Future of Dow30 with options. prosperitystocks@yahoo.com. In previous newsletters I mentioned that when the Dow30 was around 16,600 on 9/22/15, that looking at call options on the Dow30, most professional expected the Dow30 to hit 17,500 by 2/1/16 but almost no one expected the Dow30 to hit 18,000 by 2/1/16. How did I figure this out? Only 24% of money managers were bullish and that meant that there was a lot of money waiting to come in to the market and also the trend from past years show that markets bottom in October. The call option for 18,000 was 36 cents and while the 17,500 call was at $1.50. As I stated then I bought those 18,000 calls for $0.36 on 9/22/15 and on 10/28/15, my options were worth $2.58-616% increase in 36 days! I did the same with the NASDAQ index and what I bought for $0.94 on 9/28/15 was worth $4.57 on 10/28/15-386% increase in 30 days! I am still convinced that even if we have a short term correction, by year end we would see the expected ‘Santa Claus Rally”. I am also hedged if the market goes down in a big way. Why? The Dow30 is only 400 points below its all-time high and still some of the best brains on the market think that we are still in a bear market. This happens after every crash. When the Dow30 goes over 18,200 or so, all will believe that the bull market is back and rush in to the market. No professional wants to be accused of missing a bull market; and if that happens, that is the end of that person’s professional career. They want to give the illusion (to their clients) that they were in the market prior to the ‘bull run’. For example, in Q4, if Apple goes from $110 to $150, even at $150, most fund managers will buy that and their clients will assume that they made a terrific gain. This is called ‘window dressing’. While keeping the call options purchased in September (see above), I just purchased calls with a strike price equal to 18,500 on the Dow30 for January 2016 for 54 cents (this has the potential of rising to $3 or more prior to 1/15/16).
Over the past 6 months I have been bashing momentum stocks, and very especially Netflix which has a ridiculous PE of 288 and with a PE like that you are expected to like double your revenue every year. It is like buying apple for 20 times its current price. When those high PE companies disappoint Wall Street, the stocks get slaughtered. On 10/15/15, this really happened! Netflix came out with disappointing revenue and the price dropped 8% within 2 hours! Competition was hitting them hard. They expected to have 1.15 million more subscribers but they only got 880K. One analyst states that Netflix has to go down by 80% to reach fair value. Just say no to momentum stocks!
Oprah Winfrey made a very clever investment in Weight Watchers (WTW) by buying a 10% stake in the company with a seat on the board for $30million. She made a 110% profit within 7 hours! I do not know if Oprah knew that this was a major target for short sellers so she had them running for cover. Smart move! However I do not think that this would stick so I bought some put options to short sell.
In a previous edition, I mentioned that a hedge company sold call options and with that bought put options at no cost (except for brokerage commission). They did this on Valeant (VRX). In my October edition I mentioned that 32 year old CEO of American Armenian Hedge Fund bought a drug company that has the only cure for a deadly disease and raised the price by 5000% and let patients die. This brought a backlash from Hillary Clinton which was followed by some Democratic politicians. This sent the whole healthcare stocks in to a bear crash. Valeant (VRX) is the worst of the price gougers they did not invest in research and it is a hedge fund run company that bought drug companies with unique life-saving drugs and jacked up the price by about 1000%. In the past few days, Valeant (VRX) has fallen from $250 to $93-62.80% decline! In my estimation, the company who sold calls and bought puts (20MM) would have easily gained more than $100MM in profits! What did the parasite CEO of Valeant do? He appealed to the SEC for not letting him make millions by price gouging the American people. Please note that in all other countries, they have price controls when it comes to drugs. What happened to Valeant (VRX)? It is called divine justice! Now the parasite CEO announces that he will not increase prices by more than 10%. They admit that even though it was legal (many disagree), it was unethical and bad PR. At the Republican debate the neurosurgeon, Ben Carson, who has no knowledge of anything other than surgery was asked about price gouging and he said he will eliminate all regulations! Then Governor Chris Christie jumped in and said that he would prosecute these companies for price gouging. Yet the party is trying to elect jokers like Trump and Carsen over people who can run the country like Bush and Christie. Trump said, “our leaders are stupid, they allowed countries like China, Japan, Russia, Brazil and so on to devalue their currencies which is hurting America”. Most rates are set by the foreign exchange market which trades about 5 trillion dollars in a day. China is not supposed to set their rates but they only decreased it by 3%; and per well-known economists, it is a fair devaluation as China is on the decline and the US economy is strong. Republicans say they are for free markets but Trump does not understand how exchange rates come in to being! For the longest time, the Republicans and Fox news used to say that due to Obama, the dollar is going to be worthless, inflation will skyrocket so the price of gold is going to sky rocket and we will not make our employment situation any better. Now our current situation: (1) too high dollar (2)ever declining price of gold (3) employment rate is close to the official full employment rate of 5.1% (4) rate of inflation well below the 2% target of the US Reserve Bank that even social security recipients did not get their annual cost of living increase this year!
