Global Market Comments
June 21, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or PREPARING FOR THE POST-RECESSION STOCK MARKET)
(NVDA), (SPY), (MSFT), (V), (TLT), (TSLA)
Tag Archive for: (SPY)
What if they gave a recession, and nobody came?
Better yet, what if we’re already in a recession that is about to end?
Q1 brought us a GDP growth of negative 1.5%. All we need is for the current quarter to bring in a negative number and we meet the textbook definition of a recession. That means an economic recovery could begin in as little as two weeks.
The way all asset classes traded worldwide last week confirms this view. What has really been impressive is how energy has gone from the most loved sector in the market to the most hated….in hours. Oil and energy stocks have seen the most extreme price reversals in their history, down some 20%.
If you truly believed that we were going into a recession, oil is the last thing in the world you want to own. It cost money to store and there is no storage. The Russians have locked up all they can get to place the oil that no one is buying because of the sanctions.
Tanker charters have disappeared as new buyers of Russian oil, like India and China, re-route crude from its traditional buyers in Europe.
And if you don’t sell maturing futures contracts, you have to take physical delivery of millions of barrels of oil. This is borne out by the futures market, which already has oil trading at a lowly $70 one year out. This is why the oil industry isn’t investing a dime in their own business. They’ve seen this movie before.
It isn’t just stocks and oil that are collapsing. It is everything, from copper to new home construction to retail sales. All of the loss in share prices this year, some 20%, is due to multiple compression, from 21 down to 17. Earnings are still rising. That shows there is no logic to the selling.
People just want out.
We have just about dotted all the “I”’s and crossed all their “T”’s to meet the requirements of a bear market bottom. Only 2% of stocks are now above their 50-day moving average. Equity put to call ratios are close to one. There has been massive selling of sectors that only recently started to plunge, like energy and utilities.
This has brought us a negative wealth effect that has sucked $13.1 trillion out of the real economy since November.
Watch for the trifecta of yields ($TNX), the US dollar (UUP), and oil (USO) rolling over. The “everything” bubble is over.
That makes the Bitcoin crash particularly compelling to watch, as it has become a great risk indicator for all asset classes. It broke $19,000 over the weekend. It turns out that 24/7 trading means it can go down a lot faster.
Crypto in general is having its “Lehman Brothers” moment. Crypto banks, NFTs, and brokers are dropping like flies as cascading margin calls wash through the system.
This was a field where there was margin on margin upon margin. Celsius, a crypto lender, has frozen $11 billion worth of deposits. As a long-time hedge fund manager, I can tell you that gating an asset class and preventing withdrawals brings certain death.
Some of these banks were guaranteeing 19% interest rates. It’s proof yet again that if it’s too good to be true, it usually isn’t.
All of this presages a crash in the inflation rate of epic proportions from the current 8.6%. We could be back to the Fed target of 2% by yearend if last week’s trends continue.
Since the Fed is so slow to act, the next two 0.75% rate hikes are in the bag. After that, even the Fed will release that it has a recession on its hands. All further rise hikes will cease, and they may even be back to cutting by 2023.
What happens if the above scenario plays out? It’s back to the Roaring Twenties once again and my new American Golden Age.
And while we are talking about the possibility of stocks going up once again, let me fill you in on a trade that looks particularly compelling.
Sell Short the July 15 Tesla $500 puts.
That closed at $12.25 on Friday with 18 days until expiration. At an 82.3% implied volatility, Tesla is one of the most volatile stocks in the market so they will pay you fortunes for the puts. For each put you sell short, you earn $1,225. The $500 strike price is down 58.3% from the $1,200 high seen in January. This is for a company that is seeing vehicle sales rise by 40% this year, and gross sales up 50% (they raised prices three times).
In this trade, you WANT the share to get sold to you at $500. Just take delivery of the shares. Then you can ride them up to my ten-year forecast of $10,000 and get a 20-fold return. If you don’t get triggered on the puts, just do the trade again for August and take in another $1,225 and every month until you are, or the trade goes away.
I know this trade works as I have done it several times with these results.
How do you think I got three Teslas?
