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Thursday, March 28, 2024

BNN Notes – Feb 19 Appearence

I was on BNN on Jan 15th, 2013 and my "One Trade" for 2012 had been BAC, which turned out to be the best performing stock in the S&P 500 for the year.  

My "One Trade" for 2013 was this option spread on AAPL (graphic from BNN TV) and AAPL was well over $500 in January so the bull call spread returned $100 and the short puts are $2.40 turning $14,000 for 10 contracts into $97,600 in 12 months (up 597%).

The strategy we use here is called "Being the House – Not the Gambler," where we sell option premium to others, enabling us to take an inexpensive, leveraged position with limited downside.  Using this system, we are able to buy almost any stock for a 15-20% discount, leaving our Members well-hedged while maintaining a significant upside position.  

Our second trade idea for 2013 was TSLA, which was $34.50 on January 15th and closed Tuesday at $203.70 – up 490% for the year and the option spread we used hit our goal of turning $8,310 into $60,000 (up 622%), enough money to buy a Tesla with the winnings.  

Our third big trade idea for 2013 was CIM at $2.84, where $19,600 invested in our long-term, hedged position (10,000 shares) is already worth $23,100 plus $5,600 in dividends for a net return of 46% so far (position expires in January of 2015).  

On May 14th, I said in my BNN interview that "we could be in the beginning of an epic market rally," when the S&P was at 1,646 and now, 200 points later, we can talk about where I think the market is going for 2014.  

After rallying 32% in 2013, the S&P is back at it's all-time high of 1,850 and the question is, are we breaking up and over or are we headed for a correction.  We're leaning towards a correction here because, according to Citi Research, earnings expectations are deteriorating for Q1 – according to the S&P's own guidance.  

Market SentimentWhile the recent pullback has knocked back some of the bullish enthusiasm in the markets, sentiment is still near all-time highs and we continue to feed of the sugar-rush that is coming from our various central banks in various forms of Qantitative Easing.  This is not likely to continue as the Fed's own studies have determined that QE becomse less and less effective over time.  

All this "free money" being thrown at the markets has had little effect on the real economy while enriching the investor class and is slowly but surely driving inflated prices down to the consumers.  Income Disparity in the US is as bad as it was in the 1920s and incomes for the bottom 90%, adjusted for inflation, are lower now than they were in the 90s while, for the top 10%, they are up 20% with the top 30,000 (0.01%) more than tripling their incomes in the past two decades.

It's simply not sustainable, it's runaway Capitalism and US politicians are unable or unwilling to control it.  There's going to be a day of reckoning down the road and already we're seeing riots breaking out around the World as the bottom 90%, especially the bottom 80%, are reaching their breaking point.   In the last quarter of 2013, US consumer debt jumped $204Bn, the biggest move since 2007 – right before the economy collapsed.   1.2M consumers a year are going bankrupt, 1% of the workforce annually!  

Meanwhile, it's our job to make damned sure we're in the top 1%, because it really sucks not to be!  With that in mind, we have some macro trade ideas for 2014 that we think will perform well.  

Our top trade idea for 2014 is the same as it was in 2013 – AAPL.  Unfortunately, AAPL has already risen 10% from our January re-pick for Members and, though we still love it, we have strict rules about chasing stocks higher.  

The Dollar and other global currencies are engaged in a race to the bottom as the G7 run their printing pressess 24/7, flooding the World with cash but, unfortunately, they give the cash to the top 1% and, so far, it's not trickling down (no velocity of money).  

One stock that can still be chased by our Canadian friends is NAK (Northern Dynasty Minerals), who hold interests in 637 square miles of mineral claims in Alaska.  We have been in them since $1.30 but, at $1.64, they are just getting ready to break out and you can:

  • Buy 5,000 shares of the stock for $1.64 ($8,200)
  • Sell 50 Aug $2 puts for 0.80 ($4,000)
  • Sell 50 Aug $2 calls for 0.30 ($1,500)

That puts you in the stock for net $2,700 with an obligation to buy 5,000 more shares for $2 in August for an average of $1.27 per share on 10,000 shares ($12,700 and a 22% discount to the current price).  If all goes well, NAK is over $2 and you don't end up buying more and your $2,700 investment is called away for $10,000 with a 270% profit.  

CLF (Cliffs Natural Resources) was another of our three top trades of 2014 but, unfortunately, they have already jumped up from $19 to $23 but, fortunately, we know how to give ourselves a discount so we like:

  • Buying 10 CLF 2016 $18/27 bull call spread at $3.50 ($3,500) 
  • Selling 10 CLF 2016 $18 puts for $3.30 ($3,300) 

That trade is net $200 and CLF is currently $22.73 so it's $4.73 in the money.   All CLF needs to do is flatline from here and you make $4,730.  If CLF hits our goal you collect $9,000 in profits, which would be a 4,500% increase in cash.  The worst case would be CLF falling below $18 and you net into 1,000 shares of the stock at $18.20 ($18,200) but the margin requirement on the short puts is about $2,000 – making this an excellent return on cash and margin.  

Our last trade, since we feel the market is short-term toppy here, is a protective play and we can go ultra-short on the Russell 2000 with TNA, which is a 3x long ETF, currently at $76 and we can go short on them by:

  • Buying 5 TNA April $79.81 puts for $8 ($4,000)
  • Selling 5 TNA April $70.81 puts for $4 ($2,000)

That's net $2,000 and, if TNA is below $70.81 in April (next earnings period), this spread would return $4,500 making $2,500 in profits (125%).  That means a 10% drop in the Russell, back to 1,035 will pay you 125%.  That's how we hedge our bets, with 12.5 to 1 payoffs, which mean we only have to risk a little to get a lot of upside protection.  

Canada Outlook:  While I complain about the weak Dollar artificially boosting the markets, the Loonie is down 15% to the Dollar over the past few years – that's seriously pathetic.  That means 15% of your market gains are merely a reflection of the fact that the currency you are buying stocks with has less value – it's not an endorsement of the strenght of the companies.  

Meanwhile, the BOC doesn't see any inflation and have decided to keep rates steady, which is great for people and companies who are able to borrow money but terrible for citizens who are trying to save some and being offered nothing for their efforts.  

The reason there is no inflation is because the people have no money, you don't fix this by giving more money to the top 1% – same problem as America, really.  Everybody's economic "plan" can't be to devalue their currency so their exports are cheaper.  It actually works a little better for Canada than other countries, as at least you have oil to export.  

The housing market is still bubbly in Canada and you would think it would make you wonder when US housing isn't keeping up.  If US housing does take off, your material costs will skyrocket.  Like the US, Canadian Consumer Debt is 163% of income – that's going to get very ugly if rates ever do tick back up.   Also like the US, Canada's job recovery is skewed towards lower-paying jobs.  

 

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