Investing is all about probabilities and risk versus reward. You want to invest in trades that have a high probability of winning and that have a huge upside reward versus downside risk.
I like commodities because they tend to be extremely seasonal and predictable.
Natural gas, for instance, is extremely seasonal. According to historical commodity data, natural gas tends to go up in August. In nearly 80% of all the past years that natural gas has been trading, if you would have purchased this commodity on August 1st and held it till the end of the month you would have a made a profit. Now that is what I call a high probability trade.
Natural gas prices are almost entirely driven by the weather. And if you live in the Midwest, Northeast or West Coast, you know that we are having record heat waves this summer. That means a lot of people are running their air conditioner. And what powers most utilities now? Natural gas.
So after yesterday’s extreme move in natural gas, which broke a huge downward trend line, I think we could see prices jump by as much as 20% by the end of August.
If natural gas pulls back at least two days in a row in the next week (pullback means two consecutive down or flat days in price) I will be a buyer of everything natural gas related.
I like the natural gas ETF (UNG), as well as call options on it. Another alternative, the 2x leveraged ProShares Ultra Natural Gas ETF (BOIL).
A Small cap natural gas stock that I like is Penn Virginia (PVA), this stock is deeply undervalued it is trading at 1/3 of its book value, and is currently breaking out of an inverse head and shoulders pattern. This could take the stock to $7 in a very short time frame. This would be mean an almost a 40% move for Penn Virginia. The September $5 Calls are attractive at $.40 cents or less, which means if Penn Virginia goes to $7, we are talking about a home run triple digit plus winner on those call options.
My favorite small cap natural gas stock is one that not only will benefit from rising natural gas prices, but also has the kicker of having three top billionaire activist hedge funds involved, who own more than 20% of this stock. We own a huge chunk of this stock in my Billionaire’s Portfolio service, and I believe this stock could go up 150% or more by the end of the year.
I want to share with everyone the most important lesson to becoming a good investor, the concept of asymmetrical risk reward.
The world’s greatest Billionaire Investors, Carl Icahn, Warren Buffett, and all of the top performing hedge funds in the world focus have mastered this concept.
Asymmetrical risk-reward means your expected reward can be multiples of your expected risk on an investment. In most case, if I do not find this risk-reward profile I will not make an investment.
At The Billionaires Portfolio as perhaps the most important part of our process, we are looking for stocks that can jump at least 100%, and more often 300% to 500%.
In general, we buy stocks that have the potential to be influenced by a huge catalyst — a takeover, the sale of a bad business unit, etc.. That unlocks value.
I also will only buy a stock or recommend a stock when I think the downside risk is little to none. How do I know if a stock has little to no downside risk? I make sure that the stock is deeply undervalued, many times trading for less than the breakup value of the company. And I want the presence of a catalyst.
The most identifiable catalyst is an influential or activist investor who already owns the stock and is pushing for the company to put itself up for sale.
Other catalysts include FDA Approvals (for Biotech Stocks), major political, legal, regulatory and macro changes that will affect the stock in an extremely positive way. But the best and most powerful catalyst I’ve found that can push a stock higher in the short term is to have an influential or activist investor who is already pushing for change to the company.
Catalysts driven stocks can give you a nearly 300% winner in nine months … or a 90% winner in one day. My subscribers have enjoyed both.
That’s my lesson for today — and it’s an important one.
If you want to see more examples of stocks that are so cheap they can go up 100% or more in one night, if you want to see stocks with asymmetrical risk reward returns, and stocks that have identifiable and powerful catalysts, then subscribe to my Billionaire’s Portfolio service at https://www.fxtraderprofessional.com/order/billionaireport/
Will Meade
President of The Billionaires Portfolio
I am privileged to have a friend from graduate school that is one the smartest options guys at Goldman Sachs.
I see a lot of Goldman Sachs research on options, which includes a weekly report with all of their recommended option trades, as well as any published research, white papers, and studies that Goldman has done on options.
Given that most of the readers of this research are controlling hundreds, if not billions, of dollars, this is pretty special research.
I have been reading Goldman research on options for years. And I always pick up a ton of incredible trading tips and methods that the best investment bank in the world uses to analyze and trade options.
