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Posted by Martin June 17, 2024
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Wall Street’s Private Credit Circus: Dimon vs. the Big Bucks Brigade


Ah, Wall Street – never a dull moment. The latest uproar? The meteoric rise of private credit. On one side of the ring, we have Jamie Dimon, the CEO of JPMorgan Chase, sounding the alarm like a town crier. Dimon insists that private equity firms, money managers, and hedge funds are playing fast and loose, creating an unregulated wild west where risks go unchecked.

“I do expect there to be problems,” Dimon proclaimed at a Bernstein industry conference in late May, with the ominous addendum that “there could be hell to pay” if retail investors in these funds hit a rough patch.

 
Private credit debate
 

Cue the rebuttal from the other corner: the titans of private credit themselves. Marc Rowan, Apollo’s CEO, didn’t hesitate to throw a counterpunch. “Every dollar that moves out of the banking industry and into the investment marketplace makes the system safer and more resilient and less leveraged,” Rowan retorted at the same Bernstein conference. Because, of course, nothing says safety like money managers playing with billions.

Private credit advocates argue their funds are as solid as a rock. No deposit runs, no reliance on fickle short-term funding – unlike some regional banks that crumbled under pressure last year. Instead, they claim they’re backed by institutional investors like pension funds and insurance companies that won’t be knocking on the door for their money anytime soon.

Jonathan Gray of Blackstone was quick to highlight the fate of First Republic, the San Francisco bank that imploded and landed in JPMorgan’s lap. “It had 20-year assets and 20-second deposits,” he quipped, undoubtedly to a chorus of chuckles.

And then there’s the rise of private credit itself. Traditional banks are stepping back from lending, spooked by the Federal Reserve’s high-interest rates and potential economic downturns. Meanwhile, the private credit market has swelled from a measly $41 billion in 2000 to a staggering $1.67 trillion as of last September. Sure, it’s a drop in the ocean compared to the over $12 trillion in loans held by US banks, but who’s counting?

UBS chairman Colm Kelleher isn’t entirely convinced. He warned earlier this year that the private credit market might not be “particularly systemic,” but once the snowball starts rolling, it could turn into an avalanche.

Yet, for now, private credit seems to be doing just fine. According to Preqin, private credit has outperformed average investor returns over the past decade for five of the last six quarters. It’s even outshining private equity.

“Everybody can look quite good when it’s all going up to the right,” mused Goldman Sachs’ COO John Waldron, proving that even bankers can appreciate a good uphill ride.

Private credit’s assets are a smorgasbord – from corporate loans to consumer car loans and commercial mortgages. They’re a lifeline for midsize or below investment-grade borrowers in distress. Terms are flexible, interest rates adjustable, and while that might seem like a win, it’s also a potential minefield if interest rates drop.

Traditional bankers grumble that these money managers have an edge, unburdened by the same capital requirements. Regulators are cooking up new rules to tighten those screws even more. Dimon once quipped that private equity lenders were surely “dancing in the streets” when those stricter standards were proposed.

 
Private credit debate
 

But hold your applause – Washington might soon be raining on that parade. The Financial Stability Oversight Council is eyeing a new framework to label firms as “systemically important,” which means more oversight from the Fed. Naturally, private funds argue they’re not banks and shouldn’t be treated as such.

The dance between banks and private asset lenders is as tangled as ever. They’re rivals, but banks also lend to these asset managers. Dimon himself admitted that many private lenders are “brilliant” – after all, JPMorgan does business with a lot of them.

“We’re just uniquely positioned to be in the middle of all of it and I think it’s going to continue to grow,” said Troy Rohrbaugh, co-CEO of JPM’s commercial and investment bank, at another recent conference. And so the private credit circus rolls on, with Dimon and the money managers jousting for the spotlight. Grab your popcorn – this show isn’t ending anytime soon.

