MrNotAdvice 08/02/2024 NewsLetter

Newsletter - 08/03/2024

THE WHOLE WORLD IS BURING DOWN!

Ok, not really but it can feel that way at times, especially after a week like we all have just been through.

High Geopolitical risk? Check

Markets waaaay over extended? Check

Interest rates confusion? Check

Return of market volatility? Check

But here I am, calm, patient and focused. And my VIP, VIP4LIFE, Trader and OG Trader members remained just as Zen-like as I.

How can this be you ask? Well having 30 years of experience as a professional helps - there is not much that I have not seen in terms of market cycles, doom and gloom, boom and bust. It is during times like these that you want to be able to rely upon good habits, not emotions. You want to be able to filter out all of the hyperbole and focus on those datapoints that will be most useful in aiding you to make the best trading decisions. And sometimes the best decision is to do little to nothing.

This past week was an earnings and economic data heavy week. In fact I did the rare thing and closed almost all of my trades so as not to have exposure to the FOMC meeting decision. I had to choose: "hope" that the market reaction to the FOMC decision would be benign to my trades and take on additional outlier risk or give up possible gains and protect capital.

The result? I closed two trades that ended up going for 2X and 3x while I took small losses. Does that make me upset? For about two seconds. In the past I have decided to hold and I ended up watching ALL of my open trades go deeply red. At the end of the day, I remain committed to my first rule of trading: Protect Capital. More below in the Closed Trades section.

Frankly, the past 3-4 weeks have been somewhat frustrating as I have mentioned in previous Newsletters because breakout trades were just not following through. This caused me to have to hold and wait longer than I normally would for at least a scale or to be stopped out.

Even for someone with my experience weeks like last week are challenging, emotionally and psychologically. With so much hyperbolic news being reported, at times seeming like every minute, and with no clear direction in the market it is easy to get "caught up" in all of the excitement. There is an urge to want to be part of the "action" and in the past, this would've caused me to "bend" the rules a little bit in order to participate. I can tell you with absolute certainty that forcing yourself to trade just because the market environment is volatile never leads to repeatable gains because you inevitable end up trading outside of your plan.

In fact great damage can be done to all of those wonderful profitable trading habits you have been working on causing you to either really fall of the wagon so to speak, especially if you get lucky and actually have winning trades., where you end up either getting "lucky" and winning a few or you end up succumbing to FOMO or revenge trading.

Additionally, because of all the significant news this past week, stocks have been having very outsized moves. This has resulted in some ugly charts where for example, price has directionally broken a level but the candle is so big that if you entered a trade, your stop would be well over 4% while your estimated profit goal is truly unknown. On top of this, you can throw probability out the window when it comes to both the FOMC announcement as well as the market's reaction to a company's earnings. Effectively you are in a guess and hope mode and that is something I absolutely do not want to give even a tiny foothold too.

Now, I have the confidence of knowing that sometimes it takes a good flush of activity in the market before more clear trading opportunities present themselves. I believe we certainly have entered that stage of the market.

I believe as a result of last week's selling that the market has chosen a temporary direction: down. I do NOT think this is the beginning of the "Big Down" move; the one I see taking 30 to 50% of the market. In fact, my back of the napkin prediction goes like this:

Market continues to drop for a short period of time. (talk about how the market is forcing the Feds hand - maybe at the beginning of the newsletter)

The market dropping gives the Fed the cover it needs to cut rates right before the POTUS election.

Whether they cut by .25% or .50% doesn't matter because any cut will cause another pulse of inflation. Why? Because interest rate cuts are just like stimulus.

When the Fed cuts, the market will attempt to recover from the ongoing pullback. (this will be a problem since the actual boots on the ground effect of any Fed intervention takes many months to materialize in the economy)

Assuming the POTUS election goes smoothly (I truly don't believe it will. In fact just today the DHS and FBI released a warning that there could be technological and/or internet connectivity problems right around the election.) then sometime after it, the sheer weight of all the bad things macro wise will finally tip the market into a prolonged downturn.

Wildcards are many. Iran, Israel, Japan blowing up, election interference, another assassination attempt, a new "pandemic," a flood of layoffs or CRE finally reaching the tipping point. Just one of these normally would cause the market to take notice but to have so many huge events happening all at the same time is truly extraordinary.

I believe we have finally "shook out" some of the uncertainty in the markets and the remaining of the year will prove to be very fertile for trade opportunities.

Week in Review

Model Portfolio - since 5/9/2023

This Week:

Last Week:

Why did I enter trades if I knew that FOMC was coming? Why put any capital at risk?