Fed Raises Rates by 75 Basis Points, the most in 28 years, lifting a great weight from the shoulders of the market. Stocks rallied as well as bonds. It was one of the most confusing market responses I can recall. Two more 75 basis point hikes are in the can. The overnight rate could be at 2.75% by September. This may not be THE bottom, but it is A bottom. I’m adding risk here.
Dow Average Breaks 30,000, for the first time in a year, down 8,000 in less than six months, or 21%. Jay Powell has really taken a whip to this market. Suddenly, money costs money. I see another 5% of downside easy, then a strong rally.
Tesla is Raising Prices on its Cars, passing on rising commodity prices directly to customers because they can. There is still a one-year wait to get a new Model X. $7.00 gasoline is a dream come true for all EV makers, which are getting overwhelmed with demand. Ford quit taking orders for their all-electric F-150 at 200,000 because they can’t fill them. It might be smart to sell short the Tesla July $500 puts expiring in 20 trading days for a generous premium. If the stock falls that far, just take delivery of the shares and then ride them up to $10,000.
Tesla Proposes 3:1 Stock Split, its third since the company went public in 2010. Elon Musk is not above financial engineering to boost the share price. A cheaper share price would suck in more Millennial investors who love the company. Keep buying (TSLA) on dips like this one.
Soaring Interest Rates Demolish New Home Construction, down 14.42% in May. It’s only going to get worse. Avoid homebuilders like the plague.
Weekly Jobless Claims come in at 229,000, down 3,000. Watch this number climb as recession fears rise. The risk of a hard landing is growing exponentially.
Bitcoin is Still in Free Fall, down 10% on the day, and is just cents from breaking the crucial $20,000 support level. There are no buyers anywhere, and margin calls are running rampant. Several cryptos are not at risk of going under. This is when you find out who’s been swimming without a swimsuit. I am so glad I avoided crypto this year.
Ten-Year Treasuries Hit 11-Year High, at a 3.48% yield. This is the beginning of the end for the bear market in bonds, the worst in history.
30-Year Fixed Rate Mortgages Rocket to 6.28%, from 5.5%, effectively shutting down the market. Now you REALLY have to worry about real estate. That’s up from 2.8% in November. Avoid homebuilders like (LEN), (PHM), and (KBH) on pain of death.
FDA Approves Covid Shots for Kids, down to six months. Two mini shots are all that is needed. It will do a lot to bring working parents back into the workforce, and address worries of grandparents like me.
Producer Price Index Jumps 10.8% YOY, fanning the flames of inflation. The April print was up 0.8% compared to 0.4% a month earlier according to the Labor Department. Russia’s war in Ukraine continues to roil food and oil supplies globally, and China has started re-imposing Covid-19 restrictions just weeks after loosening them in major cities
Strong Dollar is Demolishing US Corporate Profits, and the worst is yet to come. Weaker foreign currencies like the Euro (FXE) and the yen (FXY) means international sales bring in less dough. Blame the Fed for a steady diet of interest rate rises which make the greenback the most attractive currency in the world.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility in market history, my June month-to-date performance exploded to +5.91%.
My 2022 year-to-date performance ballooned to 47.78%, a new high. The Dow Average is down -17.66% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 69.35%.
Last week, we made an absolute killing with the June option expiration day, running six position into their maximum profit into the close. Those were in (NVDA), a double short in (SPY), (MSFT), (V), and (TLT).
I also used the big down 1,000-point days to add new July longs in (MSFT), (NVDA), (BRKB), and (TSLA). Putting on front month call spreads with the Volatility Index over $30 is like shooting fish in a barrel.
That brings my 14-year total return to 560.34%, some 2.40 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.23%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 86.3 million, up 300,000 in a week and deaths topping 1,014,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, June 20 markets are closed for the first-ever Juneteenth, the celebration of the freeing of the slaves.
On Tuesday, June 21 at 7:00 AM, Existing Home Sales for May are published.
On Wednesday, June 22 at 7:00 AM, MBA Mortgage Applications for the previous week are printed.
On Thursday, June 23 at 8:30 AM, Weekly Jobless Claims are announced.
