IN-DEPTH: TRANSCRIPTION - LONGWave - NOVEMBER - Its the GAMMA MEME STRATEGY Stupid
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
COVER
I was new to the workforce in the 70’s and felt the economic recessionary problems of 1974 first hand and Fed Chairman Paul Volcker taking my home mortgage up in 1980 to close to 18%, but it wasn’t until the 1986 market crash that I felt the real financial pain the market can insert into your life!
Since then I have lived through a lot of market turmoil. Turmoil that every ten years seems to hit with increasing vengeance as markets have become extraordinarily more leveraged.
I saw how every single major newspaper has run something on the Dow Jones surpassing 36,000 last week, on the basis it was predicted back in the 90s in a book called “The New Strategy for Profiting from the Coming Rise in the Stock Market.” The book, incidentally, was totally wrong… the reasons stock markets are where they are today have nothing to do with the reasons the authors expected.
Yet, every single newspaper article says something like equities being a market where patience is a virtue and that in the long-term equities will outperform. This is exactly the sort of thing I was reading prior to the 2000 Dotcom Bubble Implosion.
AGENDA
If there is a single message I would like to leave in the session is that investing is about 1- Discipline, 2- Risk-Adjusted investment decisions and 3- Separating Illusion from Reality.
We are going to spend time in the next 45 slides on all three and attempt to connect them as they apply currently.
Let’s remind ourselves that the reasons stock markets are so elevated are largely down to the consequences of factors such as:
- Quantitative Easing,
- Cheap money,
- Walls of money, which in turn have fuelled a whole series of secondary consequences and investment behaviors that make zero sense in a real world;
- Such as the belief unprofitable companies are worth more than profitable ones, and
- Inspire the credulous to believe they can get rich quick from snake oil schemes like meme stocks and crypto.
It’s a madness of crowd, driven largely by the consequences of earlier actions … my experience tells me the trick is going to be recognizing what is real and what is not.
As such I would like to talk about what I call the Meme Stock Trading Strategy and the subjects listed here.
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My perspective is the market feels vulnerable to an avalanche as markets tighten liquidity, monetary ‘Tapers’ begin and rate hikes start.
Market players are generally all currently greedy and euphoric, yet also scared and fearful!
They know somehow it will end, but just can’t let go because of the perception of money still being on the table!
Investors should never forget that it is the last 5% that is always the most expensive!
It a hard drug to kick when buying the dips has delivered guaranteed returns for so many players who have never experienced anything else.
Broadly since 2008 – markets have thrived on:
- First, the belief in implicit ongoing Central Bank support for markets to avoid a confidence collapse, “too-big-to-fail” systemic bailouts, and governments equating stock market rises with their own success.
- Secondly, successive waves of QE money printing have simply inflated the price of all financial assets. The “wave of money” market bulls believe has strengthened the market base, cushioning losses on the basis that when markets do slide, and because there is so much “buy the dip” money available they will swiftly recover from any shock.
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The bottom line is that markets need to understand risk and thrive on it – not be “protected” and mollycoddled from it…
There have been massive changes in the underlying structure of markets:
- The death of market making and risk taking by banks.
- The transfer of risk from large banks with their genetic credit DNA into a very much more diverse asset management and retail investors taking direct risk. (Regulators think they have changed risk appetites – all they have done is shunt it under another carpet.)
- The lack of experience across trading floors and dealing rooms at banks, investors, and brokers of market instability – anyone under 40 in finance has never seen real market mayhem.
- A changing financial mindset – from risk trading to risk avoidance, caused by regulation, compliance and a process driven approach to any aspect of finance the regulators think they can control.
- The “Gamification” of investment into fantasy – even as fewer and fewer small stocks are covered by any real research.
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Long Term professionals feel “The market is insanely overvalued, but until now has proven that what is insane can become more insane.
So you can't short it.
Frankly all price signals are broken
…. and we could be in a "crack up boom??"
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Players who started trading the markets since 2000 seem to all be under the influence of Greed and FOMO (Fear Of Missing Out). There is presently a huge panic to chase stuff since Seasonality is strong and Money is still free and available!
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All of this reminds me of the fall of 1999. I got out of the markets then which turned out to be too early. It was painful to watch stock continuously climb through the spring and be told daily the mistake I had made.
18 months later I was being told by the same people how perceptive I had been!.
