Trump’s Folly?
March 30, 1867 the United States Secretary of State William Seward reached an agreement with Russia to purchase Alaska from The Czar for a price of $7.2 million dollars. Critics of the deal referred to it as “Seward’s Folly” and claimed that it was the worst scam in the history of the Northern hemisphere. Strangely enough when congress voted on the deal on April 9, 1867 it passed in the senate by a vote of 37-2 and the house approved it by 113-43 so someone else in the Federal government felt it must have also been a good deal.
Of course, when gold was discovered in 1895 in the Klondike area, ‘Seward’s Follow” was quickly forgotten. What was one of the worst deals of all time became one of the best. Since then Alaska has become one of the greatest natural resource areas of the world and a vital asset to the U.S. economy. Now we have a new potential folly which will not pass the house and senate with such ease and that is the purchase of Greenland form Denmark.
Greenland is a sparsely populated island of 50,000 people located North East of the US which is rich in natural resources. It is owned by Denmark and this would not be the first time that the U.S. has tried to purchase the island. In 1946, President Harry Truman offered to buy the island for $100,000,000 dollars but the Danes refused to sell it.
Trumps folly may not seem as crazy as it appears on the surface. Although the citizens of Greenland are perfectly satisfied with their current ties to Europe both culturally and physically, there may be a political reason behind the proposal, China. With their ambitions marked by taking islands and developing them into military bases, they might see owning some land in Greenland close to the American coast as a pretty good idea. Influence in the Western hemisphere can seem like a very good idea for China and who knows, Trumps folly although a longshot to go through might look different 100 years from now!
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 trading subject.
Question: Why is it when I buy options on an earnings report release and I am right as to the price direction, I still lose money?
Answer: I addressed this question before, but with the turmoil that has occurred in some of the big tech stocks I thought I would address it again. It is because the other side of the trade that sold you your option has priced in the movement that would not normally be expected. If you are trading ABC stock and it has a normal range of +/- 4.00 a week, it is not uncommon for the stock to have its range increased by 50% to 100% just before earnings are released. Over my thirty-five years of trading options, I have seen hundreds of times when the earnings release is as expected, and the stock barely budges. When that happens all of the options go down in value. It doesn’t matter which ones you own. My advice is that if you want to trade on earnings releases, never buy naked options, especially the expiring straddle or strangle.
I have enclosed a picture of what happened to premium buyers in AMZN on Friday, 02/01/19. Mind you, AMZN met expectations. In fact, it made the most money it has in any quarter since its inception but look at the results. If you look carefully you will notice that the straddles in the expiring month, which is the same as buying 100 shares of stock, opened at zero!
The stock collapsed and was down nearly 5%, but the real damage happened in the option market. If you bought some of the out of the money puts on Thursday hoping AMZN would not meet expectations, when you woke up and the talking heads were discussing the collapse you could not wait to see how much your account made. Much to your dismay when you checked, you found out you got killed on the puts you bought. How is this possible. AMZN is down almost $80 dollars and the puts are down on the day? This is exactly what I addressed before. DON’T BUY NAKED OPTIONS! If you want to play this game you should spread the premium. Either sell vertical or horizontal spreads. You might not hit a home run, but you will hit a lot of singles and doubles and will have very few strike outs!
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
T-Notes finally popped with the announcement of the first interest rate cut in ten years, but how much further do they have to go? This market looks like a knee jerk reaction that is about to end in a blow off top. Rates will not stay at these levels forever. On Thursday panic buying drove the ten year to three-year highs and I got short at 130.50. It may be too early, but the mortgage market is back to 2% and it is doubtful it will go much lower.
Crude Oil
Near term bottoms are still holding and until they are violated I will continue to play this market from the long side. This was a tough week as the market continued to churn in a wide price range. On Tuesday the market looked like it was going to break on the long side but could not hold those levels and closed the week virtually unchanged
Gold
Gold finally broke out of its volatile congestion phase and immediately went to near term highs. This type of vertical price movement is generally a blow off and I took advantage of this move to get short @ $1513. It continued to move a few dollars higher but percentage wise it was almost unchanged.
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The Big Three Commodities Contracts
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The Market Edge – ‘Market Posture’
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The Market Edge ‘Market Posture’, which has been Bearish since the week ending 08/02/19 (DJIA 26485.01) remains Bearish at this time.
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