On Friday, June 24 at 7:00 AM, New Home Sales for May are disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, since I hike ten miles with a 50-pound pack every evening, it is not unusual for me to wake up feeling like I was run over by a truck.
But one morning was different. I had no energy. So, I took a Covid test. It was negative. The next morning, I was still weak, so I took the test again. Still negative.
It was only on the third morning that I produced a positive test. I had Covid-19.
I don’t know how the heck I got this disease as I had been so careful for the past 2 ½ years with my background in virology. No UCLA degree helped here. That’s why they call this variant the “stealth omicron BA.2”.
The scary thing was that I tested negative for three days while I was potentially spreading the virus.
Thank goodness for the two vaccinations and two booster shots I received. They saved my life. They headed off a long hospital stay, a long covid disability, or even death. Thank you, Pfizer!
So I quarantined myself, donned a mask whenever I left my bedroom, and shoved cash under the door whenever the kids needed to eat.
I became a couch potato of the first order, binge-watching Killing Eve, Yellowstone, and every Star Trek ever made (there are hundreds).
Fortunately, I did not lose my sense of taste or smell, as do many others. But when you sleep 18 hours a day, you don’t eat. In two weeks, I lost 15 pounds. I guess every virus has a silver lining. But every day, I felt better and better.
Of course, I had to keep working. I sent out a dozen trade alerts while I had Covid, and the newsletters and Hot Tips kept pouring out every day.
One day, I had to give two webinars and I almost passed out during the second one. I had to excuse myself for a minute and place my head between my knees to keep from blacking out.
No rest for the wicked!
I’m completely over it now. I had to cut more loops in my belts because my pants kept falling off. I can get into clothes which haven’t fit for 40 years. Fortunately, men’s fashion never go out of style.
And here’s the really great news. I am totally immune to all covid variants for a year. The disease acts as a fifth super booster.
Looks like it’s time to top up that bucket list again. If nothing else, Covid reminded me of the shortness of life and the transitory nature of opportunity. The response of a lot of Covid survivors has been to trash the budget, throw caution to the wind, and go do those things you always wanted to do.
Why should I be any different? There is no tomorrow, next week, or next year, only now.
I’ll be hitting the road.
See you at Harry’s Bar in Venice!
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Oops, I Got Covid
A Negative Test at Last
Global Market Comments
June 14, 2022
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON FOR JUNE 14-16)
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or WHAT HAPPENS WHEN YOUR BEST FRIEND BECOMES YOUR WORST ENEMY?)
(SPY), (TLT), (TSLA), (CCJ), (TGT), NVDA), (JPM), (BAC), (C)
Of course, I am talking about the Federal Reserve.
The Fed was the best friend of share owners, pressing interest rates lower from March 2009. That remained the case for 12 years until November 2021 when its notorious pivot took place, flipping overnight from an easing to a tightening posture.
It's actually worst than that. In fact, our nation’s central bank morphed overnight from the easiest monetary policy in history to the most aggressive tightening.
Stock markets have noticed, the Dow average giving up 20% in six months, and the final lows are probably not in yet.
I would bet money that you are expecting the worst-case scenario to happen. After all, the last serious selloff in 2008-2009 took the index down a heart-palpitating 52%.
What’s more, every oil shock of the last 50 years was followed by a recession, and we are clearly in one now. So, you are right to fear for your net worth and retirement security.
However, my work suggests that the best-case scenario will happen. Who is right, you or me?
You already know the answer.
Let me tell you what is already priced in the stock market: a Russian invasion of Ukraine, inflation at a 40-year high and climbing, a doubling of mortgage interest rates in a half year, peaking of the housing bubble, popping of technology and Bitcoin bubbles, and 200 basis points of Fed interest rate hikes.
With all this negativity already in the market, I would say that it is impossible for stocks NOT to go up. All that is left is to suck in one last round of non-believers on the short side before the indexes start a move to new all-time highs. That could take months at the most.
The only question now is whether a further 5% decline to an S&P 500 of 3,600, or a final puke out low of 3,500, down 7.5%. That means you should start scaling into your favorite longs now, the Cadillacs at Volkswagen prices.
So, let’s do some thinking outside the box here.
