Category: Currency

The greatest industry in history and what can we learn from it

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What makes a deal great? Is it the rate of return, superior timing, or the ability to think differently? In my opinion, a great trade is when a trader spots an opportunity with an asymmetric reward/risk ratio, follows their personal trading principles, and is able to make a judgment call on the trade and hit a home run.
In this article, we’ll look at what I consider to be three of the greatest industries of all time, the processes behind them, and what we can learn from them. Andy Hall is considered one of the best oil traders of all time. His trading firm, Phibro, was a unit of Citigroup and has been hugely profitable even as The bank has lost money.

In one of the most creative trades ever made, Hall was able to exploit the difference between oil futures and spot prices.
Hall and his firm noticed the triangular relationship between spot oil prices and the market price of recent futures contracts and devised a plan to take advantage of this arbitrage opportunity. In 2009, when the spot: futures delta expanded dramatically, Phibro bought 1m gallons of oil and chartered supertankers to store it offshore until the difference between the two markets closed.
With the U.S. in the midst of a recession in 2009, Hall and Phibro were able to take advantage of a downturn in the industry caused by falling shipping prices. This makes it cheap to lease and store their supertankers, so phibro can make money as long as the delta between spot and futures prices closes before leasing becomes too expensive.
Hall was so valuable at Citi that in 2008 he was paid a $100 million bonus by a company in deep financial trouble.

The 3 best inflation hedges

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Current fiscal policy has laid the groundwork for a steady rise in inflation, so we have compiled a list of assets that have proven to be effective inflation hedges.
What is inflation?
Simply put, inflation is a decline in the purchasing power of money, usually because the money supply has increased.
In the last century, as the United States adopted modern monetary and fiscal policies, we saw a significant decline in the purchasing power of the dollar.
The Fed’s response to the economic crisis has basically been to print more money, which lowers the value of other dollars.
Therefore, inflation is inevitable. In the words of Stephen Covey, it’s out of our control.
If we want wealth to rise, not fall, we need to focus on assets with purchasing power that consistently yield more than the rate of inflation.

Understanding inflation
The main way to track dollar inflation is through the consumer price index (CPI).
The CPI tells us the purchasing power of the dollar over time. When the index rises, the purchasing power of the dollar declines.
How to hedge against inflation?
To prevent inflation, you need one of two things, but preferably both: a store of value and a real rate of return.
For many people, a store of value means many things. But at the very least, a store of value must retain its purchasing power for some time. That means its value doesn’t fade over time.
Here’s the list directly from the May 2020 investor letter:
Purchasing power – How does this asset retain its value over time?
Integrity – How has it come to be recognized over time and universally as a store of value?
Liquidity – How quickly can assets be converted into trading currencies?
Portability – Can you move this asset geographically if you have to do so for unforeseen reasons?
Top hedge inflation
Here are three inflation hedges:
The real estate
The U.S. stock market
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Paul Tudor Jones made a big bet on bitcoin

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Paul Tudor Jones is known in mainstream investing circles for his cowboy futures trading and his correct call for the Black Monday market crash of the 1980s. Jones has a net worth of about $5 billion, thanks to successfully managing his own funds over the past few decades.
Great inflation
According to Jones, the situation is this: Central banks have only printed 6.6 per cent of global GDP in the past few months, a situation he calls “great money inflation” (GMI).
GMI’s launch comes at a time of high global debt. Jones cited congressional projections that the U.S. government debt will reach a new high in 2021. Corporate and consumer debt was also at an all-time high before the pandemic.

Interest rates and inflation
As central banks have printed trillions of dollars around the world, the total supply of money has risen. It is common sense to expect inflation to follow. While there are many factors at work, this is basically the core of Jones’s argument, backed up by some nifty charts and economic theory.
Inflation? Enter bitcoins
Sceptical investors have long loved gold. You can’t print gold, so the supply of gold is, by definition, limited. Jones recognized this and called gold “a store of value for 2,500 years.”
Bitcoin is similar in this respect. Bitcoin’s protocol states that only 21 million bitcoins can be mined in total. As of This writing in May 2020, 18.5 million of these have been mined.
Rating bitcoin as a store of value
Jones tested bitcoin’s store of value using the following criteria, taken from his investor letter:
Purchasing power – How does this asset retain its value over time?
Integrity – How has it come to be recognized over time and universally as a store of value?
Liquidity – How quickly can assets be converted into trading currencies?
Portability – Can you move this asset geographically if you have to do so for unforeseen reasons?
Jones contrasted bitcoin with the following inflation hedges (excerpted from his letter):
gold
The US Treasury yield curve
Nasdaq 100
U.S. equities cyclical/defensive
The purchasing power
Mr Jones recalls the 1970s, when inflation was in double digits. At a time when most financial assets, such as stocks and bonds, were not growing as fast as inflation, the currency carry trade was the main way to escape it.

