“There are decades where nothing happens, and there are weeks where decades happen.” … The Pomp.
Why did the market rally last week? Simple, there were a record number of SPY PUTS purchased from Monday through Wednesday. The rally was nothing more than an unwinding of this poor positioning, and now that the shorts have been squeezed – each asset class can resume its primary trend – predominantly lower.
The Practice of Groundedness: Isn’t it strange how we can debate for hours over a fantasy sports player, but when trying to discuss buying bonds or shorting the dollar – the average person will return a glassy, blank stare. With financial literacy becoming a part of everyone’s life, Brad Stulerg’s book: The Practice of Groundedness discusses:
- 1. Financial Literacy requires that you:
o A. Be patient – so that you can get there faster,
o B. Be vulnerable – to develop confidence, and
o C. Listen – to build a deeper knowledge base and skill set.
- 2. Multitasking is a waste-of-time because it’s all about focus.
- 3. Life = How to navigate change? Practice and preparation are key.
Funny business in the CPI Report (per BR and GJ): Numeric manipulations occurred in this month’s CPI report that won’t be there in December’s report – that lands on our FED’s desks directly prior to their next meeting. Those manipulations included: (a) the Health Insurance component of the CPI plunging -4% MoM (the largest MoM fall in BLS data in the past 17 years) due to “a periodic adjustment.” The lower CPI also contained (b) lowered fuel costs using our SPR which has already rebounded +1.8% MoM with more to come. That gave our markets momentum last week that (along with seasonality and stock buybacks) could push it higher through Thanksgiving. However, the December CPI report (dropping right after the Georgia run-off election) could cause our FED to raise 75bps and remove all of those market gains – instantaneously.
The Market:
What just happened in crypto… doesn’t necessarily STAY in crypto. Back in March, Sam (CEO of FTX) offered Elon (CEO of TSLA) a financing package of between $8B and $15B to help purchase Twitter. The good news is that Elon never took him up on the offer. The following chronology of events was developed by the excellent people of HedgeHog.app:
- 11/2 – Alameda Research… a trading firm controlled by Sam, decided to base its future on an exchange traded token (FTT) – created by FTX.
- 11/4 – Stories began to circulate… as to whether Alameda Research was ‘insolvent’?
- 11/6 – Changpeng (CEO of Binance) released a statement: “As part of Binance's exit from FTX, we received approximately $2.1B. We have decided to liquidate all remaining FTT tokens on our books.”
o Alameda offered to buy Binance’s FTT tokens @ $22… but Changpeng liquidated via the open market. "We will not support people who lobby against other industry players behind their backs."
o Sam responded: “Everything is fine … nothing to see here.”
o The entire Risk/Compliance Dept. of FTX quit – effective immediately.
- 11/7 – The FTT token dropped from $22… as users lost confidence in FTX.
o Sam tweeted: “A competitor is trying to go after us with false rumors, but don’t worry – all assets are fine.”
- 11/8 – FTX users began to experience withdrawal issues… after $6B had been withdrawn from FTX in the past 24 hours.
o Changpeng tweeted that… Binance is in talks to possibly buy FTX.
o Sam tweeted… "We are working on clearing out the withdrawal backlog. All assets will be covered 1:1." This raised questions about FTX’s ability to safeguard client funds.
o Changpeng tweeted… “We signed a non-binding LOI intending to fully acquire FTX.com, and will be conducting a full DD in the coming days."
- 11/9 – Binance backs out of the deal… because the hole in FTX’s balance sheet was over $8B. "As a result of corporate DD, as well as the reports regarding mishandled customer funds, we have decided to not pursue the potential acquisition of FTX.com.”
- 11/10 – Sam tweeted an apology… and promised to do his best to make his users whole.
- 11/11 – The FTX Group filed for U.S. bankruptcy protection… including FTX.com, FTX US, Alameda Research, and approximately 130 other affiliated companies. 10 days ago this group was valued at over $32B, and on Friday they filed for bankruptcy protection and CEO Sam Bankman-Fried resigned.
- 11/11 – Elon also raised the possibility of a Twitter bankruptcy in 2023.
- 11/12 – Sam, say it ain’t so… $600m in crypto disappeared from FTX wallets with little explanation as to why.
o To Be Continued…
A couple thoughts:
- Congrats to Changpeng’s Binance. That means that the threat of Sam being left to his own devices – was greater than the threat to the crypto-industry if FTX went bankrupt.
