Testimonial

Dear MHFT,

I’ve just completed my third year trading under your guidance. I’m intensely interested in events that move markets and I find your knowledge to be quite insightful. 2016 was a breakout year for me as I made $382,000 on a trading account that started the year with $700,000. Keep sharing your wisdom!

Steve
Basel, Switzerland

John Thomas

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The Unmistakable Fingerprints of the Risk Parity Traders

I received a call from a hedge fund manager on Friday warning me of what was about to hit the market.

So much money had poured into “risk parity strategies” that it was starting  a long term secular trend up in market volatility (VIX). It was a classic case of too many people bunching up at one end of the canoe.

Witness the day’s 300 point dump in the Dow Average, which came out of the blue.

Investment advisors everywhere are bemoaning the shenanigans of high frequency traders, offshore hedge funds, and the Chinese for the recent volatility of the market that has been scaring the living daylights out of their clients.

But they have a new enemy that few outside the trading community are aware of: “Risk Parity” managers.

Risk parity is now being blamed for the steady rise of volatility from 12 to 17 in a matter of hours.

The industry is thought to have $400-$600 billion in assets under management now, with hedge funds Bridgewater and AQR in the lead.

Potentially, they could unload as much as $100 billion worth of stocks in days.

What’s more, the fun and games aren’t confined to just equities. Risk parity strategies have spread like a pandemic virus to bonds (TLT), foreign exchanges, commodities, and even precious metals.

Risk Parity is an esoteric new investment strategy that targets a specific volatility level, rather than a return relative to a convention benchmark like Treasury bonds or the S&P 500 (SPY).

When volatility (VIX) is low, they add risk, hoping to beat the returns of competitors. When volatility is high, they cut back positions, hoping they miss the losses of others.

The goal is to come out on top of the money manager league tables, sucking in tons of new assets and countless riches in management fees.

You can see right now where this is going.

In rising markets they increase buying, and in falling ones they greatly step up selling.

I’m sure there was a day several years ago when this approach made money hand over fist.

That was probably back when only its inventor was implementing it alone in a back room using an undisclosed hedge fund with a tiny amount of capital.

The problem with risk parity and all other strategies of its ilk is that they become victims of their own success. New capital pours in, returns fall, until they inevitably dive into negative numbers.

I have seen this happen time and again, from the portfolio insurance of the 1980’s (think October, 1987 when the Dow plunged 20% in a single day), to Japanese warrant arbitrage, to high frequency trading and the flash crashes.

The proof is in the pudding.

An index of 17 risk parity funds tracked by JP Morgan has fallen by 8.2% since the beginning of May. More losses are to come. It sounds like the great unwind of risk parity assets has already started.

Like all investment fads that promise great, risk-free returns, this one will come and go.

In the meantime, fasten your seat belt.

vix
indu

Arnold SchwarzeneggerDid You Say “BUY” or “SELL”

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Trade Alert – (GOOG) September 6, 2016

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ‘look over’ John Thomas’ shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen.

Alert

Trade Alert – (GOOG)- BUY

Buy the Alphabet (GOOG) October, 2016 $720-$750 in-the-money vertical bull call spread at $23.95 or best

Opening Trade

9-6-2016

Expiration Date: October 21, 2016

Portfolio Weighting: 10%

Number of Contracts = 4 contracts

This is a bet that (GOOG) won’t trade below the $750 level by the October 21st expiration date in 34 trading days.

If you can’t do the options trade, then buy the stock. I think it could REACH $1,000 over the next three years.

To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of optionshouse.

If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Bull Call Spread” by clicking http://members.madhedgefundtrader.com/ltt-executetradealerts/. You must be logged into your account to view the video.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.

Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.

Here are the specific trades you need to execute this position:

Buy 4 October, 2016 (GOOG) $720 calls at………….….……$59.80

Sell short 4 October, 2016 (GOOG) $750 calls at.…………..$35.85
Net Cost:………………………………………………………..$23.95

Potential Profit: $30.00 – $23.95 = $6.05

(4 X 100 X $6.05) = $2,420 or 25.26% in 34 trading days

GOOG

GOOG 9-6-16

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Testimonial

Congratulations on your success. Your path has been your own and your outside the box thinking is refreshing and powerful. No doubt, you have enjoyed it and yet surprised yourself and others with it over the years.

The reason for my contact is your insight into the inevitability of solar energy costs going to nearly zero. I agree. You clearly understand that this transition is massive to every aspect of our lives – and yet very few “get it”.

The next 15-40 years will see a transition that will be founded on virtually free and abundant energy. This abundant, almost zero cost energy will accelerate the effects of medical advances. It will transform our resource sectors from agriculture to mining to chemicals.

