next nine months.
(GS) is the class act in the global investment banking sector. Net out unrealized losses in its securities portfolio and it has a capital ratio of 14.5%, the highest in the industry. This implies a true leverage of 6.9:1.
The regional banking crisis has pulled forward any recession and therefore the recovery. The Fed had certainly raised interest rates by 25 basis point last week because it was already in the mail.
After that, there will be no interest rate rises for a decade. The cuts will start in June and continue rapidly after that. That’s when the economic data catches up with the reality that is happening right now, which is hugely deflationary.
(NVDA) and (TSLA) already know this, which are rising sharply.
And here is the sweet spot. Fears of a recession have knocked $75, or 19% off the recent $378 high in (GS) shares this year.
To learn more about the company please visit their website at https://www.goldmansachs.com
I am therefore buying the Goldman Sachs (GS) March 2024 $320-$330 at-the-money vertical Bull Call debit spread LEAPS at $4.50 or best.
Don’t pay more than $5.00 or you’ll be chasing on a risk/reward basis.
I stretched out to the June 2024 maturity so I don’t have too much risk bunching up in January of that year.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the Goldman Sachs (GS) March 2024 $320-$330 at-the-money vertical Bull Call debit spread LEAPS are showing a bid/offer spread of $4.00-$5.00, which is typical. Enter an order for one contract at $4.10, another for $4.20, another for $4.30, and so on.
Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
A lot of people ask me about the appropriate size. Remember, if this stock does NOT rise by 7.14% in 15 months, the value of your investment goes to zero.
The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work you triple your money.
There is another way to cash in. Let’s say we get half of your double in the next three months which, from these low levels, is entirely possible. Then you could earn half of the maximum potential profit in months. Then you can decide whether to keep the fivefold return or go for the full ten bagger. It’s a nice problem to have.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that a 7.14% rise in (GS) shares will generate a 122% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 13:1 across the $320-$330 space.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that Goldman Sachs will not fall below $330 by the June 24, 2024 options expiration in 15 months.
Here are the specific trades you need to execute this position:
Buy 1 June 2024 (GS) $320 calls at………….…..…$42.00
Sell short 1 June 2024 (GS) $330 calls at…………$37.50
Net Cost:………………………….………..………….…......$4.50
Potential Profit: $10.00 - $4.50 = $5.50
(1 X 100 X $5.50) = $550 or 122% in 15 months.
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Global Market Comments
February 9, 2023
Fiat Lux
Featured Trade:
(THE BULL CASE FOR BANKS),
(JPM), (BAC), (C), (WFC), (GS), (MS)
CLICK HERE to download today's position sheet.
Urgent Trader Warning: The Mad Hedge Market Timing Index moved to a one-year high yesterday and is in “STRONG SELL” territory. Any long stock positions you have for the short-term should be hedged. For more details, please visit my Refresher Course at Short Selling School by clicking here.
Caveat Emptor!
Global Market Comments
January 26, 2023
Fiat Lux
Featured Trade:
(WHY I AM GOING TO LIVE FOREVER)
CLICK HERE to download today's position sheet.
Global Market Comments
January 25, 2023
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(THE BULL CASE FOR BANKS),
(JPM), (BAC), (C), (WFC), (GS), (MS)
CLICK HERE to download today's position sheet.