Tech stocks are cheaper now than after the low point of the Great 2000 Dotcom Bust. But they are still expensive compared to the main market. The S&P without technology stocks is now valued at earnings multiple of 13X versus 17x main market.
That is well into decade-low territory. That’s why I have included financials like (JPM), (BAC), and (C) in my list of “must own sectors'.
It's clear that inflation will bedevil the market for months to come given the dramatic acceleration we saw in May, from 0.3% to 1%. Let me tell you that there are only two ways to end inflation, and they could be done overnight.
*End all US support for Ukraine and throw in with Vladimir Putin. That would shave $50 off the price of oil immediately and get gas prices below $3.00 a gallon. You might have a hard time selling this to the thousands of Americans going over to Ukraine to volunteer.
*Cause a sharp recession immediately. The Fed is already well on their way to doing this with three guaranteed 50 basis point rate hikes by September. The first thing to collapse in a recession is oil demand. In the last recession, it went to negative $37 in the futures market (I got stopped out at -$5). This is why the oil industry isn’t interested in investing a dime at these oil prices. They are responsible to their shareholders, not Biden’s reelection prospects.
If there is a recession, it’s an invisible one. It’s a recession where you can’t hire anyone, can’t buy anything, subcontractors give you a six-month timeline with a straight face, and it takes a year to get delivery of a damn sofa. This recession miserably fails my “look out the window test.”
But at my advanced age, I don’t get surprised anymore.
Boba tea anyone? Who knew?
Consumer Price Index slaughters stocks, taking the Dow Average down 1,600 points, or 5% in two days, the worst move in two years. It’s typical bear market action. May inflation hit 8.6%, a new 40-year high. But you have to more than double to hit the old 1980s peak. New stock lows are in easy reach.
Lumber crashes, down 50% from the highs in months, with the near-complete cessation of new orders from builders. They see a recession just around the corner with higher interest rates and no new home buyers. It’s proof that the current inflation is spiking and setting up for a big fall.
Luxury Home Sales are plunging in New York, in numbers, but not in prices. Anyone who needed debt to trade up is out of the picture.
US drop Covid Testing Requirement for international travelers. Too many Americans trying to get home were getting stranded overseas for weeks because they failed a Covid test. Wheww!! That was a close call!
Americans will spend an extra $730 Billion on energy this year. That’s a heck of a lot to take out of consumer spending. So far, there has been no decline in demand. Much of this money ended up in Russian coffers.
Amazon (AMZN) splits 20:1, triggering an avalanche of new retail buyers. The company is also at the low end of its valuation range anger a gut-punching 41% decline in the share price this year. It may be early, but (AMZN) is definitely a BUY.
Target (TGT) warns of more margin squeeze, with too much inventory and flagging demand. (TGT) has become a bellwether for all of retail, which points to inflation, labor, and supply chain problems.
Uranium Stocks soar on Biden’s plan to buy $4.3 billion worth of enriched uranium, or yellow cake. The move is aimed to replace Russian imports where Russia is one of the world’s largest suppliers. It is the most unexploited form of non-carbon energy out there. Mad Hedge recommended Cameco (CCJ), the world’s second-largest supplier, a month ago. It was up 15% yesterday at the high.
New Home Mortgages hit a 22-year low. With 30-year fixed-rate loans soaring from 2.8% to 5.58% in six months, how can they not? Refis have crashed 75% YOY. Now that the Fed has quit buying, investors won’t touch mortgage-backed securities with a ten-foot pole.
Weekly Jobless Claims pop 29,000 to a five-month high in another hint toward a recession. Continuing Claims are at 1.306 million. The preemptive layoffs by ultra-cautious companies have begun, especially in technology.
Tesla (TSLA) gets an upgrade by UBS, which sees 51% of upside from here to $1,200. Total sales should top 1.4 million vehicles in 2022, up 40% YOY, and that includes lost production of 60,000 in Shanghai. A new Gigafactory in Indonesia is planned with a locked-up supply of Nickel, where the world’s largest supply of the metal resides. Cheap labor helps a lot where 5,000 need to be hired. The company will need six gigafactories to reach 20 million annual production.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my June month-to-date performance recovered to +2.57%.