Today I will give you some nuggets that I think average trader likely don’t know, and need to know:
1) Implied volatility (“vol”) is the key element in analyzing options. When implied volatility is high, an option can become too expensive. When implied volatility is low an option can become cheap. That can create a trading opportunity. I should note, it all depends on why its high or why its low. Let’s assume there is nothing macro or micro level that has pushed vol around. Now, to know if vol might be cheap or expensive, you need to compare the current vol to its history. Where is it trading relative to the past three months, the past twelve months? Follow this screen and you will improve your options trading dramatically.
To get implied volatility for options you need a good platform that provides these statistics.
If you don’t have this type of platform, and most of you probably don’t, there are some ways to tell if implied volatility is low and the options are cheap. I call this the “eye test.” Look at a chart of the stock or ETF from which the option is derived. If the stock or ETF has gone sideways, or if its at a double or triple bottom, or a double or triple top pattern, there is a good chance implied vol. is low and the options are cheap.
Also, if the earnings announcement for a stock is close — within 1 to 2 weeks — you will likely find that implied volatility will be high, and the options will be expensive. That is why many people who have purchased options before earnings never make money. Even though the stock goes up, the option they buy already had it priced in through the inflated vol.
Now, onto tip number two …
2) You need to have a catalyst to trade options! There must be something that moves the stock or etf in a dramatic way such as a merger, a major corporate announcement, an activist investor, a major conference call/investor day, a new product launch, a major economic announcement, a change in the fundamentals of the economy, earnings announcements (but make sure you buy the option at least 2 weeks ahead of time), a potential sale or divestiture of the company. If you don’t have a catalyst such the ones listed above, don’t spend your money on options (unless you can actively hedge it).
3) There are two techniques I like: Using options as an outright bet on a spike in vol …and using options as a stock replacement strategy.
When focusing on cheap options with low implied volatility and a catalyst, you are implicitly long volatility (you’re betting on a move higher in vol).
I’ve talked about the stock replacement strategy many times on this blog. Its using options as a leveraged proxy for the stock or ETF. You look for a quick move in a short period of time. When you are using this secret stock replacement strategy, you must only buy in-the-money options.
I use both of these techniques when I buy options.
Bottom line this is just a little insight into how the richest most powerful investment bank in the world approaches options. And it reinforces what I always tell you on this blog — and what I do for my subscribers in my premium service (The Billionaire’s Portfolio). You have to follow and know what the best, most influential investors in the world are doing.
That’s right folks. I am calling the top in the housing market. Remember I am the guy who:
1) Called the top in Gold and Silver this year
2 Called the top in Emerging Markets
3) Called the top, then the bottom in Apple
4) And more importantly, I told you to buy to every dip in the stock market this year, therefore making you a killing if you trade options, futures or leveraged ETFs.
So now, me, the former top hedge fund manager, top Economist (educated at The Johns Hopkins University, trained by Fed and Treasury economists) and nationally quoted writer (Barrons, Forbes and CNN Money) … I am telling you that the Housing Market has topped and is in a bubble that is going to burst, BIG!
Why? It’s simple analysis of interest rates, understanding of hedge fund flows and basic psychology. If you were in the market to buy a house or condo just as early as May, you could have purchased a 30-year Fixed Mortgage for 3.5%. That is incredible. And that’s why people went out and purchased new and existing homes.
Now, that same 30-year fixed mortgage is being priced as high as 5%. That is a 50% increase in the total interest paid over the life of the loan. Not to mention, given the rise in housing prices, the price tag on homes in some areas of jumped as much as 35%+.
Who in their right mind would pay 50% more for the same asset two months later? That is exactly the choice being given to the new homebuyer right now. They will back off. And that is why we will see a huge dip in the sale of new and existing homes.
Bottom line: The spike in mortgage rates will cause major ripples through the mortgage and housing industry, and its stocks.
Secondly, around a third of the housing volume has been purchased by hedge funds and private equity funds over the last 2 years. That’s right, all those record home sales you heard about on the news has been driven by distressed hedge funds and private equity funds like Blackstone, who have purchased millions of homes out of foreclosure. But this game is over, for now. Many of these top distressed hedge funds and private equity funds have stopped buying homes for investment purposes because prices are too high, and there are not enough cheap homes to buy.
So put those two elements together and you will have a major shift in the demand curve. Both retail buyers and institutional buyers have stopped the presses.
If you own a home and want to protect its value, or you just want to profit off the housing bubble bursting once again, your friendly neighborhood hedge fund trader is here to help you!
