?It?s basically evil, and I don?t think it should ever be allowed to reach the size that it did. Why should everyone pay a small group of people to basically engage in legalized front running of our orders,? said Berkshire Hathaway Vice Chairman, Charlie Munger, about high frequency trading.
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Global Market Comments
December 5, 2014
Fiat Lux
Featured Trade:
(CHICAGO TUESDAY, DECEMBER 23 GLOBAL STRAGEGY LUNCHEON),
(HERE IS YOUR BIG NEW YEAR TRADE),
(CU), (FCX),
(RUNNING THE SAN FRANCISCO BAY TO BREAKERS)
First Trust ISE Global Copper ETF (CU)
Freeport-McMoRan Inc. (FCX)
When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice.
Since the 2011 top, the red metal has collapsed a shocking 40%. It has given back a nausea inducing 10% just in the last two weeks. Will copper take down the rest of the financial markets with it?
Is the bull case for risk assets over?
I doubt it.
So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown, the government?s 7.5% GDP target for 2014 notwithstanding.
It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans from banks or backstreet money lenders.
China is, in effect, on a copper standard. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash, crushing spot prices.
The latest plunge has been fueled by continuing rumors of an imminent Chinese banking crisis. The Middle Kingdom?s first corporate bond default in history, by a third tier solar company a few years ago, further heightened fears. The implicit government guarantee that was believed to back this paper suddenly went missing in action.
The high frequency traders are now in the copper futures and spot markets in force, whipping around prices and creating unprecedented volatility. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper.
Copper, along with all other hard assets, have also been taking a pasting from the strong US dollar. A robust greenback has effectively raised the price of copper in non dollar currencies in big consuming countries, like Japan and Europe. The only way to adjust for this is for the traders to take down dollar prices, which the markets have been doing with a vengeance.
It is no coincidence that copper has been falling in almost perfect lockstep with the rest of the hard asset universe, including gold, silver, oil, natural gas, coal, all the ags and ag stocks, and the commodity producing currencies of the Australian (FXA) and Canadian (FXC) dollars. The world wants paper assets (stocks and bonds), and none of the stuff you can drop on your foot (thanks Dennis).
However, cheaper copper is ultimately great news for we copper consumers, as with everything else.
Watch Dr. Copper closely. At the first sign of any real bottom, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The leverage in the company is such that a 10% rise in the price of copper triggers a rapid 20% rise or more in (FCX) shares.
I can wax one here about major structural changes in the Chinese economy that are underway, as the real problem. As the Middle Kingdom shifts from an export driven economy to a domestic demand one, there is less need for the red metal and more need for silicon and brains. But this isn?t something you can trade off of today.
So what is copper really telling us? The longer-term charts show a prolonged bottoming process. If $2.90 fails, we could see a revisit to the five-year low at $2.50.
That?s your load the boat price. During the global synchronized economic recovery that is underway, you want to view every panic sell off in a single asset class like this as a gift.
There is one further hope for copper. The Shanghai stock market has been absolutely on fire this year, rocketing some 40% since June, even beating the heady US exchanges. When risk accumulation accelerates to this extent in the world?s largest copper consumer that is great news for copper.
The two asset classes are now wildly out of sync. Either Chinese stocks are ridiculously overpriced and soon have to crash to come back in line with the red metal. Or copper has to rise.
I vote for the latter. It could be your big New Year trade.
I suffer earthquakes, forest fires, floods, dubious neighbors, high taxes, corrupt politicians, and a bankrupt state government to live in California.
It is all worth it just to run the Bay to Breakers every year, a five mile run from the San Francisco Bay to the Pacific Ocean, which has evolved into the world?s most bizarre sporting event.
The word from race organizers this year was that alcohol was banned, but that nudity was OK. Well, that?s California for you. Of the 15,000 participants, more than a few graciously accepted the tradeoff.
The race started off at the Embarcadero, near the Ferry Building, in unusually cold weather, and goose bumps were in abundance. Once underway, we all warmed up. I moved up early in the crowd, passing a dozen Elvis impersonators, some revolutionary War soldiers in jockey shorts, and a swarm of buzzing honeybees.
I made short work of the many wearing fat suits, body builders in tutus, and at least three dancing harems. Some of the guys were obviously very excited to be there. I thought I actually might get a placing when I was passed by at least ten speeding vaginas running faster than I could possibly catch them. I managed to finish in the top 1,000, just behind Adam and Eve, but well ahead of a group of drunken cavemen.
Then arose the problem of what to do with 15,000 naked people at the beach in 50 degree temperatures. A ?C? note scored a taxi back to my starting point (note to the accounting department: don?t even think about denying this expense!). It was amazing how well behaved the crowd was, given the lack of dress.
The funds raised went to a dozen local charities. I ended up with a free T-shirt and a string of pink party beads. Today, I?m sitting here too sore to get out of my chair, Heartbreak Hill having taken its toll. Still, I can?t wait to run in next year?s race, when I hope for a better time and a more provocative costume. Competing dressed as a Mad Hedge Fund Trader, I didn?t turn too many heads, given the competition.