 
 




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Posted by Martin June 15, 2024
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Investors Giving a Car Maker More Money to Ruin the Company


Tesla (TSLA) shareholders have voted to reinstate Elon Musk’s compensation package, but skepticism remains among some investors and analysts. Ibrahim AlHusseini, an early Tesla investor, expressed his reservations to Yahoo Finance. “It’s a high-stakes game, and the shareholders gave in,” AlHusseini remarked. “The fear of losing motivated them, and Elon leveraged that to his advantage.” Despite his doubts, AlHusseini voted in favor of the $56 billion package, acknowledging Musk’s achievement of seemingly impossible milestones set in 2018.

Tesla’s stock has declined nearly 30% year to date and fell around 2.5% on Friday. AlHusseini expects the stock to remain steady until the next quarterly earnings report, predicting a drop due to missed delivery and margin targets.

Tesla reported that 77% of shareholders supported Musk’s pay package, with 1.76 billion shares voting in favor, 528.9 million against, and 20.6 million abstaining. Musk enthusiastically addressed the shareholders, saying, “I love you guys.” The package, initially valued at $56 billion, is now worth about $46 billion due to a decrease in Tesla’s market capitalization.

 
Tesla investors
 

In January, Delaware Chancery Court Judge Kathaleen McCormick ruled that the original pay package, approved by 73% of voting shares in 2018, was not fairly negotiated. Although the recent vote supports reinstating the package, it does not resolve the legal challenge, which may ultimately be decided by the Supreme Court and Delaware Chancery Court.

New York City Comptroller Brad Lander, representing several pension funds owning about 3.4 million Tesla shares, criticized the approval as a mistake. Lander hopes Musk will focus on Tesla and develop clear growth plans but fears potential distractions from Musk’s other activities.

Vanguard, Tesla’s largest external institutional shareholder, played a crucial role in passing the deal. Vanguard, which holds 7% of Tesla stock, initially voted against the package in 2018 due to performance-related concerns. Longtime Tesla investor Ross Gerber questioned Vanguard’s change in stance, emphasizing the need for corporate governance.

Gerber, who co-founded Gerber Kawasaki and voted in favor of the package in 2018, advocated for a no vote this time. His firm holds 332,000 Tesla shares. Gerber criticized the package as excessive and Musk’s recent performance as poor, but he respects the shareholders’ decision.

Investors also approved a proposal to move Tesla’s incorporation from Delaware to Texas, a move Musk supported after his pay deal was voided by the judge. Lander criticized this decision, emphasizing Delaware’s shareholder-friendly laws.

Despite concerns, Lander sees a solid foundation for Tesla, giving Musk credit for the company’s success, though not justifying a $56 billion reward. Analysts view the reinstatement of Musk’s compensation package as a positive for investors.

George Gianarikas of Canaccord Genuity, who rates Tesla stock as a Buy, praised the vote of confidence in Musk’s leadership, highlighting Tesla’s leading position in developing full self-driving technology. Wedbush analyst Dan Ives, a longtime Tesla supporter, called the approval a “celebration moment,” noting it removes a significant overhang on shares. Ives believes Tesla’s valuation could exceed $1 trillion by 2025 if Musk focuses more on the automaker.

However, Dave Harden, chief investment officer of Summit Global, advised caution, warning of potential shareholder dilution and risks. Harden suggested waiting for clearer signs of growth before investing in Tesla shares or selling if already invested.

 
 




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Posted by Martin June 13, 2024
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What a surprise!


Here we go. Inflation data and PPI came in showing slowing inflation. That is what almost everybody expected yet it came as a surprise to Wall Street. It still amazes me how irrational the markets are. But it could be because of media which feed us with their bullshit headlines every day trying to tell us what just happened. One day, it is the “investors are digesting the FED”, next day the “fear of higher for longer” followed by “unexpected” fall of PPI.

 

Wall Street is always surprised!

