November 1 Post
Hi Again,
We have been in a bear market for the past 12 months! Our portfolio has been
losing money every month since March 2022 and for the first time we registered a
net gain (+13%) for October 2022! Sharp rallies take place during bear markets!
Who is Carolyn Boroden?.. Carolyn Boroden is a commodity trader advisor
and technical analyst – she is well known in the trading world and for good
reason. Known as the Queen of Fibonacci, Carolyn began her trading journey on
the floor of the Chicago Mercantile Exchange in 1978. She has witnessed many
changes over the years and is an expert when it comes to how trading works. On
10/11/22, on CNBC, she predicted that the market is long due for a “real
bounce” soon. From 10/12/22 to 10/28/22, S&P 500 rose by 9% in 16 days! No
wonder she has been the “queen” since 1978! During the same period, technicians
Carter Worth and Merriman were expecting a decline in the S&P500. On the same
day (10/12) Carolyn predicted a “real bounce”, Carter Worth (leading technician on
CNBC etc) stated that the market is not oversold so “sell, sell”. On 10/13/22,
market (DJIA) fell 500 points in the morning and ended the day with a a 800 gain.
This is a classic turnaround in trend. The question is for how long?
On 4/29/22, we bought Netflix for this newsletter at $190.26 after it had a major
drop. Even though the stock market has been in a major bear market for the
past year or so, since 4/29/22, our Netflix holding is up by 55.35% - in just 185
days! .This is why I am a strong believer in “buying/nibbling when there is blood
on the street”. 60% of Netflix revenue come from overseas. They are not doing well
in the US and Canada but they are doing great in many other countries. Now they
are going to have a lower rate for people who are willing to watch Netflix with ads.
Also they will drop people who share passwords-which is a big problem in other
countries. They have 30% of the global market share and YouTube is the 2 nd highest
with 20% of market share. Most Wall Street experts believe that Netflix will
overtake Facebook when it comes to ad revenue. Netflix ended on 10/28/22 at
$296. On 11/14/21, Netflix was at $678.80! The new low priced ads containing
service is supposed to take ad revenue from Facebook/Meta. TikTok has already
taken away most of their ad revenue. As they did in India, the US government
should ban TikTok from operating in the US. It is safe to assume that China (PRC)
is using TikTok to collect information on all our young people and they will not put
it to good use. However, in the future we would consider increasing our
Facebook/Meta and Intel holdings as we are showing a loss on those stocks on our
scorecard.
Ever since I started writing this newsletter, I have been asking everyone to start
“nibbling” when stocks or markets go down and limit your purchases to low amounts or else
you will get to the famous wall street maxim, “falling knife”. Let me give you a good real life
example by telling you what happened to the money manager, Joseph (Joe) Terranova. Joe
Terranova is a series regular on CNBC's Fast Money and the Chief Market Strategist for Virtus
Investment Partners, a $25 billion Hartford-based asset management firm. Prior to joining
Virtus, he spent 18 years at MBF Clearing Corp., where he was the director of trading and
managed more than 300 traders. For decades, we all knew that the secret to making money in
the market was to buy low and sell high but prior to this bear market, the market was acting
irrationally for years and Joe T even published a book “ Buy high, Sell Higher”. This a sign of a
market top. On 7/28/22, Joe T bought a big chunk of AMD at $97 saying he sees a better future
for AMD. On 10/7/22, AMD fell to $61 and Joe T was complaining that he was wrong on AMD
and he got caught to a “falling knife”! Joe T lost 37% just in 71 days! I have been going in
and out of AMD stock and I think AMD is sure to be a big winner in the next 5 to 10 years.
Prior to 10/7/22, I purchased AMD when it was at a net average cost of $65 but I also purchased
some PUT options on AMD as a hedge with a strike price of $45 (that expire January 2024). As
the AMD stock price declines, my put price will rise. Perfect hedge! If I add my paper loss of
AMD to my paper gain of AMD put options, my net loss is less than $25! I expect (or better
yet-HOPE!) that AMD will continue to decline in the future. On 11/21/21, AMD hit a high of
$154! Yes, it is possible that AMD will never reach that level again; but I think it will exceed
that level in 5 to 10 years.
Treasury-market liquidity is drying up and it’s going to get worse. The problem is bigger than it
seems. Liquidity in the U.S. bond market, the world’s largest, has been deteriorating since the
Federal Reserve began raising interest rates earlier this year. The end of massive monthly bond
purchases followed by the start of quantitative tightening has worsened the problem as the Fed
tries to extricate itself from Treasury and mortgage markets after buying a third of each.
