Newsletter - 7/28/2024
I don't know about you but I am tired. I mean mentally tired of watching the market operate by bizarro rules: good is bad, war is bad but not bad enough to correct the market, debt is bad but not bad enough to crash the market. Even for someone like me that has been around for awhile this market is very different. And yes, it is very tiring mentally. Protecting capital is easy but I am also very aware of the "lost opportunity" cost that can often occur. The balance to strike is between being cautious and not frozen, which I have tried to do by slimming down my position sizing.
It is during times like this I have to rely upon my experience to provide some perspective. The first time I went through this type of market mentality was in 1998 to 2000. It was the internet boom time or as we called it then the "ISP Boom." This period was when the internet really became an everyday tool for everyone and the capital markets were euphoric, even worse then they are now. Of course this period was very different from today in one way: that timeframe did not include significant geo political risks such as what exists today. So it was pure euphoria. And I enjoyed every part of it. Until it ended. While my clients made great money and largely avoided the drawdown from the ISP hangover, it did reinforce for me my belief that human perception is regularly wrong because it is constrained by bias. This bias is one of the things I watch for on a daily basis and am constantly trying to be aware of. Not all bias is bad as long as you are not intellectually downplaying or ignoring real risks that exist. Most people find this is very difficult to do because most people make decisions on how they currently feel and there is always a lag time between what you feel and reality reaffirming it's control.
You might wonder what it is I am doing all day long. I am a voracious information junkie. Throughout everyday I am constantly reading news, reports, papers. I am scanning social media accounts and news services. Sometimes I can get so focused I will forget to talk in the Discord. But I am constantly looking for information that might be useful to me and therefore to you. As a result of this I sometimes will come up with ideas or theses that are out of the norm so to speak. But for those that are curious what I am doing all day, and night sometimes, well now you know. I am looking for data, constantly. Then I am taking in all the data that I have been exposed to and making investment decisions.
As I write this reports are that Netanyahu is headed back to Israel after a rocket attack from Hezbollah in Southern Lebanon. News reports state that he has been given the "green light" to attack Lebanon by the US. Normally I would see this report and expect some type of weakness at the open on Monday, because that would be "normal." But we are not in a "normal" environment.
And I want you to understand that a market like this can drive you to the point of just saying "f it" and investing with no rules, no discipline. I know the urge can be strong especially if it lasts for more than a week or so. I feel the pressure to come up with new ideas and activity but every time I feel that urgency, I fight it down by going back to my methodology.
Truly you should be given credit for learning to trade in THE most broken/screwed up/irrational markets I have ever seen.
Let me leave you with this: if you are feeling "off" or "tentative" lately when it comes to trading, and if you are feeling overwhelmed or burned out, that is all completely normal to the trading environment we have been in for over a year (I think it really got out of hand after the $SVIB collapse).
Trading in the current environment is most like 2007-2008. It is never those who go with the investment crowd that are willing to stand out and make a call contrary to popular belief. But as is evidenced by the situation with CRE theses often take longer than you might expect. And those delays can cause doubt about your investment thesis. Sometimes I even experience those doubts. But I always go back to the data. Because at the end of the day, every single time I have been in this type of trading environment I have been faced with either trusting the data, or everything else.
Week in Review
Model Portfolio - since 5/9/2023
This Week:
Last Week:
In addition to the reasons I shared at the beginning of this newsletter this week was a tough week to trade. I tried to open multiple trades and because of the "choppiness" of the market I either wasn't able to enter because price had moved beyond my acceptable entry or had moved inverse to my investment thesis. One of the things that even I do with all of my experience is I have this internal monitoring system that is constantly running probabilities. Because of the current market conditions though, sometimes trading opportunities can disappear in hours as price reverses. Then I have to do a whole new calculation. I guess my point is this: if you are feeling like trading has become harder lately, it has.
I do believe that there is a possibility that this week, which is a very heavy data and earnings week (40% of the SP500 reports earnings this week), the market will be able to break out of the range its been in, with decisiveness. Why? Because with all of the variables that are in play this week I believe it is inevitable that one "theme" will take the lead in the market as the new "theme."
I do believe that there is a good chance that the market will attempt another rally to the topside. I do not know if that will be triggered by a surprise rate cut this week, a larger than expected cut in September, peace in Ukraine, etc. As I have already discussed, there are so many significant data points occurring at the same time that it is much harder to decide which one of those data points will take the lead for the tone of the market.
The only trades I closed this week were all losers. But I have been sizing down all of my trades recently so the net affect on the portfolio is negligible. I attribute the quick stops to the market's indecision to choose a direction currently. It happens. Yes it's annoying but most of trading is.
Closed trades this past week:
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$NTNX Sept 45P $1.95; sold for -10% in 2 days
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$IOVA Sept 11C $.85; sold for -41% in 2 days
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$XPOF Sept 17.5C $2.42; sold for -19% in 2 days.
Closed Positions
$NTNX Sept 45P $1.95; sold for -10% in 2 days
$IOVA Sept 11C $.85; sold for -41% in 2 days
$XPOF Sept 17.5C $2.42; sold for -19% in 2 days.