 

When I started trading futures I entered a trade which stopped me out in a few days. After reviewing my trade journal I came to a conclusion that I entered the trade too early and I should have waited. It was one of the days when Wall Street was freaking about too strong labor market that could curb the FED’s interest rates cut.

 
Wall Street is surprised
 

No matter how much my perception of the markets are skewed by media, I still think they are fools. That’s why I try not to watch news or read articles about the stock market. It is all nonsense.

 

I wanted to trade avoiding news that could surprise the markets

 

So I decided to add an economic calendar to my blog so I can easily and quickly see when there are any news that could pleasantly or unpleasantly surprise Wall Street. My thinking was: avoid days when the FED does anything and trade only during the days when nothing is going on.

Heck! There is something going on every stupid week! That reminded me of famous words spoken by the legendary Peter Lynch: “There will always be something to worry about in the stock market.”

That man is a legend! It is something every week – housing data, labor data, PPI, CPI, PMI, consumer confidence, you name it. If I wanted to trade only during days when nothing is happening, I wouldn’t be trading at all!

 

Back to the media

 

So what is a solution to this mess? Going back to media and try to figure out what is actually happening. But not what the media think investors are digesting, but news about economic data and overall health. And that is hard to find. 99% of market and economic news is bullcrap not worth looking at. This is the hardest part. Find a source that provides meaningful information on where the economy is heading. Some commentators are worth following and from their reports you can asses what is the most likely outcome. On the latest inflation news? It was obvious that inflation was easing. Maybe not as fast as some would wish for, but it was easing. Thus the reports about Wall Street being surprised was laughable.

 

My metrics to avoid any surprise

 

But I wanted more mechanical approach to assessing of what is going on. I found a few metrics that can do that and provide early warnings. One is volatility, and the second is greed or fear of the market’s participants and their behavior in the markets. Combining these two together, I can have some valuable insight into the markets as a herd tossed around by human psychology:
 

 

These two gauges tell me all I need to know – volatility crashed, and the markets are not yet too crazy. That is extremely bullish. This tells me to go all in (not exactly, but be aggressive). And when both gauges go crazy (volatility high and markets high), it tells me to get out as fast as I can. Crash will be imminent and Wall Street, in its euphoria, is not yet aware of it.

And when volatility is high and the markets are high, it will usually follow by volatility even higher and markets crash. But when that happens, I will be out. Hopefully.

 

Scaling trades

 

And that helps me to determine how aggressive I can be. Today, I can be aggressive. But when the markets change, I might stop scaling the trades, reducing trades by opening fewer new trades, or get out immediately at all cost. That is still personal, but I am working on eliminating that “personal” aspect to make it mechanical.

I am now fully mechanical with stocks, ETFs, and futures. When the proverbial shit hits the fan, I rotate to defensive assets (stocks and ETFs) and use a stop loss (for futures). But I am still trying to figure out how to deal with options. It is easy to scale down, I just let the old trades expire and open fewer trades, but if I have to get out sooner than that, it may mean closing positions at a loss and that is something I am not keen on.

So, still work to do.

However, as of today, I am still pleased with the rapid change in my portfolio. After repositioning my holdings and trades, my portfolio went up significantly beating the benchmark and I hope, it will stay like that in the future.

 
Portfolio vs VBINX
 

If you do not want any surprises in your portfolio subscribe to my newsletter. Every week, I will share with you what the Wall Street does and whether you should go all in or stay aside. You will be surprised how well that works. You will be getting out while other are still piling up their holdings and you will be buying back in when they are dumping everything they previously bought up.

 
 




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Posted by Martin June 10, 2024
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Repositioning our portfolio


I spent the first half of 2024 repositioning our portfolio to align with our goals. I took some trades off, some are “parked to a later day” when I will deal with them (for example, I converted some of the bad SPX trades into a “box” and now I keep rolling it away). When I build enough cushion I will get rid of them. But as of now, what are the goals?

