Global Market Comments
October 11, 2018
Fiat Lux
Featured Trade:
(REACHING PEAK TECHNOLOGY STOCKS),
(GOOGL), (MSFT), (NFLX), (FB), (AAPL),
(LOCKHEED MARTIN’S SECRET FUSION BREAKTHROUGH),
(LMT), (NOC), (BA)
Posts
One of the blowout performers in recent years has been defense company Lockheed Martin (LMT), whose stock has doubled since 2014.
Even if we don’t get new wars, we still have several ongoing ones, the administration has promised substantially ramped up defense spending in coming years.
And thanks to a decade of downsizing and consolidation there are only a few serious players left in the sector.
That means a lot of money piling into a limited number of names.
However, there is one factor that is helping (LMT) that virtually no one outside the theoretical physics community knows about.
That would be ignition.
No, I don’t mean the rebuilt ignition you bought on eBay for the beat-up ’68 Cadillac El Dorado up on blocks in your front yard.
Lockheed Martin’s famed Skunk Works in the California high desert has finally come out of the closet and announced that it has made a major breakthrough in fusion research.
A small functioning reactor could be available in as little as three years.
If true, the news would be dynamite.
I have long been partial to Lockheed as a company as it employed my mother on an assembly line in Los Angeles to build B-17 bombers during WWII.
When I visited a secret Russian airbase in 1992 to view the wreckage of Gary Powers’ U-2 spy plane, the steel Lockheed serial number was unmistakable.
After I asked to take it home as a souvenir, my hosts replied with a very firm “Nyet!” and hurried me out of the facility, citing it as a “National Treasure.”
The new fusion technology would deliver ten times more power than conventional nuclear reactors at a fraction of the cost.
Fusion involves the combining of two hydrogen atoms to create one helium atom releasing immense amounts of power.
To know how much, simply refer to Albert Einstein’s famous equation, E = MC squared.
If successful, the discovery could make available unlimited amounts of carbon-free energy at near zero cost without creating any toxic waste.
The breakthrough relies on using a “magnetic bottle” to contain the several hundred million degrees of heat generated instead of four foot thick reinforced concrete containment structures.
So far, the stock market is clueless.
Economical fusion power, the type unleashed by thermonuclear hydrogen bombs, has long been the dream of physicists and long-term planners everywhere.
The focus of research has until now taken place at the National Ignition Facility next door to me at Lawrence Livermore National Labs in Livermore, California. There, progress has recently suffered several setbacks, cost overruns, and time delays.
Mention California to most people, and images of love beads, tie-dyed T-shirts, and Birkenstocks come to mind.
But it is also the home of the first atomic bomb which was originally designed amid the vineyards and cow pastures of this bucolic suburb.
Dr. Robert Oppenheimer of the UC Berkeley School of Mining used to keep the first ever purified piece of plutonium in a file cabinet in his office that, thankfully, was made out of steel.
If it were a wooden cabinet, the US might have lost WWII.
Today, the world’s first cyclotron has been turned into a modern steel sculpture in a traffic roundabout, not a mile from my home.
The thinking at the time was that if someone accidentally flipped the wrong switch, it wouldn’t blow up San Francisco, or more importantly, Berkeley.
The $5 billion Livermore project aims 192 lasers at a BB-sized piece of frozen hydrogen, using fusion to convert it to helium and unlimited amounts of clean energy.
The heat released by this process reaches 100 million degrees, hotter than the core of the sun, and will be used to fuel conventional steam electric power plants.
The raw material is seawater and a byproduct is liquid hydrogen which can be used to fuel cars, trucks, and aircraft. If this all sounds like it is out of Star Trek, you’d be right.
I worked with these guys in the early 70s back when math was used to make things and before it was used to game financial markets, and I can tell you there is not a smarter and more dedicated bunch of people on the planet.
If it works, we will get unlimited amounts of clean energy for low cost in about 20 years. Oil will only be used to make plastics and fertilizer, taking the price down to $10 for domestic production only.