 

Will the post-coronavirus rebound last?

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After bottoming out in March 2020, the post-COVID-19 rebound has been very strong. But will it last? Or is this just a setup for another sell-off?
Post – COVID rally
On the first day of the year, if I told you how the first six months of 2020 would unfold, I think you’d be even more shocked by the fact that the Nasdaq is still making all-time highs.
Of course, there is no shortage of market commentators commenting on how irrational the market is or how the Federal Reserve has taken over the stock market.
Supply and demand affect the market. Capital flows determine supply and demand.
Surge in money supply
Data from the Federal Reserve show how much money is sloshing around the U.S. economy.
One of the main reports they did was M2 currency stocks. M2 refers to highly liquid cash sources such as people’s bank accounts, money market accounts and certificates of deposit.
That’s a lot of new money pouring into the economy. Simple supply and demand tells us that each dollar is worth far less today than it was in 2019.
This is actually the nominal return of bullish equities. More money available means more money being pumped into the stock market.
Interest rates at zero
In addition to a massive expansion of “unlimited” quantitative easing, the Fed has also cut interest rates to near zero in response to the coronavirus. As of July 1, 2020, the effective federal funds rate was 0.08%. Add in inflation and interest rates are now quite negative.

Smart money/dumb money confidence
The Smart/Dumb money Index on SentimenTrader.com tells us the level of confidence dumb money and smart money have in the stock market at a given time. This is an excellent indicator of short – and medium-term bubbles.
Retail investors are overconfident
Joseph P. Kennedy Sr. said you know it’s time to sell when the shoeshine guy gives you stock advice.
It’s a classic Wall Street adage: the little guy is always wrong. Now, the little guys are confident enough to bet their houses on the market going up sharply.
Manufacturing is coming back
Manufacturing recovered sharply in June, according to the ISM manufacturing report released on January 1.

 

Long-term capital Gains tax vs. Short-term Capital Gains Tax: What’s the difference?

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When you buy or sell financial securities, you inevitably generate profits and losses.
Buying stocks that are up 20% provides a good source of income, but there are taxes that come with it.
Stock traders need to be aware of two major tax implications, including long – and short-term capital gains taxes.
Long-term capital gains require you to pay taxes on assets held for more than a year, while short-term capital gains pay taxes on assets held for less than a year.
Within these categories of tax effects, there are several nuances and tax levels.
It’s important to understand that depending on the length of your trade, as well as your income tax bracket, when you trade a financial security you will pay a certain level of taxes on the profits you generate.
With this in mind, you should develop some strategies to optimize your tax results.

Long-term capital gains
Long-term capital gains arise from assets held for more than a year.
To calculate whether the tax gain is long-term or short-term, you need to count the number of days you hold the asset, from the day you buy it to the day you sell it.
Typically, you count from the day after you buy an asset to the day you sell it. That number needs to reach 365 days. Some exceptions to this rule are those related to gains and losses posted on the IRS website.
There are some exceptions, for example, for real estate and commodity futures.
The tax rate you pay on long-term capital gains is based on your “net capital gains.” Your net capital gain is the sum of your long-term capital gain for the calendar year minus any long-term capital losses.
Long-term capital losses are any losses you have held an asset for more than a year.
This also includes any long-term capital losses carried over from previous years.
Net capital gain is calculated using the cost of the asset you bought.
For example, if you take a commission on a stock transaction, the money goes into the price of the stock you buy or sell.
If you buy real estate, any depreciation of the asset or additional costs associated with the sale of the asset, such as improvements, can be incorporated into the sale or purchase price.