 

The First Goal of Repositioning Our Portfolio – Strategic Allocation

 

Earlier this year, I decided to invest 60% of the portfolio net-liq into more adaptive (Strategic) investments to grow the portfolio faster and minimize drawdowns. I am still in the phase of re-allocating and building this part of the portfolio.

 

What repositioning our portfolio to Adaptive (Strategic) allocation means?

 

I started working on a model that tracks several metrics such as volatility, technical indicators, and some other data and I created two scales or rating systems. Our newsletter or challenge account subscribers receive emails with those metrics. But based on those ratings, I strategically move investments from aggressive to defensive positions. Though, I am still tuning the model, it is getting interesting results and most importantly a speedy warning to get out before a real trouble hits the market.

 

The Second Goal of Repositioning Our Portfolio – Futures Trading

 

I must admit – I discovered futures and I fell in love with them. I trade options and single contracts. This is my income generating vehicle. Above, I mentioned that 60% of our portfolio will be in Adaptive, strategic allocation. The remaining 40% will be allocated in futures trading and dividend stocks. Though I will be trading equities too, but not as primary income generating trades. The only issue with trading single futures contracts is capital requirements. It is really expensive (requiring a significant buying power) to trade futures. But it is way cheaper (in terms of buying power) to trade options against futures compared to SPX. So, futures it is. But I am building up enough reserves to overcome SPAN margin craziness.

 

The Second Goal of Repositioning Our Portfolio – Dividend Growth Investing

 

Of course, this is the core of our portfolio. This is a true passive income portion (20% of our net-liq will be allocated in this part). My problem was that I never had enough income to invest regularly significant amount of money to buy dividend stocks (and I am too old to start FIRE). My only alternative was to create an income stream that can be invested into the dividend stocks. That’s why I started the options and futures journey. And yes, it took me 10 years to learn the ropes (along with blowing up two or three accounts) and now, I finally, might be trading successfully. I am still a bit nervous about this claim, but I survived two bear markets… actually three, while trading options. And in 2020 I increased my dividend holdings by 34%. Not bad. No it is time to consolidate.

Another reason for this portion of the portfolio is, that both – the strategic portfolio and options/futures trading are management intensive strategies. No one can do it without learning what I have learned. And it takes time. As I said above, I am old and one day I will not be able to trade – you know dementia, or any other mental disease may kick in, and I will be forced to stop trading. I hope, dividends will be strong enough to take over my (and my family) income needs.

 

Portfolio benchmarks

 

I try to be honest with my trading and investing and post everything – good trades (I am proud of and bragging about), and bad trades (I feel terrible about but post them too). And I also wanted to start tracking my portfolio and comparing to other sectors and instruments to see, how my new strategy, mainly the adaptive, strategic investments work and protect my portfolio. So I started tracking a few investment vehicles, normalized their prices and now comparing it with my portfolio (blue line is our portfolio, the red line is the index or other vehicle):

 
Repositioning our portfolio
Against commodities, our portfolio performs well and beats commodity sector. Why commodities? In bear markets, commodities do relatively well (in 2022 they outperformed everything out there)
 

Repositioning our portfolio
Against emerging markets, our portfolio performs well and beats the emerging markets.
 

Repositioning our portfolio
Against Gold, our portfolio performs well and beats Gold. Until recently, gold was doing better than our portfolio. Gold is another safe haven investors like to flee to, so I want to see how our portfolio does when everyone is panicking.
 

Repositioning our portfolio
Against Realty Estate market, our portfolio performs well and beats the Realty Estate market. During downturns, IYR seemed to have lower drawdowns than the market, so I want to see how our portfolio does compared to this market.
 

Repositioning our portfolio
Against 2x leverage Nasdaq, our portfolio lacks and underperform this instrument. During bullish mania, this investment boosts growth, but during selloffs, it crashes badly. Let’s see how strategic portion of our portfolio protects us from severe downturns.
 

