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If you want to make more profits with trading then you should definitely check out margin trading. In these videos I explain the basics on how to open a "long" and "short" position. Constructive criticism and feedback would be greatly appreciated. Thanks!
If you want to make more profits with trading then you should definitely check out margin trading. In these videos I explain the basics on how to open a "long" and "short" position. Constructive criticism and feedback would be greatly appreciated. Thanks!
I paid $1000 for an Adam Khoo investing course so you don't have to! (Summarized in post)
Lesson one is "stock basics" summarized: (2 videos) for every buyer there's a seller, for every seller there's a buyer, fear and greed drives prices, what fundamental analysis means, what technical analysis means. lesson 2 is ETFs summarized: (video 1) Bull markets are opportunities, bear markets are bigger opportunity's, Bear markets never last, always followed by bull market. (video 2) The market is volatile in the short term in the long term it always goes up, what an ETF is, different types of ETF indexes. (video 3) Expands on the different types of ETFs (bonds, commodities etc). (video 3) A 35min video on dollar cost averaging lol. (Video 5) summarizing the last 4 videos. Lesson 3 is Steps to investing summarized: (video 1) A good business increases value over time, a valuable business has higher sales, earnings and cashflow. (video 2) invest in businesses that are undervalued or fairly valued, stocks trade below its value because investors have negative perception of the company lesson 4 Financials summarized (all 4 videos) where to find financials, how to use a website (Morning Star) to screen stocks, how good is the company at making money, Look for companies that have growing revenue, check growth profit margin and net profit margin of company compared to industry. Lesson 5 Stock Valuation summarized (2 videos) go here: https://tradebrains.in/dcf-calculato and look at what the calculator is asking for, go to Morning Star find the needed numbers that are required, bam you got the intrinsic vale. Lesson 6 Technical Analysis summarized: (all 4 videos) What are candles sticks, what do they mean, support and ceilings, consolidation levels. Lesson 7 The 7 step formula summarized: (3 videos) See what I wrote in lesson 3 and lesson 5. lesson 8 Winning portfolio summarized summarized: (video 1) Diversify, keep portfolio balanced, different sectors (video 2) More sectors, Dividends (video 3) More on sectors, more on dividends, what are different stock caps (large cap, small cap etc) Lesson 9 finding opportunities summarized: (video 1) see lesson 3, (video 2) creating a watch list,monitor news, company announcements, stock price, financials Lesson 10 psychology of success summarized: (2 videos) basically: common sense. Lesson 11 Finding a broker summarized: (1 video) look at fees and commissions, see minimum deposit, check margin rates, make sure it has a good trading platform. I just saved you 18 hours and $1000.
If you want to make more profits with trading then you should definitely check out margin trading. In these videos I explain the basics on how to open a "long" and "short" position. Constructive criticism and feedback would be greatly appreciated. Thanks!
The dollar standard and how the Fed itself created the perfect setup for a stock market crash
Disclaimer: This is neither financial nor trading advice and everyone should trade based on their own risk tolerance. Please leverage yourself accordingly. When you're done, ask yourself: "Am I jacked to the tits?". If the answer is "yes", you're good to go. We're probably experiencing the wildest markets in our lifetime. After doing some research and listening to opinions by several people, I wanted to share my own view on what happened in the market and what could happen in the future. There's no guarantee that the future plays out as I describe it or otherwise I'd become very rich. If you just want tickers and strikes...I don't know if this is going to help you. But anyways, scroll way down to the end. My current position is TLT 171c 8/21, opened on Friday 7/31 when TLT was at 170.50. This is a post trying to describe what it means that we've entered the "dollar standard" decades ago after leaving the gold standard. Furthermore I'll try to explain how the "dollar standard" is the biggest reason behind the 2008 and 2020 financial crisis, stock market crashes and how the Coronavirus pandemic was probably the best catalyst for the global dollar system to blow up.
Tackling the Dollar problem
Throughout the month of July we've seen the "death of the Dollar". At least that's what WSB thinks. It's easy to think that especially since it gets reiterated in most media outlets. I will take the contrarian view. This is a short-term "downturn" in the Dollar and very soon the Dollar will rise a lot against the Euro - supported by the Federal Reserve itself.US dollar Index (DXY)If you zoom out to the 3Y chart you'll see what everyone is being hysterical about. The dollar is dying! It was that low in 2018! This is the end! The Fed has done too much money printing! Zimbabwe and Weimar are coming to the US. There is more to it though. The DXY is dominated by two currency rates and the most important one by far is EURUSD.EURUSD makes up 57.6% of the DXY And we've seen EURUSD rise from 1.14 to 1.18 since July 21st, 2020. Why that date? On that date the European Commission (basically the "government" of the EU) announced that there was an agreement for the historical rescue package for the EU. That showed the markets that the EU seems to be strong and resilient, it seemed to be united (we're not really united, trust me as an European) and therefore there are more chances in the EU, the Euro and more chances taking risks in the EU.Meanwhile the US continued to struggle with the Coronavirus and some states like California went back to restricting public life. The US economy looked weaker and therefore the Euro rose a lot against the USD. From a technical point of view the DXY failed to break the 97.5 resistance in June three times - DXY bulls became exhausted and sellers gained control resulting in a pretty big selloff in the DXY.
Why the DXY is pretty useless
Considering that EURUSD is the dominant force in the DXY I have to say it's pretty useless as a measurement of the US dollar. Why? Well, the economy is a global economy. Global trade is not dominated by trade between the EU and the USA. There are a lot of big exporting nations besides Germany, many of them in Asia. We know about China, Japan, South Korea etc. Depending on the business sector there are a lot of big exporters in so-called "emerging markets". For example, Brazil and India are two of the biggest exporters of beef. Now, what does that mean? It means that we need to look at the US dollar from a broader perspective. Thankfully, the Fed itself provides a more accurate Dollar index. It's called the "Trade Weighted U.S. Dollar Index: Broad, Goods and Services". When you look at that index you will see that it didn't really collapse like the DXY. In fact, it still is as high as it was on March 10, 2020! You know, only two weeks before the stock market bottomed out. How can that be explained?
Global trade, emerging markets and global dollar shortage
Emerging markets are found in countries which have been shifting away from their traditional way of living towards being an industrial nation. Of course, Americans and most of the Europeans don't know how life was 300 years ago.China already completed that transition. Countries like Brazil and India are on its way. The MSCI Emerging Market Index lists 26 countries. Even South Korea is included. However there is a big problem for Emerging Markets: the Coronavirus and US Imports.The good thing about import and export data is that you can't fake it. Those numbers speak the truth. You can see that imports into the US haven't recovered to pre-Corona levels yet. It will be interesting to see the July data coming out on August 5th.Also you can look at exports from Emerging Market economies. Let's take South Korean exports YoY. You can see that South Korean exports are still heavily depressed compared to a year ago. Global trade hasn't really recovered.For July the data still has to be updated that's why you see a "0.0%" change right now.Less US imports mean less US dollars going into foreign countries including Emerging Markets.Those currency pairs are pretty unimpressed by the rising Euro. Let's look at a few examples. Use the 1Y chart to see what I mean. Indian Rupee to USDBrazilian Real to USDSouth Korean Won to USD What do you see if you look at the 1Y chart of those currency pairs? There's no recovery to pre-COVID levels. And this is pretty bad for the global financial system. Why? According to the Bank of International Settlements there is $12.6 trillion of dollar-denominated debt outside of the United States. Now the Coronavirus comes into play where economies around the world are struggling to go back to their previous levels while the currencies of Emerging Markets continue to be WEAK against the US dollar. This is very bad. We've already seen the IMF receiving requests for emergency loans from 80 countries on March 23th. What are we going to see? We know Argentina has defaulted on their debt more than once and make jokes about it. But what happens if we see 5 Argentinas? 10? 20? Even 80? Add to that that global travel is still depressed, especially for US citizens going anywhere. US citizens traveling to other countries is also a situation in which the precious US dollars would enter Emerging Market economies. But it's not happening right now and it won't happen unless we actually get a miracle treatment or the virus simply disappears. This is where the treasury market comes into play. But before that, let's quickly look at what QE (rising Fed balance sheet) does to the USD. Take a look at the Trade-Weighted US dollar Index. Look at it at max timeframe - you'll see what happened in 2008. The dollar went up (shocker).Now let's look at the Fed balance sheet at max timeframe. You will see: as soon as the Fed starts the QE engine, the USD goes UP, not down! September 2008 (Fed first buys MBS), March 2009, March 2020. Is it just a coincidence? No, as I'll explain below. They're correlated and probably even in causation.Oh and in all of those scenarios the stock market crashed...compared to February 2020, the Fed balance sheet grew by ONE TRILLION until March 25th, but the stock market had just finished crashing...can you please prove to me that QE makes stock prices go up? I think I've just proven the opposite correlation.
Bonds, bills, Gold and "inflation"
People laugh at bond bulls or at people buying bonds due to the dropping yields. "Haha you're stupid you're buying an asset which matures in 10 years and yields 5.3% STONKS go up way more!".Let me stop you right there. Why do you buy stocks? Will you hold those stocks until you die so that you regain your initial investment through dividends? No. You buy them because you expect them to go up based on fundamental analysis, news like earnings or other things. Then you sell them when you see your price target reached. The assets appreciated.Why do you buy options? You don't want to hold them until expiration unless they're -90% (what happens most of the time in WSB). You wait until the underlying asset does what you expect it does and then you sell the options to collect the premium. Again, the assets appreciated. It's the exact same thing with treasury securities. The people who've been buying bonds for the past years or even decades didn't want to wait until they mature. Those people want to sell the bonds as they appreciate. Bond prices have an inverse relationship with their yields which is logical when you think about it. Someone who desperately wants and needs the bonds for various reasons will accept to pay a higher price (supply and demand, ya know) and therefore accept a lower yield. By the way, both JP Morgan and Goldmans Sachs posted an unexpected profit this quarter, why? They made a killing trading bonds. US treasury securities are the most liquid asset in the world and they're also the safest asset you can hold. After all, if the US default on their debt you know that the world is doomed. So if US treasuries become worthless anything else has already become worthless. Now why is there so much demand for the safest and most liquid asset in the world? That demand isn't new but it's caused by the situation the global economy is in. Trade and travel are down and probably won't recover anytime soon, emerging markets are struggling both with the virus and their dollar-denominated debt and central banks around the world struggle to find solutions for the problems in the financial markets. How do we now that the markets aren't trusting central banks? Well, bonds tell us that and actually Gold tells us the same! TLT chartGold spot price chart TLT is an ETF which reflects the price of US treasuries with 20 or more years left until maturity. Basically the inverse of the 30 year treasury yield. As you can see from the 5Y chart bonds haven't been doing much from 2016 to mid-2019. Then the repo crisis of September 2019took place and TLT actually rallied in August 2019 before the repo crisis finally occurred!So the bond market signaled that something is wrong in the financial markets and that "something" manifested itself in the repo crisis. After the repo market crisis ended (the Fed didn't really do much to help it, before you ask), bonds again were quiet for three months and started rallying in January (!) while most of the world was sitting on their asses and downplaying the Coronavirus threat. But wait, how does Gold come into play? The Gold chart basically follows the same pattern as the TLT chart. Doing basically nothing from 2016 to mid-2019. From June until August Gold rose a staggering 200 dollars and then again stayed flat until December 2019. After that, Gold had another rally until March when it finally collapsed. Many people think rising Gold prices are a sign of inflation. But where is the inflation? We saw PCE price indices on Friday July 31st and they're at roughly 1%. We've seen CPIs from European countries and the EU itself. France and the EU (July 31st) as a whole had a very slight uptick in CPI while Germany (July 30th), Italy (July 31st) and Spain (July 30th) saw deflationary prints.There is no inflation, nowhere in the world. I'm sorry to burst that bubble. Yet, Gold prices still go up even when the Dollar rallies through the DXY (sadly I have to measure it that way now since the trade-weighted index isn't updated daily) and we know that there is no inflation from a monetary perspective. In fact, Fed chairman JPow, apparently the final boss for all bears, said on Wednesday July 29th that the Coronavirus pandemic is a deflationarydisinflationary event. Someone correct me there, thank you. But deflationary forces are still in place even if JPow wouldn't admit it. To conclude this rather long section: Both bonds and Gold are indicators for an upcoming financial crisis. Bond prices should fall and yields should go up to signal an economic recovery. But the opposite is happening. in that regard heavily rising Gold prices are a very bad signal for the future. Both bonds and Gold are screaming: "The central banks haven't solved the problems". By the way, Gold is also a very liquid asset if you want quick cash, that's why we saw it sell off in March because people needed dollars thanks to repo problems and margin calls.When the deflationary shock happens and another liquidity event occurs there will be another big price drop in precious metals and that's the dip which you could use to load up on metals by the way.
Dismantling the money printer
But the Fed! The M2 money stock is SHOOTING THROUGH THE ROOF! The printers are real!By the way, velocity of M2 was updated on July 30th and saw another sharp decline. If you take a closer look at the M2 stock you see three parts absolutely skyrocketing: savings, demand deposits and institutional money funds. Inflationary? No. So, the printers aren't real. I'm sorry.Quantitative easing (QE) is the biggest part of the Fed's operations to help the economy get back on its feet. What is QE?Upon doing QE the Fed "purchases" treasury and mortgage-backed securities from the commercial banks. The Fed forces the commercial banks to hand over those securities and in return the commercial banks reserve additional bank reserves at an account in the Federal Reserve. This may sound very confusing to everyone so let's make it simple by an analogy.I want to borrow a camera from you, I need it for my road trip. You agree but only if I give you some kind of security - for example 100 bucks as collateral.You keep the 100 bucks safe in your house and wait for me to return safely. You just wait and wait. You can't do anything else in this situation. Maybe my road trip takes a year. Maybe I come back earlier. But as long as I have your camera, the 100 bucks need to stay with you. In this analogy, I am the Fed. You = commercial banks. Camera = treasuries/MBS. 100 bucks = additional bank reserves held at the Fed.