The best hedge against a falling dollar

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Many macro investors are betting on severe dollar inflation for the foreseeable future, so we’ve listed some of the best hedges against dollar depreciation.
At the risk of oversimplifying the prevailing view of this group, I think the basic simplification of the prevailing dollar bearish view is a few factors:
Inflation of the Fed’s balance sheet
Increase the money supply
The ballooning us government debt to GDP ratio
Trust in the system has fallen
Precious Metals and Mining
The two biggest criticisms of gold and other precious metals are that they pay no interest and that their status as stores of wealth is based on emotion and has no rational basis.
No interest, of course. Of course it’s true.

However, one must take into account that because of long-term dollar inflation, an interest rate equal to or exceeding the inflation rate needs to break even in purchasing power.
The truth is that metals will retain their purchasing power for some time, while the DOLLAR will not.
The next idea that precious metals are an emotion-based store of wealth makes sense.
After all, if our economy reaches hyperinflation and reverts to barter, who’s to say gold will be accepted?
These assumptions are useful if you want to discourage zealots who think gold should replace all currencies, but they are helpful for asset allocation.

Consider the fact that the world’s largest central banks hold a large proportion of their gold reserves as a hedge against fiat currency exposure.
The Bundesbank has this to say about its gold reserves: “Gold is an emergency reserve that can also be used in a crisis when the currency is under stress.”

Sell calls and puts at a premium

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Every option contract has two parties — the buyer and the seller.
You may be familiar with the call option.
You are buying the right, not the obligation, to buy or sell shares at a set price on a set date. But someone has to sell that right, and that’s the seller of the option.
You see, the sellers of options are the opposite of options trading. You pay them a “premium” (the price of the option) and they keep the money for taking the risk.
If the options expire worthless (i.e. the call expires below the strike price and the call expires above the strike price), their profit is the full premium.

Let’s create a hypothetical option trade to illustrate this concept. You buy the XYZ call option at the strike price of $10, which expires in two days, and pay $1 to buy the option.
The seller of the option is responsible for the other side of the transaction and sells the option to you.
They immediately withdraw $1 from their trading account. Two days passed, and when the option expired, XYZ was still trading at $9. Your option is now worthless, and the seller keeps their $1 profit.
Another example:
You buy the ABC call option at the strike price of $100, and when it expires in 4 days, you pay $5 to buy the option. Once the trade takes place, the option writer collects the $5.
The option expires four days later and ABC trades at $150. Your profit is now $45 ($50 after the strike price minus the $5 premium you paid) and the option writer has lost $45 on the trade.
Note that the standard stock option is 100 shares. So when you buy the option at a premium of $2, you multiply it by 100.
The profitability of short options
Short, put or put options all refer to the same thing. You’re shorting options, which means you’re betting against the option buyer.
So when you short an option contract, your maximum loss is the same as the maximum gain the option buyer would make on an equivalent contract.
For example, let’s review the profitability of a call option contract with a strike price of $50 and a cost of $2 between the buyer and seller of options:
Buyer selection:
Maximum benefit: Unlimited: There is no limit to how much stock prices can rise.
Maximum loss: the price you paid for the option (in this case, $2.00). This is also called an insurance premium.
Choose the seller:
Maximum gain: The price at which you put the option (in this case, $2.00). This is also called an insurance premium.
Maximum loss: Unlimited: Stock prices have no upper limit.
Notice how the profits of option buyers and sellers flipped? It’s easy to understand in this case.
Remember, put options are slightly different. Here is an example of a put option contract with a price of $2 and an option buyer and seller with a strike price of $50:
Buyer selection:
Maximum gain: The minimum increase in the stock price is zero, so to get the maximum profit from the put option, you have to subtract the premium paid from the strike price. In this case, it would be $50 – $2 = $48. To get your profit in dollars, you just multiply it by 48 times 100, which is $4,800.
Maximum loss: the exact amount you pay for the option (premium). In this case, it is $2.00 * 100 = $200
Choose the seller:
Maximum return: The price at which you put the option (premium)
Maximum loss: $4,800, the same as the maximum gain for the option buyer
Short calls and short puts
Two important factors distinguish a short call from a short put. When you short a call option, the theoretical risk is infinite.
In the unlikely event that you short a stock that has risen tenfold overnight, you are in trouble.
On the other hand, when you short a put option, your maximum loss is the price of the stock. If you short a put option on a $10 stock, the most you can lose is $10 minus the premium you got.
While this may seem like a trivial difference, it makes a huge difference when you can be absolutely certain of your maximum risk.