First of all I entered most of the trades with enough time, albeit short, for the trades to at least get to a scale level. Second, I adjusted all of these trades down in size with most being only 1% of my total portfolios as opposed to the 4% I would normally take.

To be honest, if I had held my performance would have been better on these trades but at what cost

Not respecting my first rule of trading.
Trading on hope.
Not relying on charting and price action.
Not utilizing probability and statistical analysis

So pretty much throwing my methodology out the window. I am sure you can see where I am headed. Look, seeing positions I have sold then move in my thesis direction resulting in my options being worth 2x or even 3x after I sold for a smaller gain is not enjoyable. But how logical is it to set aside 30 years of experience for a couple of days of "hope" trading?

Closed trades this past week:

$MBLY Sept 22P: +43% in 8 days
$UWM Sept 48C: -5% in 8 days
$SNAP Sept 12P: +14% in 5 days
$SONO Sept 12.5P: -23% in 5 days
$BHC Sept 8C: -48% in 2 days.
$FCX Sept 45P: +89% in 11 days

Closed Positions

$MBLY Sept 22P: +43% in 8 days

$UWM Sept 48C: -5% in 8 days

$SNAP Sept 12P: +14% in 5 days

$SONO Sept 12.5P: -23% in 5 days

$BHC Sept 8C: -48% in 2 days.

$FCX Sept 45P: +89% in 11 days

This and That: QB Switch

Last week I talked about CRE and specifically my proposed DOOM trade in $KRE. This week I am going to make a change at starting quarterback and move $KRE down the depth chart to second position and $VNQ into the starting role. Why? Here is my logic.

The main thesis I have is that the Commercial Real Estate (CRE) sector is in a secular downtrend and due to the 1.5 trillion of loans in CRE that need to be refinanced over the next two years along with worsening macro economic conditions will result in massive losses not unlike the residential crash in 2008. Also, the ONLY thing that will delay this would be an equally massive QE scheme.

Therefore, looking at banking and specifically those banks that are heavy with CRE paper makes perfect sense. But lately I have been considering how I might "tighten up" my thesis because banks have been pretty successful extending and pretending allowing them to NOT realize actual losses for bad CRE loans. Members have asked me how long they can get away with this and sadly because of the absolute morons and idiots in DC, for a very long time. I don't want to wait.

So this got me thinking to look at the business cycle of CRE to see if there would be somewhere earlier along the revenue chain that could offer opportunities for profit before the issues finally become apparent in the regional banking space. Let's take a look.

For simplicity purposes, I define a very simplified revenue chain in CRE as this:

Buildings are purchased or constructed using debt.
Tenants rent space in the buildings.
Owners of the buildings receive rents.
Rents are paid to the banks that made the loans.
Owners of the buildings pay down their loans and increase their equity.

As long as this cycle is not broken then all is well. But if at anytime one of the links in the chain struggle, it affects those parties later in the chain.

Now let's roughly assign industries to the revenue chain. Again, this is a simple and broad examination.

CONSTRUCTION, BUILDING MATERIALS - Buildings are purchased or constructed using debt.
ANY INDUSTRY - Tenants rent space in the buildings.
REITS, PRIVATE EQUITY, PENSIONS - Owners of the buildings receive rents.
BANKS - Rents are paid to the banks that made the loans.
BANKS, REITS, PRIVATE EQUITY, PENSIONS - Owners of the buildings pay down their loans and increase their equity and banks profit.

Looking at the above simple list from an investment standpoint:

CONSTRUCTION, BUILDING MATERIALS - Slowdowns in these sectors are harbingers of what is coming but they are often ignored in the early stages because other sectors can temporarily take up any slack resulting from a CRE construction slowdown.
ANY INDUSTRY - Most often any slowdown here will be company specific at first, then industry before the malaise is broadly felt. Plus, stocks normally don't go down because a company has decided to not rent additional CRE.
REITS, PRIVATE EQUITY, PENSIONS - In my opinion, this is first link in the chain where weakness in the above two items will be felt first.
BANKS - This was my previous investment entry.
BANKS, REITS, PRIVATE EQUITY, PENSIONS - All parties at this point suffer in a prolonged downturn in CRE demand.

Using the above as a guide I previously was intending to take a large short position at #4 but I am changing that to #3 - "Owners of the building receive rents" because this must decay BEFORE pain is felt in #4 and #5.

Time is risk and I would much rather risk money earlier along the revenue chain than later. Also, by moving up the chain I am reducing my risk if the banking sector continues to extend and pretend or gets a bailout. In fact, in order for the banks to be bailed out, something has to fail first, something has to break earlier in the chain. Which brings me to the new starting QBs of this DOOM trade.