- FTX’s major investors included: BlackRock, Ontario Pension Fund, Sequoia, Paradigm, Tiger Global, SoftBank, Circle, Ribbit, Alan Howard, Multicoin, VanEck, Tom and Giselle Brady, and Temasek.
- Did FTX’s Board of Directors and their Investment Oversight Committee… choose to let FTX fail due to human error? Maybe they had seen this movie before, and this ending was the shortest distance between 2 points.
InfoBits:
- Berkshire Hathaway lost $2.7B in Q3… due to inflation, falling stock investments, and a big loss from Hurricane Ian.
- The Chinese Government reiterated… that it would maintain its strict COVID containment policies – despite its impact on economic activity.
- Auto payment delinquencies are on the rise… as 60-day delinquencies hit 1.65% in Q3 – the highest rate in over a decade.
- Meta (formerly Facebook) announced a 11,000-employee layoff.
- Disney’s parks and media divisions disappointed last quarter… while Disney+ subscribers jumped more than expected.
- Debt-laden AMC reported its 12th straight quarterly loss… but their sales jumped 27% as consumers loaded up on popcorn while returning for blockbusters.
- TikTok slashed their ad sales target by $2B… as if we needed more evidence that the global advertising market is slowing down.
- Average US credit card interest rates… are at 30-year highs of over 19%.
- “Alexa, stop losing money”... Amazon’s Alexa team has 10K+ employees and is currently losing $5B annually.
- SoftBank Group's core Vision Fund posted a $7.2B Q3 loss… as plunging startup valuations continue to hammer the company’s financial performance.
- Work-From-Home has obscured the real available jobs numbers… it seems that at least half of the 10.7m jobs openings – are ‘fake/duplicate job openings’.
Crypto-Bytes:
- The U.S. DOJ announced a seizure of $3.4B in stolen bitcoin… during a previously unannounced 2021 raid on the residence of James Zhong who stole them from the Silk Road marketplace.
- While Bahamas-based FTX crumbles… the SEC is investigating FTX’s separate US subsidiary – looking into whether FTX.us sold unregistered securities along with mis-handled client funds.
- Lawmakers had been working with the FTX CEO… on an industry-friendly Digital Commodities Consumer Protection Act. That collaboration was probably ruined as elected officials eye the fallout.
TW3 (That Was - The Week - That Was):
Tuesday: The National Federation of Business Optimism Index fell another 1% last month, as seven of the gauge’s 10 components decreased. For today, I’m liking what I see in the financials (XLF). If this gets over $34.50, I'm going to nibble on some.
Wednesday: The futures are soggy this morning but that’s mostly due to Disney that missed earnings. I still think that energy can continue higher. I still like OXY, SLB and HES. The 50-day on the XLF is $34.49. If it can get over that and hold, it might be good for a run. And I’m liking AGG / bonds.
Thursday: Concerns continue surrounding the fall-out contagion of those levered to the FTX platform and their $8B shortfall. BTC has fallen +20% so far this week. But the number of the morning is the latest CPI reading. Estimates were for 7.9%, and the monthly came in at 0.4 – giving us 7.7% annual inflation. The futures exploded higher. Is 7.7% inflation good? No, but I get it, the world wants our FED to stop hiking and any indication that inflation is fading – gives them hopium. This is insane. With everything blown up out of proportion today, I'm not touching anything. So, this day’s over before it started.
Friday: The Dow Transports topped their 200-day moving average resistance and the Russell 2000 neared its 200-day. That isn’t carrying the same weight as the CPI data, but hopium reigns supreme.
AMA (Ask Me Anything…)
Was there anything positive to come out of the FTX fiasco? What’s positive is that everything about the technology behind FTX continues to work brilliantly. The exchange tech and the blockchains did not fail, and the smart contracts were not hacked. They kept the long-term promise of the software and the technology architecture intact. It’s the people who keep making the mistakes and letting us down.
How do I feel about the FTX fiasco? I take entrepreneurship and innovation very seriously, and the human side of both can certainly disappoint. Entrepreneurs are not prone to disclose the actual risks that they are taking with resources not their own. I’m angry that the old metrics continue to hold true: only 1 out of every thousand new businesses truly make it. I’m upset with the egregious, moral, and ethical mistakes entrepreneurs continue to make – that cause significant damage to individuals who don’t deserve it. The above combo-platter tends to erase years of progress and hard work done by their peers and educators that preceded them.
Next Week: Did we see THE Market Bottom?
