Due to the unusual activity that took place today, I thought of writing a short addendum to the October newsletter that I issued last night. As I said last night, do not expect the market to act rationally. 80% of the trades are done by algorithms and computer robots; which follow trends. Our portfolio, went up 22.6% from 8/25/15 to 10/5/15 (see below).
· First of all, last night I mentioned that there was a rumor on Wall Street that Jack Dorsey was going to be made permanent CEO of Twitter. That was announced today and just today alone Twitter jumped up by 6.99%!! It could go up another 100% within the next 12 months.
· Even though everyone was pessimistic about commodities, in August 2015, I asked you to start ‘nibbling’ at Alcoa. Today alone the stock went up by 9.35%. If you bought Alcoa on 8/25/15 as I suggested at $7.97, today your gain would be 31%.
· 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.
· As I stated yesterday, even though the corporate credit crisis is taking place all over the world and would definitely hit us at some time in the future, the stock market is ignoring it and going up. Why? The market is driven by algorithms and computer robots. They follow trends. They cannot compute the bond crisis. When the Shanghai market fell 8.5% in one day on 8/25/15, algorithms went crazy and that is why the Dow30 fell 1100 on 8/25/15. All the analysts were having a good laugh on CNBC at all the 23 year olds who programmed these computers. When the 1987 crash happened these guys were busy getting breast fed! Just before the Fed Reserve announced their decision the market went up as that is the historical trend. October markets bottom so the computers are buying. As I said last night, on Friday (10/2/15) morning at 6.30am, the Dow30 was down 280 points. I had the horse sense to know the market would go up and I bought some call options and from that point the Dow30 went up 480 points and ended the day at up 200 points. Technically this could be interpreted as a bear market bottom. On paper my options were up 52% in one day. I have a knack for noticing odd pricing in the option market. A week ago, I knew that the market might act irrationally and go up and I looked at call option prices. Most people expected the Dow30 to go to 17,500 by 12/31/15 but only a few expected the Dow30 to go to 18,000 by 12/31/15; I made this conclusion as the call option price for 17,500 Dow30 was $1.50 and the call option for Dow30 at 18,000 was $0.45. Since our recent high was over 18,000 and also a few days of 200 to 500 days could easily get us back to 18,000 before year end so I started nibbling at those options. The call options I bought at 6.30am on 10/2/15, ended today with a gain of 159% in 2 trading days or 11 trading hours! If the Dow30 hit 18,000 prior to 1/1/16, my call options would be worth $9 each. My last purchase was at 27 cents on 10/2/15. That is a 3,233% gain within 3 months! I am still hedging against a crash and I will continue to do that as long as there is a credit and currency crisis going on in the world. Also our market never got corrected. In an irrational manner it is going up so ALWAYS keep 50% of your portfolio in cash. Big corrections and crashes do not come announced. When everyone thinks that the market is done going down, then only the crashes take place. In the stock market lingo, it is called a ‘Bear Trap”. Beware- bears are waiting to trap you!
Good luck till next time!
· ADR (American Depository Receipt)- Certificate issued by a bank in the US representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.
· Arbitrage- practice of taking advantage of a price difference between two or more markets.
· Balance Sheet- Financial statement that covers assets, liabilities and equity of an entity.
· Bear Market- A market condition in which the prices of securities are falling. Some would define a bear market when the securities are down 20% from it’s recent high.
· Blue Chip Stock- A stock of a well-established, financially sound company.
· Book Value-Value listed on the balance sheet
· Bull Market-A market condition in which the prices of securities are rising.
· Contrarian-Opposing the popular view
· Credit Default Swap-A credit default swap is a type of contract that offers a guarantee against the non-payment of a loan; usually issued by banks.
· Credit Spread- The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
· Dividend-see stock dividend
· Dow Jones Industrial Average- price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.
· Earnings per share-Earnings divided by the number of shares outstanding.
· Emerging Markets- An emerging market is a country that has some characteristics of a developed market, but does not meet standards to be a developed market.
· Exchange Rate- The price of a nation's currency in terms of another currency.
· ETF (exchange traded fund)- is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.
· Exercise of options- the buyer (or holder) of a call contract may exercise his or her right to buy the underlying shares at the specified price (the strike price); the buyer of a put contract may exercise his or her right to sell the underlying shares at the agreed-upon price.
· Expiration (of options)- All options have a limited useful lifespan and every option contract is defined by an expiration month. The option expiration date is the date on which an options contract becomes invalid and the right to exercise it no longer exists. For many decades, the option expiration date was 3rd Friday of the month.
· Ex Stock Dividend- usually set for stocks two business days before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment
· Federal Fund Rate- The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight.
· Federal Open Market Committee (FOMC)- The monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members--the seven members of the Board of Governors and five of the 12 Reserve Bank presidents.
· Federal Reserve Bank- the central banking system of the United States
· 401K plan- A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis.
· Futures Market- An auction market in which participants buy and sell commodity/future contracts for delivery on a specified future date.
· GDP- The total value of all goods and services produced within a country.