So here is what you do: There is an ETF called the SPDR S&P Homebuilders (XHB). It has options. Put options here allow you to bet directly against the housing market, and these options are very liquid and cheap.
Also if you like to look at charts, take a look at a chart of the S&P Homebuilders (XHB), it has formed a bearish head and shoulders and is projecting a 25% decline for this ETF.
The September $29 (XHB) put options give plenty of time for people to realize that the housing market has topped, and for summer to pass as well (when a lot of people shop for homes).
Will Meade
President of The Billionaires Portfolio
www.billionairesportfolio.com
wmeade@purealpharesearch.com
Today I want to teach you how a billion dollar hedge fund, like the one I worked for, trades. Hedge funds are called “hedge” funds because they are structured to hedge against downside risks.
That means hedge funds are generally obsessed with risk and controlling risk — contrary to popular opinion. One of the ways to manage or minimize risk is to trade “market neutral.”
For market neutral strategies, funds will generally have a $1 short on their books, for every $1 in long positions. In this case, you’re betting on your stock picking ability, while stripping out the risk of the overall market.
So what can you do today if you want to trade a low volatility market neutral strategy? Use ETFs. ETFs are great. They are extremely liquid, easy to short and they represent an entire market, country, sector or asset class.
So if I were back at a billion dollar hedge fund, I would implement a market neutral trade today by buying $100 million dollars worth of US stocks while at the same time shorting $100 million dollars worth of emerging market stocks. As a retail investor you can execute this same trade through ETFs. In fact, since you don’t have to worry answer to investors about monthly volatility, you can get some extra juice by using leveraged ETFs.
So here is my aggressive billionaire’s market neutral ETF trade : I would be long the ProShares UltraPro S&P 500 ETF (Symbol UPRO). This ETF is leveraged 3X, or 300%. And I would be buy an equal dollar amount of the Direxion Daily Emerging Markets Bear 3X Shares ETF, symbol (EDZ). So, here you are betting that US stocks will continue to go up and that emerging market stocks will drop (or at least not go up as fast). I think this is a great trade from fundamental, monetary policy, and technical perspectives.
Now, if you want to get even more aggressive, I would put on an ETF market neutral options bet. This is a great strategy that even investors with a small account can use. Due to the recent unprecedented move in long term interest rates, I am very bullish on financial stocks (Financial stocks become more profitable as the yield curve steepens, as it is doing now). But because of this, I am very bearish on homebuilders (as higher mortgage rates will hurt future new home purchases). The chart on XLF, the financial sector ETF, looks very strong. Meanwhile the chart on XHB, the Homebuilders ETF, looks like it is starting to break down. The charts are confirming the fundamentals — the move in rates.
Will Meade
President of The Billionaires Portfolio
www.billionairesportfolio.com
wmeade@purealpharesearch.com
Folks, its time to remind you who I am and what we do here at The Billionaires Portfolio.
I get emails sometimes that frankly annoy me.
I am a hedge fund veteran with over 15-years of experience taking money out of financial markets. I am not market maker, floor trader, journalist or stock broker. These people only know how to generate commissions or sell you stories. I don’t listen to them. And I don’t care what they say. So please don’t email me and tell me what a 25-year old journalist at the Wall Street journal said about the stock market. My advice to you: Don’t listen to them.
Now, there is a stark contrast between what those people do for a living and what hedge fund professionals do. Those people get paid for having a pulse. Hedge fund professionals get paid when we make money – when our investment strategies, themes and processes WORK! We eat what we kill.
I am the real deal. I worked for a $1.4 billion dollar hedge fund started by a former Goldman Sachs Partner and Harvard MBA. He worked for the real Goldman Sachs (not a floor brokerage shop that was acquired by Goldman along the way). The one on Wall Street. When at its most powerful in the 90’s.
This man taught me everything I know. He was a brilliant investor. Not only was our performance great, but we also made money in the toughest of market conditions, in 2001 and 2002 — when no one was making money in equities.
Now, when I say I worked at a hedge fund, I’m not talking about some rinky-dink small time garage business with Mom and Dad’s money. Believe me, I see people these days, it seems that every Joe says he worked at a hedge fund. Let me be clear: We were the real deal. We managed portfolios for some of the top fortune 500 companies, pension funds and university endowments, and a handful of billionaires. The fund I worked for was so successful, and had such good performance, it was acquired for over $50 million dollars by a publicly traded asset management firm.