It will see manufacturing shift from factories and mass production to local 3D printed products – perhaps even food. It will mean AI and automation… And yes, it will mean that human labor will not be as needed or as valuable. Our relationship to work, income, wealth, etc… will have to change. 

Labor and the nature of work will be a huge challenge. Globalization has decoupled the industrial and wealth agendas from national needs that were characteristic of colonial times.

No longer do US companies like Ford pay higher wages to their employees so that they can afford their products. So, real wages have been effectively flat since the mid ’70’s. Despite productivity gains, wages go nowhere.

If the market alone were to determine the future of labor, we would simply have more “surplus population” as was defined in the periods before the 20th century.

In our world, governments will not survive such a trend. This fact is already responsible for Brexit, Trump, Sanders, Greece… 

I believe that acceleration of the adoption of renewable energy, particularly solar, and the gains achieved from lower cost energy as well as the egalitarian nature of energy wealth afforded by solar is economically and sociologically key to a more peaceful and productive transition to the future.

Massive wealth and power concentrations are threatened by the economic realities of renewables and the distribution of wealth and power therefrom. While they will not go down without a fight, certainly slowing adoption where possible and seeking to replicate their monopolies in a renewable world, they cannot win.

Short of wars and physical devastation in attempts to maintain the “scarcity” that capitalism thrives upon, they cannot prevent the more egalitarian future that abundant, low-cost energy is bringing.

So, thanks for hanging in on my email. I see that you are a free thinking, “somewhat” non-conformist. You get this.

Best wishes and thanks for your insight and your work.

Best regards,

Tom
Marion, Massachusetts

Thanks for your input, Tom.
John Thomas
John on Castle Wall

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Testimonial

I just stumbled across your writing and I love it!

I have been reading it all weekend. The more I read, the more I have this weird sensation in my frontal cortex. I believe it used to be called “thinking” before the new world order arrived. Almost stimulating….like the stuff before decaf…


What a fresh perspective you provide! You challenge my preconceived notions from CNN, and that is scary.



Please keep up the good work.



Yours Truly,

Ron
John on Bow of Tender

Adriatic Beach

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Testimonial

Your article on “The Ten Baggers in Solar Energy” is the best, well informed, educated piece of literature I have read for a long time.

Thank you for your honest and well informed article. I am going to be 86 years YOUNG in coming November and appreciate a simple jewel in this money chasing jungle.

I would like to follow you and learn more new stuff in this fast going and changing world. Thank you.

Lisa
Ontario, Canada
John Sideways

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The Mystery of the San Francisco Sublease

Commercial real estate agents are baffled. Economists are confused. Even Federal Reserve Chairman Janet Yellen is focusing a great deal of attention on the issue.

What the heck is going on with the San Francisco office subleasing market?

The question has taken on greater urgency in the wake of Friday’s abysmal nonfarm payroll report, which showed an increase of only 36,000. If no one is hiring anymore, companies certainly don’t need more office space.

When established businesses need new offices, they typically lease space in prime downtown areas. These normally take the form of a 5, 10, or 20-year lease, which the firms pay rent for on a monthly basis.

Only the wealthiest firms, like Apple (AAPL) and Oracle (ORCL) boast the cash flows that allow them the privilege of outright office ownership.

Traditionally, when companies expected the economy to slow down, they would sublease a portion of their existing space to cut costs.

When economies sped up again, they would take back their original space so they would have room to grow into.

What has analysts really scratching their heads these days is that the rate of subleasing has seen a dramatic increase in recent months. Does this mean that the economy is about to get better, worse, or neither?

Hence, the Fed’s intense interest.

I dove into the data with characteristic zeal, discovering that there is much more here than meets the eye.

It turns out that the new frenetic rate of subleasing is not an indicator of future economic activity. It is more a reflection of the structural changes besieging the US economy.

Deeper research revealed that the largest supplier of San Francisco office subleases was banker and securities broker Charles Schwab (click here for their site at https://www.schwab.com/?src=nay&sv1=dJ73RHPU_dc&sv2=73328918060&keyword=charles%20schwab&device=c&adposition=1t1&matchtype=e&network=g&devicemodel=&placement=  ).

It turns out that the entire industry is downsizing as rapidly as possible in order to cut costs. People are being replaced with machines, and machines don’t need expensive, glitzy offices on Montgomery Street, off of Union Square, or anyplace else where humans may proliferate.

Computers are much happier in giant server farms where rent and electric power are cheap, and where a small number of local techs can keep them running for pennies on the dollar.

I am thinking of The Dales, Oregon, Council Bluffs, Iowa, and Jackson County, Mississippi, where Google maintains three of its largest server farms (click here for a list of the rest at https://www.google.com/about/datacenters/inside/locations/index.html).