The crude left in the Middle East will become worthless. Lumps of coal will only be found in museums, or in jewelry, its original use. If it doesn’t work, it will melt the adjacent Mt. Diablo and take me with it.
If Lockheed’s fusion success is scalable, it could send the share price on a ballistic move from current levels.
It could well also drag the rest of the defense sector with it.
That would include Northrop Grumman (NOC) and Boeing Aircraft (BA).
If you don’t get your newsletter tomorrow, you’ll know what happened.
Now, what is this switch for?
Hi Mom!
Global Market Comments
July 27, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, AUGUST 3, 2018,
AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(STOCKS TO BUY ON THE OUTBREAK OF TRADE PEACE),
(QQQ), (SPY), (SOYB), (CORN), (WEAT), (CAT),
(DE), (BA), (QCOM), (MU), (LRCX), (CRUS),
(ORIENT EXPRESS PART II, or REPORT FROM VENICE)
So, how will the trade war end? It could be the crucial trading call of 2018.
"That which can't continue, won't," I paraphrase the noted economist Herbert Stein. I think that logic neatly applies to our global trade wars today.
In 1970, some 25% of world GDP was accounted for by international trade. Today it is 52%. Germany has been the powerhouse, with trade growing from 25% to 80%, largely through exploding auto exports. Trade growth in the U.K. has been pitiful as the old colonial ties loosened, improving only from 40% of GDP to 52%.
In the U.S., trade has grown from 10% to 25% of GDP during this time. It is far lower than the rest of the G7 nations because of the massive size of its domestic economy.
Still, placing restraints on 25% of U.S. GDP, or about $5 trillion, is quite a big hit. Think an imminent recession, quite possible a severe one. The $13 billion in subsidies offered the agriculture sector is but a drop in the bucket. It would be like killing off the goose that laid the golden egg.
Trump has a weak hand, which is growing weaker by the day. It is just a matter of time before he folds. Not to do so would entirely wipe out the benefits of the December tax package, yet still leave the U.S. government with $2 trillion in new debt. It is a perfect money destruction machine.
My bet is that Trump will claim victory at some point soon, regardless of what transpires on the negotiation front. Take the trade war away, and stocks will immediately jump 10%. That's what the stock market thinks, with NASDAQ (QQQ) at an all-time high, and the S&P 500 (SPY) just short of one. Stocks are trading over the medium term as if Donald Trump doesn't exist.
Which stocks should you buy when trade peace breaks out? Buy those that have suffered the most. The ags have to be at the top of your list, such as Soybeans (SOYB), Corn (CORN), and Wheat (WEAT), the worst hit. The old industrials such as Caterpillar (CAT), John Deere (DE), and Boeing (BA) also have to be a priority.
In the technology area you have to rotate out of the FANGs and into chip stocks, the worst performers of the sector this year. Perhaps this is what the market is shouting at us with the horrific one-day decline in Facebook (FB) yesterday. China relies on the U.S. for 80% of its chips and all of its high-end graphics cards.
China's canceling of the QUALCOM (QCOM) takeover of its NXP Semiconductors shows to what extent it is willing to retaliate in the tech area. Chip stocks to buy for the rebound should include Micron Technology (MU), Cirrus Logic (CRUS), and Lam Research (LRCX).
Even if the trade war ends tomorrow, business conditions will never be the same. Confidence in American reliability will never completely recover. Sure, Trump will be gone in 2 1/2 years. But what if he is replaced by someone worse? Trading with the United States now incurs a level of political risk not seen since the War of 1812, when Washington burned.
But no trade war is certainly better than a trade war if you are a trader or investor.
Telling the Captain How to Steer the Ship
Global Market Comments
June 13, 2018
Fiat Lux
SPECIAL SPACE X ISSUE
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, JUNE 15, 2018, DENVER, CO,
GLOBAL STRATEGY LUNCHEON),
(WILL SPACE X BE YOUR NEXT TEN BAGGER?),
(EBAY), (TSLA), (SCTY), (BA), (LMT)
I am constantly on the lookout for ten baggers, stocks that have the potential to rise tenfold over the long term.