Explain immediate or cancel (IOC) orders

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An immediate or cancelled order is an order type that indicates that the order is completed immediately and that any unfinished portions will be cancelled.
Instruct your broker to execute or cancel an order immediately.
It is a liquidity elimination order duration preference, similar to a “fill or terminate order”, with the only difference that IOC allows partial filling.
Your order will be cancelled within seconds of you sending it to the exchange.
Either some or all of your positions are filled, or you are not filled at all because there are no shares or contracts in the order book at your limit.

Immediate or unioc (IOC) order example
For example, XYZ is currently bidding $49.95 for 100 shares and $50.00 for 200 shares.
You want to make a big purchase order, but you don’t want the market to know you’re taking a big position.
Therefore, you try to cover your tracks using IOC order. You buy 10,000 shares at $50.25 and IOC is your effective buy time.
This will send your buy order to the exchange and immediately buy all stocks below your limit.
Once completed, your order will be cancelled. That way, if you only get a partial cover, your order stays on the order book, indicating that you intend to build a large position.
You’re essentially telling your broker, “I want to immediately buy 10,000 shares of XYZ at any price below $50.25, but only buy the shares that are immediately available at that price, and then cancel the order.”
Please note that if the price exceeds your limit price within the time you send your order to the exchange, your order will be cancelled immediately upon arrival at the exchange and you will no longer purchase the shares.
Effective time or order duration options
If you don’t use different order types too much, you might get confused by terms like “valid time.”
You might see “TIF” next to the limit order you sent, but have no idea what it means. It’s simple, but like most things in finance, it’s shrouded in jargon.
Valid time simply instructs your broker how long your order remains active before they cancel or execute it in the market.
Some common examples of time-bound preferences are good-til-Canceled (GTD), an order that stays active as long as you don’t perform or cancel it.
Fill or kill (FOK) is another standard chronological order, the same as IOC, except that THE FOK order does not allow partial filling.
Here are some well-known times for injunctions:
Immediate-or-cancel (IOC)
Fill-or-kill (FOK))
Good-til-canceled (GTC)
Day-til-canceled (DTC)
Market-on-close(Ministry of Commerce)
Many of these orders can only be obtained through senior brokers catering to active traders.

What Are LUPA Stocks? How to Trade.

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You’ve probably heard stock traders talk about “LUPA” stocks. But what are they?

LUPA is a relatively new acronym for four well-known tech companies that have gone public for the first time in recent years:

Lyft company
Super tech
Pinterest company
reality
The first letter of each stock is LUPA. These stocks are also known as “Paul” stocks.

In this article, we will first look at The LUPA stock as a whole and then delve into each stock.

Leader’s stock
LUPA’s shares are often lumped together for a number of reasons. First, they are all technology companies, which means they often operate in the same market segments.

Lyft and Uber, for example, both run online ride-hailing services, Pinterest runs an image-based social media network and Airbnb is an online home-sharing giant.

Second, before they went public, these companies were “unicorns,” meaning private equity investors valued each company at more than $1 billion. Finally, they are all recent public companies with large losses and rapid growth in the public markets.

Below we take an in-depth look at each of LUPA’s stocks to help you understand their business model and growth potential.

Lyft(NASDAQ :Lyft)
Lyft began trading on NASDAQ on March 29, 2019, and became the first ride-hailing company to go public in a highly anticipated listing valued at about $18 billion.

Lyft and rival Uber have been battling for dominance in the ride-hailing industry for years.

However, Lyft is only available in Canada and the United States, unlike Uber, which spans the globe. Lyft has about 35 per cent market share in the US.

But Lyft, like Uber, is very unprofitable. The two companies offer basically the same basic services, so the competition comes down to market share, driver pay and other factors that can help them achieve positive cash flow.

Lyft’s shares soared 8.7% on their first day of trading, opening at $87.24, well above its initial public offering price of $72 a share. But the stock has taken a sizable hit since completing the IPO. The company is currently trading at $57.06 per share, giving it a market capitalization of about $18.79 billion.

Super (NYSE: Breast)
Uber went public in May 2019, 10 years after The company was founded by Garrett Camp and Travis Kalanick. Lyft’s rivals priced its IPO at $45 a share, valuing it at about $82.4 billion. The company raised $8.1 billion in its IPO.

But the company’s stock has fallen since its debut. At the time of writing, Uber shares were currently trading at $49.80.