The Tea Party?s California BranchGlobal Market Comments
December 4, 2014
Fiat Lux
Featured Trade:
(THE EIGHT WORST TRADES IN HISTORY)
Global Market Comments
December 3, 2014
Fiat Lux
Featured Trade:
(10 REASONS WHY I?M WRONG ON BOND),
(TLT), (TBT), (LQD), (MUB), (ELD), (JNK),
(A SPECIAL NOTE ON EXERCISED BANK OF AMERICA OPTIONS), (BAC)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
iShares iBoxx $ Invst Grade Crp Bond (LQD)
iShares National AMT-Free Muni Bond (MUB)
WisdomTree Emerging Markets Lcl Dbt ETF (ELD)
SPDR Barclays High Yield Bond ETF (JNK)
This morning, Bank of America paid out a five cent quarterly dividend, which works out to an annualized yield of 1.18% and the shares will open this morning trading ex.
For those of you who have wisely followed my Trade Alert to buy the Bank of America (BAC) December, 2014 $15-$16 vertical bull call spread, good for you. As of last night, you were showing a profit of 0.88% on the position.
However, there is a chance that the short side of the trade, the December, 2014 $16 calls were exercised against you before the opening this morning. If that is the case, you would have been informed by your broker by email and immediate action is required on your part to avoid unnecessary risk.
The options traded on US exchanges and referred to in my Trade Alerts are American style, meaning that they can be exercised at any time by the owner. This is in contrast to European style options, which can only be exercised on the expiration day.
The vertical option spreads that I have been recommending for the past year are composed of a deep in-the-money long strike price plus a short portion at a nearer money strike price.
When stocks have high dividends, there is a chance that the near money option you are short, the December, 2014 $16 calls, gets exercised against you by the owner.
This requires you to deliver the stock equivalent of the option you are short, plus any quarterly dividends that are due. Don?t worry, because your long position perfectly hedges you against any principal risk in this situation.
However, you will be liable for the five-cent dividend, which works out to $5 for every call option you are short. If you executed the full 110 contracts recommended in my Trade Alert that works out to $550 (100 shares per option X $.05 dividend X 110 contracts).
You then need to email or call your broker back immediately informing him that you want to exercise your remaining long option position to meet your assigned short position.
This should completely close out your position and leave you with about half your remaining profit. This is not an automatic process and requires action on your part!
It also means that you get your margin back, plus your profit, the next day, and don?t have to run the position another two weeks into expiration. That means you are free to use the money to put on new trades.
Assignments are made on a random basis by an exchange computer, and can happen any day. You may get exercised, or you may not. Exercise means the owner of the option that you are short completely loses the entire premium on his call.
Dividends have to be pretty high to make such a move economic, usually at least over 3% on an annual rate. But these days, markets are so efficient that traders, or their machines, will exercise options for a single penny profit.
In fact, there are now some dedicated hedge funds and independent individual options traders that specialize in buying up calls the day before and ex dividend day to capture a tiny 29 basis point gross overnight profit. That is before execution expenses.
It hardly seems worth it to me, but I guess what they lack in size, they make up in volume. Hey, you do what you can do to earn a living.
Surprise assignments create a risk for option spread owners in a couple of ways. If you don?t check your email every day, you might not be aware that you have been assigned.
Alternatively, such emails sometimes get lost, or hung up in local servers or spam filters, which occasionally happens to readers of my own letter.
Then, you are left with the long side deep out-of-the-money call without on offsetting short position. You are now unhedged. This means you will have a substantially higher margin requirement, and is the equivalent of going outright long the stock in large size.
Suddenly, you are playing a totally different game, and not one I recommended. If the stock rises, then you could be in for a windfall profit. But if it falls, you could take a big hit. Guess which way the stock usually goes.
Better to completely avoid this situation at all cost and not take the chance. You are probably not set up to do this type of trading.
If you don?t have the cash in your account to cover this, you could get a margin call. If you ignore this call as well, your broker will close out your position at market without your permission.
It could produce some disconcerting communications from your broker. They generally hate issuing margin calls, and could well close your account if it is too small to bother with, as they create regulatory issues.
In order to get belt and braces coverage on this issue, it is best to call your broker and find out exactly what are their assignment policies and procedures. Believe it or not, some are still in the Stone Age, and have yet to automate the assignment process or give notice by email.
An ounce of prevention could be worth a pound of cure here. You can?t believe how irresponsible some of these people can be. The phone calls are free.
Consider all this a cost of doing business, or a frictional execution cost. In-the-money options are still a great strategy. But you should be aware of all the ins and outs to get the most benefit.
Good Luck and Good Trading
John Thomas
Global Market Comments
December 2, 2014
Fiat Lux
Featured Trade:
(DECEMBER 3 GLOBAL STRATEGY WEBINAR),
(LOADING UP ON LINN ENERGY),
(LINE), (USO), (UNG), (XLE),
(THE MOST FUNCTIONAL WORD IN THE ENGLISH LANGUAGE)
Linn Energy, LLC (LINE)
United States Oil ETF (USO)
United States Natural Gas ETF (UNG)
United States Oil ETF (USO)
You can pay up to $17 a unit for (LINN) and have a good chance of making a quick, snapback profit.