Repositioning our portfolio
Against Nasdaq index, our portfolio outperforms the index. During bullish mania, this investment boosts growth, but during selloffs, it crashes badly. Let’s see how strategic portion of our portfolio protects us from severe downturns.
 

Repositioning our portfolio
This is one of the volatility metrics I monitor, so I am interested in seeing how our portfolio performs against CBOE short volatility index. So far, the index does better.
 

Repositioning our portfolio
SPX doesn’t need any introduction. So far, we beat the index, but I want to see how we do when there is a selloff. So far, our portfolio seems to be more volatile than the index (thanks to the futures SPAN margin requirements), but when I fully build up our Adaptive, Strategic portfolio, I want to see how that impacts our portfolio volatility.
 

Repositioning our portfolio
In 2022 bear market, TLT failed to protect investors. In fact, bonds fell harder than equities. It is something I have not seen before. Yet, investors use TLT as safe haven, so I am interested how our portfolio will do over a long period of time.
 

Repositioning our portfolio
I think, comparing our portfolio full of equities and futures with dollar is a bit off, but dollar can move the markets. And if it does move the markets, I want to see how our portfolio does.
 

Repositioning our portfolio
VBINX is a broader Index fund, broader than SPX, so I added it too.
 

Repositioning our portfolio
VXZ is another volatility metric I track. When people panic, this baby goes up. It shoots up. I want to see if our portfolio shoots up with it.
 

Repositioning our portfolio
We are beating energy sector.
 

Repositioning our portfolio
Utilities are another defensive sector investors like to use when they panic. I want to use it to see how our portfolio does when they panic.
 

I started tracking these vehicles and our portfolio recently. I do not want to spend time filling out old data, so I will be updating these chart moving forward only. I hope, I will be able to see a better picture about our strategies and how they work in real life.

 
 




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Posted by Martin June 02, 2024
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Is the weakness in the stock market over?


I had a bullish trade when I bought futures contract late in April 2024 and then I was trailing my stop higher. I thought this could continue longer but then I was stopped out. I was thinking: did I place my stop loss (in fact it was a stop gain loss) order too close the market and I was stopped prematurely? A few days later the stock market started selling more and it showed up that it was a good move. I was stopped out right before more selling happened, while I was waiting for a new breakout that has never arrived.

 
Stock market Futures Trading
 

The price crashed on a very high volume (investors were freaking out about inflation, yields, FED and so on, old story). Despite the recovery attempt the next day, it failed and the market continued lower and eventually fired a short selling (breakdown) signal.

 
Stock Market Profits
 

We sold the futures short and set up a new stop loss order. The stop loss was selected at about 0.50% above the market risking $1,537.50 if the trade turned against us. The Friday’s initial trading proved that we were on the right side of the market. Not even in a day, we were making $1,700.00 of unrealized profit. I was excited about it. But then the market reversed and started rallying higher.

Maybe, this rally will turn out to be fake and next week we will resume selling but on Friday, it was not clear. And it still is not clear. Tomorrow, we still may rally higher and create new highs (and fire a buy signal). I do not know it. No one knows. The only indication that is telling me that this bullish trend may continue is that the price action printed a very large green candle on a very high volume while volatility crashed more than 10%. I wrote about it in today’s weekly newsletter why the market may very likely continue higher next week.

This was all happening very fast and when I started seeing profits disappearing, I closed the position. It turned out to be the right move. If I waited longer, the trade would have turned into a loss (the stop loss would have hit). By reacting fast, I preserved a small gain:

 
Stock Market Profits
 

This appears to be a beauty of Futures. Thanks to leverage, this small price difference of only 4.25 points (5,244.25 – 5,240 = 4.25 point) delivered a relatively nice profit of $212.50 (4.25 * 50 = 212.50).

 
Stock Market Profits
 

However, the price action happened so fast that this posed another issue I am trying to solve. I published this trade to my subscribers so they can copy-trade it if they choose to. But when the market started moving up fast, I issued a closing order alert but the subscribers may have not received it on time to get our at the same price as I did. They may have even close the trade for a loss.