Treasury Secretary Janet Yellen recently said she was “worried about a loss of adequate
liquidity in the market,” as Treasury supply booms to fund government spending but regulations
limit big financial institutions’ willingness to serve as market makers. At the same time, traders
see the potential for another 2% in rate hikes by March 2023. What is happening amounts to an
“illiquidity spiral,” says Greg Barker of Concoda, a geopolitical and financial newsletter. As the
Fed reduces Treasury market liquidity, volatility creates more illiquidity, which leads to more
volatility, he says. The Merrill Lynch Option Volatility Estimate, or MOVE, index, shows how
violent the action has been. The index, which captures bond-market volatility much like
the Cboe Volatility IndexVIX –4.66% , or VIX, does with the stock market, is trading at the
highest level since mid-2009. Some strategists say this is just the beginning. “The USD [U.S.
dollar] wrecking ball will force central banks to defend their currencies,” says Richard Farr,
chief market strategist at Merion Capital, as the dollar continues to rise as the Fed aggressively
raises rates in the face of inflation. “If central banks must defend their currencies, they will sell
Treasuries to raise USD. The act of selling Treasuries is bearish for bonds [meaning yields will
rise], and we believe this worldwide phenomenon is barely even out of the starting gate.”
Moreover, Deluard says a surging dollar threatens a major source of demand for U.S. stocks.
Private-sector defined-benefit pension funds have been selling some $400 billion of stocks
annually, a trend that’s spreading to the public sector, he says. Pension-fund outflows have been
offset by purchases of U.S. equities by the rest of the world, with sovereign wealth funds and
foreign central banks amassing large holdings over the past 20 years. But the bear market and
dollar shortage will cut this source of demand, as dollar-denominated assets are sold to defend
national currencies, he says. Now, everything is getting hit at the same time, says LaVorgna.
That comes on top of a separate problem. The personal savings rate fell to 3.5% in August,
roughly half of what it had been in the decade before the pandemic. As ongoing liquidity
problems portend lower asset prices, LaVorgna says households that can save will increasingly
do so at the expense of economic growth. The impact is potentially significant, given that stock
ownership is concentrated in wealthier households and the top two income quintiles represent
60% of overall consumption. “As long as the official policy is to make the stock market go
down, so that people are less wealthy, so that they buy fewer things, so that prices stop going
up, all while doing nothing about fiscal policy (tax cuts given by Tump), we believe the correct
posture is to be bearish on stocks and bullish on inflation,” he wrote. Concoda’s Barker notes
that the U.S. continues to issue twice the amount of bonds a year compared to pre-Covid. As
increased supply is issued into increasingly illiquid conditions, higher yields and Treasury-
market instability is ahead, he says. That’s a conclusion from which Fed-pivot dreams are born.
But the optimistic view is too shortsighted, with the problems fueling Treasury-market
illiquidity, bond yields, and inflation so pernicious. (Lisa Beilfuss, “The Economy”, Barrons,
10/24/22)
Talking about US Treasuries! In my own way I try to find strategies that will work in this bear
market. When interest rates go up, what happens to bond valuations? They go down! Making
money by short selling the bond market is a “no-brainer”. We can do this in the stock market by
using bond ETFs. Most people prefer to trade the 20+ year bond ETF, iShares 20+ Year
Treasury Bond ETF (TLT) as it is very liquid. I really should have started doing this in July
2020 but better late than never. On 9/22/22, I bought TLT put options (to short sell TLT) with a
strike price $95 (at that time, the price of TLT was at $103) . On 10/14/22, in just 22 days, my
“paper” gain was 46% !! Too early to sell. Since 1/1/22, I have made 5 other trades on TLT
and sold one at 0 profit and gains on the rest : 18%, 47%, 94% and 146% (average time
held: 90 days) !! During the same period the stock market (S&P 500) fell 24.68! It is prudent
to assume that interest rates have to go higher in the short term to tame inflation but at times,
market conditions will lower rates and that will give me more and more opportunities to short
sell TLT with put options.
I love to study option tables. By studying option tables I can get a good idea of what might
happen in the future. Are most people bullish enough? Are most people bearish enough? Are
they rational? In early 2020, when covid hit China (PRC) I started buying put options on
Disney and made a 845% profit within 3 months! Once again, I discovered something
interesting on 10/14/22 with respect to TLT options. I was looking at the TLT options expiring
1/17/2025. On 10/14/22, TLT ended around $98.50. First for all, you lay people, let me explain
the definition of open interest. Open interest is the number of options or futures contracts that
are held by traders and investors in active positions. These positions have been opened, but
have not been closed out, expired, or exercised. I always get in to options with a lot of “open
interest”. On TLT option table for “call options” (expecting the TLT price to go up due to
decreasing interest rates) that expire 1/17/2025, the open interest on options with a strike price
of $160 was 2,220 ! Open interest on all other call options came to less than 1,000! This is
amazing! Let me explain in laymen terms; out of all “traders” who are in TLT call options,
more than 2/3, expect TLT to go up more than 60% before January 2025 and have a significant
lower interest rate by then. Last time TLT was at $160 was in November 2020. There was a
“double top” on the TLT chart (Feb/July 2020) and TLT came crashing down with the Federal
Reserve raising rates to combat inflation. How can I make money with this information? As I
make money by short selling TLT in the short run, I will start nibbling at TLT ETF or call
options. Bond market volatility will give immense opportunities to make money in TLT trades
for the next 3+ years!