Revisiting 2008 briefly: the true money printers
The true money printers are the commercial banks, not the central banks. The commercial banks give out loans and demand interest payments. Through those interest payments they create money out of thin air! At the end they'll have more money than before giving out the loan. That additional money can be used to give out more loans, buy more treasury/MBS Securities or gain more money through investing and trading. Before the global financial crisis commercial banks were really loose with their policy. You know, the whole "Big Short" story, housing bubble, NINJA loans and so on. The reckless handling of money by the commercial banks led to actual money printing and inflation, until the music suddenly stopped. Bear Stearns went tits up. Lehman went tits up. The banks learned from those years and completely changed, forever. They became very strict with their lending resulting in the Fed and the ECB not being able to raise their rates. By keeping the Fed funds rate low the Federal Reserve wants to encourage commercial banks to give out loans to stimulate the economy. But commercial banks are not playing along. They even accept negative rates in Europe rather than taking risks in the actual economy. The GFC of 2008 completely changed the financial landscape and the central banks have struggled to understand that. The system wasn't working anymore because the main players (the commercial banks) stopped playing with each other. That's also the reason why we see repeated problems in the repo market.
How QE actually decreases liquidity before it's effective
The funny thing about QE is that it achieves the complete opposite of what it's supposed to achieve before actually leading to an economic recovery. What does that mean? Let's go back to my analogy with the camera. Before I take away your camera, you can do several things with it. If you need cash, you can sell it or go to a pawn shop. You can even lend your camera to someone for a daily fee and collect money through that.But then I come along and just take away your camera for a road trip for 100 bucks in collateral. What can you do with those 100 bucks? Basically nothing. You can't buy something else with those. You can't lend the money to someone else. It's basically dead capital. You can just look at it and wait until I come back. And this is what is happening with QE. Commercial banks buy treasuries and MBS due to many reasons, of course they're legally obliged to hold some treasuries, but they also need them to make business.When a commercial bank has a treasury security, they can do the following things with it:- Sell it to get cash- Give out loans against the treasury security- Lend the security to a short seller who wants to short bonds Now the commercial banks received a cash reserve account at the Fed in exchange for their treasury security. What can they do with that?- Give out loans against the reserve account That's it. The bank had to give away a very liquid and flexible asset and received an illiquid asset for it. Well done, Fed. The goal of the Fed is to encourage lending and borrowing through suppressing yields via QE. But it's not happening and we can see that in the H.8 data (assets and liabilities of the commercial banks).There is no recovery to be seen in the credit sector while the commercial banks continue to collect treasury securities and MBS. On one hand, they need to sell a portion of them to the Fed on the other hand they profit off those securities by trading them - remember JPM's earnings. So we see that while the Fed is actually decreasing liquidity in the markets by collecting all the treasuries it has collected in the past, interest rates are still too high. People are scared, and commercial banks don't want to give out loans. This means that as the economic recovery is stalling (another whopping 1.4M jobless claims on Thursday July 30th) the Fed needs to suppress interest rates even more. That means: more QE. that means: the liquidity dries up even more, thanks to the Fed. We heard JPow saying on Wednesday that the Fed will keep their minimum of 120 billion QE per month, but, and this is important, they can increase that amount anytime they see an emergency.And that's exactly what he will do. He will ramp up the QE machine again, removing more bond supply from the market and therefore decreasing the liquidity in financial markets even more. That's his Hail Mary play to force Americans back to taking on debt again.All of that while the government is taking on record debt due to "stimulus" (which is apparently only going to Apple, Amazon and Robinhood). Who pays for the government debt? The taxpayers. The wealthy people. The people who create jobs and opportunities. But in the future they have to pay more taxes to pay down the government debt (or at least pay for the interest). This means that they can't create opportunities right now due to the government going insane with their debt - and of course, there's still the Coronavirus.
"Without the Fed, yields would skyrocket"
This is wrong. The Fed has been keeping their basic level QE of 120 billion per month for months now. But ignoring the fake breakout in the beginning of June (thanks to reopening hopes), yields have been on a steady decline. Let's take a look at the Fed's balance sheet. The Fed has thankfully stayed away from purchasing more treasury bills (short term treasury securities). Bills are important for the repo market as collateral. They're the best collateral you can have and the Fed has already done enough damage by buying those treasury bills in March, destroying even more liquidity than usual. More interesting is the point "notes and bonds, nominal". The Fed added 13.691 billion worth of US treasury notes and bonds to their balance sheet. Luckily for us, the US Department of Treasury releases the results of treasury auctions when they occur. On July 28th there was an auction for the 7 year treasury note. You can find the results under "Note -> Term: 7-year -> Auction Date 07/28/2020 -> Competitive Results PDF". Or here's a link. What do we see? Indirect bidders, which are foreigners by the way, took 28 billion out of the total 44 billion. That's roughly 64% of the entire auction. Primary dealers are the ones which sell the securities to the commercial banks. Direct bidders are domestic buyers of treasuries. The conclusion is: There's insane demand for US treasury notes and bonds by foreigners. Those US treasuries are basically equivalent to US dollars. Now dollar bears should ask themselves this question: If the dollar is close to a collapse and the world wants to get rid fo the US dollar, why do foreigners (i.e. foreign central banks) continue to take 60-70% of every bond auction? They do it because they desperately need dollars and hope to drive prices up, supported by the Federal Reserve itself, in an attempt to have the dollar reserves when the next liquidity event occurs. So foreigners are buying way more treasuries than the Fed does. Final conclusion: the bond market has adjusted to the Fed being a player long time ago. It isn't the first time the Fed has messed around in the bond market.
How market participants are positioned
We know that commercial banks made good money trading bonds and stocks in the past quarter. Besides big tech the stock market is being stagnant, plain and simple. All the stimulus, stimulus#2, vaccinetalksgoingwell.exe, public appearances by Trump, Powell and their friends, the "money printing" (which isn't money printing) by the Fed couldn't push SPY back to ATH which is 339.08 btw. Who can we look at? Several people but let's take Bill Ackman. The one who made a killing with Credit Default Swaps in March and then went LONG (he said it live on TV). Well, there's an update about him:Bill Ackman saying he's effectively 100% longHe says that around the 2 minute mark. Of course, we shouldn't just believe what he says. After all he is a hedge fund manager and wants to make money. But we have to assume that he's long at a significant percentage - it doesn't even make sense to get rid of positions like Hilton when they haven't even recovered yet. Then again, there are sources to get a peek into the positions of hedge funds, let's take Hedgopia.We see: Hedge funds are starting to go long on the 10 year bond. They are very short the 30 year bond. They are very long the Euro, very short on VIX futures and short on the Dollar.
This is the perfect setup for a market meltdown. If hedge funds are really positioned like Ackman and Hedgopia describes, the situation could unwind after a liquidity event:The Fed increases QE to bring down the 30 year yield because the economy isn't recovering yet. We've already seen the correlation of QE and USD and QE and bond prices.That causes a giant short squeeze of hedge funds who are very short the 30 year bond. They need to cover their short positions. But Ackman said they're basically 100% long the stock market and nothing else. So what do they do? They need to sell stocks. Quickly. And what happens when there is a rapid sell-off in stocks? People start to hedge via put options. The VIX rises. But wait, hedge funds are short VIX futures, long Euro and short DXY. To cover their short positions on VIX futures, they need to go long there. VIX continues to go up and the prices of options go suborbital (as far as I can see).Also they need to get rid of Euro futures and cover their short DXY positions. That causes the USD to go up even more. And the Fed will sit there and do their things again: more QE, infinity QE^2, dollar swap lines, repo operations, TARP and whatever. The Fed will be helpless against the forces of the market and have to watch the stock market burn down and they won't even realize that they created the circumstances for it to happen - by their programs to "help the economy" and their talking on TV. Do you remember JPow on 60minutes talking about how they flooded the world with dollars and print it digitally? He wanted us poor people to believe that the Fed is causing hyperinflation and we should take on debt and invest into the stock market. After all, the Fed has it covered. But the Fed hasn't got it covered. And Powell knows it. That's why he's being a bear in the FOMC statements. He knows what's going on. But he can't do anything about it except what's apparently proven to be correct - QE, QE and more QE.
A final note about "stock market is not the economy"
It's true. The stock market doesn't reflect the current state of the economy. The current economy is in complete shambles. But a wise man told me that the stock market is the reflection of the first and second derivatives of the economy. That means: velocity and acceleration of the economy. In retrospect this makes sense. The economy was basically halted all around the world in March. Of course it's easy to have an insane acceleration of the economy when the economy is at 0 and the stock market reflected that. The peak of that accelerating economy ("max velocity" if you want to look at it like that) was in the beginning of June. All countries were reopening, vaccine hopes, JPow injecting confidence into the markets. Since then, SPY is stagnant, IWM/RUT, which is probably the most accurate reflection of the actual economy, has slightly gone down and people have bid up tech stocks in absolute panic mode. Even JPow admitted it. The economic recovery has slowed down and if we look at economic data, the recovery has already stopped completely. The economy is rolling over as we can see in the continued high initial unemployment claims. Another fact to factor into the stock market.
TLDR and positions or ban?
TLDR: global economy bad and dollar shortage. economy not recovering, JPow back to doing QE Infinity. QE Infinity will cause the final squeeze in both the bond and stock market and will force the unwinding of the whole system. Positions: idk. I'll throw in TLT 190c 12/18, SPY 220p 12/18, UUP 26c 12/18.That UUP call had 12.5k volume on Friday 7/31 btw.
Edit about positions and hedge funds
My current positions. You can laugh at my ZEN calls I completely failed with those.I personally will be entering one of the positions mentioned in the end - or similar ones. My personal opinion is that the SPY puts are the weakest try because you have to pay a lot of premium. Also I forgot talking about why hedge funds are shorting the 30 year bond. Someone asked me in the comments and here's my reply: "If you look at treasury yields and stock prices they're pretty much positively correlated. Yields go up, then stocks go up. Yields go down (like in March), then stocks go down. What hedge funds are doing is extremely risky but then again, "hedge funds" is just a name and the hedgies are known for doing extremely risky stuff. They're shorting the 30 year bond because they needs 30y yields to go UP to validate their long positions in the equity market. 30y yields going up means that people are welcoming risk again, taking on debt, spending in the economy. Milton Friedman labeled this the "interest rate fallacy". People usually think that low interest rates mean "easy money" but it's the opposite. Low interest rates mean that money is really tight and hard to get. Rising interest rates on the other hand signal an economic recovery, an increase in economic activity. So hedge funds try to fight the Fed - the Fed is buying the 30 year bonds! - to try to validate their stock market positions. They also short VIX futures to do the same thing. Equity bulls don't want to see VIX higher than 15. They're also short the dollar because it would also validate their position: if the economic recovery happens and the global US dollar cycle gets restored then it will be easy to get dollars and the USD will continue to go down. Then again, they're also fighting against the Fed in this situation because QE and the USD are correlated in my opinion. Another Redditor told me that people who shorted Japanese government bonds completely blew up because the Japanese central bank bought the bonds and the "widow maker trade" was born:https://www.investopedia.com/terms/w/widow-maker.asp"
Since I've mentioned him a lot in the comments, I recommend you check out Steven van Metre's YouTube channel. Especially the bottom passages of my post are based on the knowledge I received from watching his videos. Even if didn't agree with him on the fundamental issues (there are some things like Gold which I view differently than him) I took it as an inspiration to dig deeper. I think he's a great person and even if you're bullish on stocks you can learn something from Steven!
The TSLA 2K Play - A Trade Retrospective on Taking a $.21 Credit to Make $8.34 More
There are different ways to play TSLA to $2000 this past week. Here’s my thought process on how I approached trading the move up, without paying a debit (but uses margin).
On Monday, August 17, besides TOS being absolutely atrocious, TSLA was lurching higher, and at around 11am PST or so, when it broke out to new highs, my thought was that there’s probably going to be a short squeeze again that takes us to $2000, the target that basically everyone was looking at. So, I looked to put on a play that captured something to that $2000 price level by Friday, Aug 21 expiration. I began by looking at the 1980/2000 long call vertical. At the time, that spread cost $2.28 debit. So if I were to just put on that vertical, I would be paying $2.28 to make potentially $17.72. But I don’t really like paying large debits (large is anything above $.25 per spread), especially for these types of short-term directional bets. So I looked for other ways to reduce the debit. Alongside the purchase of the long call vertical, I also sold the 1650/1625 put vertical, for $2.05 credit. The reason for placing the short strike of the put vertical at 1650 is that it was under Monday’s low, and the reason for the long strike at 1625 was that it made the put vertical wide enough to collect a decent credit. Now, the total debit on the trade became $2.28 (debit of 1980/2000 call vertical) - $2.05 (credit from 1650/1625 put vertical), or $.23. $.23 was pretty cheap, and honestly I could’ve stopped there. But as I was thinking about the trade, I realized I didn’t really like how the short put verticals actually added more downside risk to the trade. So I was thinking that as early as I could, I would buy back that short put vertical once it drained in value, as TSLA continued running up with the momentum it had. And given the huge upside momentum that day, I thought that TSLA would probably gap and continue higher the following day, or at the very least just move sideways, which would drain the value of the short put vertical and allow me to buy it back for a low debit. However, if I bought back the put vertical before it fully drained to 0, then my overall debit on the trade wouldn’t just cost $.23 anymore - it would cost more. So in the spirit of keeping the debit as low as possible, I needed to actually collect more credit from somewhere else, if I really didn’t want to pay for this trade. So, I decided that I was going to sell a call vertical above the 1980/2000 long call vertical. And a safe enough distance above the long call vertical, would be up at 2200, which gives me 200 points of runway above 2000. So I sold to open the 2200/2250 call vertical, for $1.27 credit. I felt safe about selling the 2200/2250 call vertical, because for it to really be at risk, TSLA would first need to move above 2000, the psychological level, and by the time it starts to get near 2200, the 1980/2000 call vertical will be 20 points deep ITM, so I have 20 points of coverage. Of course there’s still 30 points of risk (given that the 2200/2250 short call vertical is 50 points wide), but time is on my side. Assuming that TSLA even gets near 2200 on the last day, given how little time left there is, that short call vertical would probably be trading for maybe $10 or so, and the 1980/2000 long call vertical in front of that short call vertical, would be deep ITM and worth $20, so I can just close the entire spread at a profit anyway. So after selling that 2200/2250 call vertical, the trade went from $.23 debit to $1.04 credit (because $.23 - $1.27 = -$1.04, or $1.04 credit). Now I’m getting paid to play the breakout to TSLA 2K.