So, I am thinking about what ways and options I have to post alerts faster. Not easy task. Emails take time to compile, I tried Twitter but it didn’t seem to work well either. So, if you are a subscriber, or even a reader of my blog and have an idea how to post our trade alerts fast, please, let me know if the comments. I am genuinely interested in helping my followers in the meaningful way and deliver my service fast enough to react.
 

So, right now, I am out of the trade and again waiting for a new entry signal. If the futures breakout above the resistance or breakdown below the support again, I will be re-entering the trade and placing my stop loss order below the entry point. This time, I will also send a notification to my subscribers.

 
 




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Posted by Martin May 27, 2024
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Futures trading – Waiting for a breakout


At the end or April, I entered into futures trading. Not just trading options against futures but also buying and selling futures contracts. It turned out to be a very profitable trade and I plan on trading it again. The only issue with this type of trading is that it is very capital intensive. Unlike other trading vehicles, futures need $12,960.00 fixed buying power. Selling options only need $1000 (depending on the trade setup). But futures can be very profitable thanks to the leverage.

 
Futures Trading profits
 

I used trailing stop to protect my profits since this market is very volatile. Despite volatility crashing, there can be wild swings (thanks to the FED and spooky investors who freak about it all the time without thinking – freak now, think later.
 

So, I got stopped out and banked a good $10,250.00 profit.
 

I am happy about it and now I have a huge urge to brag about it. That’s why I am posting my result, but also show what I plan on doing next. And my next move is to wait for a new breakout to buy back in and ride the sucker up again (or get stopped if it doesn’t work).

 
Futures Trading profits
 

When the futures break up above the resistance, I will be re-entering the trade and placing my stop loss order below the entry point. This time, I will also send a notification to my subscribers.

 
 




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Posted by Martin May 26, 2024
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Understanding Dividends


Dividends can be a contentious topic in the investment world, with varying opinions on their impact and value. Let’s break down the main perspectives and clarify the mechanics behind dividends. Dividends are payments made by a corporation to its shareholders, usually in the form of cash or additional shares. They are typically paid out of the company’s earnings. However, there are investors who claim that dividends are a zero sum game and that you get nothing because it is paid from the stock price. So, how is it?

 

Source of Dividends

 

Dividends are paid from a company’s profits or earnings. When a company generates profit, it can choose to reinvest in the business, pay down debt, buy back shares, or distribute a portion of the profits to shareholders as dividends.
The decision to pay dividends is made by the company’s board of directors.

 

Impact on Stock Price

 

When a company pays a dividend, the stock price typically decreases by the dividend amount on the ex-dividend date. This adjustment reflects the fact that the company has reduced its cash reserves by paying out the dividend.

For example, if a stock is trading at $100 and a $2 dividend is paid, the stock price might drop to $98 on the ex-dividend date.

 

Dividend Investing Perspective

 

Proponents: Supporters of dividend investing argue that dividends provide a reliable source of income, especially for retirees or those seeking steady cash flow. Dividends can also indicate a company’s financial health and commitment to returning value to shareholders.

Critics: Critics suggest that dividends are essentially a return of capital, arguing that investors might be better off if companies reinvested the earnings to fuel growth. They see the drop in stock price as evidence that dividends do not add net value to shareholders.

 

Dividend Investing – A Zero-Sum Game?

 

The argument that dividend investing is a zero-sum game stems from the belief that dividends merely redistribute existing value rather than creating new value. Here’s a closer look at both sides of the argument:

 

The Zero-Sum Game Argument

 

Dividends and Stock Price Adjustment: Since the stock price typically drops by the dividend amount, some argue that dividends do not provide additional value. They view it as simply shifting money from the company’s balance sheet to the shareholder’s pocket, resulting in no net gain.