Here is another possible strategy we can employ to make money with TLT options that are
connected to US Treasuries. The ETF known as TLT (20 year treasuries) closed at 93.63 on
10/21/22. 2003 to 2009 TLT would reach 96.30 and not go beyond 96.30. So it is safe to
assume that when rates normalize, TLT could go back to the range of 81.70 to 96.30. This
knowledge could give us many opportunities to trade this ETF with call and put options. For
every 100 shares of TLT you buy, you can “write/sell” I covered call option on TLT. For
example, for 500 shares of TLT, you can “write/sell” 5 covered CALL contracts of TLT for
any strike price and for any contract expiry date. Choices! Choices! Studying option tables as of
10/21/22, Options expiring January 2025 with a strike price of $95 was at $16.50. So let us
assume you bought 100 shares of TLT at $93.63 for $9363. Now you can “write/sell” 1 covered
call option contract at $16.50 for which you will immediately receive $1650. From this point
forward, you have many options- pardon the pun. If you want you can just take a vacation till
January 2025. You have already received a 17.62% profit! Not bad for a 14 month trade! Prior
to January 2025, if TLT goes over $95, the buyer will exercise these options; and it is automatic
sale of your 100 shares at $95 (for which you paid $93.63). That is another 1.5% (approx.)
profit on this trade. So the total gain is over 19%! Let us assume that TLT does not go over $95
prior to February 2025, then you can pocket the 16.5% from the option premium and you get to
keep your 100 shares to repeat this kind of trade in the future. In an option premium price you
have 2 components (A) intrinsic value (B) time value. In other words, as we get closer to
January 2025, the price of this option price could go down; also if TLT falls, this option price
will fall. Then you can buy back the covered call option that you “wrote/sold”. If it falls to
$8.25, you can buy back the call option and make a 100% profit-it is like buying at $8.25 and
selling at $16.50; you sold first and then bought it later!
Where are we going from here? What will happen to our financial markets? S&P500 chart
shows a recent double bottom so the stock market could go up significantly in the short run. For
how long though? Sooner or later we have to consider the fundamentals. Remember the golden
rule? Don’t fight the Feds. The financial markets are fighting the Feds. As the former Governor
of the Bank of Israel stated, if the US Federal Reserve pivot to please the market, they lose all
credibility -which is already damaged as they took so long to take action against inflation. There
is no separation of economics and politics. Oxford University that started teaching economics
for undergrads, had a BA degree in Economics, Politics and Philosophy. Rate of inflation is at a
40 year high. All prudent economists (including those who work for the Federal Reserve) know
that 80% of the problem was created by the Federal Reserve by “printing” over 8 trillion dollars
in the recent past. 15% of the problem was created by the huge tax cuts for the rich and the
corporations; and only 5% due to stimulus payments sent to 85% of the US population who earn
less than $50K per year. Fed Chair Jerome Powell admitted that it was wrong for them to wait
so long to act against inflation stating that “inflation was transitory”. I saw many Republican
ads stating that Democrat congress men and women stated that inflation was transitory. By
fooling the masses with these lies, if the Republicans win control of the congress in 2022, it
would be terrible for the middle class and the poor. Democrats can only blame themselves as
they did a very poor job of explaining this situation. They could have used what happened in
UK to make a case against the Republican policies of tax cuts for the rich and cutting essential
payments to the middle class and the poor. Liz Truss who came to power in UK to reintroduce
Reaganomics lasted only a few days in power and becoming the UK PM to hold office for the
shortest period. When she announced tax cuts for the richest people, markets destroyed the UK
currency and the IMF warned the UK government that this will destroy the UK economy and it
is extremely unfair to the middle class and the poor at the expense of the wealthiest people in
UK. According to a certain political theory, if the control goes to the Republicans in 2022,
there is a high probability that Democrats will keep the White House in 2024. The stock/bond
markets are behaving as if the Federal Reserve will pivot soon and start cutting rates in 2023.
Do they realize that the Federal Reserve is trying to tame a rate of inflation that is at a 40 year
high? Jerome Powell stated that he is more like Volker than Arthur Burns. Volker had to raise
rates to 15% to tame inflation. 40% of inflation is due to the rise in housing/rents. Most of the
housing gets bought with cash by billion dollar funds and real estate billionaires and they are in
to price gauging. This has nothing to do with the lack of housing. Fed Chair Powell stated that
he will increase rates to destroy these real estate speculators and then he will lower rates so
most people will be able to afford housing again. They created this problem by “printing” over
8 trillion dollars. So we are sure to see a lot of volatility in stock and bond markets over the next
few years! That is not a bad thing! This is going to be true for all countries. In fact, I have been
buying put options on the ETF known as EEM (Emerging markets) and already I can see gains
in my put options. There is a time to sow the seeds and there is a time to reap the harvest. When
a stock or a market crashes (i.e. Netflix), it is time to “nibble” (buy a little at a time) and know
that in 3 to 5 years, you will be able to reap the benefits of your investment. However, if you
buy too much, you will get caught to the famous Wall Street, “Falling Knife” and lose
everything! While you “nibble”, you can also buy some put options as a hedge or insurance. We
are going to have an exciting future! Be optimistic!