The Rip, the Rally, and Out-of-the-Box… Last week our markets were living inside an SPX range that stretched between 3600 and 3800. All the while, we were accumulating open interest for the past 45 to 60 days. Then the CPI news hit on Thursday that was 2 tenths of a percent less than annually anticipated (6.3% inflation vs 6.5% anticipated) and all heck broke lose to the upside. [Now, what also fueled this rally was a large amount of short covering that had to occur because of the tremendous number of PUTs that were purchased prior to the CPI release.]
Does this rally have legs? This rally could have legs, but only if the jobs data and GDP can confirm this move higher. The new channel for the SPX (currently around 4,000) is between 3931 and 4211.
‘Trashed Tech’ is what actually rallied… Products like NVDA, AMZN, Peloton, TeleDoc, and many other tech companies ‘left-for-dead’ moved higher like there was no tomorrow. This is an algorithmic trading tactic – not necessarily a rally that has any longevity associated with it.
Financials ripped higher on dramatically LOWER rates? Over the past 60 days, financials (XLF) have moved higher as our FED has raised rates. This naturally makes sense – higher interest rates = higher interest income for the banks. But this week, as rates moved lower (bonds higher) – the financials continued to move higher. Humm, how can that be? It’s because the entire marketplace got caught up in a Gamma squeeze – initiated by the lopsided PUT buying that occurred prior to the CPI release. Tip #1: Make no mistake, if the SPX moves below 3931 – this rally is OVER! I can see us gradually moving up into the 4211 level – especially during the Thanksgiving holiday, but moving below 3931 is a show-stopper.
The Dollar’s (DXY) move lower… over the past 30 days (from $114 to $106) has caused the metals (/GC, /SI), oil (/CL), and other commodities to move higher – reigniting inflation fears if oil moves over $100. But the DXY was also a ‘flight to quality’ trade, and that could be in the middle of reverting back to its old self.
Bonds and the new Volatility… Bonds rallied higher on Thursday, and were closed on Friday for the Veteran’s Day holiday. Tip #2: If the bonds (/ZB) move up into 126, that tells us that people are beginning to park money in bonds, and wait for calmer days. The VIX remains around 22, which is relatively high for the dollar and rates getting crushed.
Will the crypto-crush be contained? What bothers me is not the FTX trade, but rather the investors. One of the investors was Sequoia ($200m) – who is one of the smartest VC firms on the street. I worry about what other ‘dominos’ are out there that will cause more marketplace-flare-ups, not necessarily within the crypto-space – because even a chart of AAPL can be made to look bubble-like at times.
Trades:
- Tip #3: Goldman Sachs (GS) … statistically has broken above its Expected Move for the 4th consecutive week. It needs to pullback between here and January’s expiration.
- Tip #4: VIX … I’m looking to buy a Dec. out-of-the-money CALL spread.
- Tip #5: IBM … I’m buying the Jan. +130 / -120 PUT spread – 70 days out because it has exceeded its upside Expected Move for the past 3 weeks.
- Tip #6: SBUX… Exactly like IBM, I’m buying the Jan. +85 / -75 PUT spread – 70 days out.
SPX Expected Move (EM):
- Last Week’s EM = $117 and we moved over 100 points ABOVE the EM. WOW. This was almost a 2-Sigma move.
- Next Week’s EM = $99 – you’re kidding me right?
Tips:
HODL’s: (Hold On for Dear Life)
- PHYSICAL COMMODITIES = Gold @ $1,774 /oz. & Silver @ $21.79 /oz.
- AGG – BOT some bonds (AGG = $96.51 / in at $93)
- **BitFarm (BITF = $0.80 / in at $4.12)
o Selling CCs for income,
- **Bitcoin (BTC = $16,600 / in at $4,310)
- **Ethereum (ETH = $1,230 / in at $310)
- GME – DRS’d and HODL
- GS (Downside PUTS):
o BOT Nov 18 / +$342.50 / -$340 GS PUT Spread
- **Grayscale Ethereum (ETHE = $7.20 / in @ $13.44)
- Innerscope (INND = $0.014 / in at $0.0052)
- RIG ($4.42 / in at $3.47)
- SPY (Downside PUTS):
o BOT Dec 16 / +$357 / - $347 SPY PUT Spread
o BOT Dec 16 / $285 DIA PUT
- XLU (Upside CALLS):
o BOT Nov 18 / -1X $63 / + 2X $67 Back-Ratio CALL Spread
* * Denotes a crypto-relationship
Trading Tips:
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Please be safe out there!
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