All of a sudden, everyone I know in Texas, and there are quite a few of them, called to tell me to buy Linn Energy, all within the space of one hour. I summarize their diverse comments below.
We have reached a margin call induced capitulation sell off in Linn Energy this morning, when oil was trading as low as $64 a barrel at the European opening.
There were obviously also a couple of leveraged energy and commodity funds that blew up and are undergoing forced liquidation at the market.
Add to that all the individuals who bought (LINN) on margin when the yield was only 8% so they would take 16% home to the bank.
This has taken the price of the units down to an artificial, and hopefully temporary, low of $15.90. At that price, the yield was a mind blowing 17% (after all, this is California).
It was a classic ?Throwing out the baby with the bathwater? moment. (LINN) gets 54% of its $1.6 billion in revenues from natural gas, which has held up remarkably well in the energy melt down, thanks to the early arrival of the polar vortex this winter.
Only 22% of its income derives from oil related projects, and half of this is hedged in the futures market from any downside exposure in the price of oil, according to the company?s recent pronouncements. Linn has actually plunged more than oil from its recent peak.
Does a loss on 10% of its revenues justify a gut wrenching 50% drop in the units? I think not.
But then, I am being rational and analytical, and I can assure you that the energy markets are now anything but rational and analytical.
Its not like oil is going to stay this low forever. Try to buy oil for delivery in the futures market two years out, and it has already recovered to $75/barrel, and there is very little available at that price.
What happens when the price of something goes down? Demand increases, and that will be good for Linn Energy, which is inherently more of a volume play on gas and oil, not a price play.
Keep also in mind that the absurd salaries the company was paying for workers in the Midwest has also vaporized. Roustabouts can now be had for as little as $75,000 a year compared to $200,000 only six months ago. This will cut (LINN)?s costs quickly and flow straight to the bottom line.
Falling costs and rising volumes sound like a winning formula to me.
And if you have the courage to buy the units here on margin, the yield rockets to a breathtaking 34%. It therefore can?t stay this low for long.
Linn Energy, LLC is an independent oil and natural gas company based in Houston, Texas. It holds oil and gas producing assets in many parts of the United States: Mid-Continent, including properties in Texas, Louisiana, and Oklahoma; the Hugoton Basin in Kansas; the Green River Basin in Wyoming; East Texas; California, including the Brea-Olinda Oil Field in Los Angeles and Orange Counties; the Williston/Powder River Basin, which includes a position in the Bakken Formation; Michigan/Illinois; and the Permian Basin in Texas.
At the end of 2012, the firm reported proved reserves of 4,796 bcfe (billion cubic feet equivalent) of oil and gas combined. Of this total, 24% was crude oil, 54% natural gas, and 22% natural gas liquids.
Structured as a master limited partnership for tax purposes, the firm is required to pay out most of its cash reserve to unitholders (stockholders) each quarter as distributions, thereby ducking the double taxation of corporate taxation.
However Linn retains some attributes of a limited liability corporation, including giving voting rights to its unitholders. Linn Energy also operates a subsidiary, LinnCo, a C Corporation, which is subject to different tax rules from its parent company.
All we have to do is survive the near term volatility and Linn Energy will be a winner.
Passed on by a friend with my apologies in advance:
Well, it's?shit... That's right, shit!
Shit may just be the most functional word in the English language.
You can smoke shit, buy shit, sell shit, lose shit, find shit, forget shit, and tell others to eat shit.
Some people know their shit, while others can't tell the difference between shit and Shinola.
There are lucky shits, dumb shits, and crazy shits.
There is bullshit, horse shit, and chicken shit.
You can throw shit, sling shit, catch shit, shoot the shit, or duck when the shit hits the fan.
You can give a shit or serve shit on a shingle.
You can find yourself in deep shit or be happier than a pig in shit.
Some days are colder than shit, some days are hotter than shit, and some days are just plain shitty.
Some music sounds like shit, things can look like shit, and there are times when you feel like shit.
You can have too much shit, not enough shit, the right shit, the wrong shit or a lot of weird shit.
You can carry shit, have a mountain of shit, or find yourself up shits creek without a paddle.
Sometimes your breath smells like shit.
Sometimes everything you touch turns to shit and other times you fall in a bucket of shit and come out smelling like a rose.
When you stop to consider all the facts, it's the basic building block of the English language.
And remember, once you know your shit, you don't need to know anything else!!
You could pass this along, if you give a shit; or not do so if you don't give a shit!
Well, shit, it's time for me to go.
Just wanted you to know that I do give a shit and hope you had a nice day without a bunch of shit.
But, if you happened to catch a load of shit from some shit-head........... Well, Shit Happens!!!
HOPE YOUR SHITTY DAYS ARE FEW AND FAR BETWEEN