My 2022 year-to-date performance ratcheted up to 44.44%, a new all-time high. The Dow Average is down -13.52% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 66.63%.
That brings my 14-year total return to 557%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.56%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 85.6 million, up 200,000 in a week, and deaths topping 1,011,200 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, June 13 at 8:00 AM EDT, US Consumer Inflation Expectations are out.
On Tuesday, June 14 at 8:30 AM, the Producer Price Index for May is published.
On Wednesday, June 15 at 10:30 AM, Retails Sales for May are announced. The Fed interest rates decision is out at 11:00 AM. The press conference follows at 11:30.
On Thursday, June 16 at 8:30 AM, Weekly Jobless Claims are out. We also get Housing Starts and Building Permits for May.
On Friday, June 10 at 8:15 AM, Industrial Production for May is published. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I have benefited from many mentors and role models over the years, but Al Pinder, last of the New York-based Shipping and Trade News, is one of my favorites. Short with blown hair, glasses, and an always impish smile, he was a regular at lunch where we always played an old dice game called “ballout.”
I sat next to Al for ten years at the Foreign Correspondents Club of Japan high up in Tokyo’s Yukakucho Denki Building, we were pounding away on our antiquated Royal typewriters. At the end of the day, our necks would be stiff as boards. Al’s idea of work was to type for five minutes, then tell me stories for ten.
Saying that Al lived a colorful life would be the understatement of the century.
Al covered the Japanese invasion of China during the 1930s, interviewing several key generals like Hideki Tojo and Masaharu Homma, later executed for war crimes. He told me of child laborers in Shanghai silk processors who picked cocoons out of boiling water with their bare hands.
Al could see war with Japan on the horizon, so he took an extended tour of every west-facing beach in Japan during the summer of 1941, taking thousands of black and white pictures. The trick was how to get them out of the country without being arrested as a spy.
So he bought an immense steamer trunk and visited a sex shop in Tokyo’s red-light district where he bought a life-sized, blow-up doll of a Japanese female. His immensely valuable photos were hidden below a false bottom in the trunk and the blow-up doll placed on top.
When he passed through Japanese customs on the ship home from Yokohama, the inspectors opened the trunk, had a good laugh, and then closed it. These photos later became the basis of Operation Coronet, the American invasion of Japan in 1945.
Al was working for the Honolulu Star Bulletin when the Japanese attacked Pearl Harbor on December 7, 1941. Many antiaircraft shells fired at the attacking zeros landed in Honolulu causing dozens of casualties. Al told me every woman on the island wanted to get laid that night because they feared getting raped by the Japanese Army the next day.
Since Al knew China well, he was parachuted into western Yunan province to act as a liaison with Mao Zedong, then fighting a guerrilla war against the Japanese with his Eighth Route Army. Capture by the Japanese then meant certain torture and certain death.
In 1944, Al received a coded message in Morse code to pick up an urgent communication from Washington. So, he hiked a day to the drop zone and when the Army Air Corps DC-3 approached, he lit three signal fires.
A package parachuted to the ground, which he grabbed and then he fled for the mountains. Dodging enemy patrols all the way, he returned to his hideout in a mountain cave and opened the package. It was a letter from the Internal Revenue Service asking why he had not filed a tax return in three years.
When the second atomic bomb fell on Nagasaki, the war ended on August 15. Since Al was the closest man on the spot, he flew to Korea where he accepted the Japanese surrender there.
Al was one of the first to move into the Press Club, which housed war correspondents in one of the only buildings still standing in a city that had been bombed flat.
Al never left Japan because, as with many other war correspondents who arrived with the US military, it was the best thing that ever happened to him. After some initial hesitation, they were treated like conquering heroes, it was incredibly cheap at 800 yen to the dollar, and the women were beautiful.
During the Japanese occupation when the people were starving, Al bought an acre of land in Tokyo’s burned-out prime Akasaka district for a ten-pound can of ham. He spent the rest of his life living off this investment, selling one piece at a time, until it eventually became worth $10 million.
Al went to work for the Shipping and Trade News, an obscure industry trade publication which no one had ever heard of. I sat next to him when he artfully lifted every story out of an ancient book, Ships of the World. But Al always had plenty of money to spend.
