NEW INITIATIVE: Imaginary Stock and Options Portfolio

Let’s try this out. I’ve called the Macau top, the China top, the Japan top and the VIX spike. I think the gold bear is finally over. I’ll go up against all the Keynesian hedge fund guys who know nothing about business cycles.

Here’s my model portfolio, assuming a $100,000 portfolio. This is only a game, and I am not making any recommendations. I advise you not to follow any of this, because I am covering myself for legal reasons.

$500 GLD JAN 2017 225 CALL  @ $0.13/contract

$10,000 CORR at $5.20/share w/9% dividend

$500 TLT JAN 2017 PUT @ $3.00/contract

$30,000 GG at $13.40/share w/1.1% dividend

$20,000 CVX at $78/share w/5.5% dividend

$39,000 CASH

I’ll make a page out of this thing and update monthly and with any changes.




“Rafi, you’ll have come up with your own topic today, we’re too busy with the market collapse.”

I just called one of my editors for a topic. He answers the phone and I hear screaming in the background. I ask if everything is OK. He says yeah.

And he tells me, “Sorry, you’ll have to come up with your own topic today. We’re too busy with the market collapse.”

We ain’t seen nothin’ yet.

The Abyss Deepens – China Opens Another 6.5% Down

Shanghai just opened for trading. The index is down another whopping 6.5%. Japan is down another 2%. Europe opens in a few hours.

Where do we go from here? It looks like we’re headed for another down day given the Asian opens. At some point, the Fed is going to give up and announce a new QE4. It is at that point that gold will skyrocket as everyone realizes that QE will never end, not before the dollar is fundamentally revalued down.

Four for Five on Short Calls

On March 23, I said the following:

NEW YORK (TheStreet) — Japan’s stock market may be about to put in a long-term top and there are two ETFs you can short to take advantage…

In order to take advantage of a turn south, there are two main options in terms of ETFs one can short, either directly or through options. The first is the iShares MSCI Japan ETF(EWJ) , which has greatly underperformed the Nikkei by 17% over the last year. This could mean it will also lose value faster than the Nikkei itself if and when the BOJ announces a less accommodative monetary policy. The second is the WisdomTree Japan Hedged Equity ETF(DXJ) , which has the added benefit of underperforming when the Yen rises relative to the dollar.

If the BOJ confirms no more QE, which it has already hinted at, then the Yen is likely to rise relative to the dollar, pushing DXJ down even faster than EWJ, which is not hedged against the Yen.

I went short DXJ when the Nikkei was at 19,750. The top was at 20,952. I was 6% off. DXJ was at $56, and covered at $46. It really tanked today because the Yen skyrocketed, and the DXJ holds short positions in the Yen, which brought it down even further.

On June 1, I said the following:

But, as Austrian Business Cycle Theory suggests, there need not be any actual shrinking in the money supply to bring on the bust after the boom. All that needs to happen is that the rate of increase slows. And if the policy of the People’s Bank of China is indeed to maintain the status quo in the money supply, then we may have seen our top in the Chinese stock market, and its corresponding ETF, the iShares FTSE/Xinhua China 25 Index (FXI), just from last month.

I went short FXI at $48, and covered at $39. It’s now at $34.

The Greek shorts I already wrote about.

On August 13, I wrote the following:

If the S&P (NYSEARCA:SPY) breaks through the 2040 support zone, tested twice since February, then a serious crash is both possible from both a fundamental and technical perspective. The S&P has not gone anywhere since February, and has not stagnated for so long since the 2009 bear market bottom.

Personally, I am going long the VIX here out to November. The closest ETF is the VIX Midterm Futures (NYSEARCA:VIXM), though rollover of contracts and decay makes holding the VIX options directly more attractive for less capital.

And covered this morning.

The only short that has not worked out yet is Italy. I shorted EWI earlier this year, and my position expires in September. EWI has to go to 12 for it to work, and it may not make it. Three weeks to go. We’ll see if I go 5 for 5.

And yes, I’m still waiting for gold to rise. Luckily, there’s no time limit on that one.



The Most Volatile Day in Stock Market History

What the hell was that?!

The Dow traded in a range of 7% today, in one single day. That’s wider than its trading range since December, nine whole months.

The Nasdaq was even worse, with a range of 9%. That has never, ever happened before.

The volatility was so extreme that the VIX couldn’t even open for the first 30 minutes of the day because the value of the options it’s based on couldn’t even be calculated. As soon as trading opened I covered my calls, but I was freaking out a bit at the open because it was literally frozen.

My broker’s servers crashed twice this morning while I was trying to cover it. But eventually I did. Everyone it seems was losing their minds.

Further, the Yen was trading like a penny stock against the Dollar today, up 2.65% in one day.

The S&P moved up 2.5% in the space of 12 minutes, and then rocketed back down at the close to below 1900.

Unbelievable. I wonder what happens tomorrow.

What I absolutely love about finance

Maybe I can’t sleep so well. So I’ll write. There’s something incredible about trading and investing that is unlike any other capitalistic satisfaction in the world, in my opinion. In any other job, you have to work for somebody, even if you are your own boss. You have to please clients, trade with consumers, rely on people in the end. If you have a boss who pays you, you’re even more dependent. I have a boss. I like him. In fact I have a few people over me, but we get along well because they trust me and I trust them.

But pleasing them is nothing like winning a trade. Why?

In the markets, you have no bosses. Nobody does. It’s you against everyone else. It’s everyone else against you, and you are all equals. It’s your brain against everyone eles’s brains. It all depends on how you think, if you can figure out the answer better than all the other people trading against you. You answer to no one, have no clients, are dependent on no one. If you have the right answer and are willing to put money on it, you will beat everyone else who disagrees with you and puts money on it. No matter their background, how old they are, how much experience they have, degrees, titles prestige, or anything else.