On Tuesday, TSLA gapped up higher, and right off the bat, the short put verticals basically drained from $2.05 to $.83. I closed that out to remove any downside risk, so that if TSLA decides to reverse and tank, or hang out sideways and never make it to 2000, no harm no foul, I have the upside play on for a credit. Recall that $.23 (the debit of the initial entry) - $1.27 (the credit collected from the sale of the 2200/2250 call vertical) + $.83 (the debit of buying back the short put vertical) is -$0.21, which is a $.21 credit, after adjustments. And now, I just have to manage TSLA to the upside. The result of this adjustment left me with a 4 legged spread where I’m long the 1980/2000 call vertical and short the 2200/2250 call vertical (this 4-legged spread is also called a condor, specifically a Call condor). Throughout Tuesday and all of Wednesday, TSLA just moved sideways, and I was fine with that. Others who purchased naked long calls far OOM were worried about the premium drain, but I was fine knowing that I got paid to play the move to 2K, whether it happened or not. It completely did not matter if TSLA moved sideways or tanked, because it wouldn’t negatively impact the equity curve. Another reason why I actually liked TSLA hanging sideways is that it gives TSLA less of a chance to surge higher and run over that 2200/2250 short call vertical with the time left before expiry.
Thursday was where the magic happened (for pretty much everyone). As we know at around 7:45 am PST, TSLA rallied from around $1900 to almost $2000, and the Call condor really started to expand in value. When TSLA was at $1990, the call condor spread expanded to $8.34. Recall that the cost on this trade (after the closing the short put vertical) put my cost at a $.21 credit. Now, I can sell this condor out and pocket another $8.34. That’s pretty sweet. Getting paid $.21 to make another $8.34. (At this moment, I noted what the legs were trading for. The long vertical of the condor was trading for $9.27, and the short vertical was actually trading for $.93. Recall that when I entered the short vertical on Monday, I actually collected a $1.27 credit on it. Now, even after the 150 point move up in TSLA, even after volatility expansion, that short vertical was still worth $.34 LESS - that’s the power of theta decay). So at that point, I pretty much just closed out the entire position. I was pretty happy with essentially getting paid $.21 to make another $8.34 (in hindsight, I could’ve milked another $11.66 per spread, but that’s besides the point).
What if TSLA decided to tank upon entry, jeopardizing the short put vertical? Upside conviction was strong, but I would have to buy it back and find a way to reduce the new debit on the overall trade.
What if TSLA decided to make a run up to $2000+ very early on in the week (ie. on Tuesday it runs up to $2100)? Then the 2200/2250 short call vertical would’ve expanded too much and offset the gains of the deep ITM 1980/2000 long call vertical. I would have to cough up the debit and buy additional call verticals to cover the upside. Perhaps a 20 or 30 point wide call vertical around the 2100 strike to cover the remaining upside risk, which would cost around $10-$15 debit. Then work to reduce that debit over the week.
But what if TSLA decided to tank below 2100 after adjustment above? Or lower to below 1980? Or even further down? Sell more 2200/2250 call verticals. Then sell out the long call vertical for whatever remaining debit. Then sell out the 1980/2000 call vertical for whatever value it has left.
So many adjustments. KISS. You will just get whipsawed and use up a ton of margin. It's just what I have to do. I have to be mechanical about the greeks and not play the hope card. This trading style is not for everyone and is not the holy grail.
PRPL earnings is tomorrow, 8/13, after hours. Any other date is wrong. Robinhood is wrong (why are you using Robinhood still!?!). I'm going to take you through my earnings projections and reasoning as well the things to look for in the earnings release and the call that could make this moon even further.
I make the assumption that Purple is still selling every mattress it can make (since that is what they said for April and May) and that this continued into June because the website was still delayed 7-14 days across all mattresses at the end of June. May Revenue and April DTC: The numbers in purple were provided by Purple here and here. April Wholesale: My estimate of $2.7M for Wholesale sales in April comes from this statement from the Q1 earnings release: " While wholesale sales were down 42.7% in April year-over-year, weekly wholesale orders have started to increase on a sequential basis. " I divided Q2 2019's wholesale sales evenly between months and then went down 42.7%. June DTC: This is my estimate based upon the fact that another Mattress Max machine went online June 1, thus increasing capacity, and the low end model was discontinued (raising revenue per unit). June Wholesale:Joe Megibow stated at Commerce Next on 7/30 that wholesale had returned to almost flat growth. I'm going to assume he meant for the quarter, so I plugged the number here to finish out the quarter at $39.0M, just under $39.3M from a year ago. Revenue Expectations from Analysts (via Yahoo) https://preview.redd.it/notxd6hhbng51.png?width=384&format=png&auto=webp&s=aa0453414f467aa6c5bf72ce8a8046c0ae6e62a5 My estimate of $244M comes in way over the high, let alone the consensus. PRPL has effectively already disclosed ~$145M for April/May, so these expectations are way off. I'm more right than they are.
I used my estimates for Q3/Q4 2019 to guide margins in April/May as there were some one time events that occurred in Q1 depressing margins. June has higher margin because of the shift away from the low end model (which is priced substantially lower than the high end model). Higher priced models were given manufacturing priority.
Marketing and Sales Joe mentioned in the Commerce Next video that they were able to scale sales at a constant CAC (Customer Acquisition Cost). There's three ways of interpreting this:
Overall customer acquisition cost was constant with previous quarters (assume $36M total, not $93.2M), which means you need to add another $57M to bottom line profit and $1.08 to EPS, or
Customer Acquisition Costs on a unit basis were constant, which means I'm still overstating total marketing expense and understating EPS massively, or
Customer Acquisition Costs on a revenue basis were constant, which is the most conservative approach and the one I took for my estimate.
I straightlined the 2.2 ratio of DTC sales to Marketing costs from Q1. I am undoubtably too high in my expense estimate here as PRPL saw marketing efficiencies and favorable revenue shifts during the quarter. So, $93.2M General and Administrative A Purple HR rep posted on LinkedIn about hiring 330 people in the quarter. I'm going to assume that was relative to the pre-COVID furloughs, so I had June at that proportional amount to previous employees and adjusted April and May for furloughs and returns from furlough. Research and Development I added just a little here and straight lined it.
Interest Expense Straightlined from previous quarters, although they may have tapped ABL lines and so forth, so this could be under. One Time and Other Unpredictable by nature. Warrant Liability Accrual I'm making some assumptions here.
We know that the secondary offering event during Q2 from the Pearce brothers triggered the clause for the loan warrants (NOT the PRPLW warrants) to lower the strike price to $0.
I can't think of a logical reason why the warrant holders wouldn't exercise at this point.
Therefore there is no longer a warrant liability where the company may need to repurchase warrants back.
The liability accrual of $7.989M needs to be reversed out for a gain.
What to Watch For During Earnings (aka Reasons Why This Moons More)
Analysts, Institutionals, and everyone else who uses math for investing is going to be listening for the following:
Warrant Liability Accrual
Capacity Expansion Rate
CACs (Customer Acquisition Costs)
New Product Categories
Cashless Exercise of PRPLW warrants
Margin Growth This factor is HUGE. If PRPL guides to higher margins due to better sales mix and continued DTC shift, then every analyst and investor is going to tweak their models up in a big way. Thus far, management has been relatively cautious about this fortuitous shift to DTC continuing. If web traffic is any indicator, it will, but we need management to tell us that. Warrant Liability Accrual I could be dead wrong on my assumptions above on this one. If it stays, there will be questions about it due to the drop in exercise price. It does impact GAAP earnings (although it shouldn't--stupid accountants). Capacity Expansion Rate This is a BIG one as well. As PRPL has been famously capacity constrained: their rate of manufacturing capacity expansion is their growth rate over the next year. PRPL discontinued expansion at the beginning of COVID and then re-accelerated it to a faster pace than pre-COVID by hurrying the machines in-process out to the floor. They also signed their manufacturing space deal which has nearly doubled manufacturing space a quarter early. The REAL question is when the machines will start rolling out. Previous guidance was end of the year at best. If we get anything sooner than that, we are going to ratchet up. CACs (Customer Acquisition Costs) Since DTC is the new game in town, we are all going to want to understand exactly where marketing expenses were this quarter and, more importantly, where management thinks they are going. The magic words to listen for are "marketing efficiencies". Those words means the stock goes up. This is the next biggest line item on the P&L besides revenue and cost of goods sold. New Product Categories We heard the VP of Brand from Purple give us some touchy-feely vision of where the company is headed and that mattresses was just the revenue generating base to empower this. I'm hoping we hear more about this. This is what differentiated Amazon from Barnes and Noble: Amazon's vision was more than just books. Purple sees itself as more than just mattresses. Hopefully we get some announced action behind that vision. This multiplies the stock. Cashless Exercise of PRPLW Warrants I doubt this will be answered, even if the question is asked. I bet they wait until the 20 out of 30 days is up and they deliver notice. We could be pleasantly surprised. If management informs us that they will opt for cashless exercise of the warrants, this is anti-dilutive to EPS. It will reduce the number of outstanding shares and automatically cause an adjustment up in the stock price (remember kids, some people use math when investing). I'm hopeful, but not expecting it. The amount of the adjustment depends on the current price of the stock. Also, I fully expect PRPL management to use their cashless exercise option at the end of the 20 out of 30 days as they are already spitting cash.
I've made some updates to the model, and produced two different models:
Warrant Liability Accrual Goes to Zero
Warrant Liability Accrual Goes to $47M
I made the following adjustments generally:
I reduced marketing expenses signifanctly based upon comments made by Joe Megibox on 6/29 in this CNBC video to 30% of sales (thanks u/deepredsky).
I reduced June wholesale revenue to 12.6M to be conservative based upon another possible interpretation of Joe's comments in this video here. It is a hard pill to swallow that June wholesale sales would be less than May's. The only reasoning I can think of is if May caused a large restock and then June tapered back off. The previous number of $19.0M was still a retrenchment from the 40-50% YoY growth rate. I'm going to keep the more conservative number (thanks again u/deepredsky).
I modified the number of outstanding shares used for EPS calculations from 53M (last quarters number used on the 10-Q) to almost 73M based upon the fact that all of the warrants and employee stock options are now in the money. Math below. (thanks DS_CPA1 on Stocktwits for pointing this out)
Now that we have established that coliseum still has not exercised the options as of july 7, and that purple needs to record as a liability the fair value of the options as of june 31, we now need to determine what that fair value is. You state that since you believe that there is no logical reason that coliseum won't redeem their warrants "there is no longer a warrant liability where the company may need to repurchase warrants back." While I'm not 100% certain your logic here, I can say for certain that whether or not a person will redeem their warrants does not dictate how prpl accounts for them.
The warrant liability accrual DOES NOT exist because the warrants simply exist. The accrual exists because the warrants give the warrant holder the right to force the company to buy back the warrants for cash in the event of a fundamental transaction for Black Scholes value ($18 at the end of June--June 31st that is...). And accruals are adjusted for the probability of a particular event happening, which I STILL argue is close to zero. A fundamental transaction did occur. The Pearce brothers sold more than 10M shares of stock which is why the exercise price dropped to zero. (Note for DS_CPA1 on Stocktwits: there is some conflicting filings as to what the exercise price can drop to. The originally filed warrant draft says that the warrant exercise price cannot drop to zero, but asubsequently filed S-3, the exercise price is noted as being able to go to zero. I'm going with the S-3.) Now, here is where it gets fun. We know from from the Schedule 13D filed with a July 1, 2020 event date from Coliseum that Coliseum DID NOT force the company to buy back the warrants in the fundamental transaction triggered by the Pearce Brothers (although they undoubtably accepted the $0 exercise price). THIS fundamental transaction was KNOWN to PRPL at the end Q4 and Q1 as secondary filings were made the day after earnings both times. This drastically increased the probability of an event happening. Where is the next fundamental transaction that could cause the redemption for cash? It isn't there. What does exist is a callback option if the stock trades above $24 for 20 out of 30 days, which we are already 8 out of 10 days into. Based upon the low probability of a fundamental transaction triggering a redemption, the accrual will stay very low. Even the CFO disagrees with me and we get a full-blown accrual, I expect a full reversal of the accrual next quarter if the 20 out of 30 day call back is exercised by the company. I still don't understand why Coliseum would not have exercised these. Regardless, the Warrant Liability Accrual is very fake and will go away eventually.
ONE MORE THING...
Seriously, stop PMing me with stupid, simple questions like "What are your thoughts on earnings?", "What are your thoughts on holding through earnings?", and "What are your thoughts on PRPL?". It's here. Above. Read it. I'm not typing it again in PM. I've gotten no less than 30 of these. If you're too lazy to read, I'm too lazy to respond to you individually.
Margin Isn't Dangerous & Why I'd Still Use It If I Had Less Than $25,000
Cash vs. Margin
TL;DR- Use Margin if you're trading securities and either above or below 25k. If you know how to size positions, it won't matter if you move $4,000 into a trade or $4,000,000. As long as you sized the position correctly. If you're limited to 3 trades, then take 3 PERFECT trades: https://imgur.com/a/SpPOERQ I see lots of people discussing contrasting ideas although they attempt to justify using both. Here are some things I see said and written frequently from people that doesn't add up for me:
"Use a cash account to avoid PDT" - (Totally fine, in some cases such as certain options traders. Not if you're trading securities.)
"Risk 1% of your account" - (So if your account is at $25,500, I risk ~$255 and if I lose 2R I'm below PDT. Doesn't sound too great to me if I were to lose the first 2 straight trades.)
"Margin is a double-edged sword" - (It's only dangerous if you don't set hard stops or size your positions correctly.)
"Never take on a trade that is worth more than your account" - (I can agree if you were swing trading but in terms of IntraDay trading, this is hindering your ability to grow your account. If you're risking $100 on a trade that costs less than your account value.. then $25 on a trade because of your account value.. then you're adding unneeded variables. Remember: "Consistency.")