It was neither. It was obvious what was going to occur and it was not possible to know how much more it would rise and just how quickly it would full. All I really had to know was what was ahead and not be greedy!!! Obviously the later being the real problem!
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Let me quote one of the greatest traders ever (Stanley Drukenmiller) and what he did during the upside panic in 1999.
“I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and I couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”
What I am saying here is that investing and trading it about discipline! It isn’t about being smart! Usually what we need to do is quite simple, but we ignore the obvious in favor of our emotions!
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Druckenmiller entered as shown here. If he had just stayed within any normal regression he would have been rewarded. His emotions got in the way of what had always made him money!
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Do we have the same thing going on now?
Here is Bitcoin and Tesla.
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Here are two obvious channels for both.
Knowing this the decision is obvious but I can assure you that few will heed it!
Not for one moment am I saying both are not heading higher near term and there is money that might be made!
I am saying it is about RISK ADJUSTED investing!
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Let me now shift to separating illusion from reality.
The giant lifts in the market as I said earlier has been built on cheap, available credit that has flowed into asset appreciation versus productivity investments.
The vehicles for that asset appreciation have been dominated by technology within the adoption of passive ETF investing. The FAANG stocks quickly came to control the dominate indexes and formed bases in many different types of ETF’s
Today we have “TAAAMN” currently lead by Tesla.
Microsoft, Apple, Amazon, Tesla, Alphabet, Meta and Nvidia are at 26.41% of the popular SPY instrument and those same stocks are 50.76% of the QQQ’s
As the well followed Nomura’s McElligott says: “It matters a whole heck of a lot when we see QQQ options posting $Gamma and $Delta [in the] 100%ile”!” We will get to this distortion in a moment.
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We began shining a light on how the disappearing stock float was changing and distorting the equity markets in our April 2018 LONGWave video. It is important to revisit this video to remind yourself of what has been steadily going on. It only got worse since making that video.
The video can be found at the MATASII site or on our YouTube channel. The link is shown at the bottom.
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Buybacks, reduced US IPO’s and Private Equity ownership which restricted the size of the stock pool was already in 2018 having a tremendous impact on the markets.
It has only accelerated since!
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More critically it was beginning to power what we referred to then as the “ETF Dynamo”!
The structural dynamic also has only gotten larger … much larger!
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This more graphically illustrates the deterioration in market volume since the Financial Crisis.
Stock volume actually grew until the 2008 Financial Crisis and since has abruptly headed lower while stock prices have historically headed higher.
The question is how could this be??
Yes the stock pool is taking less stock buying to move it upwards but it is now more than this.
We will come to back to the answer to this question in just a moment, but first we need to recognize another development in the markets.
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That is the dramatic shift from buying stocks to buying options on the underlying stock.
A record $538bn of single stock options traded on the average day in Oct-2021, including $894bn on 29-Oct, a single-day high.
The options market was 1.4X the underlying shares volume in Oct-2021.
The reason for this besides gaining leverage is how players today are using the options market.
We have:
- ETF’s which must use options to protect their liquidity risk, be nimble when the ETF is more than a single index and contains a broad array of stocks and to add additional profit.
- Meme Stock Trading Strategies which we will go into in more detail in moment,
- Short Squeezes which has become a staple of the market which we have highlighted a number of times in previous videos.
- Use by what is referred to as the PPT or Plunge Protection Team.
All of these are using Options in a massive way.
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Going back to our question it stands to reason even if the volumes are extremely large in the options market then volumes should also be large and likewise growing in individual underlying stocks. But it isn’t!
That means that Calls and Puts are being written “Naked”. They are not actually supported by actual stocks that are being pledged as part of the Call or Put Contract.
In effect we have a counterfeit market which will work as long as the players can always meet their obligations.
This is like banking where your money is never there because it has been lent out. As long as there is no bank panic or run on the bank everything works fine.
In this case it could any number of things that could trigger a “miscue”!
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Built on top of just using options are now all sorts of hedging techniques using sophisticated algorithms that maximize profits with hedges in place. These create SKEW Walls.
A SKEW is the price differential of options out in time and price versus current prices. These SKEW WALLS develop when large numbers traders are all coming to similar trading decisions and what they are willing to pay for these future protection options.
One of our S&P Daily charts is shown here where we have the key options levels updated for us by SpotGamma that allows us to ensure our technical analysis aligns with the dynamics of options movements. It illustrates just how much options now dominate stock movements.