I say this not to brag. I want to help you understand the difference between me and 99% of the rest of the journalists, financial media and stockbrokers and hacks that try to give you advice. I worked for the best. I learned from the best. And I created real money and real value for people. And I do it consistently for my own accounts to this day.
So when I tell you information on this blog — like when I’ve told you to buy stocks, sell gold, sell emerging markets and sell gold — listen to me! I know what I am doing. I have excellent sources of information (real hedge fund managers) and I am usually right.
Please read through my former blog posts.
As I’ve said in prior posts, I am writing this blog and running The Billionaires Portfolio to help and educate you, the retail investor.
I don’t care what people think about me. I don’t care what the industry would think about this? I don’t care.
I want you to get the same tools that I provide to my rich clients. I want you to make 30% to 50% a year and be able to retire and send your kids to college.
That’s why I am doing this. I don’t need the money. But I like to make money. It’s fun. And the internet is an amazing tool to communicate with the world. Believe me, if I can destroy the business model that has been ripping off investors for a very long time, I will make a lot of money from it. And that’s what I intend to do.
I want to even the playing field between the rich and the middle class and I also want to expose the abuse that is going on in the brokerage and mutual fund industry. And I want to help you use the markets to make money. It’s not that hard, despite what all of these charlatans will tell you. I tell you almost every day in this blog how to make money.
Now, my lesson for you today: The way to make money in financial markets (the only way I was taught to make money) is to invest with a top-down view and to only invest when a potential catalyst is in play.
What does this mean?
First, a top-down view helps you understand the world and helps you determine which asset class and sector is best suited in a particular environment. Next, when you invest in stocks, all of the typical financial metrics (valuation, growth, etc) are all secondary to catalysts. Investing in stocks with catalysts means everything! It’s the only way to make consistent money. Only invest in stocks where an event can create a price adjustment for you. This is limited to just stocks. It’s the name of the game in currencies, commodities, bonds, real estate, etc.
If you learn one thing from reading my blog, that’s the takeaway. Investors that make a living and build wealth in financial markets win by participating in events (i.e. catalysts).
How do YOU do this? You subscribe to The Billionaires Portfolio, my premium service that is up 22% in less than 10 months. It’s crushing the stock market by more than 10%. But more importantly my subscribers – normal, every day people — have made real money and real profits. My average subscriber is up more than $4,000 and my service only costs $297 a quarter. That’s a good trade.
So sign up for my service. And don’t write me or second guess me about this blog. You are not me. You don’t have the quality of work experience, investing background or, quite frankly, the education that I do. I am good at what I do, because I learned from the best. And I continue to be good at what I do because I listen and I follow the best. And I work my ass off for my subscribers, 10+ hour days, 7 days a week. I don’t take vacations.
I don’t play golf. This is it. This is what makes me tick. For me, taking money out of financial markets is a competition. And I am a fierce competitor.
With all of that said, I want to tell you my take on Google and Apple, because I know it’s in every average investor’s portfolio. Here it is: It’s my take on all stocks, especially technology stocks. You buy them! Stocks are the only game in town and will be for the rest of the year. Global central banks want us to buy stocks (our catalyst). So buy them.
So from now on, if you are cynic, a crybaby, or if you wildly overestimate your abilities as an investor, don’t read this blog.
If you are a winner and a doer, if you are someone who takes control of their life, their money and their investments, and someone that wants to learn from the best, then please continue reading my blog. If you want to join me, subscribe to The Billionaires Portfolio. I wont you let you down.
Respectfully,
William Meade
President of The Billionaires Portfolio
wmeade@purealpharesearch.com
The media does a very poor job of interpreting financial and economic data, and telling the story. In most part, they do a poor job because they have poorly aligned incentives. They need eyeballs to make money.
As such, they continuously try to find ways to create “shock value.” That can affect your psychology as an investor. And that can create a barrier to making money as an investor.
That’s exactly what we’ve seen throughout the crisis that has resulting in the masses losing money early on, and then losing even more money throughout. And mis-information is exactly what we’ve seen this week. After Bernanke spoke on Wednesday, both Bloomberg and MarketWatch immediately ran headlines that said the Fed was ready to taper by end of year. Untrue!