When Al passed away in the early 2000s, an official from the American embassy in Tokyo showed up at the Press Club asking if anyone knew all Pinder. We eventually traced a bank branch which held a safe deposit box in his name. In it was proof that the CIA had been bribing every Japanese prime minister of the 1950s. He kept the evidence as an insurance policy against the day when his lucrative deal with the Shipping and Trade News was ever put at risk.
I flew in for Al’s wake and his Japanese wife was there along with most of the foreign press. Everyone was crying until I told the IRS story, then they had a good laugh.
A few years ago, I was invited to give the graduation speech at Defense Language Institute in Monterey, California. The latest bunch of graduates, including my nephew, were freshly versed in Arabic and headed for the Middle East.
The school was founded in 1941 to train Americans in Japanese to gain an intelligence advantage in the Pacific war.
General 'Vinegar Joe' Stillwell said their contribution shortened the war by two years. General Douglas MacArthur believed that an army had never before gone to war with so much advance knowledge about its enemy.
To this day, the school's motto is 'Yankee Samurai'. There on the wall with the school’s first graduates was a very young Al Pinder, still with that impish grin.
Al lived a full life and I still miss him to this day. I hope I can do as well.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Al Pinder
Press Club 1976
Global Market Comments
June 8, 2022
Fiat Lux
Featured Trade:
(FRIDAY, JUNE 17 SAN FRANCISCO STRATEGY LUNCHEON)
(A NOTE ON OPTIONS CALLED AWAY)
(SPY), (TLT)
I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.
I still have seven positions left in my model trading portfolio, they are all deep in-the-money, and about to expire in seven trading days. That opens up a set of risks unique to these positions.
I call it the “Screw up risk.”
As long as the markets maintain current levels, ALL of these positions will expire at their maximum profit values.
They include:
Current Capital at Risk
Risk On
World is Getting Better
(TLT) 6/$124-$127 put spread 20.00%
(NVDA) 6/$120-$130 call spread 10.00%
(BRKB) 6/$260-$270 call spread 10.00%
(V) 6/$150-$160 call spread 10.00%
(MSFT) 6/$200-$210 call spread 10.00%
Risk Off
World is Getting Worse
(SPY) 6/$430-440 put spread -10.00%
(SPY) 6/$440-$450 put spread -10.00%
With the June 17 options expiration upon us, there is a heightened probability that your short position in the options may get called away.
If it happens, 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 instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
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 correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away.
I’ll use the example of the S&P 500 (SPY) June 2022 $430-$440 in-the-money vertical BEAR PUT spread.
For what the broker had done in effect is allow you to get out of your put spread position at the maximum profit point days before the June 17 expiration date. In other words, what you bought for $9.00 on May 23 is now worth $10.00, giving you a near-instant profit of $1,200 or 11.11%!
All have to do is call your broker and instruct them to “exercise your long position in your (SPY) June 2022 $440 puts to close out your short position in the (SPY) June 2022 $430 puts.”
You must do this in person. Brokers are not allowed to exercise options automatically, on their own, without your expressed permission.
This is a perfectly hedged position, with both options having the same name and the same expiration date, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs. There are strategies out here that try to capture dividends the day before they are payable. Exercising an option is one way to do that.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (SPY) position after the close, and exercising his long (SPY) call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the 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, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
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.
There is a further annoying complication that leads to a lot of confusion. Lately, brokers have resorted to sending you warnings that exercises MIGHT happen to help mitigate their own legal liability.
They do this even when such an exercise has zero probability of happening, such as with a short call option in a LEAPS that has a year or more left until expiration. Just ignore these, or call your broker and ask them to explain.
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.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.
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.
Calling All Options!
Global Market Comments
June 7, 2022
Fiat Lux
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Global Market Comments
May 31, 2022
Fiat Lux
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I love inflation.
Thanks to the relentless increase in prices, the value of my home has risen by $4 million over the last ten years, and $2 million over the last three years alone.
And I’m not the only one.
Some 66% of Americans own their own homes and may have seen similar price increases or more.
