September 8 Post
Hi Again,
What is the best way to make money in a market that is going nowhere? Select a
stock that has upside potential and buy the stock in 100 share increments and for
each 100 shares, write/sell call options (covered calls). Right now, natural gas
stocks are red hot (till recently)due to the Russian invasion of Ukraine and Europe
trying to get enough natural gas for the winter. I hold many stocks in this industry.
One of them is Range Resource Corp (RRC). On 8/26/22, I wrote (sold) call options
on the shares I hold at a price of $169 per contract. On 8/26/22, RRC was at $34.
The covered call I sold had an expiry date of 9/2/22 (7 days) and a strike price of
$37. On 9/1/22, RRC was at $32 but I bought back the option at $5 per contract,
making a profit of $164 per contract! I still hold the stocks and one day, I will sell it
when it is prudent. All experts agree that natural gas stocks will continue to go
higher and higher; and I disagree. I am a contrarian. If we get to know that Europe
and the US are expected to have mild winters (or something of that nature), natural
gas prices will come tumbling down (as they have been doing for the past few days)
. On 9/1/22, after selling my covered calls (expiring 9/2/22) on RRC, I sold covered
calls on RRC (strike price $35, expiring 10/21/22-in another 51 days) to repeat the
same process. On 9/7/22, the covered call options I sold for $213 has gone down to
$115! If I decide to buy it back that will get me a 46% profit in just 7 days! I also
have some long term puts on RRC as a hedge against a big fall in RRC price.
Pardon the pun but there are so many “options” with “options”!!
When the “fear gauge” (VIX) goes down to 20 or below, it is time to short sell the
market and when VIX goes to about 30, it is time to buy the market-this is all for
the short term. On 8/17/22, VIX was around 20 so to short sell the market I bought
put options on the NASDAQ on QQQs. On 8/17/22, I bought QQQ put option with
a strike price of 200 and expiry date 1/20/23 for $119 per contract. On 9/1/22, VIX
was at 27 so I sold my put options at $214 per contract with a 79% profit in 15
days!!
In investments and trading what is important is to have valid strategies and then it is
all about your discipline!
What is happening in the market right now? There is a tug of war between 2 camps.
The camp that is having a major impact on the market is under the impression that
the Federal Reserve will not be able to keep their word and keep raising rates for a
long time without lowering rates in 2023. They say as the Feds pivoted within the
past 12 months, and they will pivot again and start lowering rates in 2023 as
inflation is already on the decline. However Fed Chair Powell stated that he is
more like former Fed Chair Volker (who raised rates to 15% in the 1980s to kill
inflation for 30+ years) than former Fed Chair Arthur Burns who stopped raising
rates prematurely in the 1970s which led to stagflation and hyperinflation.
Feds will not buy bonds in the open market for the first time in 20 years and they
will start unloading some of their bonds to decrease their balance sheet. In 2018
when they tried to do it, they had to come back and buy bonds to keep the bond
market liquid. This too will raise rates. (Josh Brown, CNBC, 8/10/22)
Monetary policies are more effective than fiscal policies. Mathematical economics
can prove that. When the Feds lower rates and the economy benefits Presidents try
to take the credit and when the Feds tighten monetary policy to lower inflation,
Presidents get wrongly blamed. Even though some inflation was caused by stimulus
payments, 95% of inflation was caused by too lenient monetary policy for an
extended period of time coupled with huge tax cuts for the wealthy and companies
that used tax cuts for stock buybacks (even Trump agreed that this is what
happened) . As Fed Chair Powell stated 1/3 of inflation is due to housing prices and
rent. Many Wall Street firms were buying cash down (leaving out the people able to
buy with mortgages) and then renting those houses and increasing rents over 100%
every few months. Monetary tightening is already paying off. California governor
wants to enact laws to protect people from these Wall Street firms-most probably
those announcements will come when we get closer to the election day. Same kind
of policy changes were made in Canada and New Zealand. Per Tom Lee on CNBC
(8/26/22), housing inventories and used car inventories are at the highest level since
2007. After the Feds tighten or lower rates, it takes 6 months to see the impact on
“main street”(economy).