If I were to go back to when I was below $25,000 some years ago. I'd still use a margin account while being limited to 3 trades per week. Here's why:
Formulas you have to know: Position size formula = Risk ÷ Stop Size Stop Size Formula = Entry - StopLoss
Stock ABC, Entry = $10.00 StopLoss = $9.90 StopSize = 10¢ Risk = $100 In Live Trading: $100 ÷ $0.10 = 1000 Shares 1,000 shares at $10.00 = $10,000 position
Stock XYZ, Entry = $385 StopLoss = $383.00 StopSize = $2.00 Risk = $100 In Live Trading: $100 ÷ $2.00 = 50 Shares 50 shares at $385 = $19,250 position. *$10,000 CASH account: CANNOT trade Stock XYZ and must wait 3 days for his entire account to settle after trading Stock ABC. If it was a margin account, they'd still be able to take 2 more trades this week. *$10,000 MARGIN account: CAN trade Stock XYZ and can trade both scenarios while still able to trade 1 more time in a 5 day rolling period.
Then the next point made is, "Just won't trade anything above $20".
Ok. great rebuttal, but why? Let's remember this: StopSizes aren't always directly correlated to the price of a stock. YES you're more likely to have a wider StopSize on a higher priced stock and a tighter StopSize on a lower priced stock. But remember this: 1¢ of slippage on 1,000 shares is 10% of his risk ($10)... It will be even more slippage if his stop loss market order is hit. Even a Sell-StopLimit order will have slippage within the amount you allow for when you enter a position. Stock XYZ would have to be slipped 20¢ just to equate the amount of slippage on Stock ABC.Highly liquid and available stocks such as AAPL, AMD, NVDA etc don't have 20¢ spreads. Not even 10¢. Rarely 5¢. Most of the time. Just a couple cents. Of course there could be more right out of the open but the spread in my years of experience is tightened within 2 minutes of the open. Yes, these small amounts in pennies do hold lots of merit if you're looking at having any longevity in this business, it WILL add up over the years.
Both trades have the same risk [in perfect world theory].
If both stop market orders were hit (StopLoss). Both traders would exit with a $100 loss on each. Although 1 trade required $10,000 in capital and the other trade required $19,250 in capital. Use margin. If I had to go back to when I had less than $25,000 in my account, I'd still do it the same way I did it with margin. I highly suggest using margin even if you’re limited to 3 trades per week. I get asked all the time when I began trading. If you watched my last video, I showed my first ever deposit with Scottrade (Old brokerage that was bought out by TDA a few years ago) in 2015 although I don't consider that's when I started trading because I didn't treat it the way I do today. I really consider myself starting as a trader in 2017 when I: •Wrote a business plan •Understood statistics •How to research. All this being said, slowly over time I noticed that I am taking less and less trades and increasing my risk size. Why? EV: Expected Value. - Margin has zero negative effect if you're sizing your positions the same every time. Margin allows you to take on more expensive positions that are showing your edge. Bonus: Being limited to 3 trades a week isn't fun, I remember that feeling from years ago. Just remember to take 3 perfect trades a week. Sometimes "Perfect Trades" don't work out in your favor while some subpar situations hit target. Some weeks you might take your 3 "Perfect Trades" by Tuesday. Some weeks you might take only 1 "perfect trade". If you follow my watchlists on Twitter (Same handle as my Reddit), I keep my Day Trading Buying Power transparent. Not always is it growing perfectly linear. And not always am I posting every single day because sometimes, my edge isn't there. Just because the market is open doesn't mean you HAVE to trade. My watchlists aren't littered with 15+ tickers. Rarely do they have more than 7. That may work for other traders, but for me, I demand quality. It's either there or it isn't. No reason to force a trade. I'd rather focus heavily on a few tickers rather than spread myself thin across multiple. Trading isn't supposed to be exhilarating or an adrenaline rush. It can be boring. I said that in the post I wrote back in April. Also if you make money, even if its just $20 in a month. Take that money out and buy something. Shrine it. Cherish it. You ripped that money out of WallStreet. Be proud of it. It takes a lot of courage to do this business. Realize that the P/L is real money. Sometimes even just buying a tank of gas or a book will help you realize that. Spend it from time to time. Get something out of your trading account. You may or not be trading for long, get something that is tangible to always remember the experience in case you don't last. Make it your trophy. That's all I've got for right now. Maybe I'll make another post or 2 before the year ends. I hit my 1 year full-time mark in September. Best wishes! -CJT2013
Didn’t see one posted yet so let this be the megathread that cliff can sticky or whatever. I’ll update this as info comes in and maybe live blog the call if I make it to my computer in time Webcast info can be found at: https://ir.tesla.com/events/event-details/tesla-inc-q2-2020-financial-results-and-qa-webcast The call starts at 2:30pm PDT Q2 report: https://ir.tesla.com/static-files/f41f4254-f1cc-4929-a0b6-6623b00475a6 Call live blog (times in PDT): 2:30: "Call starting shortly" 2:32: Tesla director of investor relations 2:33: Elon opening remarks. Good job to the Tesla team. 4th consecutive profitable quarter. Auto industry is down, but Tesla is up. Next gigafactory is just north of Austin, Texas (15 min from downtown Austin) on the Colorado river. "Boardwalk" and "ecological paradise." Cyber truck, Semi, and 3&y for eastern half of North America. Fremont will do S&X for worldwide and 3&Y for western half of NA. Shout out to Tulsa. Tesla solar is the cheapest in the US. 30% cheaper than US average. $1.49/w. New Tesla Model S has a range over 400 miles. 2:39: FSD crap 2:40: Thank you Tesla team again for a full year of profitability. 3 new factories within the next year. "So much to be excited about"! "Never been more excited for the future of Tesla" 2:42: CFO Saved costs by laying employees off Continue reducing costs $48M FSD recognized Megapack is profitable Questions from institutional investors: Q: *missed the first question, sorry* Q: Vision for the future A: FSD on all vehicles. Biggest value increase of any company. Q: AP. Upcoming self driving milestones A: Major milestone is transition from "2.5D" (pictures) to "4D" (video) environment. Later this year. Big improvement to process video instead of pictures for FSD... Better than humans. "Orders of magnitude reliability" better. Elon thinks computers are smart. Q: Alien Dreadnought A: Putting more work into manufacturing engineering to make the machine that makes the machine. GF1 is alien dreadnought version 0.5. Working towards 1.0. GF Shanghai makes better cars than Fremont. Berlin Model Y will look the same but have more advanced architecture. Integrating design and manufacturing. Vertical integration is important. Increasing CapEx efficiency. "Tesla loves manufacturing!" Q: How many can Tesla produce in Texas A: "Right now, 0. Long term, a lot." Retail: Q: Tesla Energy A: Long term Tesla Energy will be same size as Tesla Automotive. Solar, wind, and batteries. Grid scale storage will expand. Auto-bidder is autopilot for battery storage; Like high frequency trading. Makes sure the battery is working correctly and grid satisfied. Main thing about Tesla is cell production at an affordable price (Tesla doesn't manufacture cells though? - me). "Talk more about this at battery day." Q: Tesla Semi production plans A: Production will start next year. First few units will be used by Tesla. Mainly between Fremont and Reno/Sparks. Some early units will go to some early adopters. Semi will be awesome. Semi will use nickel based cells. Passenger vehicles will use iron based cells; range of maybe 300 miles in the Chinese market. Use very little cobalt in cells already. Q: Why is Tesla removing the standard range vehicles A: "Mining companies, please mine more nickel at high volume." Tesla will sign a long term contract. New normal for range will be ~300 miles. Q: What is the hold up of Tesla insurance outside of California A: "Joking before call about quarterly insurance question." "Version 0.9" in California. Use the data captured in the car to assess probability of crash and use that for premium. Take the California product and use it in other states or make other states better; going with the latter. Handful of states by the end of the year. Regulatory approval will be needed. Version 2, Version 3, etc. as they go forward. Car will let you know to "drive better if you want a lower premium." Elon: "#1 thing to take from this call is that Tesla is hiring ... especially insurance." Tesla insurance will be provided for Tesla Network car sharing; not required. Investors on the line: Q: Gross margin of vehicles different between factories. A: GM increased in China. Model Y was profitable in first quarter of production. Model Y is more expensive than Model 3 to produce, but will become closer to the same. Locally sourcing components is "literally rising 5%-10% price improvement per month." Suppliers are eager to support Berlin GF. Q: Is Tesla aiming for industry leading gross margin. EV credits A: "We don't run the business to rely on regulatory credits." Revenue from FSD. OpEx continues to come down. I have to go, so this is it for the call live blogging
The Walt Disney Company (NYSE:DIS) es una compañía multinacional estadounidense dedicada principalmente a los medios de comunicación masivos y a la industria del entretenimiento. Su sede está en Burbank, California, EEUU. La compañía cotiza bajo el ticker DIS, en Nueva York, a un precio de US$ 127,44 al 23/8/2020. Goza de un tamaño prominente, teniendo 223 mil empleados y una capitalización de mercado de 230.292M de dólares. Disney integra el índice Dow Jones Industrial Average (DJIA) desde 1991, y también integra el S&P 100 y el S&P 500. Evaluando más en detalle el desempeño de la acción, la acción cotiza US$ 127,44 al 23/8/2020. Hace aproximadamente un año, el 26/8/2019 la acción cotizaba a US$ 137,26 lo que representa una caída aproximada del 7,15% anual (TTM). La caída es mas pronunciada YTD, Disney cotizaba US$ 148,2 a principios de año, por lo que al día de hoy la caída seria del 14%. No obstante, la acción a recuperado bastante valor después de la caída pronunciada que sufrió en Febrero-Marzo, llegando a cerrar a US$ 85,76 el 23/3/20 (habiendo subido un 48% desde entonces). Es para destacar que desde dicha caída se vio un significativo incremento en el volumen operado del papel. Mirando brevemente las medias móviles, vemos que la cotización actual esta por encima del promedio de 30 días (US$ 122,73), del de 90 días (US$ 115,98) y de 200 días (US$ 124,12). Con respecto al mercado, al 25/8, desde comienzo de año Disney se desempeñó por debajo del S&P 500 (5,7%), y del DJIA (-2,15%), con desempeño de -12,42% YTD. La compañía fue fundada en 1923 por los hermanos Walt y Roy Disney. A lo largo de su historia, Disney se consolidó como líder en la industria de animación estadounidense y luego diversificó sus negocios dedicándose a la producción de películas live-action, televisión y parques temáticos. A partir de 1980 Disney creo y adquirió diversas divisiones corporativas, para penetrar en mercados que fueran mas allá de sus marcas insignia orientadas a productos familiares. Disney es conocida por su división de estudios cinematográficos (The Walt Disney Studios), que incluye Walt Disney Pictures, Walt Disney Animation Studios, Pixar, Marvel Studios, Lucasfilm, 20th Century Studios, Searchlight Pictures y Blue Sky Studios. Otras unidades y segmentos de la compañía son Disney Media Networks; Disney Parks, Experiences and Products y Walt Disney Direct-to-Consumer & International. A través de estas unidades, Disney posee y opera canales de televisión como ABC, Disney Channel, ESPN, Freeform, FX y National Geographic, así como también venta de publicidad, merchandising y música. También tiene divisiones de producción teatral (Disney Theatrical Group) y posee un grupo de 14 parques temáticos alrededor del mundo. Es evidente la complejidad de las operaciones de Disney, por lo que vale la pena ir un poco mas a fondo en la composición de los segmentos operativos de Disney, en base al reporte anual de 2019 (mas representativo que el ultimo reporte trimestral en medio de la pandemia), donde encontramos cuatro segmentos relevantes. El primer segmento, denominado “Media Networks”, compuesto principalmente por los canales domésticos de TV, este segmento generó 24.827M US$ de ingresos en 2019 (un 34,7% del total). El segundo segmento es el de “Parks, Experiences and Products”, compuesto por los parques temáticos, resorts y cruceros de las compañías, así como también de las licencias de los nombres, personajes y marcas de la compañía y de los productos de merchandising propios, este segmento reportó 26.225M US$ de ingresos en 2019 (un 36,66% del total, el segmento mas relevante de la compañía). El tercer segmento, es el de “Studio Entertainment” que contiene las operaciones de producción de películas, música y obras de teatro, así como también los servicios de post-produccion. Este segmento reportó 11.127M US$ (un 15,55% del total). El ultimo segmento, quizás el mas interesante es “Direct-to-Consumer & International”, donde además de contener las operaciones internacionales de TV y servicios de distribución de contenido digital como apps y paginas web, se incluyen las unidades de servicios de streaming de Disney, compuestas principalmente por Hulu, ESPN+ y Disney+. Este sector reporto ingresos por 9.349M US$ (un 13,07%, enorme incremento respecto del 5,6% que reportó en 2018). Respecto a la distribución territorial de las operaciones, es notorio el bagaje del mercado doméstico (EEUU y Canadá) donde concentraron en 2019 el 72,6% de las operaciones. Vale destacar también que hubo un incremento significativo interanual de las operaciones en los mercados de Asia-Pacífico (del 9,3% al 11,2%) y en Latinoamérica y otros mercados (del 3,09% al 4,61%). En lo que respecta a la política de dividendos de la compañía, encontré registros de pago constante de dividendos desde al menos 1989. El ultimo dividendo fue el 13/12, habiendo pagado $0,88 y arrojando un dividend yield anual de 1,2%. La compañía decidió omitir el dividendo semestral correspondiente al primer semestre de 2020 por la pandemia del COVID-19. Evaluando un poco la posición financiera de la empresa, a junio de 2020, según el balance presentado, Disney tenia activos corrientes por 41.330M US$ y pasivos corrientes por 30.917M US$, lo que resulta en un working capital (activos corrientes netos, activos corrientes menos pasivos corrientes) de 10.413 US$. El working capital entonces representa el 33,68% de los pasivos corrientes (Con lo cual, el current ratio es de 1,34 apreciándose una mejoría respecto del 0,9 reportado en septiembre 2019). En relación con la deuda de largo plazo, la podemos estimar en 70.052M US$ (borrowings + other long-term liabilities), dado que en septiembre 2019 la cifra era de 51.889M US$, vemos que sufrió un aumento considerable (en el orden del 35%). Respecto a los flujos de efectivo de Disney, vemos que en lo que va del año fiscal (septiembre 2019-junio 2020) Disney reportó flujo de efectivo por operaciones por 5949M US$, casi lo mismo que reportó para todo el año fiscal 2019 (5984M US$). Viendo la evolución de 10 años del CF de operaciones:
CF de operaciones (mill. USD)
Dif. Anual %
Viendo la evolución en 10 años del flujo de efectivo de operaciones, vemos que en 2019 hubo una drástica reversión de la tendencia al alza que se venia reportando (con un 58,14% de caída interanual). Esto se debe en parte a la política de adquisiciones de la empresa, que vemos reflejado en el flujo de efectivo por inversiones, equivalente en 2019 a -15.096M US$ (muy por encima del promedio de 2010-2018, equivalente a -4179,4M US$). En lo relativo a las ganancias de la compañía, para el Q2 2020 Disney reportó pérdidas por 4721M US$ (contra una ganancia de 1760M US$ para el Q2 2019). La situación se atenúa considerando las cifras para los últimos nueve meses (Q4 2019-Q2 2020), donde Disney totalizó perdidas por 1813M US$. No obstante, la situación del COVID-19 distorsiona nuestro análisis a largo plazo, por lo que para analizar la evolución interanual desde los últimos 10 años, utilizare los datos de los reportes anuales (datando el ultimo de septiembre 2019).
