Hello Traders,
Welcome to this week’s newsletter. Tomorrow is the second day of the Fed’s FOMC meeting and this is the first time in the last few years that the market is completely clueless on what the Fed will do. On the one hand, traders are almost certain that a 75 bps increase will happen, while on the other hand, Powell assured us last month that 75 bps is out of the window. What will tomorrow bring? I am sitting tomorrow out, as I want to be selective on my trades.
The Big Picture
The number one question on everyone’s mind is: Where is the bottom? Well truth be told, no one knows. Are we pricing in a season of stagflation? Are price increases slowing down? It all depends. Over the past few days, I spent some time regressing the natural log of EPS and the 10-year rate as an independent variable in order to get an estimate of the S&P’s forward price. The results were statistically significant and I thought I would share them with you.
Currently, SPX’s forward earnings is $227. If we assume a recession as our base case, the earnings could be as low as $160. If we assume a softish landing, the EPS could be $200. Based on these assumptions, SPX could be anywhere from $3,500 to $4,500. It’s also very similar with SPY as a proxy.
Running a sensitivity analysis on the numbers, we see where I believe SPY should be by year-end (given current information).
Option Trades for the Week
So far this week, I have only made 3 trades. I finally closed the $MSTR bear spread with decent profit. I knew Bitcoin would break down and that I just needed to be patient. I also sold some $550 puts on Tesla on Monday, and then covered them today. My goal is to sell premium on panic days like yesterday and cover when implied volatility retrieves. You are solely betting on volatility and less on a direction.
My only open trade is 4 cash-secured puts on SPY at $352, with an expiry on June 21, 2022. My reasoning is solely fundamental here. Based on my model, $350 puts SPY at a forward P/E of 16, which is a reasonable place to start building a position.
Tweet of the Week
The tweet of the week goes to Jason Calacanis, a Silicon Valley venture capitalist. One of the things that really bothers me in the market is overconfidence. Perhaps unfortunately, or perhaps fortunately, Silicon Valley is filled with overconfidence. Years of zero rates, free money, and money-losing companies have led this crowd to believe that they are geniuses. Of course, I am overgeneralizing here, and I understand the value that venture funds play in our society, but the arrogance of some VCs is too much for me (and many others) to handle. In a series of tweets this past week, Jason predicted both a recession and its severity!
When you are so confident that you think you can predict not only a recession, but also its severity, that shows me that we are still far from the bottom. The bottom does not happen until everyone is humbled!
One Last Thing:
Over the weekend, I wrote a piece on one of the secret causes of inflation. You might think it is war, or supply chain distribution, or money printing, but the truth is that one of the secret causes of the inflation we are experiencing is ESG greenwashing and years of underinvestment in energy and precious metals. Although this is a controversial piece, I stand by my research. Feel free to check it out HERE.
To your success,
Ardi