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Let’s now put some meat on what all this means by discussing what has become to be called Meme Stocks and the Meme Trading Strategy.
Remember, this is only one way options are now controlling the market and creating massive distortions.
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A Meme Stock is a stock that has seen an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums like Reddit.
For this reason, these stocks often become overvalued, seeing drastic price increases in just a short amount of time.”
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Here we see the growth in the Meme scene showing call options traded based on a 20 day moving average.
The US speculative trading volume gauge as show here hit its highest in July. The most recent chart I have but with little doubt it has exploded to new highs since July!
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This chart in late September shows large and small options traders are mostly buying speculative calls
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What we are seeing is:
- Heavy call buying by retail as well as institutions IS BACK!
- Sentiment Trader notes that both are in the top 2% of all weeks since the dot.com bubble.
- They write: "There were about 8 million options traded on Tesla last week. There were over 100 million call options traded on all stocks across all U.S. exchanges."
- Traders are being told:
- There is nothing wrong with buying calls, but it depends on how you are using those calls. Replacing longs with calls makes a lot of sense to us.
- Markets are elevated, thus selling out longs and replacing them with cheap calls is a rational trade, especially as vols have stayed relatively low.
- Hedging melt up risks with cheap calls is another rational trade.
Ourselves, we wonder if the pure speculative call options will evaporate due to theta burning quickly should some of the hot names reverse or take a pause.
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Now let’s talk about the Meme Trading Strategy itself. It obviously comes in many forms and continues to broaden and mutate.
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The Meme Gamma Bull Strategy is basically about:
- Selecting thinly traded, low volume, stocks to gain the greatest impact from this manipulation tactic.
- Find a stock with relatively high put options volume, send the word out to “the group” (your online forum of choice) to buy the stock “en masse.” [The raison d’etre of Robinhood, Reddit, WallStreetBets et al]
- The sudden and coordinated unusual high volume buying raises the price of the stock, since the number of shares outstanding is limited. This forces the put options holders to cover positions and join in the buying, or to hedge their put options positions by buying call options on the stock.
- With the price gains in the stock, the meme Gamma Bull groupies also buy call options on margin. This results in massive call options purchases, outlier volume, which forces the underwriters of the call options to go in and buy the actual stock to protect their exposure.
- Result, a high-volume mega-mass of buying energy in a low volume stock, with limited stock outstanding, forcing an explosive short-term rise in the price of this otherwise uninteresting stock.
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It’s working and catching on fast. This sort of thing used to be illegal as nothing more than stock market manipulation. The law hasn’t changed!
One thing I am certain of is Regulatory Enforcement certainly has!
It’s like the US Illegal Border crossings. The Feds just don’t seem to care and appear to just be looking the other way?
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I need to stress the players involved in this are large and sophisticated. They are not the Day Traders of old who had few tools, skills or analytics.
Their screens look different than the day traders of old!
They have control of the market and are taking it with them.
The markets are delusions, unable to achieve price discovery and almost totally manipulated without any impunity!
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Let me give you a couple of examples from last week alone.
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Let’s start with Tesla.
Here is last week’s Tesla Stock chart.
Nobody has missed the Tesla call options bonanza.
The simple leak that Hertz was going to buy large fleets of Tesla was all it needed even though Elon Musk immediately twittered that no contract had been signed.
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The fact oil was rising only confirmed to Morgan Stanley what was ahead for Tesla .
When I mentioned this to a knowledgeable friend of mine he laughed then proceeded to tell me it took 8 hours to charge a Tesla and taking a trip was something he certainly wouldn’t do with one. There may be charging stations he said, but sleeping at the station while it charged and not his hotel was something he didn’t envisage!
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On Monday Oct 25 Tesla stock had already climbed nearly 13% as option traders piled on Bullish bets. The total premium exchanged hands during that week represented nearly 50% of the total single stock options.
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Bullish bets on call options accounted for 85% of volume. The soaring volume was primarily due to call options which accounted for nearly 85% of the total premium transacted in SLA options.
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Fund managers that still aren't trading options in order to manage risk/take advantage of volatility are dinosaurs.
The biggest problem with current options traders is the fact that few have bothered reading Hull or Taleb. Most will learn what Theta is the hard way...