Net Income (mill. USD)
Dif. Anual %
Como se puede ver en el cuadro, pese al revés sufrido por las obvias complicaciones de la pandemia, el historial de ganancias de Disney es sólido. La compañía tuvo en los últimos 10 años, 2 años de contracción en las ganancias (2017 y 2019), pero en términos generales, las ganancias crecieron a una tasa promedio del 13,02% los últimos 10 años. Para evaluar el crecimiento general estos 10 años, si tomamos el promedio de los primeros 3 años (2010-2012) y el promedio de los últimos 3 (2017-2019), las ganancias de Disney crecieron un 125,8%. Mirando un poco de ratios, analizaré el EPS (Earnings Per Share) de la acción. Para el Q2 2020, Disney presentó un EPS negativo, de -2,61, contra un 0,98 obtenido en el Q2 2019. Refiriéndonos al desempeño pre-pandemia, el EPS promedio anual de los últimos 5 años fue de 6,3 y el ultimo EPS anual reportado (septiembre 2019) estaba ligeramente por encima, alrededor de 6,68. En lo respectivo al Price/Earning, el P/E (TTM) al valor de la acción del 23/8 es de -208,9. No obstante, si eliminamos la distorsión producto de la pandemia, calculando las ganancias promedio de los últimos 3 años (de acuerdo con los reportes anuales), es de 18,38, lo cual es un valor aceptable dada la coyuntura de los últimos años. En lo que respecta al Price-To-Book (P/B) ratio, el book value a junio 2020, es de 50, por lo que el P/B (siempre al precio del 23/8) es de 2,54, un valor razonable dados los promedios de los sectores en los que Disney tiene incidencia. El ultimo ratio a analizar es Price/Assets (P/E*P/B) que, (usando P/E con promedio de las ganancias de los últimos 3 años) arroja un valor de 46,68. Sobre el soporte institucional de la compañía, Disney tiene un apoyo considerable, calculado en el 66,42% del flotante en manos de instituciones. Los tenedores líderes son Vanguard con el 8,22%; BlackRock (NYSE:BLK) con el 6,32% y State Street Corporation (NYSE:STT) con el 4,19%. Otros tenedores significantes (1-2%) son Bank of America (NYSE:BAC), MorganStanley (NYSE:MS) y Bank of New York Mellon (NYSE:BK). En lo respectivo al management de Disney, la primera consideración importante es respecto al legendario CEO de la compañía, Robert “Bob” Iger, quien, en febrero de este año, después de posponerlo por años, decidió dar un paso al costado como CEO de la compañía, dejando a cargo al director del segmento de Parques y Resorts, Bob Chapek. Esto duró poco, y en abril Iger volvió a tomar las riendas de la compañía. No obstante, es altamente probable que, una vez estabilizado el panorama Iger retome su frustrado plan de dar un paso al costado. En lo relativo a la compensación, Iger cobró 47.525.560 US$, los executive officers una remuneración promedio de 11.319.422 US$ y el empleado promedio de Disney cobró 52.184 US$. Una cosa que llama la atención del balance de Disney (septiembre 2019), es el incremento notorio del goodwill (de 31.269M US$ a 80.293M US$, un aumento del 157%). No obstante, este incremento puede deberse a la política de fusiones y adquisiciones de la compañía. Disney viene llevando en los últimos años una política de adquisiciones relativamente agresiva, ideada por el CEO Bob Iger, de las cuales podemos destacar 4 o 5 operaciones clave, la primera de ellas fue la adquisición de Pixar, la famosa empresa de animación que había despegado bajo la conducción de Steve Jobs y Ed Catmull, en 2006 por 7,4MM US$ (de esa adquisición se beneficiaron sacando películas muy exitosas como Up, Wall-E, Ratatouille, Toy Story 3, etc.). Otra adquisición clave, fue la compra de Marvel en 2009 por 4MM US$ (La última de sus películas Avengers: Endgame, la más taquillera de la historia de Disney, vendió entradas por 3MM US$). En 2012, Disney compró Lucasfilm (histórica productora de Star Wars), por 4,05MM US$, y posteriormente anunció una muy lucrativa tercera trilogía de Star Wars. Por último, en marzo de 2019, Disney concretó la adquisición de 2oth Century Fox, en marzo de 2019, por la extraordinaria cifra de 73MM US$, sus resultados aún están por verse. Analizar la competencia de Disney es algo trabajoso, dado la variedad de sectores en los que se involucra y la falta de compañías que abarquen tantos sectores como Disney. Considero que la compañía que más se aproxima en cuanto a sus operaciones y al volumen de las mismas es Comcast (NASDAQ:CMSCA), si bien Disney compite con numerosas empresas en numerosos sectores, como podrían ser, por ejemplo Cedar Fair (NYSE:FUN) o Six Flags (NYSE:SIX) en el negocio de los parques temáticos; ViacomCBS (NYSE:VIAC) o Discovery Communications (NASDAQ:DISCA) en el negocio mediático; así como Netflix (NASDAQ:NFLX) o Amazon (NASDAQ:AMZN) en el negocio del streaming, sobre los cuales hablare más adelante. También compite con segmentos de negocios de conglomerados grandes como Sony (NYSE: SNE) o AT&T (NYSE:T). Observando a Comcast, el acérrimo rival, vemos que la capitalización bursátil es similar, siendo de 198.301M US$ para Comcast y de 234.538M US$ para Disney, así como los empleados, teniendo 190.000 (CMCSA) y 236.000 (DISN). El desempeño de ambas acciones es parejo, en términos generales Comcast tuvo mejor performance, sobre todo YTD (-3,47% contra -10,26%). En los márgenes y ratios también gana Comcast, supera ampliamente en gross margin (TTM) a Disney, con 56,78% contra 27,95% y en net margin (TTM) con 10,91% frente a un pobre -1,91%. El EPS (TTM) da 2,53 para Comcast contra -0,6 para Disney. Consecuentemente, Comcast pudo mantener un P/E positivo de 17,56. Si bien los números parecen positivos en la comparación para el lado de Comcast, me parece relevante destacar que lo mismo que fue su mayor ventaja comparativa (la composición de sus segmentos operativos), puede ser lo que la haga perder en la comparación a futuro, dada la absoluta supremacía que tiene la operatoria relacionada con la televisión, así como la falta de un segmento de negocios dedicado al streaming de video (sobre el cual también me referiré mas adelante). Para analizar el futuro, creo que es relevante hacer unas breves conclusiones sobre la actualidad. En primer lugar, los segmentos operativos mas afectados fueron el segmento de parques temáticos, resorts, etc. y el segmento de los estudios cinematográficos con lo cual los ingresos de Disney este último trimestre quedaron a cargo, principalmente, de los canales de TV (que sufrieron una breve baja del 2%) y de los servicios de streaming. Empezando por los sectores más afectados, respecto a la producción fílmica (Studio Entertainment), me parece que la situación no es crítica, claramente la situación de la pandemia redujo fuertemente los ingresos del sector (al haberse reducido lógicamente la asistencia a salas de cine). No obstante, el manejo del sector viene siendo exitoso hace años (en los últimos 2 años lanzaron 3 de las 4 películas más taquilleras de la historia de la compañía, Endgame, Infinity War, y el live-action de El Rey León), y no hay indicios de que esto vaya a cambiar en el futuro (hay un esquema de estrenos futuros interesante). En lo que respecta a los parques, las perspectivas no son tan buenas. La caída para el Q2 2020 fue del 85% en relación al Q2 2019. Es evidente que al haber una cuestión sanitaria de por medio, el turismo va a ser uno de los sectores mas afectados, habiendo sufrido una caída increíble en la primera mitad del año.  Actualmente, la actividad comercial de los parques temáticos está empezando a reanudarse, habiendo reabierto las operaciones en Walt Disney World en Florida, y estando a la espera de reabrir Disneyland en California, dada la incertidumbre de la pandemia. No obstante, la recuperación fue peor de lo esperado y a partir de Septiembre Walt Disney World recortará los horarios de sus parques. Asimismo, comparativamente, el desempeño de Universal Studios (propiedad de Comcast), parece ser mejor que el de Disney en esta reapertura. No obstante, es importante destacar el carácter de líder absoluto de Disney en este sector, con una competencia que difícilmente pueda igualar su posición, con lo cual si bien el desempeño en el corto plazo puede ser inferior al de la competencia, es altamente probable que recupere su posición dominante en el mediano-largo plazo. Es interesante ver, en tercer lugar, el segmento “Media Networks” que consiste principalmente en los canales de TV que Disney posee. Este sector no tuvo una caída significante (solo del 2% para el Q2 2020 en relacion al Q2 2019) en el corto plazo, pero en el largo plazo, es evidente que la tendencia del sector es a desaparecer. Las encuestas y reportes muestran un lento descenso año tras año de la audiencia, tanto de TV en vivo, TV diferida y radio. Con lo cual, a largo plazo, es previsible que este segmento sufra una disminución considerable en su volumen de operaciones. También es previsible (y así lo reflejan las encuestas), que el reemplazo de la TV tradicional sea protagonizado por los servicios de video streaming (VOD), es decir, por las operaciones del cuarto segmento (Direct-to-Consumer). Disney tiene hoy 3 servicios de streaming, Hulu, ESPN+, y Disney+ (ofrece los tres en un bundle que cuesta US$ 12,99). Como ya dijimos, el incremento de los ingresos por estos servicios durante el FY 2019 fue significante. Veamos la evolución de los subscriptores a estos servicios en lo que va del FY 2020 (es decir, Q4 2019, Q1 2020 y Q2 2020).
Investment Thesis: Why investing in POW.TO (Power Corporation of Canada) now is an investment in a future high market cap Wealthsimple IPO
I have seen some posts here wondering about the wisdom of investing in Wealthsimple's parent company, Power Corporation of Canada (POW.TO). I decided to look more into this, decided to post my investment thesis and research on why I, long-term, I have a very bullish view on Wealthsimple (and by extension POW.TO), and why I think this is equal to being an early stage investor in a Wealthsimple IPO.
Ownership: Power Corporation of Canada (POW.TO) (83.2% ownership)
AssetsUnderMangement: $5.4 billion, as of June 30, 2020 (4.9 billion in June 30, 2019)
Wealthsimple Invest (ETF Roboadvisor service), WS was one of the first-movers in this space in Canada and offered robo-advising as part of its initial product in 2015. WS claims to have largest digital investing presence in Canada (70% of the market) (reference).
Wealthsimple Cash, a savings account service
Wealthsimple Trade, a commission free trading app where users can buy and sell ~8,000 stocks and ETFs
Wealthsimple Crypto, a commission free cryptocurrency trading app, currently in beta
SimpleTax.ca, a free tax-return service used by ~1 million Canadians per year, acquired in late 2019
WS has had many successful rounds of funding and a vote of confidence from both its parent POW.TO and other multinationals investing in fintech.
Last year WS received a $100 million dollar investment led by Allianz X, the start up investor arm of German financial services giant Allianz
WS has had 7 total investing rounds, totalling $266.9 million (reference)
WS has been extremely aggressive in targeting growth areas. Wealthsimple’s CEO Mike Katchen has said he wants to position the company as a “full-stack” financial services company. Here are some of their current expansion areas:
UK and USA Expansion - in 2017, they started offering similar investing services in the UK and the US (reference and reference).
Socially Responsible ETFs - WS recently partnered with Mackenzie Investment to offer socially responsible ETFs with a social and environmental focus. Although probably not something that older investors care about, this is particularly important for younger investors who want to make sure their investments are socially responsible
Cryptocurrency - WS is currently testing a beta service of their cryptocurrency app, and offering fee-free cryptocurrency trading, similar to Wealthsimple Trade. Whatever your views of cryptocurrency (I'm of the view that I can in some cases be part of a portfolio to hedge against risk), it's here to stay. Earlier this month, WS was the first company in Canada to register with the Ontario Securities Exchange Commission (reference). My sense is that crypto will face increasing regulations and scrutiny in the coming years, which will be a good thing for WS which is a step ahead of the game (reference). Even Google is starting to look into relaxing its restraints on crypto (reference).
Other full-stack services - WS has been mum on what other services they might offer, but insurance, mortgages, and chequing accounts could be other areas of disruption. (Reference)
WS is run by young guys who have big ambitions and plans for the company. Sometimes there are CEOs with the intangibles that can really drive a company's growth, and from what I can glean, I think the company has a lot of potential here in terms of vision by its leaders. You can read more about the founders here
Michael Katchen, CEO, Background: Led product and marketing at a start up called 1000memories, a Y Combinator startup later acquired by Ancestry.com. Worked for McKinsey & Company.