So, what if the price of a gallon of milk goes up by $1? I’ll happily pay that if it means my largest personal investment appreciates at triple-digit rates. Besides, I’m lactose intolerant anyway, and all my kids have grown up.
I’ll tell you what else inflation does. It makes stocks really cheap. That’s because investors fear that the Fed will raise interest rates by too much, destroy company earnings, and trigger a recession.
This is counterintuitive because companies actually benefit from inflation because they can get away with faster price increases more often, boosting profits. I took my kids out to a graduation dinner yesterday and practically had to take out a second mortgage to do so.
Personally, I believe that such a stock market bottom is close. But while the last bottom was within 10%, or 200 S&P 500 (SPX) points in terms of price, it is only 50% in terms of time. That signals a great new bull market for stocks beginning sometime this summer. Then anything you touch will double in three years.
You will look like a genius….again!
You can see who agrees with me by looking at which stocks are already getting bought up. Coca-Cola (KO), Johnson & Johnson (JNJ), and Procter & Gamble (PG) are the kind of safe, dividend-paying, brand name stocks that very long-term investors like pension funds love to own. They tend to buy and hold….forever.
No meme stocks here.
It isn’t just the Fed that is raising interest rates, which can only control overnight rates. The US budget deficit is falling at the fastest rate since WWII, possibly taking us to a budget surplus by year-end. As a result, the money supply is shrinking at the fastest rate in 60 years.
QT, or quantitative tightening, will fan the flames when it starts on January 1, ultimately taking up to $9 trillion out of the financial system.
Remember all that liquidity from QE, near-zero rates, and massive government spending that saved the economy from Armageddon? Play for movie in reverse and you get the oppositive result, i.e. falling share prices….at least for a while.
The battle as to who is right about the direction of the economy continues unabated. Is it bonds or stocks? At the rates that stocks have been plunging, stocks are essentially anticipating another Great Depression.
Ten-year US Treasury yields that soared from 1.33% to 3.12% in a mere six months are proclaiming that happy days are here again and will last forever. Since January, the average monthly mortgage payment has jumped by $450 a month. If that isn’t recessionary, I don’t know what is.
As a 53-year veteran of these markets, I can tell you that the bond market is always right. That’s because the money spent on equity research has shrunk to a shadow of its former self in recent decades, while bond research is as strong as ever.
Always listen to the guy with the $10 million budget and ignore the one with the $500,000 budget, which means that in the coming months, equity prognosticators will realize the error of their ways and come over to my way of thinking once again.
The Fed Minutes were not so horrible, downplaying the risk of a full 1% rate rise, triggering a 1,000-point rally in the Dow. With five up days in a row, this is starting to look like THE bottom. Is this the light at the end of the tunnel?
Q1 GDP dives 1.5% in its final read. It’s the worst quarter since the pandemic began during Q2 2022. Weekly Jobless Claims dropped 8,000 to 210,000.
NVIDIA Rips, surprising to the upside on almost every front, sending the stock up $30, or 18.75%. Mad Hedge followers bought (NVDA) last week. This is one of the best-run companies in the world. I expect the shares to rise from the current $178.51 to $1,000 in five years. Buy (NVDA) on dips.
The Consumer will keep driving the economy, says Bank of America CEO Brian Moynihan. Betting against the American consumer has always been a fool’s errand. I’m with Brian. Cash levels this high were never followed by recessions.
Only 18% of Americans will increase stockholdings this year, which is usually what you get at market bottoms. It was closer to 100% at the December top. Yet another signal that we are approaching the bottom in price, if not time.
New Home Sales dive in April, down 16.6% on a signed contract basis, the weakest in two years. The macro is definitely conspiring against the market. It’s all about interest rates. The average monthly mortgage payment has rocketed by $450 a month since January. Inventories have also soared from 6 to 9 months.
Advertising is in free fall, especially the online version, a usual pre-recession indicator. It is the easiest and first expense companies cut when they expect flagging sales. Look no further than yesterday’s astonishing 43% collapse in Snap (SNAP). Notice that TV commercials are getting endlessly repeated as the number of advertisers and ad rates fall. If I see one more ad for Interactive Brokers, I’ll shoot myself.