Look at the great long-term track records compiled by the most outstanding money managers, and they always have a handful of these that account for the bulk of their outperformance, or alpha, as it is known in the industry.
I've found another live one for you.
Elon Musk's Space X is so forcefully pushing forward rocket technology that he is setting up one of the great investment opportunities of the century.
In the past decade his start-up has accomplished more breakthroughs in advanced rocket technology than seen in the last half century, since the golden age of the Apollo space program.
As a result, we are now on the threshold of another great leap forward into space. Musk's ultimate goal is to make mankind an "interplanetary species."
There is only one catch.
Space X is not yet a public company, being owned by a handful of fortunate insiders and venture capital firms. But you should get a shot at the brass ring someday.
The rocket launch and satellite industry is the biggest business you have never heard of, accounting for $200 billion a year in sales globally. This is probably because there are no pure stock market plays.
Only two major companies are public, Boeing (BA) and Lockheed Martin (LMT), and their rocket businesses are overwhelmed by other aerospace lines.
The high value-added product here is satellite design and construction, with rocket launches completing the job.
Once dominated by the U.S., the market for launches has long since been ceded to foreign competitors. The business is now captured by Europe (the Ariane 5), China (the Long March 5), and Russia (the Angara A5).
Until recently, American rocket makers were unable to compete because decades of generous government contracts enabled costs to spiral wildly out of control.
Whenever I move from the private to the governmental sphere, I am always horrified by the gross indifference to costs. This is the world of the $10,000 coffee maker and the $20,000 toilet seat.
Until 2010, there was only a single U.S. company building rockets, the United Launch Alliance (ULA), a joint venture of Boeing and Lockheed Martin. ULA builds the aging Delta IV and Atlas V rockets.
The vehicles are launched from Cape Canaveral, Florida, and Vandenberg Air Force Base in California, one of which I had the privilege to witness. They look like huge roman candles that just keep on going, until they disappear into the blackness of space.
Enter Space X.
Extreme entrepreneur Elon Musk has shown a keen interest in space travel throughout his life. The sale of his interest in PayPal, his invention, to Ebay (EBAY) in 2002 for $165 million, gave him the means to do something about it.
He then discovered Tom Mueller, a childhood rocket genius from remote Idaho who built the largest-ever amateur liquid fueled vehicle, with 13,000 pounds of thrust. Musk teamed up with Mueller to found Space X in 2002.
A decade of grinding hard work, bold experimentation, and heartrending testing ensued, made vastly more difficult by the 2008 Great Recession.
Space X's Falcon 9 first flew in June 2010, and successfully orbited earth. In December 2010, it launched the Dragon space capsule and recovered it at sea. It was the first private company ever to accomplish this feat.
Dragon successfully docked with the International Space Station (ISS) in May 2012. NASA has since provided $440 million to Space X for further Dragon development.
The result was the launch of the Dragon V2 (no doubt another historical reference) in May 2014, large enough to carry seven astronauts.
Space X conducted the first successful flight test of the new Dragon capsule on May 6 of this year.
Then Musk really upped his game by successfully pulling off the first ever landing of a booster rocket on a platform at sea in April 2016. This is crucial for his plan to dramatically cut the cost of space travel.
Commit all these names to memory. You are going to hear a lot about them.
Musk's spectacular success with Space X can be traced to several different innovations.
He has taken the Silicon Valley hyper-competitive ethos and financial model and applied it to the aerospace industry, the home of the bloated bureaucracy, the no-bid contract, and the agonizingly long-time frame.
For example, his initial avionics budget for the early Falcon 1 rocket was $10,000 and was spent on off-the-shelf consumer electronics. It turns out that their quality had improved so much in recent years that they met military standards.
But no one ever bothered to test them. The $10,000 wouldn't have covered the food at the design meetings at Boeing or Lockheed-Martin, which would have stretched over years.