Brett Huneycutt, COO, Rhodes Scholar... not much else I know about the guy
Quote sfrom CEO: Michael Katchen On being laughed out of the boardroom when he proposed his idea for Wealthsimple:
Within the last month, Wealthsimple has also opened an office in London. Katchen said a push into the European market is “possible” as its “ambitions are global,” but right now the Canadian and U.S. markets are “a lot to chew.” It is a far cry from the company’s early days: Katchen said he was “laughed out of the boardroom” for laying out a global vision for Wealthsimple at a time when they had just $1.9-million in funding and 20 users***.***“It’s a very personal mission of mine since I moved back from California, to inspire more Canadian companies to think big and to think internationally about the businesses that they’re building,” he said. (reference)
On Wealthsimple's growth in the next 10-15 years:
Wealthsimple has more than $5 billion in assets under management and 175,000 customers in Canada, the U.S. and U.K. He sees that reaching $1 trillion 15 years. “We’re just getting started,” he said. “Our plans are to get to millions of clients in the next five years.” (reference)
Brand Value and Design
Out of all the financial services company in Canada, WS probably has the most cohesive and smart design concept across its platforms and products. I see the value in Wealthsimple in not just the assets they have under management, but also the value of the brand itself. I mean, what kind of financial services company makes a blog post about their branding colour scheme and font choices? Also see: Wealthsimple’s advertisement earlier this year capturing 4 million views on Youtube. There also seems to be very strong brand awareness and brand loyalty amongst its users. I think a lot of users find WS refreshing as a financial services company because they cut through the "bullshit" and legalese, and try to simply things for the consumer. They also have their own in house team of designers and creative directors to do branding, design, and advertising, and this kind of vertical integration is generally unheard of in the financial services industry (reference).
Interestingly, the CEO’s ultimate goal is to take the company public. Therefore, I see an investment in POW.TO as being an early stage pre-IPO investor in WS (reference).
The goal is to get Wealthsimple to the size and scale to go public, something that Katchen said he’s “obsessed with.” While admitting that an IPO was still a few years down the road, Katchen already has a target of $20 billion in assets under administration (AUA) as the tipping point (the company recently announced $4.3 billion in AUA as of Q1 2019) (reference)
Ultimately, my sense is that a spun-out Wealthsimple IPO eventually be worth a lot, perhaps even more than POW.TO at some point. Obviously the company is losing money right now, and no where even close to an IPO, and there are still many chances that this company could flop. The best analogy that I can think of is when Yahoo bought an early stake in Alibaba (BABA) back in the early 2000s, and there came a point where their stake in BABA was worth more than Yahoo’s core business. I think an investment in POW.TO now is an early investment in WS before it goes public. (reference)
Expansion problems. In the UK, they reported significant losses and despite increasing users. (reference). The US is also an especially competitive space with lots of similar competitors.
The robo-advising, fintech space is highly competitive now, and the Big Five Banks and other investment/trading companies could easily start offering low-cost or commission free trading
Competitors such as Robinhood could also expand into the Canadian market and take out a huge chunk of WS's userbase
The X Factor
What I find particularly compelling about WS is they have aggressively positioned themselves to be a disruptor in the Canadian financial services industry. This is an area that has traditionally been thought to be a firewall for the Big Five Banks. There is also a generational gap in investing approaches, knowledge, and strategy, and I think WS has positioned itself nicely with first-time investors. My sense is that COVID-19 has also captured a huge amount of young adults with its trading app in the last few months, who will continue to use Wealthsimple products in the future. The average age of its user is around 34. As younger individuals are more comfortable with moving away traditional banking products, I think Wealthsimple’s product offering offers significant advantages over its competitors.
Power Corp is a Good Home
Currently POW.TO is trading at $26.30, down from its 52-week high of $35.15. I see an investment in POW.TO now as fairly low risk, and while WS grows, and there is also the added benefit of a high dividend stock. One of the most confusing things I found about Power Corp was its confusing corporate structure where there were two stocks, Power Financial Corp, and Power Corp of Canada. Fortunately, in Dec 2019, they simplified and consolidated the stocks, which also simplifies the holding structure of WS. I currently see POW.TO has a good stock to hold as well if you're a dividend holder, with a dividend of 6.86%. Also, POW.TO is patient enough to bide its time and let its investment in WS grow, unlike a VC that might want to sell it quick. For example, the reason why WS went with POW.TO instead of the traditional VC route is explained here:
Katchen has directly addressed the question of why he did not go the traditional VC route recently, saying: If you are a business that requires perhaps decades to achieve the vision you have, well, if you’re not going to be able to generate the kind of returns that venture needs is they will force you to sell yourself, they will force you to go public before you’re ready, or they will just forget about you because you’re going to be a write off. And so Katchen essentially flipped Wealthsimple to Power Financial. Power is well known as a conservative, patient, long-term investor. (https://opmwars.substack.com/p/the-wealthsimple-founders-before)
My belief is there is a huge unrecognized potential in POW.TO's massive ownership stake in WS that will be realized maybe 5-10 years down the road. I didn't really dive into the financials of POW.TO in relation to WS's performance, because the earnings reports do no actually say much about WS. I'm aware of the main criticisms that POW.TO is a mature company and dividend stock that has been trading sideways for many years, and the fact that WS is currently not a profitable company. I am not a professional investor, and this is just my amateur research, so I certainly welcome any comments/criticism of this thesis that people on this subreddit might have! (Please be gentle on me!).
The Great Unwinding: Why WSB Will Keep Losing Their Tendies
I. The Death of Modern Portfolio Theory, The Loss of Risk Parity, & The Liquidity Crunch SPY 1 Y1 Day Modern portfolio theory has been based on the foundational idea for the past 3 decades that both equities and bonds are inversely correlated. However, as some people have realized, both stocks and bonds are both increasing in value and decreasing in value at the same time. This approach to investing is used pretty much in everyone's 401K, target date retirement plans, or other forms of passive investing. If both bonds and equities are losing value, what will happen to firms implementing these strategies on a more generalized basis known as risk-parity? Firms such as Bridgewater, Bluecrest, and H2O assets have been blowing up. [2,3] Liquidity has been drying up in the markets for the past two weeks. The liquidity crisis has been in the making since the 2008 financial crisis, after the passage of Dodd-Frank and Basel III. Regulations intended to regulate the financial industry have instead created the one of the largest backstops to Fed intervention as the Fed tried to pump liquidity into the market through repo operations. What is a repo?
A repo is a secured loan contract that is collateralized by a security. A repo transaction facilitates the sale and future repurchase of the security that serves as collateral between the two parties: (1) the borrower who owns a security and seeks cash and (2) the lender who receives the security as collateral when lending the cash. The cash borrower sells securities to the cash lender with the agreement to repurchase them at the maturity date. Over the course of the transaction, the cash borrower retains the ownership of the security. On the maturity date, the borrower returns the cash with interest to the lender and the collateral is returned from the lender to the borrower.
Banks like Bank of New York Mellon and JP Morgan Chase act as a clearing bank to provide this liquidity to other lenders through a triparty agreement. In short, existing regulations make it unfavorable to take on additional repos due to capital reserve requirement ratios, creating a liquidity crunch.[7,8,9] What has the Fed done to address this in light of these facts?
In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period.
II. Signs of Exhaustion & The Upcoming Bounce is a Trap, We Have Far More to Go A simple indicator to use is the relative strength index (RSI) that a lot of WSB is familiar with. RSI is not the be all and end all. There's tons of indicators that also are indicating we are at a very oversold point. SPY 1 Y1 Day RSI Given selling waves, there are areas of key support and resistance. For reference, I have not changed key lines since my original charts except for the colors. You can check in my previous posts. 247.94 has been critically an area that has been contested many times, as seen in the figure below. For those that bought calls during the witching day, RIP my fellow autists. The rejection of 247.94 and the continued selling below 233.86 signals to me more downside, albeit, it's getting exhausted. Thus, I expect the next area in which we start rallying is 213. SPY 10 Day/30 min Another contrarian indicator for buying calls is that notable people in finance have also closed their shorts. These include Jeffery Gundlach, Kevin Muir, and Raoul Pal.[11,12,13] III. The Dollar, Gold, and Oil As previously stated, cash is being hoarded by not only primary banks, but central banks around the world. This in turn has created a boom in the dollar's strength, despite limitless injections of cash (if you think 1 trillion of Repo is the ceiling, think again) by the Fed. DXY Despite being in a deflationary environment, the DXY has not achieved such levels since 2003. Given the dollar shortage around the world, it is not inconceivable that we reach levels of around 105-107. For disclosure, I have taken a long position in UUP. However, with all parabolic moves, they end in a large drop. To summarize, the Fed needs to take action on its own currency due to the havoc it's causing globally, and will need to crush the value of the dollar, which will likely coincide with the time that we near 180. If we are indeed headed towards 180, then gold will keep selling off. WSB literally screams bloody guhhhhhh when gold sells off. However, gold has been having an amazing run and has broken out of its long term channel. In times of distress and with margin calls, heavy selling of equities selling off of gold in order to raise cash. As previously noted, in this deflationary environment, everything is selling off from stocks, to bonds, to gold. /GC Futures Contracts 5 Y1 Wk What about oil? Given the fall out of the risk parity structure, I'm no longer using TLT inflows/outflows as an indicator. I've realized that energy is the economy. Closely following commodities such as light crude which follow supply and demand more closely have provided a much better leading indicator as to what will happen in equities. Given that, oil will also most likely hit a relief rally. But ultimately, we have seen it reach as low $19/barrel during intraday trading. /CL Futures Contracts 1 Y1 D IV. The Next 5 Years In short, the recovery from this deflationary environment will take years to recover from. The trend down will not be without large bumps. We cannot compare this on the scale of the 2008 financial crisis. This is on the order of 1929. Once we hit near 180, the Fed crushes the dollar, we are in a high likelihood of hitting increased inflation, or stagflation. At this point the Fed will be backed into a corner and forced to raise rates. My targets for gold are around 1250-1300. It may possibly go near to 1000. Oil could conceivably go as low as $15-17/barrel, so don't go all in on the recovery bounce. No matter what, the current rise in gold will be a trap. The continued selling in the S&P is a trap, will bounce, forming another trap, before continuing our painful downtrend. I haven't even mentioned coronavirus and unemployment until now. I've stated previously we are on track to hit around at least 10,000 coronavirus cases by the end of this month. It's looking closer to now 20-30,000. Next month we are looking to at least 100,000 by the end of the April. We might hit 1,000,000 by May or June. Comparison of the 2020 Decline to 1929 ------------------------------------------------------------------------------------------------------------------------------------------------ Chart courtesy of Moon_buzz tl;dr We're going to have a major reflexive rally starting around 213, all the way back to at least to 250, and possibly 270. WSB is going to lose their minds holding their puts, and then load up on calls, declaring we've reached a bottom in the stock market. The next move will be put in place for the next leg down to 182, where certain actors will steal all your tendies on the way down. Also Monday might be another circuit breaker. tl;dr of tl;dr Big bounce incoming. Bear trap starting 213. Then bull trap up around 250-270. We're going down to around 182. tl;dr of tl;dr of tl;dr WSB will be screwed both left and right before they can say guh. Hint: If you want to get a Bloomberg article for free, hit esc repeatedly before the popup appears. If it doesn't work, refresh the article, and keep hitting esc. Remember, do not dance. We are on the cusp of a generational change. Use the money you earn to protect yourselves and others. Financial literacy and knowledge is the key to empowerment and self-change. Some good DD posts: u/bigd0g111 -https://www.reddit.com/wallstreetbets/comments/fmshcv/when_market_bounce_inevitably_comesdont_scream/ u/scarvesandsuspenders - https://www.reddit.com/wallstreetbets/comments/fmzu51/incoming_bounce_vix_puts/ Update 1 3/22/2020 - Limit down 3 minutes of futures. Likely hit -7% circuit breaker on the cash open on Monday at 213 as stated previously. Do not think we will hit the 2nd circuit breaker at 199.06. Thinking we bounce, not too much, but stabilize at least around 202.97. Update 2 3/23/20 9:08 - Watching the vote before making any moves. 9:40 - sold 25% of my SPY puts and 50% of my VXX calls 9:45 - sold another 50% of SPY puts 9:50 - just holding 25% SPY puts now and waiting for the vote/other developments 11:50 - Selling all puts. Starting my long position. 11:55 - Sold USO puts. 12:00 - Purchased VXX puts to vega hedge. 2:45 - Might sell calls EOD. Looks like a lot of positioning for another leg down before going back up. It's pretty common to shake things out in order to make people to sell positions. Just FYI, I do intraday trading. If you can't, just wait for EOD for the next positioning. 3:05 - Seeing a massive short on gold. Large amounts of calls on treasuries. And extremely large positioning for more shorts on SPY/SPX. Will flip into puts. Lot of people keep DM'ing me. I'm only going to do this once. https://preview.redd.it/uvs5tkje1ho41.png?width=2470&format=png&auto=webp&s=c6b632556ca04a26e4e08fb2c9223bfcb84e0901 That said, I'm going back into puts. Just goes to show how tricky the game is. 3:45 - As more shorts cover, going to sell the calls and then flip into puts around the last few min of close. Hope you guys made some money on the cover and got some puts. I'll write a short update later explaining how they set up tomorrow, especially with the VIX dropping so much. 3/24/20 - So the rally begins. Unfortunately misread the options volume. The clearest signal was the VIX dropping the past few days even though we kept swinging lower, which suggested that large gap downs were mostly over and the rally is getting started. Going to hold my puts since they are longer dated. Going to get a few short term calls to ride this wave. 10:20 - VIX still falling, possibility of a major short squeeze coming in if SPY breaks out over 238-239. 10:45 - Opened a small GLD short, late April expiration. 10:50 - Sold calls, just waiting, not sure if we break 238. If we go above 240, going back into calls. See room going to 247 or 269. Otherwise, going to start adding to my puts. https://preview.redd.it/ag5s0hccxmo41.png?width=2032&format=png&auto=webp&s=aad730db4164720483a8b60056243d6e4a8a0cab 11:10 - Averaging a little on my puts here. Again, difficult to time the entries. Do not recommend going all in at a single time. Still watching around 240 closely. 11:50 - Looks like it's closing. Still going to wait a little bit. 12:10 - Averaged down more puts. Have a little powder left, we'll see what happens for the rest of today and tomorrow. 2:40 - Closed positions, sitting on cash. Waiting to see what EOD holds. Really hard trading days. 3:00 - Last update. What I'm trying to do here posting some thoughts is for you guys to take a look at things and make some hypotheses before trading. Getting a lot of comments and replies complaining. If you're tailing, yes there is risk involved. I've mentioned sizing appropriately, and locking in profits. Those will help you get consistent gains. https://preview.redd.it/yktrcoazjpo41.png?width=1210&format=png&auto=webp&s=2d6f0272712a2d17d45e033273a369bc164e2477 Bounced off 10 year trendline at around 246, pretty close to 247. Unless we break through that the rally is over. Given that, could still see us going to 270. 3/25/20 - I wouldn't read too much into the early moves. Be careful of the shakeouts. Still long. Price target, 269. When does the month end? Why is that important? 12:45 - out calls. 12:50 - adding a tranche of SPY puts. Adding GLD puts. 1:00 est - saving rest of my dry powder to average if we still continue to 270. Think we drop off a cliff after the end of the quarter. Just a little humor... hedge funds and other market makers right now. 2:00pm - Keep an eye on TLT and VXX... 3:50pm - Retrace to the 10 yr trend line. Question is if we continue going down or bounce. So I'm going to explain again, haven't changed these lines. Check the charts from earlier. https://preview.redd.it/9qiqyndtivo41.png?width=1210&format=png&auto=webp&s=55cf84f2b9f5a8099adf8368d9f3034b0e3c4ae4 3/26/20 - Another retest of the 10 yr trendline. If it can go over and hold, can see us moving higher. 9:30 - Probably going to buy calls close to the open. Not too sure, seems like another trap setting up. Might instead load up on more puts later today. In terms of unemployment, was expecting close to double. Data doesn't seem to line up. That's why we're bouncing. California reported 1 million yesterday alone, and unemployment estimates were 1.6 million? Sure. Waiting a little to see the price action first. Treasuries increasing and oil going down? 9:47 - Added more to GLD puts. 10:11 - Adding more SPY puts and IWM puts. 10:21 - Adding more puts. 11:37 - Relax guys, this move has been expected. Take care of yourselves. Eat something, take a walk. Play some video games. Don't stare at a chart all day. If you have some family or close friends, advise them not to buy into this rally. I've had my immediate family cash out or switch today into Treasury bonds/TIPS. 2:55pm - https://youtu.be/S74rvpc6W60?t=9 3:12pm - Hedge funds and their algos right now https://www.youtube.com/watch?v=ZF_nUm982vI 4:00pm - Don't doubt your vibe. For those that keep asking about my vibe... yes, we could hit 270. I literally said we could hit 270 when we were at 218. There was a lot of doubt. Just sort by best and look at the comments. Can we go to 180 from 270? Yes. I mentioned that EOM is important. Here's another prediction. VIX will hit ATH again. 2:55pm EST - For DM's chat is not working now. Will try to get back later tonight. Stream today for those who missed it, 2:20-4:25 - https://www.twitch.tv/videos/576598992 Thanks again to WallStreetBooyah and all the others for making this possible. 9:10pm EST Twitter handles (updated) https://www.reddit.com/wallstreetbets/comments/fmhz1p/the_great_unwinding_why_wsb_will_keep_losing/floyrbf/?context=3, thanks blind_guy Not an exhaustive list. Just to get started. Follow the people they follow. Dark pool and gamma exposure - https://squeezemetrics.com/monitodix Wyckoff - https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method MacroVoices Investopedia for a lot. Also links above in my post. lol... love you guys. Please be super respectful on FinTwit. These guys are incredibly helpful and intelligent, and could easily just stop posting content.