First, the Fed said nothing different in its prepared statement. They stayed the course. But, in Bernanke’s speech, he laid out a scenario where the Fed would reduce its purchases and perhaps even end QE.
But there is a huge caveat that waters down the “shock value” for journalists.
For the Fed to dial down its QE, they would first need to see their VERY optimistic projections about the economy achieved.
To be precise, they think that unemployment will go from 7.6% to 7.2-7.3% by end of the year. IF it does, they may reduce the size of their current QE program. And IF their projections by mid-year 2014 are right, they may end this third round of QE all together. Their projection of unemployment at that stage would be 7%. (We should note that the Fed has been overly optimistic and largely wrong on economic projections throughout the crisis).
Now, it’s important to understand, these are VERY aggressive projections about the economy. For the most part, throughout the duration of QE3 unemployment has gone sideways – in the mid 7 percent area. Now, all of the sudden, they expect dramatic improvement in the coming months.
That’s great!
Does it mean the Fed is going to reduce QE? No! Does it mean they will IF their optimistic economic projections come true. Yes, likely!
Guess what? An aggressively improving economy is highly positive for stocks! It’s not negative! Economic shock is the “risk” that has overhung the stock market for years. QE has served to quell that risk. Guess what else quells that “shock” risk? A dramatically improving economy.
That means, investors will look at the valuation of the stock market, relative to its historical average valuation (usually a P/E multiple) and they will find great value in buying stocks.
But the media likes fear. It gets eyeballs and generates advertising dollars. So they have painted a scenario where reduced QE means a stock market crash. That could not be further from the truth. People that make money in stocks, use these mis-interpretations by the broader market as a gift to BUY, not sell.
And that’s precisely what sophisticated investors are doing.
Now, the real topic the media should be covering: Why is the Fed so optimistic about the economy all of the sudden?
It’s all about Japan. In a research note over the weekend to my clients, I said “IF the Fed does decide to ‘taper’ its current bond buying program earlier than they previously indicated, it’s a flashing message that the Fed thinks the impact of Japan’s (inflation-seeking) policies are going to pack a punch – enough so, that they could be concerned that the positive economic impact in the U.S. could be sharp enough eliminate the need for their QE program all together.”
Again, understand the Bernanke (the Fed) has committed trillions of dollars toward keeping the U.S. economy afloat in recent years, and has a vested interest in keeping stock values high and house prices on an upward trajectory. They would do nothing to jeopardize that.
Remember, the rest of the world continues to be early into a second wave of monetary easing – not tightening. That underpins the very dynamic that the Fed is hoping for – creating an environment where people are willing to take more risk, spend money and invest money.
Unfortunately, many of you can be influenced by the drama on CNBC or from scanning the headlines on the Wall Street Journal. With that, we know that some of your perceptions about the stock market are influenced. So today, I wanted to make sure you understand what the Fed REALLY said. And what the real backdrop is for the economy and the stock market.
Recall that throughout the past nine months, the stock market has risen nearly 20% (and our Billionaire’s Portfolio has risen as much as 30% during the period) all while the media was telling you to panic about one event or another. And sadly, many that hold themselves out to be investing professionals have been educated by watching CNBC and reading the opinions of journalists. We’ve told you along the way not to succumb to the bad information. If you have listened, well done!
With the potential for more global monetary stimulus to come next month, from the BOE and ECB, keep perspective on this (June) consolidation period for stocks. And we are given a gift to now buy against the prior all-time highs of 1576.
Bryan Rich
Cofounder of The Billionaires Portfolio
www.billionairesportfolio.com
I have been blessed in that I have worked for and had clients who were Billionaires. But there is one Billionaire I met during my hedge fund days that I will never forget, because he was one of the best options traders I have ever seen.
He had a 5 Step system for trading options that I use for my all my options trading today. I am going to share this with you today and I call this ” The Billionaires 5 Rules of Options Trading”
1) Never ever buy an Option (a Put or a Call) unless there is a catalyst or event. This means you only buy an option when there is an event that will dramatically move the price of the stock up or down. These events or catalysts can be anything from: Earnings Announcements, Fed Meetings, Economic Releases, an Activist Hedge Fund buying a stock to any type of corporate change, CEO, sale of a business unit, merger or acquisition. The key is to buy the option before this event occurs, you never ever want to buy an option after the catalyst or event. So in summary only buy an option when there is catalyst or event that will dramatically alter the price of the stock.