Tax Implications: Dividends are often taxed, which can reduce the overall return for investors compared to capital gains, which might be taxed at a lower rate or deferred until the stock is sold.

 

The Value Creation Argument

 

Income Generation: Dividends provide a steady income stream, which can be especially valuable in low-interest-rate environments or for investors seeking predictable cash flows.

 
Dividend Investing
 

Reinvestment Opportunities: Dividend reinvestment plans (DRIPs) allow investors to purchase additional shares with their dividends, potentially compounding returns over time.

Signal of Financial Health: Regular, sustainable dividends can signal a company’s confidence in its future earnings and financial stability, potentially attracting more investors and supporting the stock price.

 

Conclusion

 

Whether dividends are viewed as valuable or a zero-sum game depends largely on individual investment goals and perspectives. Here are some key takeaways:

Income vs. Growth: Dividend investing can be highly beneficial for those seeking income and stability. For growth-focused investors, reinvestment of earnings might be more appealing.
Company’s Health: Dividends can indicate a healthy, profitable company. However, investors should also consider the company’s overall strategy and growth prospects.

Tax Considerations: The tax treatment of dividends versus capital gains can influence their attractiveness depending on the investor’s tax situation.

In summary, dividends can be an important part of an investment strategy, providing income and potentially signaling company health. However, whether they add net value depends on the investor’s perspective, goals, and tax considerations.
 

What do you think? Is dividend investing a zero sum game when you get nothing because the dividend is taken from the stock price, or is it a value created by the compoany and paid to the investors? Let me know what you think in the comments.

 
 




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Posted by Martin May 26, 2024
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Contest #26: Guess the S&P 500 Friday Close And Win Cash!


Last week, we didn’t have enough votes to have a valid contest. We need at least five people to vote according to rules below to make the contest a valid one. Please vote in the comments below and win cash!

 

Contest voting is from Sunday May 26th – Wednesday May 29th and it is now OPEN

 

Welcome to the Guess the S&P 500 Friday Close Challenge!

 

We’re thrilled to bring you an exciting contest where your forecasting skills could win you a fantastic prize – a $100 Amazon or Cash gift card! Get ready to flex your market intuition and join the fun.
 
 

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Posted by Martin May 19, 2024
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Contest #25: Guess the S&P 500 Friday Close And Win Cash!


Last week, we didn’t have enough votes to have a valid contest. We need at least five people to vote according to rules below to make the contest a valid one. Please vote in the comments below and win cash!

 

Contest voting is from Sunday May 19th – Wednesday May 22nd and it is now CLOSED

 

Welcome to the Guess the S&P 500 Friday Close Challenge!

 

We’re thrilled to bring you an exciting contest where your forecasting skills could win you a fantastic prize – a $100 Amazon or Cash gift card! Get ready to flex your market intuition and join the fun.
 
 

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Posted by Martin May 15, 2024
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Why I Switched to Trading Futures and Futures Options


I run a program for subscribers to present my trades and post trade alerts. Anytime I open a trade, close it, or adjust it, I send out an alert so subscribers can copy trade my trades. Any subscriber can also ask any questions and if they need help I can help them with trades, explain the mechanics of a trade or help them out if any trade goes against them. I traded SPX for years but lately started shifting to trading Futures and Futures Options. Here is why.

 

When Trading Futures and Futures options, PDT doesn’t apply

 

I do not day trade but time to time when the markets got volatile, I was forced to adjust an SPX trade a few times in the same day. I trade multiple accounts, some are large enough where day trading wasn’t an issue, but others were small (below $25,000) and that caused those accounts being flagged as “Pattern Day Trader” (PDT). In those accounts, I couldn’t trade freely and I had to be very careful with the trades. Many adjustments couldn’t be done at all, I had to let the trade expire in the money and incur losses.