You may have heard about off-shore tax havens of questionable legality where wealthy people invest their money in legal "grey zones" and don't pay any tax, as featured for example, in Netflix's drama, The Laundromat. The reality is that the Government of Canada offers 100% tax-free investing throughout your life, with unlimited withdrawals of your contributions and profits, and no limits on how much you can make tax-free. There is also nothing to report to the Canada Revenue Agency. Although Britain has a comparable program, Canada is the only country in the world that offers tax-free investing with this level of power and flexibility. Thank you fellow Redditors for the wonderful Gold Award and Today I Learned Award! (Unrelated but Important Note: I put a link at the bottom for my margin account explainer. Many people are interested in margin trading but don't understand the math behind margin accounts and cannot find an explanation. If you want to do margin, but don't know how, click on the link.) As a Gen-Xer, I wrote this post with Millennials in mind, many of whom are getting interested in investing in ETFs, individual stocks, and also my personal favourite, options. Your generation is uniquely positioned to take advantage of this extremely powerful program at a relatively young age. But whether you're in your 20's or your 90's, read on! Are TFSAs important? In 2020 Canadians have almost 1 trillion dollars saved up in their TFSAs, so if that doesn't prove that pennies add up to dollars, I don't know what does. The TFSA truly is the Great Canadian Tax Shelter. I will periodically be checking this and adding issues as they arise, to this post. I really appreciate that people are finding this useful. As this post is now fairly complete from a basic mechanics point of view, and some questions are already answered in this post, please be advised that at this stage I cannot respond to questions that are already covered here. If I do not respond to your post, check this post as I may have added the answer to the FAQs at the bottom.
How to Invest in Stocks
A lot of people get really excited - for good reason - when they discover that the TFSA allows you to invest in stocks, tax free. I get questions about which stocks to buy. I have made some comments about that throughout this post, however; I can't comprehensively answer that question. Having said that, though, if you're interested in picking your own stocks and want to learn how, I recommmend starting with the following videos: The first is by Peter Lynch, a famous American investor in the 80's who wrote some well-respected books for the general public, like "One Up on Wall Street." The advice he gives is always valid, always works, and that never changes, even with 2020's technology, companies and AI: https://www.youtube.com/watch?v=cRMpgaBv-U4&t=2256s The second is a recording of a university lecture given by investment legend Warren Buffett, who expounds on the same principles: https://www.youtube.com/watch?v=2MHIcabnjrA Please note that I have no connection to whomever posted the videos.
TFSAs were introduced in 2009 by Stephen Harper's government, to encourage Canadians to save. The effect of the TFSA is that ordinary Canadians don't pay any income or capital gains tax on their securities investments. Initial uptake was slow as the contribution rules take some getting used to, but over time the program became a smash hit with Canadians. There are about 20 million Canadians with TFSAs, so the uptake is about 70%- 80% (as you have to be the age of majority in your province/territory to open a TFSA).
Eligibility to Open a TFSA
You must be a Canadian resident with a valid Social Insurance Number to open a TFSA. You must be at the voting age in the province in which you reside in order to open a TFSA, however contribution room begins to accumulate from the year in which you turned 18. You do not have to file a tax return to open a TFSA. You do not need to be a Canadian citizen to open and contribute to a TFSA. No minimum balance is required to open a TFSA.
Where you Can Open a TFSA
There are hundreds of financial institutions in Canada that offer the TFSA. There is only one kind of TFSA; however, different institutions offer a different range of financial products. Here are some examples:
The Canadian big 5 bank branches and most other financial institutions offer a TFSA that allows you to buy mutual funds, hold cash, GICs, term deposits, and possibly ETFs. This is a good choice if you want guaranteed returns or diversified investing.
There are a number of on-line banks such as Tangerine, Simplii Financial, Oaken Financial, and many more that offer the TFSA.
The discount DIY brokerage arms of the big 5 banks give you more choices, including stocks, warrants, bonds and options. There are also standalone brokers like IBKR Canada, Questrade, Qtrade, and Virtual Brokers, among others, that offer this.
Some brokerages and financial advisors also offer TFSAs that give you these investment choices, in different formats such as:
Traditional brokerage, where a stockbroker invests your money (BMO Nesbitt Burns, RBC Dominion Securities and others)
Financial advisor who will invest your money according to a plan you put together with the advisor (TSI Network and many others)
"Robo" advisors such as Wealthsimple, RBC InvestEase, BMO SmartFolio, or Wealthbar
BMO's AdviceDirect, which is a semi-directed hybrid between standalone DIY investing and fully-advised investing, where you operate on a DIY basis but have access to a registered investment advisor (a live person) who can give you suggetions and advice.
Your TFSA may be covered by either CIFP or CDIC insuranceor both. Ask your bank or broker for details.
What You Can Trade and Invest In
You can trade the following:
GICS, mutual funds, term deposits
individual common and preferred stocks listed on an "approved exchange" which is the TSX, TSX-V, NASDAQ, NYSE, and about 20 other exchanges worldwide, but not the US OTC pink sheets. Many examples, such as Suncor, Linamar, Apple, any of the big banks, and many thousands of others, when you want to buy into an individual company
stock-like securities like REITS, ETFs and ETNs, including 2x and 3x leveraged
gold and silver certificates
cash of many countries (CAD/USD/EUGBP/AUD/NZD/JPY/CHF and many others)
government bills and bonds of most countries, subsovereigns like Canadian provincial bills and bonds, and most corporations
options that trade on the Montreal Exchange or various options exchanges in the USA and the rest of the word (see FAQ for details)
gold, silver bullion certificates
shares in certain private companies -- but consult your tax advisor on this
What You Cannot Trade
You cannot trade:
commodity futures contracts
option spread positions (see FAQ for details)
anything that requires a margin account, meaning, a special kind of account that allows you to borrow money directly from the broker against the assets you have in your account and the assets you intend to buy.
crypto (although there exist crypto ETNs that you can buy)
Again, if it requires a margin account, it's out. You cannot buy on margin in a TFSA. Nothing stopping you from borrowing money from other sources as long as you stay within your contribution limits, but you can't trade on margin in a TFSA. You can of course trade long puts and calls which give you leverage.
Rules for Contribution Room
Starting at 18 you get a certain amount of contribution room. According to the CRA: You will accumulate TFSA contribution room for each year even if you do not file an Income Tax and Benefit Return or open a TFSA. The annual TFSA dollar limit for the years 2009 to2012 was $5,000. The annual TFSA dollar limit for the years 2013 and 2014 was $5,500. The annual TFSA dollar limit for the year 2015 was $10,000. The annual TFSA dollar limit for the years 2016 to 2018 was $5,500. The annual TFSA dollar limit for the year 2019 is $6,000. The TFSA annual room limit will be indexed to inflation and rounded to the nearest $500. Investment income earned by, and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html If you don't use the room, it accumulates indefinitely. Trades you make in a TFSA are truly tax free. But you cannot claim the dividend tax credit and you cannot claim losses in a TFSA against capital gains whether inside or outside of the TFSA. So do make money and don't lose money in a TFSA. You are stuck with the 15% withholding tax on U.S. dividend distributions unlike the RRSP, due to U.S. tax rules, but you do not pay any capital gains on sale of U.S. shares. You can withdraw *both* contributions *and* capital gains, no matter how much, at any time, without penalty. The amount of the withdrawal (contributions+gains) converts into contribution room in the *next* calendar year. So if you put the withdrawn funds back in the same calendar year you take them out, that burns up your total accumulated contribution room to the extent of the amount that you re-contribute in the same calendar year.
E.g. Say you turned 18 in 2016 in Alberta where the age of majority is 18. It is now sometime in 2020. You have never contributed to a TFSA. You now have $5,500+$5,500+$5,500+$6,000+$6,000 = $28,500 of room in 2020. In 2020 you manage to put $20,000 in to your TFSA and you buy Canadian Megacorp common shares. You now have $8,500 of room remaining in 2020. Sometime in 2021 - it doesn't matter when in 2021 - your shares go to $100K due to the success of the Canadian Megacorp. You also have $6,000 worth of room for 2021 as set by the government. You therefore have $8,500 carried over from 2020+$6,000 = $14,500 of room in 2021. In 2021 you sell the shares and pull out the $100K. This amount is tax-free and does not even have to be reported. You can do whatever you want with it. But: if you put it back in 2021 you will over-contribute by $100,000 - $14,500 = $85,500 and incur a penalty. But if you wait until 2022 you will have $14,500 unused contribution room carried forward from 2021, another $6,000 for 2022, and $100,000 carried forward from the withdrawal 2021, so in 2022 you will have $14,500+$6,000+$100,000 = $120,500 of contribution room. This means that if you choose, you can put the $100,000 back in in 2022 tax-free and still have $20,500 left over. If you do not put the money back in 2021, then in 2022 you will have $120,500+$6,000 = $126,500 of contribution room. There is no age limit on how old you can be to contribute, no limit on how much money you can make in the TFSA, and if you do not use the room it keeps carrying forward forever. Just remember the following formula: This year's contribution room = (A) unused contribution room carried forward from last year + (B) contribution room provided by the government for this year + (C) total withdrawals from last year. EXAMPLE 1: Say in 2020 you never contributed to a TFSA but you were 18 in 2009. You have $69,500 of unused room (see above) in 2020 which accumulated from 2009-2020. In 2020 you contribute $50,000, leaving $19,500 contribution room unused for 2020. You buy $50,000 worth of stock. The next day, also in 2020, the stock doubles and it's worth $100,000. Also in 2020 you sell the stock and withdraw $100,000, tax-free. You continue to trade stocks within your TFSA, and hopefully grow your TFSA in 2020, but you make no further contributions or withdrawals in 2020. The question is, How much room will you have in 2021? Answer: In the year 2021, the following applies: (A) Unused contribution room carried forward from last year, 2020: $19,500 (B) Contribution room provided by government for this year, 2021: $6,000 (C) Total withdrawals from last year, 2020: $100,000 Total contribution room for 2021 = $19,500+6,000+100,000 = $125,500. EXAMPLE 2: Say between 2020 and 2021 you decided to buy a tax-free car (well you're still stuck with the GST/PST/HST/QST but you get the picture) so you went to the dealer and spent $25,000 of the $100,000 you withdrew in 2020. You now have a car and $75,000 still burning a hole in your pocket. Say in early 2021 you re-contribute the $75,000 you still have left over, to your TFSA. However, in mid-2021 you suddenly need $75,000 because of an emergency so you pull the $75,000 back out. But then a few weeks later, it turns out that for whatever reason you don't need it after all so you decide to put the $75,000 back into the TFSA, also in 2021. You continue to trade inside your TFSA but make no further withdrawals or contributions. How much room will you have in 2022? Answer: In the year 2022, the following applies: (A) Unused contribution room carried forward from last year, 2021: $125,500 - $75,000 - $75,000 = -$24,500. Already you have a problem. You have over-contributed in 2021. You will be assessed a penalty on the over-contribution! (penalty = 1% a month). But if you waited until 2022 to re-contribute the $75,000 you pulled out for the emergency..... In the year 2022, the following would apply: (A) Unused contribution room carried forward from last year, 2021: $125,500 -$75,000 =$50,500. (B) Contribution room provided by government for this year, 2022: $6,000 (C) Total withdrawals from last year, 2020: $75,000 Total contribution room for 2022 = $50,500 + $6,000 + $75,000 = $131,500. ...And...re-contributing that $75,000 that was left over from your 2021 emergency that didn't materialize, you still have $131,500-$75,000 = $56,500 of contribution room left in 2022. For a more comprehensive discussion, please see the CRA info link below.