Similarly, Musk sent out the specs for a third-party valve actuator no more complicated than a garage door opener, and a $120,000, one-year bid came back. He ended up building it in-house for $3,000. Musk now tries to build as many parts in-house as possible, giving it additional design and competitive advantages.
This tightwad, full speed ahead and damn the torpedoes philosophy overrides every part that goes into Space X rockets.
Amazingly, the company is using 3-D printers to make rocket parts instead of having each one custom made.
Machines guided by computers carve rocket engines out of a single block of Inconel nickel-chromium super alloy, foregoing the need for conventional welding, a frequent cause of engine failures.
Space X is using every launch to simultaneously test dozens of new parts on every flight, a huge cost saver that involves extra risks that NASA would never take. It also uses parts that are interchangeable of all its rocket types, another substantial cost saver.
Space X has effectively combined three nine-engine Falcon 9 rockets to create the 27 engine Falcon Heavy, the world's largest operational rocket. It has a load capacity of a staggering 53 metric tons, the same as a fully loaded Boeing 737 can carry. It has half the thrust of the gargantuan Saturn V moon rocket that last flew in 1973.
Musk is able to capture synergies among his three companies not available to any competitor. Space X gets the manufacturing efficiencies of a mass production carmaker.
Tesla Motors has access to the futuristic space age technology of a rocket maker. Solar City (SCTY) provides cheap solar energy to all of the above.
And herein lies the play.
As a result of all these efforts, Space X today can deliver what ULA does for 76% less money with vastly superior technology and capability. Specifically, its Falcon Heavy can deliver a 116,600-pound payload into low earth orbit for only $90 million, compared to the $380 million price tag for a ULA Delta IV 57, 156-pound launch.
In other words, Space X can deliver cargo to space for $772 a pound, compared to the $7,515 a pound UAL charges the U.S. government. That's a hell of a price advantage.
You would wonder when the free enterprise system is going to kick in and why Space X doesn't already own this market.
But selling rockets is not the same as shifting iPhones, laptops, watches, or cars. There is a large overlap with the national defense of every country involved.
Many of the satellite launches are military in nature and top secret. As the cargoes are so valuable, costing tens of millions of dollars each, reliability and long track records are big issues.
Enter the wonderful world of Washington, DC politics. UAL constructs its Delta IV rocket in Decatur, Alabama, the home state of Senator Richard Shelby, the powerful head of the Banking, Finance, and Urban Affairs Committee.
The first Delta rocket was launched in 1960, and much of its original ancient designs persist in the modern variants. It is a major job creator in the state.
Shelby has criticized President Obama's attempt to privatize and modernize the rocket business as "a faith-based initiative." ULA is a major contributor to Shelby's campaigns.
ULA has no rocket engine of its own. So, it buys engines from Russia, complete with blueprints, hardly a reliable supplier. Magically, the engines have so far been exempted from the economic and trade sanctions enforced by the U.S. against Russia for its invasion of the Ukraine.
ULA has since signed a contract with Amazon's Jeff Bezos-owned Blue Origin, which is also attempting to develop a private rocket business but is miles behind Space X.
Musk testified in front of Congress in 2014 about the viability of Space X rockets as a financially attractive, cost-saving option. His goal is to break the ULA monopoly and get the U.S. government to buy American. You wouldn't think this is such a tough job, but it is.
Musk has since sued the U.S. Air Force to open up the bidding.
He became a U.S. citizen in 2002 primarily to qualify for bidding on government rocket contracts, addressing national security concerns.
NASA did hold open bidding to build a space capsule to ferry astronauts to the International Space Station. Boeing won a $4.2 billion contract, while Space X received only $2.6 billion, despite superior technology and a lower price.
It is all part of a 50-year plan that Musk confidently outlined to a venture capital friend of mine two decades ago. So far, everything has played out as predicted.
The Holy Grail for the space industry has long been the building of reusable rockets, thought by many industry veterans to be impossible.