The EV Shortage worsens, with wait times for a new Tesla extending beyond a year. I can sell my Model X for more than I paid for it three years ago. Gasoline at $6.00 is converting a lot of drivers, and gas lines this summer loom. Big three dealers are price gouging on the few EVs they have, charging well over list. Good luck finding a Rivian pick-up; that’s a two-year wait. Maybe that makes (TSLA) a “BUY” down here?
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my May month-to-date performance recovered to +8.80%.
My 2022 year-to-date performance exploded to 38.98%, a new high. The Dow Average is down -9.30% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 61.22%.
Last week was a quiet one, with me using the monster rally to add new shorts in Apple (AAPL) and the S&P 500 (SPY).
That brings my 14-year total return to 551.54%, some 2.40 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 43.54%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 84 million, up 1.5million in a week, and deaths topping 1,004,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, May 30, markets are closed for Memorial Day.
On Tuesday, May 31 at 9:00 AM EST, the S&P Case Shiller National Home Price Index for March is released.
On Wednesday, June 1 at 10:00 AM, JOLTS Job Openings for April are published.
On Thursday, June 2 at 8:30 AM, Weekly Jobless Claims are out. We also learn the ADP Private Employment Report for May.
On Friday, June 3 at 8:30 AM, the big Nonfarm Payroll Report for May is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, as a lifetime oenophile, or wine lover, I long searched for the Holy Grail of the perfect bottle. I finally found my quarry in 1989.
During the 19th century, Russia was still an emerging country that sought to import advanced European technology. So, they sent agents to the top wine-growing regions of the continent to bring back grapevine cuttings to create a domestic wine industry. They succeeded beyond all expectations building a major wine industry in Crimea on the Black Sea.
Then the Russian Revolution broke out in 1918.
Czar Nicholas II and his family were executed, and eventually, the wine industry was taken over by the Soviet state. They kept it going because wine exports brought in valuable foreign exchange with which the government could use to industrialize the country.
Then the Germans invaded in 1941.
Not wanting the enemy to capture a 100-year stockpile of fine wine, the managers of the Massandra winery dug a 100-yard-deep cave, moved their bottles in, bricked up the entrance, and hid it with shrubs. Then everyone involved in storing the wine was killed in the war.
Some 45 years later, looking to expand the facility, some Massandra workers stumbled across the entrance to the cave. Inside, they found a million bottles dating back to the 1850s kept in perfect storage conditions. It was a sensation in the wine collecting world.
To cash in, they hired Sotheby’s in London to repackage and auction off the wine one case at a time. It was the auction event of the year. For years afterwards, you could buy glasses of 100-year-old ports and sherries from the Czar’s own private stock at your local neighborhood restaurant for $5, the deal of the century.
I attended the auction at Sotheby’s packed Bond Street offices. The superstars of the wine collecting world were there with open checkbooks. I sat there with my paddle number 138 but was outbid repeatedly and wondered if I would get anything. In the end, I managed to pick up some of the less popular cases, a 1915 Madeira, a 1936 white port, and a 1938 sherry for about $25 a bottle each.
For years, these were my special occasion wines. I opened one when I was appointed a director of Morgan Stanley. Others went to favored clients at Christmas. My 50th, 60th, and 70th birthdays ate into the inventory. So did the birth of children number four and five. Several high school fundraisers saw bottles earn $1,000 each.
One of the 1915’s met its end when I came home from the Gulf War in 1992. Hey, the last Czar didn’t drink it and looked what happened to him! Another one bit the dust when I sold my hedge fund at the absolute market top in 1999. So did capturing 6,000 new subscribers for the Mad Hedge Fund Trader in 2010.
It turns out that the empties were quite nice too, 100-year-old hand-blown green glass, each one is a sculpture in its own right.
I am now reaching the end of the road and only have a half dozen bottles left. I could always sell them on eBay where they now fetch up to $1,000 a bottle.
But you know what? I’d rather have six more celebrations than take in a few grand.
Any suggestions?
Stay Healthy,
John Thomas
CEO & Publisher
Global Market Comments
May 23, 2022
Fiat Lux
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