Can Anyone Say 1999 Again?
Markets always repeat. You can go back hundreds of years and the market psychology never changes. There is always a new idea that will change the way the world thinks. In some cases, it is correct, and the world does change for the better but in many cases the idea comes to a crashing halt. What we are seeing now with the flood of IPO’s seems like 1999 again.
Some of today’s investors were toddlers the last time this happened. They may not even remember the Dot Com bubble. When I look at today’s landscape it is hard for me not to be reminded off what was going on twenty years ago. The concept looks to be the same. Come up with an idea, find some wealthy investors and then go to the next step, ‘The IPO’. In case you don’t know what and IPO is it allows initial investors in a startup company to be reimbursed for their investment in the public market.
The problem right now is that all of the IPO’s are losing a fortune. That doesn’t mean that they will go broke, but their business model just burns cash. On Friday We Work went public and it is another company that is losing money. The CEO, Adam Neumann tried to distance himself from Lyft and Uber by stating that his business model is quite different. Although the company reported a $264 million loss in the last quarter on strong revenue growth and had a $1.9 Billion loss in 2018, the CEO claims that the company is in great shape!
I am old school. I want a company to show it can make money in almost any market environment. The most anticipated IPO’s this year Lyft, Uber and We Work have lost billions of dollars trying to improve their business models. The big money investors are in the process of cashing out. At some point the “new economy’ has got to start to make money or they will go broke. I am more of a Warren Buffett man. If the company’s business doesn’t make money then I look elsewhere. Time will tell if I am right.
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the subject.
Question: What Is Pin Risk?
Answer: When you trade options, it is always possible that the underlying stock will end up exactly at the strike price of the option that you are long or short. When this occurs, you have a problem. If you are long a put/call you must make a decision whether or not to exercise your option. If you are short a put/call you have the risk of being assigned. What should you do? There is a rule in the business that the other side of the trade has the same problem as you do. So, the logical answer is to exercise 50% of your options and buy back 50% of your short position. On average you will have the best result on Monday. The safe way is to buy back all of your shorts and exercise all of your longs. In the long run this strategy should work as well as the 50% rule. Unfortunately, there is no clear cut answer to this problem. In the short run anything can happen no matter what you do. In the long run no matter what strategy you use you should break even.
The Wise Guy Report: The View From The Floor
Each week I talk about what I think the Wise Guys (floor traders) are up to with the Big Three commodity contracts: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). I also track the Market Edge (www.marketedge.com) ‘Market Posture’ which has a twenty-six year record of forecasting the intermediate-term direction of the stock market as measure by the DJIA with around 70% accuracy.
T-Notes
This week T-Notes finally succumbed to fright as buyers moved money from equities to fixed income. It wasn’t a great amount, but it moved interest rates close to resistance. This is the first flight to quality that we have seen since the panic in the fall of 2018. We will continue to hold our long position with an eye on the double top. If it holds we will take profit and take a shot from the short side. If it breaks through we will continue to hold on.
Crude Oil
This market saw little price action in response to the selloff in equities. It has been locked in a tight trading range for the past couple of weeks and continues to make a series of lower highs. The volatility has been reduced, but crude has a tendency to suddenly wake up and become very volatile. Until we get a better idea of price direction we will stay on the sidelines.
Gold
You would have thought with the selloff in the equities coupled with global tensions mounting that Gold would be the beneficiary of this type of environment. However, the market could seem to care less. The precious metal found some legs at long term support and had a reasonable rally but is now stuck in tight congestion on very low volatility. It tried to break out above long term resistance but when it could not penetrate recent highs it fell back into congestion. We will continue to hold our long position until long term support is violated.
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The Market Edge ‘Market Posture’, which has been Bullish since the week ending 4/18/2019 (DJIA 26559.54) remains Bullish at this time.
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