 

Trading Futures and Futures options requires less Buying Power

 

This is the biggest advantage I am seeing so far – futures are cheaper to trade. Not on the fees basis, they are more expensive compared to SPX, but on the margin requirements basis. I can open an option trade and limit the margin requirements to $1,000 while collecting significantly higher credit. I can even sell a single naked put contract which would require $8,000 – $12,000 buying power and collect $3,000 – $5,000 credit. Do the same with SPX and you will need $94,000 Buying Power. Compare the requirements for SPX vs. Futures options below:

 
Trading Futures vs SPX

 
And here is a same trade (same delta and expiration) for futures put contract:

 
Trading Futures vs SPX

 
As you can see, I can collect about the same credit for the same expiration day, same delta, but with significantly lower BP reduction. This is a big deal. Not because I can recklessly trade more contracts, but because I will have more cash and buying power left to weather volatility and day-to-day market fluctuations. The worst thing in trading options is not to have enough cash when there is a storm or panic out there and you are forced to close a trade for a loss due to a margin call. It happened to me many times that the markets changed, margin maintenance requirements increased and I had to close a trade safely far away from the market so survive the storm for a loss just to release the buying power.

 

Trading Futures options are safer

 

If you compare the pictures above, you may notice one more benefit of options against Futures vs. SPX that makes futures safer. The same delta is farther away from the money compared to SPX. The dashed line on both trade tickets represent 1SD (1st Standard Deviation). The SPX is at the 1SD, the futures put option is three strikes lower than that. If we assume that the markets can fluctuate and fall down to 1SD, futures contract can still survive the wave of panic selling. The SPX will be already in the money. Of course, this is not something to bet on every single trade, but it provides better safety down the road.

 

Trading Futures contracts also require less capital

 

If you do not want to trade Futures options, you can trade contracts directly. While we can buy a futures contract, we cannot buy SPX. If you want to buy SPX you have to use an ETF that tracks SPX such as SPY. In my opinion, SPX and SPY are less efficient as far as capital requirements. If you decide to day trade futures, you would need $6,000 buying power (not an exact number, but in the vicinity of it). If you hold a Futures contract overnight, the BP will increase to $12,890 (again in the vicinity of it). You will never be able to achieve this with SPY. Try to invest the same amount of SPY shares to gain the same rewards as with Futures and you will need significantly larger capital to open such trade.

 

Trading Futures contracts are more profitable

 

Given what I said above about Futures being more efficient, they provide far better return on invested capital. I opened a Futures contract in April 30th. I bought 1 /ESM4 Futures contract at 5,080 per contract (with $12,890 +/- buying power reduction). Today (May 15th, 2024), that contract is worth $12,800.00 of unrealized profit:

 
Trading Futures contracts

 
I wouldn’t be able to achieve this holding SPY with only $12,000 buying power. I would need a lot more capital to do it.

Here is the same trade on a chart (with a trailing stop to protect gains should the market reverse and sell off):

 
Trading Futures contracts

 

What’s not so good with trading Futures options?

 

The only thing in my evolution of Futures trading and trading options against Futures contracts is difficulty to adjust complex options strategies. For example, rolling a simply vertical put spread (or call spread) is impossible to do as a single trade. At least Tasty Trade says, they do not support such trade (and I am not sure if this is the same with other brokers or just Tasty). Adjusting a trade, like rolling to further date, needs to be done by legging in and out. That can be sometimes very frustrating.

Another bad thing (ugly) is the fees. Fees when trading options against Futures, are very high, so trading short expiration (like 0 DTE) trades and use delta 10, for example, is impossible to do. The trade will not be profitable. The trade will open for a debit (as a seller, I want a credit).
 

Other than that, I like the performance of using options against Futures or buying/selling Futures contracts directly, so far.

 

Do you want to trade Futures with us?

 

If you want to receive our trade alerts to your email inbox, subscribe to our SPX Alerts (although they are no longer SPX alerts), or if you want me to help you trading your account, shoot me an email. I will be happy to assist you.
 
 




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