A Trip Down A Trader's "Lunacy Lane".
Some self-deprecating fun to explain why I "donated" premium to the options market makers.
Nothing has changed in the few days since I wrote this piece about the ongoing credit orgy, and my conclusion remains the same: “watch credit, pick your time frames, and don’t be a hero on the short-side: as long as credit holds, buybacks WILL continue for longer - and get bigger - than any short can remain solvent.”
But yes…there is a “but”, or rather a “gut” (mine to be precise) and it has raised its fat ugly head to push me into a large chunk of long-dated waaaay out of the money QQQ 0.00%↑ puts that have a near 100% (97% if one uses the 0.03 delta as a proxy) chance of dying a worthless death. So why am I pissing money away? First, second, third and foremost, because that has been a horrible habit of mine for the 28+ years I have been staring at tickers on a daily basis. I have gotten better, but every once in a while I fall off the wagon. When I do fall off the wagon, I try to rationalize it as “this time is different”, by talking myself into seeing market “tells” suggesting that a YUGE air pocket is out there (by the way, for the psychoanalysts out there, this rarely happens to me on the bullish side of things). It’s a form of lunacy that I don’t wish on anyone, but while I am confessing it, I may as well share the hallucinations that come with it:
I just saw through a Reuters’ piece from a few minutes ago, that Brian Reynolds is sticking with his credit-fueled/buybacks-driven bull market thesis. Here is the excerpt:
Now, if you do not know Brian, he is “only” the guy who has correctly called every secular move in credit and stocks since the mid-’90s. And by “correctly called” I mean he told his clients (I used to be one of them) what to do AND when to do it to catch these primary moves. The credit signs he taught me to watch is why a short week ago I concluded my last piece by saying “watch credit, pick your time frames, and don’t be a hero on the short-side: as long as credit holds, buybacks WILL continue for longer - and get bigger - than any short can remain solvent.” But when I fall off the wagon and start making shit up in my head, here is how my brain processes Brian’s take: “He has been spot-on for 30 years so, on average / in the long run, he is eventually going to screw one up in a big way, and I am the only who knows that “eventually = here and now”. Through that sealtight analysis, which trader would not buy a slug of .03 delta index puts?
Yesterday Harry Dent - a/k/a the anti- Brian Reynolds predicted that by 2025 the Nasdaq will drop 92% and NVDA 0.00%↑ will trade for about $2.40. I processed his words in the same rigorous fashion that led me to conclude that Brian Reynolds is going to be wrong this time: Harry Dent has been wrong for longer that I can remember, and he has been telling us how wrong he is EVERY. FUCKING.WEEK. for the last 5 years trough his “Harry’s Rant” YouTube channel. Therefore, if “reversion to the mean” actually exists Harry has to… HAS TO!.. be right at some point, and I (and only I) know that that point is now. To complete my impenetrable statistical analysis, does anyone seriously think that the decades long record of Brian Reynolds being correct and Harry Dent being wrong can continue after I bought a chunk of doomsday puts?
On a slightly less deranged note the Commercial Real Estate market (office and residential) is falling apart deeper and faster than I discussed a week ago. That is complete nonsense of course because changes in the CRE market are measured - at a minimum - in time frames of “many months”, but my delusions are being fed by the accelerating number of anecdotal wipeouts of institutional assets all over the country. By wipeouts I mean “short sales” of properties for 50% of the outstanding debt, or 20-40% of the price at which they last traded. Again, what I am seeing is as much “news” as last week’s newspaper, but please don’t put facts in the way of my fantasies.
As a corollary, the regional banks’ game of “extend and pretend” is about to end; since that sentence rhymes - and my Twitter feed reinforces that at least once an hour - it must be true.
Lastly, going into tomorrow’s CPI release and the afternoon Fed dance, a soft CPI will likely free the Fed to signal its first cut of the cycle. The consensus is that lower rates will push stocks even higher. Unfortunately, the last 30 years and (2 credit crisis) have led to the opposite result in a relatively short period of time. On the flip side a hot CPI will perpetuate the “higher for longer” approach and stocks (let alone CRE and regional banks) are going to get hit hard. So you see? I bought my puts lotto tickets because this time I can’t lose!!
Good luck into tomorrow’s news fest and to the market makers who sold me the puts… you’re welcome.