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But it gets worse! Here is the chart for Avis. Obviously the traders surmised if it was good for nearly bankrupt Hertz it would be good for Avis and they attacked it.
We used to call this “Pumping and Dumping” but now we just call it Meme Trading!
All this wouldn’t be important but TESLA is part of the TAAAMN and also included in the SPY, QQQ, Russell etc.
This took the whole market with it!
It is interesting that as I do this video I hear Elon Musk in pre-market ask investors in a Twitter tweet whether based on the new taxation of high income earners to fund the $1.2T Infrastructure bill he should sell 10% of his shares? The stock is down 5% from last weeks close.
How is any of this investing?
Especially when we remember there were massive option bets in highly shorted names like GSX and IQ that Bill Hwang owned, before his fund, Archegos, blew up. The games going on here are not just the Meme Traders but big funds are doing the same.
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Let me give you another example and linkage by building on the Avis spike we just looked at.
On Tuesday, November 2nd, 2021, the Dow Transportation Index, a composite of 20 individual stocks, exploded higher 2,307 points, 14.4 percent, intraday, and closed up 1,096 points, or 6.68 percent.
Only 35 percent of its component stocks rose. 65 percent declined. So how did this happen?
The Gamma Bull traders gathered together to push up the price of Avis to a level that forced massive short-covering, forcing those most pessimistic about the stock to join them in a meme group buy tsunami. Avis opened at 171.46, and promptly tripled in value within the first 90 minutes of trading, eventually closing at 357.17, doubling its value in one day.
Because the Dow Transportation Index is a price weighted index, as are the Dow Industrials, the doubling of Avis in one day was responsible for 1,132 of the Trannies’ 1,096 point gain.
One stock. the Reddit gamers loaded up, manipulated, and caused this extraordinary casino move in the oldest stock index in the stock market.
Charles Dow must be rolling in his grave.
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What is unknown, in this manipulation game, is how much involvement the Plunge Protection Team has taken to boost a false positivity. The manipulation shut down the potential Dow Theory Bear market signal. The PPT would want that failure. Under the circumstances, while it makes for great narrative to the investment community to see the Potential Dow Theory Bear Market Signal and non-confirmation with the Industrials take place, the way it happened is not the stuff of confidence-building for the future of the economy.
The trucks are not running, the cargo ships are still unloaded, plane flights are still being canceled, etc.. . Smoke and mirrors are not the tent poles of reality.
Here is the thing, a lot of margin debt was Tuesday, to push Avis and Trannies higher.
The problem for the Gamma Bull memes is, if Trannies as a whole drop, which will take Avis down with it, the margin calls will siren and a massive amount of selling must follow. This can cause a cascading plunge, with the memes getting their clocks cleaned.
Schemes almost never end well, whether its Ponzi, Oligopolies’ of the residential real estate market (see REITs in the 1980s and the Savings and Loan catastrophe), subprime mortgage lending, Gamma Bull meme trading, or whatever.
Meanwhile, American Airlines, a component of the Dow Transportation Index, announced on the same day as this Avis Gamma Event, that:
“American Airlines cancels hundreds of flights after canceling thousands over the weekend”
Go figure.
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The question is how long can this go on for?
Or is that the real question?
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The markets have tracked the expansion of the Fed balance sheet which when taper ends or sooner when the Treasury starts to flood the market with new debt issues which will add to liquidity reduction.
The market as we can see is presently ahead of the Fed’s balance sheet growth which normally adjusts the market.
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However, we have major seasonality pressures that the market sees,
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.. in addition to equity inflows again starting to resemble a tsunami!
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Maybe we should focus on the reality of what Congress just dumped on us as an approved $1.2T Infrastructure Bill which requires major new taxes for the wealthy beginning in January.
Clearly as Elon Musk just tweeted, the rich are grappling what to do before everyone else does?
Like an avalanche it only takes one snow flake to set it off.
The option games being played tells us that the market presently has no real support as it has no real volumes.
It will be a matter of who gets to the door the fastest
Maybe we should just remember what Stanley Druckenmiller had to re-learn.
Forget trying to make money here, just stand aside!! It is about reality not illusion and delusion.
It is about what we said at the beginning of this session. It is about 1- Discipline, 2- Risk-Adjusted Investing and 3- Reality versus Delusion.
It’s now your chose on the type of investor or trader you are.
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2021 turn out to be an outstanding investment year for you and your family.
Thank you for listening