Imagine what the economics of the airline business would be if you threw away the airplane after every flight? It would cost $1 million for one person to fly from San Francisco to Los Angeles.
This is how the launch business has been conducted since the inception of the industry in the 1950s.
Space X is on the verge of accomplishing exactly that. It will do so by using its SuperDraco engines and thrusters to land rockets at a platform at sea. Then you just reload propellant and relaunch.
The concept has so far been successfully tested to an altitude of 1,000 meters (click here for the YouTube video.
Attempts to do this from a live launch have so far failed (click here for that video where they almost made it at and here), but Musk predicts a 50% chance of success in the next test this coming December.
Pull this off, and launch costs will plummet to pennies on the dollar. If Space X can chop payload costs to under $100, compared to ULA's $7,515, that is a savings that even Richard Shelby can't cover up.
Talk about disruptive innovation with a turbocharger!
The company is building its own spaceport in Brownsville, Texas, that will be able to launch multiple rockets a day.
The Hawthorne, CA, factory (where I charge my own Tesla S-1 when in LA) now has the capacity to build 20 rockets a year. This will eventually be ramped up to hundreds.
Space X is the only organization that offers a launch price list on its website, much as Amazon sells its books (click here for that link). The Falcon 9 will carry 28,930 pounds of cargo into low earth orbit for only $60.2 million. Sounds like a bargain to me.
Space X currently has $5 billion in contracts to fly over 50 missions for a variety of private and governmental entities, making the company cash flow positive. This includes a $1.6 billion NASA contract to supply the (ISS).
This no doubt includes an assortment of tax breaks, which Musk has proved adept at harvesting. Elon has been a quick learner with the ways of Washington.
Customers have included the Thai telecommunications firm, Rupert Murdock's Sky News Japan, an Israeli telecommunications group, and the U.S. Air Force.
So when do we mere mortals get to buy the stock? Musk estimates at 12 flights a year the company will earn a 10% return on capital, making it worth $4 billion to $5 billion.
The current exponential growth in broadband will lead to a similar growth in satellite orders, and therefore rocket launches. So, the commercial future of the company looks especially bright.
However, Musk is in no rush to go public. A permanent, viable, and sustainable colony on Mars has always been a fundamental goal of Space X. It would be a huge distraction for a publicly managed company. That makes it a tough sell to investors in the public markets.
You can well imagine that the next recession would bring cries from shareholders for cost cutting that would put the Mars program at the top of any list of projects to go on the chopping block. So, Musk prefers to wait until the Mars project is well established before entertaining an IPO.
Musk expects to launch a trip to Mars by 2025 and establish a colony that will eventually grow to 80,000. Tickets will be sold for $500,000.
There are other considerations. Many employee and early venture capital investors wish to realize their gains and move on. Public ownership would also give the company extra ammunition for cutting through Washington red tape. These factors point to an IPO that is earlier than later.
On the other hand, Musk may not care. The last net worth estimate I saw for him was $13 billion. If his three companies increase in value by 10 times over the next decade, as I expect, that would increase his wealth to $130 billion, making him the richest person in the world.
If an IPO does come, investors should jump in with both boots. While the value of the firm may already have increased tenfold by then, there may be another tenfold gain to come. Get on the Elon Musk train before it leaves the station.
To describe Musk as a larger than life figure would be something of an understatement. Musk is the person on which the fictional playboy/industrialist/technology genius, Tony Stark, in the Iron Man movies has been based.
In the recently released Tomorrowland Disney movie, a Tesla supercharging station features prominently. Elon takes all this in good humor, lending a Tesla roadster to the film producers.
Musk has said he wishes to die on Mars, but not on impact. Perhaps it would be the ideal retirement for him, say around 2045, when he will be 75.
To visit the Space X website, please click here. It offers very cool videos of rocket launches and a discussion with Elon Musk on the need for a Mars mission.
Catching a Dragon by the Tail
This Could Be the Stock Performance
Is Mars the Next Hot Retirement Spot?
