"Know thyself, nothing in excess, surety brings ruin. -Delphic Maxims"
The CPI Report on Wednesday was highly favorable from several perspectives. It is widely considered that the first inflation print in the two handle for three years has unencumbered the Doves at the FOMC. While Jackson Hole could prove a tempering catalyst, ultimately the odds for a Fed cut in September have greatly risen. The odds have actually risen to 100%, as implied by futures.
The market is largely reflecting that the Federal Reserve can now turn its focus to the labor market. And given that inflation reports are coming in the right direction, and the last jobs report came in the wrong one, many prominent economists have been pounding the drum for the Federal Reserve to cut.
Even though the Fed can now turn its focus to the labor market, the subsequent labor market data after the post-payrolls freakout has been constructive. The economy appears very much to be in a soft-landing mode, and the volatility event likely shook out a lot of complacent positions. Sometimes a good sell-off is like a pressure wash for a bull market, as we saw this week.
As we predicted on August 6th, the volatility curve collapsed and presaged a massive rally. We not only got you short the $VIX in two trades, we also got you long Nvidia. So, if you listened to Punk Rock Traders you didn't sit this rally out and scratch your head while it happened you got real returns. As of the close yesterday, the performance of contracts we recommended are as follows:
Nov 23rd $VIX put option at $23 is up 52.4% since 8/6/24.
Nov 23rd $VIX put option at $18 is up 30.8% since 8/13/24.
Long strangle with a bullish bias on $NVDA with two Sept. 13th $120 calls for every Sept 13th $96 puts is up 75.6% since 8/8/24.
Please also check out our article on how to create a synthetic dividend for Berkshire Hathaway ($BRK.B).
As of publishing the market was a little bit down, so a bit of those gains could be given back today. However, we remain firmly committed to the Nvidia trade through earnings and the VIX trade until the election, until further notice. Depending on how far ITM the Nvidia options go, I may urge our readers to sell half their position to limit risk going into the earnings report even though I think it will prove fortuitous for Jensen Huang.
It has been a wild few weeks in markets. By some measures, some of the wildest on record. It was a challenging environment to launch Punk Rock Traders into, yet we have excelled. The volatility crush proved the largest in history, and I find it very likely that the $VIX stays in the lower $10-$20 regime for much of the year. There's always a chance that geopolitical risk could reignite inflation fears, but this is a relatively low probability outcome.
"We will get more clarity on whether or not we are entering a recession very soon, and I believe the bunk jobs report was an anomaly rather than a watershed moment in this cycle. The qualitative fact that the inversion has already started to materially collapse means that this risk is in a different breed compared to what happened after COVID, it was a volatility blow-off, not a source of persistent uncertainty." -
The market may take a bit of a breather Friday after a rip-roaring week of gains that re-affirmed we are in a bull market. I am very proud that we have given you some winning advice and orientation in a very challenging period for markets. It was not easy to call a probable end of adverse market conditions on August 6th, and I believe our justification was sound. We saw anomalies in the Nvidia options chain that we exploited near what is increasingly seeming like a local low.
I am even more proud that we were able to give you easily implementable winning trades. The Nvidia trade was risk-defined and well justified based on the rapid collapse of the VIX futures curve and my careful and accurate analysis of the company over this bull market. I have faith that there upcoming earnings report will make this trade even more profitable than it has been so far.
Nvidia has consistently shattered earnings expectations and I don't think they will have yet exhausted the seemingly endless demand for their chips, which are necessary for many artificial intelligence related functions. There will be an end to Nvidia beating analyst estimates, the analysts will eventually catch up, but I think that time is quarters away.
There is an old informal indicator called the magazine cover indicator that accuses the business press of being famously late. In other words, they only cover something once it has already peaked or has become irrelevant. While there is no formal politician indicator, I think this week is pretty informative of the fact that inflation has died.
The day after the CPI report that all but assured the Fed begins a soft-landing cutting cycle is marked by Donald Trump holding an odd press conference (pictured) semi-focused on inflation and Kamala Harris introduced a plan that includes price controls. These to me both seem like contrarian indicators that inflation has died, particularly coupled with the record low medium-term expectations for inflation recently reported by the NY Fed.
Punk rock investing is sophisticated options trades aimed at wealth augmentation for sophisticated investors. We are aimed at providing high-alpha ideas without the usual regard for reputation that holds many of the best on Wall Street back from offering their best ideas. Instead we are punk rock about trading. Contact me if you have interest in our approach and our ideas. We are looking forward to hearing from you.