I like to think differently and come up with a different perspective. For the last decade or so, the corporate America and the Republican Party have been advocating welfare for the biggest multi-national companies by decreasing the corporate tax rate so they will bring back to this country the $2 trillion they have overseas. The argument is that then they will invest that in our jobs and people. Trump’s friend, Carl Icahn just established a multi-billion dollar super pac to get the laws changed. Carl Icahn himself has been saying that all companies do is financial engineering by buying back stocks and increasing dividend payments-without making actual investments. This is what they will do with this $2Trillion! In investments, as Jim Cramer says it is not good to avoid selling due to minimize tax payments because you might lose what you have already earned. This should apply to this $2 Trillion problem too. No one has pointed this out but during the past few months, the US dollar (USD) rose sharply against all currencies and that trend is expected to continue. Russia and Brazil did not and does not like a 40% reduction in their currency value against the USD. Even though it is not realistic, let us assume they had this $2 Trillion in Brazil or Russia where the USD rose 40% so now in dollar terms these companies have already lost $800 Billion due to currency devaluations! I am assuming that most of this $2 Trillion is in Europe, over the past 5 years, the Euro fell 29.45% against the USD- that is a loss of $600 Billion in currency devaluations. According to the World Bank and IMF, the US economy is the only strong economy in the world-it is the sole engine that is dragging all other major economies. If our growth rate gets stronger, the US Federal reserve will increase rates to avoid inflation so why give welfare to these companies to bring this 2 trillion dollars to our biggest companies. Most people are ignorant of the fundamentals of economics. When a country grow over the technical full employment rate (i.e. 5% for us) we run in to the economy’s worst enemy- inflation! Feds will do anything to avoid inflation. Over the past few years, our companies have spent over $1,7 Trillion on buying back stocks, increasing dividends and mergers & acquisitions. Companies like Apple, without bringing their money from overseas, borrowed against it to buy back stocks and pay dividends. Now they might have to pay more when US rates go up and their foreign asset have gone down in value due to currency valuations. Serves them right! Also I think our government should take action such as not allowing these companies get Federal contracts for keeping their money overseas. I have not seen this analysis done by anyone; this is my own analysis. May be I should send this to Clinton or Sanders!
I initially recommended Twitter when everyone hated it. Then last month I stated that there was a rumor on Wall Street that the board was going to make Jack Dorsey the permanent CEO of Twitter; the very next day that happened and the stock went up by 6% in one day. There is a rumor that Google, Apple or Facebook might buy Twitter. Then what happened on 10/7/15, Saudi Prince Alaweed doubled his stake at Twitter to 5% and now he is the #2 owner of Twitter and he owns more shares than the founder and CEO, Jack Dorsey! This Saudi Prince is well respected on Wall Street and he is known to pick ‘stock bottoms’. He still owns a major share of Citibank, 21st Century Fox etc. Then on 10/12/15, Twitter announced that they were cutting their global labor force by 8% and they have the lowest pay rates compared to their competitors. On the same day, Jim Cramer predicted that the price of Twitter would go up. The good news on Twitter kept on flowing like a tidal wave in October 2015! On 10/16/15, former CEO of Microsoft, Steve Ballmer, sent a tweet, “Good job, Twitter! I am glad that I just bought 4% of your company”. Now Ballmer and Alaweed owns more of Twitter than CEO Dorsey! Then a few days ago, CEO Dorsey announced that he was going to donate a big share of his stocks to an employee pool to reward his employees. Dorsey is developing new products every week. When all technology stocks were going down, Twitter rose sharply. By the last week of October, the open interest (all available) options on twitter was higher than any other stock in the market-even more than Apple! Earnings call show that they are on the right path by increasing users and revenue and cutting costs. After moving up sharply to $31.36 on 10/27/15, the price dropped to $28.46 on 10/30/15; apart from my stock holdings I took a wild bet on Twitter by buying call options (strike price: $50, expiry date : 3/18/16) for 14 cents each. If Twitter rise to $50, my options would have a value around $4; that is a 2,757% gain in less than 6 months!! On the other hand if Twitter goes up to it’s 10/27/15 high of $31.36, I would be able to sell my options at 33 cents (more than a 100% gain). I am not implying that Twitter would go up to $50 by 3/18/16 but intuitively I know that it might double within the next 3 years.