2) This Catalyst or Event must occur before the option expires. An easy example of this is Earnings, you only want to buy an option that expires more than a week after the earnings date. Again this means when you buy an option make sure you leave yourself enough time so that your option does not expire before the catalyst or event occurs.
3) The Option must be Cheap. This can be hard to measure but I like to keep it simple, I personally don’t like paying more than a $1 for any option. But if its a high priced stock, I will only buy the option it gives me at least 25 times leverage or more on the stock. Meaning divide the price of the stock by the actual option price. For example if the stock of XYZ is $100 do not pay more than $4 for the option on that stock, that’s the easiest way to make sure the option is cheap.
4) Only buy options in stocks that have low volatility. This means you want to buy options on stocks that have moved sideways of flat for months at a time. Look at a chart if there has not been a significant uptrend or downtrend in the last 3 to 4 months, there is a good chance that the volatility in the stock is low and the options are cheap. Also if you have options software, you can compare the stock and its options implied volatility and underlying volatility to its historical implied and underlying volatility. This may sound confusing but its the same premise value investors use, they buy stocks when they are cheap in comparison to what they historically sold for, so you want to buy options when the volatility is low or lower than what it historically has sold for.
5) Only buy options if you can make 200% or more on the option. This is very important, too many people buy options with no exit plan or profit target. You have to set a goal or sell point when you buy an option and to make it worthwhile from a risk reward standpoint. The option should have at least a 200% or more upside. Why 200%? because there is a good chance when you buy an option, you will lose the entire value or premium of the option (or 100% of your investment in the option) therefore to be rewarded for that risk you need to be able to make 200% or more in that option. Simply stated only buy an option when you have at least a 2 to 1 reward to risk scenario.
Now I will give you a real life example of an options trade I just made, where I only followed 2 of the 5 steps and it cost me dearly on my trade.
About two weeks ago I purchased a large quantity of put options on Silver, (The Silver ETF, Symbol SLV), that expired on June 28th. The option was very cheap I paid .$50 cents per option. So I followed steps 3 and 4, in that I purchased a cheap put option ($.50 cents) whose volatility was low, so the options were cheap not only in price but also cheap in terms of Silver’s historical volatility as well.
My big mistake though was not having the proper catalyst, I thought Silver was going to drop in price but I just wasn’t exactly sure why? I thought initially it would drop because the Job Numbers that were released 2 weeks ago would be strong and therefore would cause Silver to sell off. Also I thought Silver had broken a huge downward consolidation pattern and therefore it would drop 10% in the next couple of weeks.
Well the Job Numbers were good, and Silver sold off and I was up 100% on my Silver put options in 2 days, but instead of following the Trading Rules my Billionaire friend taught me, I took my 100% profit and went home.
Because of this I did not follow the 200% or more profit rule and I did not have the right catalyst, which turned about to be the Fed Meeting I therefore missed out on one of the biggest moves in Silver’s history, its 7% decline today.
By not following my Billionaire friend’s 5 Trading Rules for Options, I missed out a huge trade. I would have made 400% on my Silver Puts today instead of the 100% I made two weeks ago. So I learned first hand how much it can cost you by not following each and every one of the 5 rules above.
So my lesson to you is not only are these 5 Rules for Trading Options important, but even more important is that you make sure before you buy an option that you have followed each and every one of the 5 rules I stated above. Meaning do not buy an option unless it meets each and every one of the 5 rules.
To make it easy for yourself print out these rules and then before you trade an option make sure that you can check off each rule before you buy the option. If you do this I promise that not only will you greatly improve the success of your options trading but you will make a lot of money in the process as well.
Will Meade
President of The Billionaires Portfolio
www.billionairesportfolio.com
wmeade@purealpharesearch.com
I want everyone who owns a stock or ETF to read this: Bryan Rich as you know is a global macro hedge fund manager and top global macro strategist who publishes a weekly research piece to his institutional clients (his clients include some of the top hedge funds and wealthiest families in the world). Bryan is also very astute at analyzing and predicting what the FED is doing.
I have summarized below some of the key points from his research piece as well as the link to his actual research note.
“In recent weeks, people have become panic-stricken about the possibility that the Fed could reduce the size of its current QE program or “taper” it.