The shrinking of the financial industry is not only reflective of the price of office space.

It also explains why New York City, the center of the financial industry, has shown the slowest residential price appreciation since the 2012 bottom. Layoffs there in recent years have surpassed well over 200,000.

Who has been the biggest taker of new floor space in The City by the Bay?

That would be technology companies, which are far and away the fastest growers in the economy. This should be a sign of continued health of the American economy.

Yes, it would be fair to ask the question of the risks posed by 70 or so unicorn, fast growing tech companies that have yet to go public. The bloom here is clearly off the rose, with many getting slapped with lower valuations in the latest rounds of fund raising.

But unicorns rarely occupy prime or trophy office space. They are usually just one step out of a garage, to be found in cheaper “B” and “C” commercial office space.

No less a giant than ride sharing giant Uber, said to be worth $65 billion, just moved into an abandoned Sears department store in downtown, low rent Oakland, CA.

As is so often the case these days, traditional, historical data can be dangerous to follow, as it may have been rendered meaningless by our hyper evolving economy.

Look before you leap.

Google Global Server Farms

Global Google Server Farms

Home Price Appreciation Charles Schwab

Need Some Space?

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Why We Do Put Spreads

Yesterday morning, I used the opening dip to come out of the SPY June, 2016 $212-$217 in-the-money vertical bear put spread at cost. This is being prompted by OPEC’s failure to reach a production ceiling once again.

The timing was fortuitous. An hour later, favorable inventory numbers delivered a 3% spike in Texas tea, dragging the stock market up along with it.

This allowed me to de-risk ahead of major market moving events:  the release of the May nonfarm payroll at 8:30 EST on Friday June 3, and the June 14 Fed interest rate decision.

This year, it’s all about risk control. Ignore it at you peril.

We had a nice profit in this position a week ago, before the dramatic short covering rally ensued.

Again, the hard earned lesson is to take the small profits as long as we are living in a 5% trading range. Pigs are getting slaughtered by the pen full.

This year, it seems like every market move is intended to cause maximum damage to hedge funds, regardless of the logic. From here, that means stocks could go up just enough to trigger another wave of stop loss buying, and then fail again.

A summer swoon is still in the cards, especially if the Fed raises rates in June. 

Humans would be mad to buy stocks up here at the top of a two-year trading range, but machines don’t care. That is giving us our added upside volatility.

Either way, I’d rather watch from the sidelines for free. The algorithms will take advantage of the poor summer liquidity to whipsaw prices as much as they can, capturing as many pennies as possible.

If we do get an extreme move worth fading, I’ll re enter the trade. If not, then I’ll stay in cash awaiting another soft pitch.

A good rule of thumb in 2016 is to wait an extra day before strapping on a new position. Prices move more than you expect, even though it is not reflected in the Volatility Index (VIX).

The small profit we eked out of the SPY June, 2016 $212-$217 in-the-money vertical bear put spread offers a perfect illustration of why we execute put spreads.

We got the market and the timing wrong; yet,we still got out whole and lived to fight another day. When we executed this short position, the (SPY) was at $206.58.

Some 13 trading days later, the (SPY) rose 1.56% to $209.80, yet our put spread rose in value from $2.51 to $$2.55, making us $96. Some emails I received from followers indicated that they got executed as high as $2.61! All the money was made in time decay.

I love strategies that make money when you’re wrong!

The SPY June, 2016 $212-$217 in-the-money vertical bear put spread was a bet that the (SPY) would fall, move sideways, or rise modestly into the June 17 expiration. That’s exactly what we got.

Because this is a hedged option position, the minute-to minute price movement is small enough to enable readers to get in and out even accounting for transmission delays posed by the internet. You don’t need to live your life in front of a screen grasping for pennies.

You also have clearly defined risk. You can’t lose any more money than you put in. And if Armageddon hits, time value assures that you can always recover much of your investment.

I’m starting to wonder if the June 14 Fed meeting will be the last bout of volatility in the market that we see for a while. The doldrums are here for the summer, and the attractive trades in any asset class are few and far between.

Returns on selected assets
SPYJohn at the beach

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Testimonial

I’ve subscribed to John’s trading service for several years.

As a writer myself, I look forward to John’s daily newsletters. They are loaded with great investment ideas and information affecting world markets. They are delivered in clear, entertaining prose and are a joy to read. I learn something new from them every day.

John’s advice has saved me from losing a lot of money by keeping me in the market when others were bailing out. Following his option trades allowed me to make sure my son graduated from Stanford with zero student debt. That’s a lot of green, folks. Stanford is 50+ K a year.

Alan
Florida

John with Tesla2

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