Before preceding let me speak to the difficulty in finding a REIT that is focused entirely on office CRE. First, I was able only to find ONE Exchange Trade Fund that did so: $DESK. Here are it's holdings:

Well that looks just AWESOME! But there is a problem: it traded 710 shares on Friday AND there are no options past Jan 2025.

Let's compare that to $VNQ's top holdings:

$VNQ has major exposure to office CRE via Prologis, Equinix, SPG, Realty Income Corp BUT it also has an equal weighting of assets in Cell Tower and Digital assets which will act as a buffer for the office CRE. However, due to it's sheer size the office CRE is plenty sufficient to track a downturn in office CRE.

Moreover, looking at the long term chart it is evident that there is a lot of room for it to fall:

So $VNQ moves up to the #1 spot to benefit from the coming CRE collapse. Even though I will not use the $DESK ETF I am interested in two of the top 10 holdings:

And both the $BXP and $EQC charts shows that there is plenty of room to fall:

One issue with $EQC is that it was not in existence in 2008 so it was able to buy properties at the low. That's a double edged sword though because they also invested when interest rates were low in the CRE space and therefore are going to be subject to the same refi and debt issues across the industry.

Therefore the resulting DOOM CRE list with estimated allocations is as follows:

$VNQ: 15%
$KRE: 20%
$BXP: 10%
$EQC: 5%
$BAC: 5%
$WFC: 5%

My target is 50% of the total assets in my portfolios allocated to the CRE mess. Also, I will look to go into the non-banks BEFORE the banks, using the charts of course.

One final note: with the expectation of a Fed cut timing these trades will be key. Therefore when I enter these trades the stop will be 50% on all of the above. That means if I lose on all of them then since I have 60% allocated my portfolios will drop 30%.

Tales from the Dark Side:
Grasping Defeat from the hands of Victory

I think this is an important to understand the effect of "positive returns from protecting capital." Looking at the past week you might think it was a "meltdown?" Not even close since looking at last week's returns they were actually quite small. In fact as an example, the QQQs are only down 10% in the past two months - a totally normal pullback. Now imagine this continuing for more months. If you stayed fully invested instead of parking cash you would not be feeling too good today.

This is one of the main reasons I use options: I can get larger exposure directionally without committing the capital I would have to if I were in

equities only. But what's even more important is that not realizing NEGATIVE returns is as important as realizing POSITIVE returns.

I cannot tell you how many times I have seen professionals and retail get caught up in the excitement of a week like last week and compel themselves to trade just because "everyone else is." Yes, it's a challenge to not get caught up in the emotions of the market. But that's the point: investing or trading just because it happens to be a high news headline period of time completely ignores the first rule of trading: protecting capital. And as can be seen from the chart, losing money INCREASES the positive returns needed to generate consistent portfolio growth.

PROTECT CAPITAL. FOLLOW THE TRADE RULES. RESIST EMOTIONS. BE DIFFERENT THAN RETAIL.

Charts of Interest

$ENVX and $EOSE

While I am going to largely hold my comments on $ENVX and $EOSE because I will be doing a Podcast with Mr. Greg Reyes this week.

However, I will say this: the stock dropped this weekend because on the $ENVX earnings call they extended the revenue runway by 6 months to 2026. For me the issue is that management provided zero color about this shift.

Also there is some confusion about them tapping the ATM. From transcripts it appears that Ajay said they were done last call and yet they tapped it. More importantly, why did they tap it since it was a small amount relatively speaking.

i will discuss at more length with Greg on the Podcast.

$EOSE had an excellent week despite the overall markets' weakness. This week is a huge week with earnings coming out and as we wait for the possible DOE loan. In fact I said this last week:

If the company fails to update the DOE loan status on the earnings call, or before it, the stock is going back below $1.50.

Doom

Anti Doom

PODCAST:

The Podcast library is here.

VIDEOS:

The Video library is here.

Paid Memberships:

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See what others are saying:

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Don't forget the Discord live chat is STILL FREE but it will be closing to new members soon. In fact, we have already started removing non-active members.

In the meantime, come and join us - its the best community out there: Discord.
Also, be sure to check out the new page for Daytrading on the website, run by the fine gents @BaconTurkeyClub and @Juggernaut. If you ever wanted to learn or just watch two pros daytrade live, they are at it every day here: DiscordFuturesChannel.
Finally, be sure to check out VampireTrades and his amazing penny stock trades.

Thankyou Family!

theBoss

Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.