This topic has become a dominant focus and created much fear and uncertainty for average traders and investors. But, again, as we’ve seen over and over throughout this crisis period, people are focused on the wrong thing — they can’t see the forest for the trees.
Sure the Fed’s third round of QE, kicked off in September of last year, has been a big deal. It signaled/confirmed that even after two rounds of QE, trillions of dollars worth of backstops, bailouts and global stimuli, the global economy was at risk of another deep downturn. Unemployment was persistently high. Deflation was returning as a reasonable threat.
As such, the Fed’s third act was the warning signal for the rest of the world. And as such, we’ve seen another round of global monetary easing as the response to economic data that had been revisiting the levels we saw in 2009, when the global economic crisis was at peak intensity.
Now, after nine months and nearly $800 billion pumped into the financial system, U.S. employment is better. But it’s still too high and stagnating. And inflation is running at the lowest on record.
With that, what can the Fed do?
Answer: They can keep the QE spigot wide-open. And keep hoping higher stock prices can be the antidote.
Okay, so QE hasn’t directly produced inflation and solved the world’s problems as the Fed might have expected when they launched it in late 2008, but it has produced a direct benefit and an indirect benefit. The direct benefit: The Fed has been successful at driving mortgage rates lower, which has ultimately translated to rising house prices (along with a slew of other government subsidized programs). That has been good for the economy.
The indirect benefit: As Bernanke has said explicitly, “QE tends to make stocks go up.” Stocks have gone up. That has been good for the economy.
But we need a lot more.
As I reiterated in my last Big Picture piece, “the Fed has told us explicitly that it wants employment dramatically better, and inflation higher. They have gotten neither. Their best hope to achieve those two targets is through higher stocks and higher housing prices. While their monetary policy has hit the wall, unable to produce growth, higher stocks and higher housing prices are their only chance. Strength in these key assets has a way of improving confidence and improving paper wealth. Increasing wealth makes people more comfortable to spend. Better spending leads to hiring. A better job market can lead to inflationary pressures. That’s the game plan for the Fed. But they are in the early stages. “
The other HUGE source of assistance to the Fed is Japan.
It’s Japan, not the Fed, where everyone’s attention should lie. Japan can be the answer to the global economic crisis. The Fed is now a mere sideshow.” Read more …
Will Meade
President of The Billionaires Portfolio
www.billionairesportfolio.com
Once a week now on this blog I will be trying to educate and teach my readers about trading. Why? First, I love educating and teaching. And I know there are so many secrets and tips I can share from my trading and hedge fund days that can really help the everyday investor.
Secondly, I was a teaching assistant in graduate school, and loved every minute of it teaching undergraduate economics. Speaking of grad school, I used this secret options strategy to pay for most, if not all, of my tuition using just a $4,500 trading account.
Since I was a poor grad student I only had a small trading account, so I had to figure out a way to build a diversified portfolio with just a little bit of capital. And that’s when I figured out my secret options strategy.
This secret options strategy is very simple. It focuses exclusively on buying cheap options, or what I call penny options.
Penny Options are one of the real secrets of investing. Penny options are options on liquid ETFs and stocks with a premium less than a $1.
By using penny options, you can build a diversified portfolio, even with a trading account as small as a few thousand dollars.
And now, not only can small investors trade penny options, but investors now have access to mini options. Mini Options are 1/10 the size of regular options. A mini option controls 10 shares, instead of 100 shares like a regular option. Mini Options are offered on widely owned stocks like Amazon, Google and Apple. Again, a Mini Option costs one tenth of a regular option. So if a regular option costs $950 dollars, a mini option only costs $95 dollars.
So that brings me to Amazon …
Amazon has a super cheap mini option that is also a penny option. It is the Amazon (AMZN) July $290 Mini Option Call. And boy is it cheap. For just 90 cents, I can control 10 shares of Amazon stock until mid July.
Now, Amazon has just broken out of huge sideways channel or flag formation, which projects a price target for Amazon of $320. So if Amazon hits $320 by mid July, those dirt cheap penny-mini options would give you more than a 200% gain.
Even though I have a much much bigger trading account today than I did in grad school, I still almost exclusively trade penny options (options under a $1). You get incredible leverage and you only need to put a little amount of capital down to make a lot of money. That’s what I call a great return on investment.
Will Meade
President of The Billionaires Portfolio
www.billionairesportfolio.com
wmeade@purealpharesearch.com