FAQs That Have Arisen in the Discussion and Other Potential Questions:
Equity and ETF/ETN Options in a TFSA: can I get leverage? Yes. You can buy puts and calls in your TFSA and you only need to have the cash to pay the premium and broker commissions. Example: if XYZ is trading at $70, and you want to buy the $90 call with 6 months to expiration, and the call is trading at $2.50, you only need to have $250 in your account, per option contract, and if you are dealing with BMO IL for example you need $9.95 + $1.25/contract which is what they charge in commission. Of course, any profits on closing your position are tax-free. You only need the full value of the strike in your account if you want to exercise your option instead of selling it. Please note: this is not meant to be an options tutorial; see the Montreal Exchange's Equity Options Reference Manual if you have questions on how options work.
Equity and ETF/ETN Options in a TFSA: what is ok and not ok? Long puts and calls are allowed. Covered calls are allowed, but cash-secured puts are not allowed. All other option trades are also not allowed. Basically the rule is, if the trade is not a covered call and it either requires being short an option or short the stock, you can't do it in a TFSA.
Live in a province where the voting age is 19 so I can't open a TFSA until I'm 19, when does my contribution room begin? Your contribution room begins to accumulate at 18, so if you live in province where the age of majority is 19, you'll get the room carried forward from the year you turned 18.
If I turn 18 on December 31, do I get the contribution room just for that day or for the whole year? The whole year.
Do commissions paid on share transactions count as withdrawals? Unfortunately, no. If you contribute $2,000 cash and you buy $1,975 worth of stock and pay $25 in commission, the $25 does not count as a withdrawal. It is the same as if you lost money in the TFSA.
How much room do I have? If your broker records are complete, you can do a spreadsheet. The other thing you can do is call the CRA and they will tell you.
TFSATFSA direct transfer from one institution to another: this has no impact on your contributions or withdrawals as it counts as neither.
More than 1 TFSA: you can have as many as you want but your total contribution room does not increase or decrease depending on how many accounts you have.
Withdrawals that convert into contribution room in the next year. Do they carry forward indefinitely if not used in the next year? Answer :yes.
Do I have to declare my profits, withdrawals and contributions? No. Your bank or broker interfaces directly with the CRA on this. There are no declarations to make.
Risky investments - smart? In a TFSA you want always to make money, because you pay no tax, and you want never to lose money, because you cannot claim the loss against your income from your job. If in year X you have $5,000 of contribution room and put it into a TFSA and buy Canadian Speculative Corp. and due to the failure of the Canadian Speculative Corp. it goes to zero, two things happen. One, you burn up that contribution room and you have to wait until next year for the government to give you more room. Two, you can't claim the $5,000 loss against your employment income or investment income or capital gains like you could in a non-registered account. So remember Buffett's rule #1: Do not lose money. Rule #2 being don't forget the first rule. TFSA's are absolutely tailor-made for Graham-Buffett value investing or for diversified ETF or mutual fund investing, but you don't want to buy a lot of small specs because you don't get the tax loss.
Moving to/from Canada/residency. You must be a resident of Canada and 18 years old with a valid SIN to open a TFSA. Consult your tax advisor on whether your circumstances make you a resident for tax purposes. Since 2009, your TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. Note: If you move to another country, you can STILL trade your TFSA online from your other country and keep making money within the account tax-free. You can withdraw money and Canada will not tax you. But you have to get tax advice in your country as to what they do. There restrictions on contributions for non-residents. See "non residents of Canada:" https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf
The U.S. withholding tax. Dividends paid by U.S.-domiciled companies are subject to a 15% U.S. withholding tax. Your broker does this automatically at the time of the dividend payment. So if your stock pays a $100 USD dividend, you only get $85 USD in your broker account and in your statement the broker will have a note saying 15% U.S. withholding tax. I do not know under what circumstances if any it is possible to get the withheld amount. Normally it is not, but consult a tax professional.
The U.S. withholding tax does not apply to capital gains. So if you buy $5,000 USD worth of Apple and sell it for $7,000 USD, you get the full $2,000 USD gain automatically.
Tax-Free Leverage. Leverage in the TFSA is effectively equal to your tax rate * the capital gains inclusion rate because you're not paying tax. So if you're paying 25% on average in income tax, and the capital gains contribution rate is 50%, the TFSA is like having 12.5%, no margin call leverage costing you 0% and that also doesn't magnify your losses.
Margin accounts. These accounts allow you to borrow money from your broker to buy stocks. TFSAs are not margin accounts. Nothing stopping you from borrowing from other sources (such as borrowing cash against your stocks in an actual margin account, or borrowing cash against your house in a HELOC or borrowing cash against your promise to pay it back as in a personal LOC) to fund a TFSA if that is your decision, bearing in mind the risks, but a TFSA is not a margin account. Consider options if you want leverage that you can use in a TFSA, without borrowing money.
Dividend Tax Credit on Canadian Companies. Remember, dividends paid into the TFSA are not eligible to be claimed for the credit, on the rationale that you already got a tax break.
FX risk. The CRA allows you to contribute and withdraw foreign currency from the TFSA but the contribution/withdrawal accounting is done in CAD. So if you contribute $10,000 USD into your TFSA and withdraw $15,000 USD, and the CAD is trading at 70 cents USD when you contribute and $80 cents USD when you withdraw, the CRA will treat it as if you contributed $14,285.71 CAD and withdrew $18,75.00 CAD.
OTC (over-the-counter stocks). You can only buy stocks if they are listed on an approved exchange ("approved exchange" = TSX, TSX-V, NYSE, NASDAQ and about 25 or so others). The U.S. pink sheets "over-the-counter" market is an example of a place where you can buy stocks, that is not an approved exchange, therefore you can't buy these penny stocks. I have however read that the CRA make an exception for a stock traded over the counter if it has a dual listing on an approved exchange. You should check that with a tax lawyer or accountant though.
The RRSP. This is another great tax shelter. Tax shelters in Canada are either deferrals or in a few cases - such as the TFSA - outright tax breaks, The RRSP is an example of a deferral. The RRSP allows you to deduct your contributions from your income, which the TFSA does not allow. This deduction is a huge advantage if you earn a lot of money. The RRSP has tax consequences for withdrawing money whereas the TFSA does not. Withdrawals from the RRSP are taxable whereas they are obviously not in a TFSA. You probably want to start out with a TFSA and maintain and grow that all your life. It is a good idea to start contributing to an RRSP when you start working because you get the tax deduction, and then you can use the amount of the deduction to contribute to your TFSA. There are certain rules that claw back your annual contribution room into an RRSP if you contribute to a pension. See your tax advisor.
Pensions. If I contribute to a pension does that claw back my TFSA contribution room or otherwise affect my TFSA in any way? Answer: No.
The $10K contribution limit for 2015. This was PM Harper's pledge. In 2015 the Conservative government changed the rules to make the annual government allowance $10,000 per year forever. Note: withdrawals still converted into contribution room in the following year - that did not change. When the Liberals came into power they switched the program back for 2016 to the original Harper rules and have kept the original Harper rules since then. That is why there is the $10,000 anomaly of 2015. The original Harper rules (which, again, are in effect now) called for $500 increments to the annual government allowance as and when required to keep up with inflation, based on the BofC's Consumer Price Index (CPI). Under the new Harper rules, it would have been $10,000 flat forever. Which you prefer depends on your politics but the TFSA program is massively popular with Canadians. Assuming 1.6% annual CPI inflation then the annual contribution room will hit $10,000 in 2052 under the present rules. Note: the Bank of Canada does an excellent and informative job of explaining inflation and the CPI at their website.
Losses in a TFSA - you cannot claim a loss in a TFSA against income. So in a TFSA you always want to make money and never want to lose money. A few ppl here have asked if you are losing money on your position in a TFSA can you transfer it in-kind to a cash account and claim the loss. I would expect no as I cannot see how in view of the fact that TFSA losses can't be claimed, that the adjusted cost base would somehow be the cost paid in the TFSA. But I'm not a tax lawyeaccountant. You should consult a tax professional.
Transfers in-kind to the TFSA and the the superficial loss rule. You can transfer securities (shares etc.) "in-kind," meaning, directly, from an unregistered account to the TFSA. If you do that, the CRA considers that you "disposed" of, meaning, equivalent to having sold, the shares in the unregistered account and then re-purchased them at the same price in the TFSA. The CRA considers that you did this even though the broker transfers the shares directly in the the TFSA. The superficial loss rule, which means that you cannot claim a loss for a security re-purchased within 30 days of sale, applies. So if you buy something for $20 in your unregistered account, and it's trading for $25 when you transfer it in-kind into the TFSA, then you have a deemed disposition with a capital gain of $5. But it doesn't work the other way around due to the superficial loss rule. If you buy it for $20 in the unregistered account, and it's trading at $15 when you transfer it in-kind into the TFSA, the superficial loss rule prevents you from claiming the loss because it is treated as having been sold in the unregistered account and immediately bought back in the TFSA.
Day trading/swing trading. It is possible for the CRA to try to tax your TFSA on the basis of "advantage." The one reported decision I'm aware of (emphasis on I'm aware of) is from B.C. where a woman was doing "swap transactions" in her TFSA which were not explicitly disallowed but the court rules that they were an "advantage" in certain years and liable to taxation. Swaps were subsequently banned. I'm not sure what a swap is exactly but it's not that someone who is simply making contributions according to the above rules would run afoul of. The CRA from what I understand doesn't care how much money you make in the TFSA, they care how you made it. So if you're logged on to your broker 40 hours a week and trading all day every day they might take the position that you found a way to work a job 40 hours a week and not pay any tax on the money you make, which they would argue is an "advantage," although there are arguments against that. This is not legal advice, just information.
The U.S. Roth IRA. This is a U.S. retirement savings tax shelter that is superficially similar to the TFSA but it has a number of limitations, including lack of cumulative contribution room, no ability for withdrawals to convert into contribution room in the following year, complex rules on who is eligible to contribute, limits on how much you can invest based on your income, income cutoffs on whether you can even use the Roth IRA at all, age limits that govern when and to what extent you can use it, and strict restrictions on reasons to withdraw funds prior to retirement (withdrawals prior to retirement can only be used to pay for private medical insurance, unpaid medical bills, adoption/childbirth expenses, certain educational expenses). The TFSA is totally unlike the Roth IRA in that it has none of these restrictions, therefore, the Roth IRA is not in any reasonable sense a valid comparison. The TFSA was modeled after the U.K. Investment Savings Account, which is the only comparable program to the TFSA.
The UK Investment Savings Account. This is what the TFSA was based off of. Main difference is that the UK uses a 20,000 pound annual contribution allowance, use-it-or-lose-it. There are several different flavours of ISA, and some do have a limited recontribution feature but not to the extent of the TFSA.
Is it smart to overcontribute to buy a really hot stock and just pay the 1% a month overcontribution penalty? If the CRA believes you made the overcontribution deliberately the penalty is 100% of the gains on the overcontribution, meaning, you can keep the overcontribution, or the loss, but the CRA takes the profit.
Speculative stocks-- are they ok? There is no such thing as a "speculative stock." That term is not used by the CRA. Either the stock trades on an approved exchange or it doesn't. So if a really blue chip stock, the most stable company in the world, trades on an exchange that is not approved, you can't buy it in a TFSA. If a really speculative gold mining stock in Busang, Indonesia that has gone through the roof due to reports of enormous amounts of gold, but their geologist somehow just mysteriously fell out of a helicopter into the jungle and maybe there's no gold there at all, but it trades on an approved exchange, it is fine to buy it in a TFSA. Of course the risk of whether it turns out to be a good investment or not, is on you.
Remember, you're working for your money anyway, so if you can get free money from the government -- you should take it! Follow the rules because Canadians have ended up with a tax bill for not understanding the TFSA rules. Appreciate the feedback everyone. Glad this basic post has been useful for many. The CRA does a good job of explaining TFSAs in detail at https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf
Unrelated but of Interest: The Margin Account
Note: if you are interested in how margin accounts work, I refer you to my post on margin accounts, where I use a straightforward explanation of the math behind margin accounts to try and give readers the confidence that they understand this powerful leveraging tool.
Trading with margin is simply using borrowed money to buy or sell stocks short. Brokerage firms will allow you to use your cash on hand as equity in determining the amount of margin you are allocated in your trading account. Watch this video to learn more about margin trading, how it works, and some of the benefits and risks to help you decide whether it is a trading strategy that can help you achieve your investment goals. Read relevant legal disclosures. Next steps to consider. Apply for margin. Margin trading has unique risks. In order to decide if it is right for you, it is important understand these risks, as well as your personal risk tolerance. If you want to learn more, check out the next video on the risks of margin trading. Forex Momentum Trading On Margin, Short Video – Margin in Practice using TWS. Exactly how do we measure Momentum Trading? Researchers compute Momentum Trading by multiplying the mass of the object by the velocity of the object. It is a sign of exactly how difficult it would certainly be to stop the object. If you were running, you could have For each trade made in a margin account, we use all available cash and sweep funds first and then charge the customer the current margin interest rate on the balance of the funds required to fill the order. The minimum equity requirement for a margin account is $2,000. Please read more information regarding the risks of trading on margin.
Margin trading, conceptos basicos Jose Alfonso Hernando. ... Rating is available when the video has been rented. ... Cómo interpretar el VOLUMEN en el TRADING ... 📌Binance SHORT TRADE Tutorial Binance Margin Trading FULL Tutorial Margin Trading Beginners - Duration: 20:03. Mango Research 2,581 views. 20:03. $1,000 to Six Figures ... One of the best rule for the margin trading is explained in video, Which can give you profit for 90% sure if you know risk management. If you like the video please subscribe to the channel, like ... Margin trading in the forex market is the process of making a good faith deposit with a broker in order to open and maintain positions in one or more currencies. Margin is not a cost or a fee, but ... Brian explains the basics of margin trading to answer this question. Loading... Advertisement Autoplay When autoplay is enabled, a suggested video will automatically play next. Up next ...