· Going Public- The process of selling shares that were formerly privately held to new investors for the first time.
· Government Securities-A bond (or debt obligation) issued by a government authority, with a promise of repayment upon maturity that is backed by said government.
· Growth Funds-The Growth Fund seeks to provide capital appreciation and some current income.
· Hedging-A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, bonds, stocks and so on.
· Hedge Funds- privately-owned companies that pool investors' dollars and reinvest them into all kinds of complicated financial instruments.
· High Yield Bonds-A high paying bond with a lower credit rating than investment-grade corporate bonds
· Illegal Dividend-A dividend declared by a corporation that is in violation of its charter and/or of state laws
· Index Funds-When an investor purchases a share of an index fund, he or she is purchasing a share of a portfolio that contains the securities in an underlying index.
· Index Options-Index options usually have a contract multiplier of $100, meaning that the price of an index option equals the quoted premium times $100. Unlike options in shares of stock or even commodities, it's not possible to physically deliver the underlying index to the purchaser of an index option
· IRA Accounts-Account at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis
· In the money (options)- Situation in which an option's strike price is below the current market price of the underlier (for a call option) or above
· Junk Bonds-A security issued by a corporation that is considered to offer a high risk to bondholders
· LEAPS (options)- Long Term Equity AnticiPation Security Options are options of longer term until expiry than other, more common, options.
· LBO (Leverage Buyouts)- stands for Leveraged Buyout and refers to the takeover of a company that utilizes mainly debt to finance the buyout
· Load Funds-A mutual fund that comes with a sales charge or commission
· Margin Accounts-A brokerage account in which the broker lends the customer cash to purchase securities
· Market to Market-Refers to accounting for the value of an asset or liability based on the current market price instead of book value.
· MLP (Master Limited Partnership)- limited partnership that is publicly traded on an exchange
· M1, M2, M3, M4 – see money supply
· Money Supply- Include cash, coins and balances held in checking & savings accounts. M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice.
· Money Market Funds-One of the sections of a financial market where securities and financial instruments with short-term maturities are traded is called the money market.
· Moving Averages-A technical analysis term meaning the average price of a security over a specified time period.
· Municipal Bonds-A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.
· Mutual Funds-An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets
· Naked Options-A trading position where the seller of an option contract does not own any, or enough, of the underlying security
· NASDAQ-created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971.
· NYSE-A stock exchange based in New York City, which is considered the largest equities-based exchange in the world based on total market capitalization of its listed securities.
· Net Asset Value-A mutual fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding
· No Load Funds-A mutual fund in which shares are sold without a commission or sales charge.
· Off Balance Sheet Financing-A form of financing in which large capital expenditures are kept off of a company's balance sheet through various classification methods. For anyone who was invested in Enron, off-balance sheet (OBS) financing is a scary term.
· Offshore-Located or based outside of one's national boundaries.
· Open Market Operations-Market interventions by a central bank to manipulate liquidity levels by buying or selling short term securities.
· Options-see Stock Options-
· Out of the money (options)- the strike price of the option exceeds the share price of the underlying equity.
· OTC (Over the counter)- A decentralized market, without a central physical location,
· Penny Stocks-common stock, usually highly speculative, selling for less than a dollar a share.
· Preferred Stocks- Dividends that are paid out prior common stock dividends are paid out.
· Prime Rate- The prime rate is the interest rate commercial banks charge their most creditworthy customers, which are usually corporations.
· Put-Call Ratio- technical indicator demonstrating investors' sentiment. The ratio represents a proportion between all the put options and all the call options purchased on any given day.
· Put Options- An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option,
· Retail Investor- Individual investors who buy and sell securities for their personal account, and not for another company or organization
· Reverse Split-the opposite of a conventional (forward) stock split, which increases the number of shares outstanding
· Shareholder-Shareholders are a company's owners
· Short Covering-refers to the purchase of the exact same security that was initially sold short, since the short-sale process involved borrowing the security and selling it in the market.
· Short Interest-Short interest can be expressed as a percentage by dividing the number of shares sold short by the total number of outstanding shares
· Shorting-Initially you borrow certain stocks, sell them and later, if possible, when the price drops, you buy it in the open market to replace the borrowed stocks.
· Short Interest Ratio-the number of shares shorted divided by the number of shares available for trading
· Short Squeeze-A situation in which a heavily shorted stock or commodity moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the stock.
· Stock Dividend-A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
· Stock Exchange Market-Organized and regulated financial market where securities (bonds, notes, shares) are bought and sold
· Stock Option-A right to buy or sell specific securities or commodities at a stated price within a specified time.
· Stock (or Ticker) Symbol-string of letters used to identify a stock, bond, mutual fund, ETF or other security traded on an exchange
· Stop Limit Order-A stop order that designates a price limit.
· Subprime-borrowers with a tarnished or limited credit history.
· Venture Capital-Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets.
· VIX Index- trademarked ticker symbol for the CBOE Volatility Index, a popular measure of the implied volatility of S&P 500 index options; the VIX is calculated by the Chicago Board Options Exchange (CBOE).