This and That: CRE
So I have gotten some questions about Commercial real estate:
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Why do banks stocks keep going up if their business is deteriorating?
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What about the positions that I already have that are at a loss?
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Is it still a viable trade option?
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When is CRE going to break?
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What if you are wrong about CRE?
While not completely inclusive of the questions I have been getting, they are the most common. I intend to answer all of them but before I do that, allow me to set the stage, so to speak.
Everyone wants to be Michael Burry. Or Warren buffet. Or any successful trader. Everyone wants to results of being a trader like that. But very few have the mental and emotional fortitude to do so. And that doubt is completely normal. But at some point, you either have to believe or not believe. I can teach you, I can provide concrete proof of what I am sharing but:
I cannot hold your hand. This means that you must continue to build up emotional tolerance to aid in your trading. You must be able to develop a confidence that the trade setup is favorable.
Either you see the potential of this trade or you do not. If you do see the potential then I can understand why it is confusing to hear me say CRE is going to drop at the same time those very stocks are going up. But, there is nothing I can do about predicting WHEN it will happen. The cost to be in the trade are sometimes losses before the real payoff occurs. I am trading the way I learned to trade over 30 years so trust me that one of the loneliest places to be is to be early.
Why do banks stocks keep going up if their business is deteriorating?
Perhaps one of the most annoying things when entering a large macro type trade is seeing the stocks of the industry go up as the industry macro deteriorates. However, there is not one industry that has been troubled where the stocks DON'T continue to go up even as their foundations are crumbling (Helloooo switches and routers and $CSCO in the early 2000s).
My opinion as to why bank stocks keep advancing:
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It is where momentum is right now; to the long side
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Mega Bank earnings have largely been non-catastrophic.
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The banks have been able to reclassify NPLs and extend their terms so as to not have to realize losses in their loan portfolios. Effectively they are kicking the can.
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Within the industry there is the belief that the Fed will bail them out anyway.
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There is so much bad news in the world that CRE is not the Catastrophe du Jour, yet.
Look, while I might think that the Fed is back door stimulating these banks or they are illegally propping them up or something along those lines, I do not have proof. Therefore, I have to base my opinion upon known data AND those unknown possible data points that I believe are most likely.
The most likely reason bank stocks are outperforming is that investors are stupid. I do not say that in a mean way. But it IS the most likely reason that they are going up at the same time their operations are getting worse. Given all of the other possibilities what other reason could it be? I am talking about data based decision making. What other possibility is more likely than this is yet another example that investors are stupid?
Looking at the chart, I want you to ask yourself this: why wouldn't you want to short at the highest possible level?
What about the positions that I already have that are at a loss?
Ok, I am going to be blunt here. My portfolios are up +180% since May 2023. That includes the "DOOM Starter" positions that I established last year as well as losses I have already taken. The current $KRE position I own is not a concern to me because I opened it knowing full well I could take a total loss on it and because it is only a portion of my overall porfolio.
One of things that the way I trade allows me to do is to take positions like $KRE as starter positions of a macro theme as "just in case" positions. These are positions that I take when I see a large macro theme developing but I don't know when the major catalysts will occur. I want to have exposure "just in case."
The positions I own currently account for 14% of my total portfolio. With my trading history even a complete loss on that 14% is not really a huge deal.
If you have starter positions in $KRE and $VNQ and you are worried then I want to remind you that of the above: these were always starter positions and I was very clear about that. If you over position sized relative to your total portfolio, if you have lost confidence because the stock prices have been going up, or if you just don't want to deal with the positions anymore, then sell the positions. YOU must have the conviction or you have to borrow mine.
But if you want to have the chance to make the returns that a Michael Burry does, then you have to deal with the cognitive dissonance of being very alone in your position. Everyone always remembers the
destination, rarely the journey.
I have been by myself alone with investment calls before. I was alone in the mid 90s when "Peak Oil" meant that every oil company was going to go out of business and yet there I was buying oil.
I was going long $AAPL in 2013 when it had been cut in half trading in the teens. You probably don't remember but that was when everyone hated $AAPL - they were done.
I was alone in 2007 when my Quant fund signaled it was time to get flat.
More recently, I was alone in 2023 when everyone was calling for 6-7 interest rate cuts in 2023-2024.
I was alone in 2023 when I said that we were not coming out of a recession but instead were headed into a deeper one.
My point is I have been here before. Yes it's lonely.
Is $KRE still a viable trade option?
I believe it is. I mean look at the bad news that comes out of this sector every single day. I have been wrong about the timing but not about the problems within commercial real estate an banking. From my research I still only see the possibility of a bailout as saving the industry. In fact, I have already written about why I do not think CRE is ever "coming back."
Right now, at this moment the battle in CRE is very simple: Can the industry and the banks that financed the industry delay having to realize any losses long enough for interest rate cuts to happen or for demand to pick back up? Will the Fed come in and rescue them via a bailout?