Out of all the shorts that increased from 9/30/15 to 10/15/15, GE was the 3rd highest, so no wonder GE went to a 7 year high. If I heard anyone saying that GE could go up by 49% in 90 days in 2015, no one would have believed it. It has been stick in the mud for more than 8 years. After the financial crisis, some thought that GE (only original Dow30) would even get dropped off the Dw30. It is so big, it rarely moves. As I stated on 10/5/15 (1st addendum for October 2015), I sold my $27 calls at a 300% profit but my intuition told me not to sell at that time. If I waited just 2 more days I would have got a 2,000% profit but the decision I made was a rational as GE hit a 3 year high and my options were going to expire in 2 months. What I had to say about GE on 10/5/15 (in my addendum:
General Electric (GE) was the biggest story today! For the past few years everyone thought I was crazy to recommend GE. As I have been saying they are going through a death and rebirth process. The new GE is going to be totally different than the GE of the past. Alan Peltz who owns the Hedge Fund TRIAN invested $2.5B in GE. The Chief Investment Officer of Trian stated that they consider GE to be totally ‘risk free’ with dividend yield close to 4% while the US 10 year treasury rate is at 1.99%. They are pressuring GE to increase their buybacks from $90B to $120B. Jim Cramer said that the price of GE could double with Trian getting in to GE. Trian expect margins to grow rapidly at GE. Now Trian is the #10 owner of GE and they see GE going up by 70%. I had GE stocks and call options. Maybe it was too premature but I sold my call options (GE, strike price $27, expiry: Jan 2016) at a 300% profit and kept the stocks. If GE goes to $54 as Jim Cramer predicts and if that happens prior to 1/15/16, I could have made a 10,000% profit but with options, one cannot take that risk. Next time GE goes down, I will get in to options again. Over the past year or so, it has been trading between $24 and $26. It has been a trader’s dream.
This is what I stated on 10/11/15 (addendum 2):
Freeport McMoran- Analysts used to call this the worst stock in the market about 2 months ago and at that time I asked you to start ‘nibbling’ (buying) it. Then Carl Icahn bought a big share of the company. Last week, on CNBC, Carl Icahn was saying that he wanted the price to drop for a year or so he could buy more and then make a lot of money in 3years. I had the same wish for all of you. Luckily or unluckily, like Twitter, it kept going up! On 10/8/15 alone this stock went up by 9.97%! This week alone, 10/5/15 to 10/9/15, Freeport went up by a WHOPPING 34.72! So $1,000,000 invested in Freeport on 10/2/15, you would have gained $340,720 in 5 days! This too will not last. All this is due to short covering as well as algorithms and computer robots gone crazy. From the bottom of my heart I want to thank all the 23 year old idiots who created those robots! Also Morgan Stanley upgraded Rio Tinto and BHP-which I think was quite premature. Even though I did not put Rio Tinto (UK based commodity company), I bought Rio for the long term as it pays a dividend of 6% about 1 month ago but I think it is too risky for you. I will not be surprised to see the price drops 50% to 80% soon. Wait for the profit takers! Then, like Carl Icahn, buy more. If it comes out that Chinese economy is weaker than expected, this will hurt Freeport. China consumes 40% of all supplies. They are heavily in to high yield bonds so if that bond market blows up, that would be a terrible blow to Freeport. Like Mr. Icahn, I too have hedges against the high yield market. Buy puts on HYG! If you took my advice and bought Freeport on 8/25/15, today your holding would be up by an AMAZING 65.32% in just 46 days
As I mentioned a few weeks ago, in my addendums, Apple had the highest short sell increase and I predicted that this will cause the price of Apple to go up as these people will have to do some panic buying to cover their shorts; and as I predicted within the past 3 weeks, Apple rose from $110 to $120 (9% in 3 weeks). On 10/22/15, Brad Lamensdorf who predicts a bear market in 2016 and who was shorting Apple said that they got out of the Apple short position. However Brad was bullish for the US market for 2015 Q4. On 10/11/15, in my 2nd addendum, this is what I had to say about Apple:
As I have been saying in the past, on Wall Street, love can turn in to hate in an instant. A month or two ago (or prior), it was impossible to find someone who did not love Apple on Wall Street. Now almost everyone hates Apple. Kevin O’ Leary, Shark Tanks Billionaire who thinks he is an expert on stocks was saying that Twitter was dead prior to its astronomical rise of the stock also mentioned that Apple has no future now. Why? His 18 year old son told him that he hates Apple music. How stupid! For the past year or so he would come on TV and say that Apple was the best stock ever. On 8/25/15, when the market crashed 1100 points, Apple CEO emailed Jim Cramer of CNBC to let him know that IPhone sales are growing rapidly in China and that is what stopped the carnage-not limited to Apple. Recently Nike earnings report also show that China sales are doing great. Why? These American products are status symbols for the Chinese. As I said a few days ago, Apple had the highest short interest hike of all stocks with a rise of 14 million in one week. When I was talking about all the stocks that went up sharply last week due to short coverings, did you wish you were able to buy them prior to that rise? Now here you have that with Apple. Next time Apple would report earnings would be on 10/27/15. There is a very high probability that Apple would skyrocket around 10/27/15. I looked at call option prices but they are too rich for my blood but this means you can make a lot of money by writing options on Apple.
Good Bye for now! Have a great November and a Happy Thanksgiving!
Fernando. Prosperitystocks@yahoo.com. http://www.tibetanbuddhisthealingprayerchants...cial-blog/