Investors have been concerned about the company’s business model and workplace culture. Uber has been hit by a series of scandals, including sexual harassment, embarrassing leaks about executive behavior and suspected spying programs. Kalanick was ousted as CEO of the ride-hailing giant in 2017 after a shareholder revolt.

The company also faces stiff competition in ridesharing and food delivery, and the price war with Lyft and other rivals is expected to continue in each market.

While Uber CEO Dara Khosrowshahi called the first quarter of 2021 “the best quarter ever,” with all-time high gross bookings, the company still recorded a net loss of $108 million.

However, that was a huge improvement over the $968 million net loss the company recorded in the fourth quarter of 2020.

Pinterest (NYSE: Pin)
Pinterest is a social media site that allows users to discover new interests through visual sharing and by “pinning” videos or images to their own or others’ boards and viewing what users have nailed down.

People use it for all kinds of inspiration, like interior design, cooking, clothing and travel. Simply put, it is a visual platform, optimized to inspire users with new ideas and an understanding of one’s taste.

Pinterest shares began trading in April 2019, valuing the company at $10 billion.

Pinterest has been able to put together a stable business since it was founded in 2010. As of January 2021, the company ranks 14th in the world in terms of global active users. It ranks below social networks like Facebook, Snapchat, Instagram and TikTok, but above Twitter.

Pinterest added more than 100 million monthly active users in 2020, its biggest increase ever. While the company won’t pose much of a threat to social media giants Google and Facebook, some analysts believe it still has room to grow.

Its core concept is to inspire users through products, ideas and so on, and create value for shareholders and users. Over the past year, the company has improved its average revenue per user (ARPU) significantly across all markets, and user growth is reasonable.

Four risk factors for the accumulation of risk in financial markets

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Until everyone needs liquidity at the same time, it is hard to know how much leverage there is in the market.

Leverage can gather quietly in strange corners of the market, as the 2008 financial crisis and the recent collapse of Archaegos demonstrated.

I mean, who would have thought a bunch of media stocks like Viacom or Discovery would be at the forefront of a liquidity event?

Before we continue, let’s give a rough definition of leverage, because it means different things in the software world than it does in financial markets.

In this article, we will analyze the current level of leverage in the market through transparent data sources and try to estimate where the hidden leverage is.

The dangers of leverage
The dangers of leverage bring us back to the most basic practice in finance: lending. Banks lend, customers borrow.

Unsecured loans are based entirely on credit. If the borrower defaults, the bank is in trouble. Secured loans are loans backed by collateral, meaning that in the event of a default, banks have some assets tied to the loan that they can seize to cover some of the losses. That’s how mortgages work.

When conditions worsen, as they did in 2008, the value of customer collateral falls. So banks need more collateral so they don’t lose a lot of money if they default.

When banks demand more collateral from borrowers, they either default or raise cash in other ways.

They typically raise cash by selling other liquid assets. When everyone is selling liquid assets at the same time, it puts further downward pressure on prices across the industry, leading to a recession.

Borrowers have been hollowed out, either selling their assets at rock-bottom prices just to meet loan requirements, or they have defaulted on their loans and are now bankrupt. The banks lost a lot of money because a bunch of their loans went bad.

So you can see that if we toughen up the system, people borrow far more than they can afford, and banks lend, the negative feedback loop gets even worse.

There are many fascinating explanations for how the 2008 financial crisis happened, but at the most basic level it was about too much leverage in the financial system.

Today, we look back at the sources of dangerous and potentially hidden leverage in today’s financial system.

No, we do not cite 2008 to say that the financial system is in a similar situation today. Rather, we use it to illustrate the dangers of leverage.

First, we’ll review some publicly available data from the Financial Industry Regulatory Authority.

Margin debt is at an all-time high
One number we can transparently access is the total margin debt of finRA registered broker-dealers. FINRA is the self-regulatory body that regulates the security industry, and one of its responsibilities is to regulate registered broker-dealers.

These registered broker-dealers are required by FinRA to report certain data on their clients to ensure regulatory compliance, including the level of margin used by customers.

These data basically show us how much debt investors are getting into their brokers through margin debt. It answers the question: How much money do clients use that is not their own? That number has grown steadily since FINRA began collecting data in the late 1990s.

Below is our chart using a logarithmic scale of total debit balances on margin accounts for FINRA broker-dealer customers since 1997.

As you can see, the level of margin debt fluctuates with the market itself, but overall the number has been rising steadily and is now at an all-time high.