A guy making his first trade with $1,000 in his brokerage account can  beat the biggest banksters on the planet armed with hundreds of billions of dollars on any one trade. If he keeps beating them he can bankrupt them. There is nothing theoretically stopping anybody from beating the deepest insider. Anyone can beat anyone at any time. Anyone can even beat the Fed if he waits for the right timing and execution.

If you are right, regardless of your “qualifications” you will beat them. There is no one to please and no one to depend on other than your own thoughts.

If you are the type of person that has sincere convictions based on logic and morality, then the markets are the place for you. Yes, you certainly have to figure out the timing schemes and the different vehicles and how they work and the timing and spacing appropriate for each bet you make, but once you learn that technical stuff, any Austrian can beat any Keynesian over the long term.

It’s the true battle of ideas, where the true idea will win the money, and the false idea will go bankrupt, because no one, nothing, can fool the markets.

Look out Below! Asia Crashing!

Japan is down 3%. China is down 8%. Mideast markets are down 5 to 9%. Israel was down 6%. Europe wakes up in four hours. S&P futures are cutting through support at 1970, down 20 points. Gold steady.

I’m going to sleep now, and looking forward to waking up to some nice negative numbers at the open in 11 hours.

Back in time to October 17th 1987

I was listening to Peter Schiff’s podcast today and he said something I wasn’t aware of. Prior to Black Monday, October 19th 1987, the biggest one day decline in stocks in history, the Dow and S&P had had a particularly bad previous two trading days. Schiff said that the current setup reminds him of 1987.

On October 15th, the S&P was down 2.4%, from 305.2 to 298.1. On October 16th, it was down a further 5.2%. That in itself would have been considered an historic crash, had not the market absolutely crashed over 20% on Monday morning, October 19, 1987.

I did a search of the headlines on October 17, the day after the market closed down 5.2%, right before the infamous megacrash. I found this:

Stock prices collapsed in a broad selloff, with the Dow Jones industrial average suffering its first daily loss of more than 100 points. Waves of selling produced record volume of 343.2 million shares. The Dow’s loss of 108.36 points left it at 2,246.73, which was 235.48 points, or 9.49 percent, below where it began the week. The daily loss, amounting to 4.6 percent, is the sixth largest in postwar records. The breadth of the decline was stunning – only 111 Big Board issues managed to rise, while 1,749 declined. Weakness in the dollar and a related rise in interest rates are being given the blame for a correction that has now seen the Dow back off 17.5 percent, or 475.69 points, from the peak of 2,722.42 set on Aug. 25. [ Page 1. ]

Market professionals see no signs of calamity in the decline. Many of them like to remind nervous small investors that the market still has a sizable gain for this year. [ 1. ] Computerized trading by big institutions played a key role in the slide. [ 38. ] Washington officially maintained its stand of indifference to market developments. [ 39. ] The exchanges and trading houses had few problems handling the record volume, thanks to electronics. [ 38. ]

Here’s today’s headline from Bloomberg:

Stock Selloff Looks Overblown to Three Wall Street Strategists

Let us see what happens Monday morning. Money supply growth is low enough that a 1987 type event is possible.

After all that, finally covering my Greek put option shorts

Months ago, around the last Greek elections when Syriza was elected, I went short the National Bank of Greece. I bought 20 contracts of a 50 cent January 2016 put for 10 cents each. For those who aren’t familiar with options, a put gives me the right to sell a security at a certain price by a certain date. 10 cents a put really means $10, because each contract controls 100 shares.

So 20 contracts cost me a grand total of $200. It was a nickel and dime trade, because had I known economics back in 2008 (I wasn’t introduced until 2012) I would have gone short Greece then and made a lot of money. I wasn’t confident I would still make money on my contracts after Varoufakis resigned and the Greeks took the bailout, but I kept them anyway and the National Bank of Greece kept on plummeting down.

So today I sold all 20 puts for 19 cents a contract. NBG is at $0.70 a share. I think I bought them when it was at $1.50 or so. The $0.50 puts are still not in the money, but if someone wants to buy them for $0.19, they are betting NBG will go to $0.29. I don’t know if they’ll get that far. So I sold them.

(Disclaimer for all the government people, I love you all dearly: I am not advising anyone. No one should listen to anything I ever say about anything. This is all for raunchy entertainment purposes.)

Chinese Government Threatens to Physically Beat Shortsellers, Shanghai Rallies


I guess I’ll cover this morning and lock in some profits. China has threatened to physically beat short sellers of stocks in an attempt to arrest the tide of panic selling. They can’t beat me up, those bastards.

Short selling is actually balancing for the market because, as Murray Rothbard not so famously said, because virtually nobody knows anything he ever said, “For every short seller there is a buyer”.

If someone sells a stock short, someone has to buy the stock from that short seller. Otherwise he cannot sell it short. He has to sell it short to somebody. And that somebody has to buy it. Short selling sounds mystical and magical and confusing, but it is very simple. You put in an order to borrow shares from somebody else who is willing to loan them to you. You sell the borrowed shares at their current price on the market. And then, if you are successful, you buy them back at a lower price and give them back to the guy you borrowed them from. That’s pretty much it.

Short sellers must buy shares back in order to return them. The more short sellers there are in a market, the more people are forced to buy shares because they have to by contract. That supports declines when they do happen. By banning short sellers and threatening to beat the crap out of them, all China is doing is ensuring that there will be no support for future collapses.

It will stem the tide for now, so I’ll cover the short, but the decline will continue in a few days, and there won’t be any short sellers who must cover in order to support it.

Thanks to Bill Gross, I now know that the better ETF to short is the ASHR rather than FXI. It’s more concentrated on Chinese development banks and other speculative stuff rather than large cap established Chinese companies.