I don't know and I don't know.
But what I do know is that the industry is breaking down. That's real evidence of real problems. My bet is that the problems become so big that they can no longer be contained. I am using the same process I have always used: analyze incoming data against possible outcomes and decide if the reward to risk is large enough to make it worth your money.
I post non-stop in our Discord chat articles about properties going into servicing and being bought for $.20, $.30 on the dollar. These are real transactions. This is real collateral being marked down. Remember that at the start of a downturn the best collateral gets sold first. That's where we are now.
But I do not know when THE event that final breaks it all open will happen. But I would ask you: what is the data telling you? Is it getting better or worse?
When will CRE finally break?
I don't know. Everyday is a step closer. But you will notice that I have not added to my DOOM trades. Sometimes crazy takes time.
What if you are wrong about CRE?
Then I will lose more money than I already have. It's part of trading. I have been wrong so far. And I have lost real money. Life goes on. I mean I don't like it but it happened and it's just one trade or two trades or whatever it was. I moved on.
IN CLOSING,
Let's use a baseball analogy:
Let's say you get up to bat and you see evidence that the pitcher is faltering. So you know that your chances of getting a hit or even more are better because of this.
So your first at bat you make contact but no hit. You actually strikeout. But as you walk back to the dugout, you can see that the pitcher is in even worse physical shape. Sweating, breathing hard, and limping now.
At your second at bat you are even more confidant and again, the best you can do is a hit that leads to an out. But you know that when a pitcher starts looking like this one does your chances for a homerun go up drastically.
So do you go back to the dugout, throw your bat, complain about the game being rigged, the umpire being bad, the pitcher not faltering when its so obvious that he is physically declining before your eyes.
OR
Do you sit and watch and smile to yourself? Because you know the previous failed plate appearances are part of the probability (your batting average is 333 so you get a hit every 3rd at bat) and that it is only a matter of time before the decline in the pitcher will lead to a big fat pitch for you.
This is where I am with CRE and $KRE. I am just smiling to be totally honest because now price is moving so inversely to what the news is reporting daily that I know market participants have entered the twilight zone.
OR, I am wrong and at the last minute, the opposing pitcher will be pulled and replaced before I get a third chance (the Fed will bail them out).
At the end of the day I am doing what I always do: playing the odds.
I like my odds.
Tales from the Dark Side:
Activity does not equal Productivity
I remember after being in the business for about three weeks I noticed the guy who sat across from me had no clients. I was surprised because he was always on the phone. With the leads he was getting he should've had at least 10 new clients. But he had 1.
I wasn't the only one who had noticed this because the manager was constantly standing by this guy and feeding him what to say. But it never led to the "handoff" where the broker hands off the phone to the manager so that the manager can "up" or increase the number of shares in the order.
I don't know how it finally came out but here is what this guy was doing: he was calling his voicemail and leaving around 200 messages per day. And this was back in the day when it was a physical voicemail machine with actual recording tape. He was terrified of actually cold calling so he did everything else but the actual call. This is also why he didn't have any clients other than his Dad.
He was doing a lot of activity but it was misdirected, unfocused, based in fear etc. But ultimately activity that would do nothing for furthering his career.
So it is with trading: just because you are busy does not mean you will be successful. Of course there are other takeaways from this story:
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If you are lying to yourself about any aspect of trading, you will fail.
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If you are interpreting being active as leading to success, that's wrong.
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If you are afraid then you are setting yourself up for failure.
As for what happened to Mr. Voicemail? Last I heard he was running a fund for Invesco. True story.
Charts of Interest
$ENVX and $EOSE
I read a detailed Bear position and their concerns are no different than mine: maybe the tech isn't "all that," maybe they can't scale.
But I am more comfortable today that management wants to succeed and that this is not some SPAC POS - because I have data/evidence of such.
Bears are making no such allowance and therefore their logic process is flawed from the beginning. And of course the results of such logic will also be flawed.
Price is telling me that it wants to test the top of the 6/25 gap at $13.75.
I think there is a chance that price reverses right here IF Monday the market is strongly green.
Do not be faked out if price reverses - it could be a retest of the weekly midpoint of $15.50ish.
Range is $15.50 to $13.75.
Range is $2.00 to $1.50.
If the company fails to update the DOE loan status on the earnings call, or before it, the stock is going back below $1.50.
Buyers are still in control of price as is evidenced by the vertical red bars in the lower graph.
Anyone who asks me why I have long LEAPs in $EOSE, I now respond with one single word: Cerebrus. Now it's about sitting back and letting them do what they do.
Doom
Anti Doom
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Don't forget the Discord live chat is STILL FREE but it will be closing to new members soon. In fact, we have already started removing non-active members.
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In the meantime, come and join us - its the best community out there: Discord.
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Also, be sure to check out the new page for Daytrading on the website, run by the fine gents @BaconTurkeyClub and @Juggernaut. If you ever wanted to learn or just watch two pros daytrade live, they are at it every day here: DiscordFuturesChannel.
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Thankyou Family!
theBoss
Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.