Global Market Comments
May 2, 2018
Fiat Lux
Featured Trade:
(TRADING THE U.S. STEEL FIASCO),
(X), (XLI), (TSLA), (BA)
(ANNOUNCING THE MAD HEDGE LAKE TAHOE, NEVADA, CONFERENCE, OCTOBER 26-27, 2018)
(THE COOLEST TOMBSTONE CONTEST)
Talk about unintended consequences. Tamper with the free market and it will usually blow up in your face.
You would have thought that U.S. Steel was going to announce blockbuster earnings in the wake of the new 25% steel tariff imposed by the administration, right?
Wrong.
Instead, it has triggered a disaster of epic proportions. The reasons why provide a crash course on how fast the modern economy is evolving.
Of course, the stock market didn't like it, the shares crashing some 17.1% since the announcement. U.S. Steel, far and away the biggest beneficiary of administration policies, is now down on the year.
You may recall that we made a fortune when we bought U.S. Steel last summer at $21 a share, well before the run up into the passage of the tax package. The shares gained a mind-blowing 127%.
Not only did the company deliver a shocking disappointment on Q1 earnings, bringing in net profits of only 10 cents a share, it guided lower for Q2. Expectations had been far higher. Still, that is far better than the $180 million loss it brought in a year ago.
The CEO, David Burritt, cited unexpected "operational volatility." Take that to mean the chaos created by the steel tariffs. There is also trouble with its Great Lakes factory.
Flat rolled steel used to manufacture cars swung from an $88 million loss to a $23 million profit. But tubular steel used for pipelines incurred a $23 million loss.
What is really amazing is that the company made only a dime per share off an increase in total steel shipments YOY of 15.6%. Clearly, there is trouble in Pittsburgh.
And here is what U.S. Steel didn't expect. Instead of paying the extra 25% for imported steel, many customers are simply designing steel out of their products to cut costs rather than shifting to (X).
Three decades ago, this might have taken years to achieve. Thanks to advanced software applications this can now be accomplished in weeks. Companies are vastly more sensitive to costs than they were only a few years ago, and mere pennies can make all the difference.
It's only a matter of time before the entire auto industry shifts to carbon fiber, which has four times the strength of steel at one fifth the weight. That gives you a 20X improvement in performance and safety. Cost and mass manufacturing are the only issues.
Tesla (TSLA) is planning to make the jump in a couple of years. Boeing (BA) and the U.S. Air Force already have.
Where is U.S. Steel in a carbon fiber world? Try Chapter 11.
In the meantime, U.S. Steel consumers are scrambling to get exemptions from the punitive tariffs, creating a bureaucratic nightmare for all involved.
Wilber Ross's Commerce Department has been flooded with some 3,500 requests, each one of which takes months to review. The agency has boosted staff, but it is still overwhelmed. It looks like the only new American jobs the tariff will create will be government ones.
It turns out that many types of high grade steel, such as for razor blades and specialized carbon steel parts, aren't made in the U.S.
To prove that I learn something new every day, I discovered that even France is an important steel supplier. And I thought it was all about wine, cheese, and those cute black berets.
The net result for consumers has been uncertainty in the extreme. That purgatory has just been extended with the government's 30-day postponement of the tariffs announced yesterday.
If companies wait long enough the tariffs will simply disappear. They will certainly be declared illegal by the World Trade Organization.
The national security rationale for the steel tariffs was always completely bogus and will be laughed out of court. If steel really were a national security issue the Defense Department would have its own steel mill, as it already does with semiconductors.
The chips in U.S. weapons systems are 100% made in the USA to keep foreign back doors out of the design process.
Wars of the future will be bought with software, not M1 Abrams tanks or battleships. If fact, they already are.
As for the shares of U.S. Steel, I'm not touching them here. If the economic data continues to weaken as it has, you don't want to be anywhere near this sector.
The stock market already has reached that conclusion.