What could change the situation and drive the market lower? Unexpected
geopolitical events could do that. If China (PRC) invades Taiwan, that could topple
markets all over the world. If Putin wins the war in Ukraine, he is not going to stop
there; and if Putin invades Poland and other countries, that could create more
problems for the world. There is a huge financial crisis brewing in China (PRC)
which will have a domino effect on all other countries. Our 2007 housing/banking
crisis is nothing compared to what is going on in China. PRC homes worth $60
Trillion USD (more than all US stocks) have gone down 40% in 2022. Countries
like Malaysia providing resources to the PRC will see their economies going down
with the PRC.
Lately the media has been very pessimistic about the natural gas situation in
Europe; however natural gas stocks in the US have been going down recently.
For example, RRC was $35 on 8/22/22 and on 9/6/22, it is down to $31. EQT was
at $50 on 8/29/22 and on 9/6/22, it is down to $46. Cheniere Energy was at $171 on
8/24/22 and on 9/1/22 it was down to $156. As I stated before I have been making
money on writing covered calls on RRC. Fortunately, as a hedge, I also bought
some puts on RRC as a hedge and that is up 18.56 in 11 days! So I am making
money on the covered calls and on the puts. On covered calls, when the underlying
stock price go down, you can buy back to calls you sold previously for a profit. On
9/1/22, I sold covered calls on RRC (strike price $35, expiry 10/21/22) at $213 per
contract and in just mere 6 days, those are priced at $175 but I will hold this longer
to obtain more of a gain.
Per CNBC as of 9/6/22, not only UK but all of Europe face a big banking crisis due
to the natural gas crisis. Most utilities in UK and Europe have been buying natural
gas on the spot market and buying with margin (over $1.5 Trillion at risk) and this
is heading towards a calamity. This could be good for the US in the long run.
Citibank announced on 9/6/22 that the European energy crisis will impact the whole
world. Politically, if European voters follow Fox News and elect politicians who
will support Putin, then Putin will easily win the Ukraine war and then take over all
of Europe. If we lose our status in the world, that will hurt US companies as 70%
revenue of most big US companies come from overseas. If Russia and China (PRC)
rule the world, they will get all countries to stop imports from the US. That is
according to economic history. Due to covid shutdowns etc., the demand for natural
gas in China (PRC) has gone down. Per a report on CNBC on 9/6/22, when a
shipment of natural gas or oil is loaded in to a tanker at a US port for a purchase
made by China (PRC), that shipment belongs to China even before the tanker leaves
the US port! Observing satellite tracking devices, they have found that China (PRC)
is taking liquid gas directly from the US to Europe and for what they paid less than
$20 in the US, they are selling it over $50 in UK and Europe!
Some more interesting information per CNC 9/6/22-9/7/22:
Atlanta Fed President stated that “we created inflation and we have been
reducing the rate of inflation”. All prudent economists knew that anyway.
Monetary policy is the best way to bring down inflation but fiscal policies can
help too. Increasing tax rates for the richest Americans and corporations who
pay next to nothing in taxes and spend trillions of dollars on stock buybacks
too will be deflationary.
When Obama wanted to extend tax concessions to the solar industry, the
Republicans got Obama to agree to let US export natural gas. Trump would
have done it anyway. The reason we did not allow the export of natural gas is
that we did not want US natural gas consumers to freeze to death in the
winter. Now that is a real possibility. US Dept of Energy warned US energy
companies to keep enough natural gas to support the domestic market. Most
countries to protect domestic consumers ban export of certain items. Example
1- China (PRC) has banned export of chemical fertilizer. Example 2- India
recently banned the export of wheat.
In 2022, the US exported more energy resources to Europe up to August 31,
2022, than we did in all of 2021.
20% of US energy comes from Nuclear (clean energy). Several CEOs in the
energy sector were on CNBC and they all stated that the recently passed
inflation reduction act will help the US immensely. Germany and UK too will
rely more on nuclear energy now.
Within the past 12 months, the US budget deficit declined by $1.7 Trillion.
We are sure to have a volatile market over the next few months as September is
the worst month for the stock market; and all the major crashes happened during
the month of October.