On the USS Missouri; Made in the USA
Global Market Comments
March 23, 2018
Fiat Lux
Featured Trade:
(DON'T MISS THE MARCH 28 GLOBAL STRATEGY WEBINAR),
(FRIDAY, APRIL 6, INCLINE VILLAGE, NEVADA, STRATEGY LUNCHEON)
(WHY US BONDS LOVE CHINESE TARIFFS),
(TLT), (TBT), (SOYB), (BA), (GM)
This trade was an unmitigated disaster, and hopefully it will be the worst of the year. I?m glad we had one of these because it provides a wonderful opportunity to illustrate everything that can go on with a trade. Every loss is a learning opportunity, and a loss not learned from is an opportunity wasted, and dooms one to repetition. Let me count the ways:
1) I was too aggressive on the strike. I should have matched my long August $70 strike with a short May $70 strike instead of reaching for the extra income by selling the $72.50?s. I got away with this on the (PHM) trade. Not so on (BA).
2) I shouldn?t have leveraged up with a 1:2 ratio. Those who did straight 1:1 spreads did much better and slept well at night. They saw only a slight opportunity cost as some losses were offset by profits in the August $70 puts as intended.
3) I was not aware that individual investors were so harshly treated by margin clerks. Hedge funds only get charged margin on the delta plus some small maintenance, which they then continuously rehedge. Most retail investors were prevented from doing this trade by broker policies banning naked put selling.
4) The Morgan Stanley guy who decided to price the Facebook (FB) issue on an options expiration day has to have a hole in his head. That only succeeded in increasing market volatility. I?m sure that when they made the call, they thought this would make (FB) go up faster. Instead, the reverse happened. On Friday, everyone?s portfolio effectively turned into a long Facebook position, tracking (FB) tick for tick. This did not end well.
5) This was a really unlucky trade. Although the global macro situation is pretty much unfolding as I expected, I didn?t think the rot would spread so fast once it set in. Even a one-day short covering rally on Friday would have turned this trade profitable. Thank Greece for that. Facebook too. It took one of the longest continuous market moves down, 12 out of 13 days, for this trade to lose money.
6) The only consolation is that those who had puts exercised against them and saw stock delivered into their accounts Monday morning at a cost of $72.50 were granted a huge short covering rally to sell into, with (BA) rising $2.85 back up to $72. This enabled shareholders to recover 85% of their losses on the position.
Taking in the entire May short option expiration play, and it is clear that this didn?t work. Add up all the P&L?s and this is what the damage came to:
(FXE) $127 puts? +$950
(FXE) $132 calls? +$950
(FXY) $121 puts? +$1,500
(PHM) $8 puts? +$980
(IWM) $77 Puts? -$5,544
(BA) $72.50 puts -$8,708
Total?? -$9,872, or ?9.87% for the notional $100,000 model portfolio.
Of course, this loss was more than offset by the enormous profits that we took in on our long put positions in the recent market meltdown. Since I initiated the short put strategy on May 3, the long put positions added a welcome 30% to the value of the portfolio.
We did get the protection against a sideways market that had been killing my performance in April. So it did perform its insurance function as intended. As I often remind readers, when you buy fire insurance, you don?t complain to the company when your house doesn?t burn down.
The way this strategy usually works is that you make money like clockwork all year, then one bad month wipes out two thirds of your total profits. That means repeating this play will probably work for the rest of 2012.
This also illustrates how the neophytes who attempt this strategy with tenfold leverage regularly get wiped out. What looks like easy money on the outside quickly becomes toxic waste on your position sheet. The rich uncle morphs into a serial killer overnight. When I look at those miracle 100% a year track record regularly touted on the Internet, this is usually what I find.
These calculations assume that you sold your (BA) at the close on Friday, which was a new low for the year. The net loss on the short (BA) May $72.50 puts comes to ($72.50 - $69.15 + $0.24 = $3.11). This subtracts (100 X 28 X -$3.11) = -$8,708, or -8.70% for the notional $100,000 model portfolio.
Oops