Value Investing How do people trade leveraged ETFs? What’s the point ? Who are these people ?

How do people trade leveraged ETFs? What’s the point ? Who are these people ?
Has COVID cause a fundamental shift in the tobacco industry? Here are my thoughts
Thesis on shorting bonds of countries at the Zero Lower Bound . The US/EU/JAP will be forced to artificially manufacture inflation to move clear of the Zero Lower Bound, they can't go negative otherwise people will just run to ATMs and hoard cash [bonus counterexample]
SensorTower 2020 Review Mobile Trends

How do people trade leveraged ETFs? What’s the point ? Who are these people ?

Posted: 02 Feb 2021 07:32 PM PST

Hi everyone,

Had this question on my mind for a bit. One of my first trading mistakes was holding a leveraged bear etf overnight. It was SPXU , despite guessing the direction of the SP500 that day, I forgot to sell before end of day and watched all my earnings get wiped out. On the day that oil was worth negative monies last year. I watched DWT (now extinct 3x bear leverage etf on oil ) skyrocket from 11 to 40 a share practically in an hour.

I'm still learning but was wondering , how does one tame these leveraged etfs ? What kind of use do they have for the average investor ?

Thank you for your replies in advance.

Edit ; since they are supposed to be traded only in the day , are they useful for people with "insider information" so to say ? If they know there's a big announcement that will shake the market in one direction or the other .. then they jump into it ?

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Has COVID cause a fundamental shift in the tobacco industry? Here are my thoughts

Posted: 02 Feb 2021 09:35 AM PST

I have followed the tobacco industry for years, but never invested. At a minimum, it's a great history lesson (there's a good reason the US capitol building is adorned with tobacco leaves). The industry is the classic definition of simple, but not easy.

Clearly the industry has headwinds. It always has. Right now, they feel particularly existential in the form of competition from legal marijuana and e-vapor.

But COVID has changed the landscape. Volume leveled off for the first time in five years! As for e-vapor, it looks like more like the ability to navigate the regulatory issues will be the single most important factor for success. Clearly, Big Tobacco is in the best position to do this thanks to their seasoned legal teams and lobbyists. One thing is for sure, in the long-term, people will get their nicotine, it's just a matter of the form it will take.

The big three companies - Altria, Philip Morris and BAT are cheap. They trade at 10% cash flow yields with 80% payouts (which in this industry is arguably fine). They have plenty of cash to fund growth opportunities, which are going well, all things considered. While COVID has been a setback for Altria's heat-not-burn roll-out, it has been a boon for its combustible business. Meanwhile heat-not-burn is 20% of Philip Morris's volume already!

Therefore, it's hard to tell how much of the current price is a result of a) legitimate threats to the business or b) the rise of ESG, the ethics of the industry, and fund managers' unwillingness to invest in the "death merchants".

In my opinion, all of this reiterates the immutable fact of the tobacco industry - The oligopoly will persist, if not forever, for a very, very long time to come (long enough to return a lot of cash in the form of both dividends and buybacks). I'm close to putting a significant amount of capital to work establishing permanent positions.

EDIT: I am referring to the Big 3 global companies by market share. I specifically excluded ITG due to several factors, including its dividend cut.

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Thesis on shorting bonds of countries at the Zero Lower Bound . The US/EU/JAP will be forced to artificially manufacture inflation to move clear of the Zero Lower Bound, they can't go negative otherwise people will just run to ATMs and hoard cash [bonus counterexample]

Posted: 03 Feb 2021 03:10 AM PST

The Zero Lower Bound is also known as the moment when the rubber meets the road. Nominal Interest Rate on overnight deposits at the Central Bank and the equivalent short term government bonds pay out zero, zip, nada, nulla...percentage wise.

Many people attribute the fact that we are at the Zero Lower Bound to the top down decisions of Central Banks. It is them, in fact which decide the Nominal Rate on overnight loans between banks to meet the cash requirements to be held at the Central Bank per the regulations specifically put in place by the Central Bank itself.

Reality is that the Central Bank is not God. It has very little room for manouver and generally +/- 500bps the rate of interest on short term overnight loans is approximately the same as it would be without its intervention.

So if it's not the Central Bank driving the charge and being God establishing the rate, then who is it? Well It's us! It's us with our behavior and how we behave with our finances, most importantly how much do we spend and how our expenditure creates inflation.

Inflation is the rise of prices as measured in the unitary currency of controlled by the Central Bank of the country being examined. In the US the 2 indicators used by the Fed are the CPI and the PCE, those measure year over year, so when they are positive it means that there is, in fact inflation. When they are negative it means the phenomenon at play is deflation.

Inflationary and deflationary forces square off every day in the global and domestic economy to produce the result which is measured monthly by the aforementioned (CPI, PCE) indicators .

Now for inflation to happen there has to be a level of impulsivity which compels people to act on it and create a scenario in which money chases goods thus enabling vendors and retailers to rise the price. Matter of fact this is happening less and less and there are are some secular trends which favor deflation over inflation, they are just beginning to produce their effect upon the global economy :

1) Aging demographic, people become less impulsive as they age

2) Population (even young people) are increasingly risk averse compared to the past and you can see this everywhere, not only in finance, people live in the NOW less and less and thus are less impulsive, below some non financial trends

a) Cigarette consumption is down
b) Drugs consumption is down, especially stimulants
c) Alcohol consumption is down
d) ER visits due to bar brawls and domestic injuries are down
e) Violence all around is down
f) Sexual intercourses per year is down
g) Number of female sex partners per male is down
h) Age of first sexual intercourse is pushed in the 20s, whereas people would already fathered 100s of kids back in the Middle Ages
i) You have 80 yr old people still buying 30 year govt. bonds investing "for the future" whlist they are literally about to die and become nothing for the rest of time
l) Space is our frontier very much like the Ocean was for the people in the Bronze age....we have lost zero people in space, ZERO! And zero ships, that alone means we are playing it too conservative out of fear
m) Finally I know i'll get a lot of flak for this but the lockdowns, honestly we would have never locked down in the 80s 90s 00s... for a disease which statistically trims a few months off people lives

3) The rise of platforms such as Amazon, Ebay, Trivago which eliminate price slippage and enable vendors to front run their competitors by lowering the price by a fraction of a penny. This eliminates holes in the price making, and enables the consumer to sort by price. Eliminating slippage and price holes is a huge blow to inflation. We've seen nothing yet, e-commerce is just a few percentage of the total purchases in the US and it will reach 100% in the coming decades, plus if you exclude platforms like trivago and fiverr we still don't have an Amazon for services, that would completely eviscerate inflation.

Given that the rate of interest follows inflation/deflation this means that if left alone the interest rate will follow suit and head into the negative.

And here lies the problem, interest rate cannot go into the negative because people and companies would rather withdraw money from the bank and hold them in the form of banknotes which would NOT carry the negative component. That could potentially signify the return to the stoneage of Banking, the end of fractional reserve and the collapse of the financial system. Suffices to say that government will not allow this to happen.

The big question which is also the base of the investment thesis being presented here is :

How will they avoid financial armageddon?

The answer is by artificially manufacturing enough inflation to move away from the Zero area and thus have the Interest rate follow suit and move away from the Zero Lower Bound.

Note that this move is disconnected by monetary policy consideration and solely done to propel the financial system away from the Zero bound and contrast deflationary pressures which are still in the very beginning and have a lot of energy yet to unleash (think of deflationary pressures as an Cat-5 Hurricane which is only now forming offshore Cabo Verde and will hit Florida in 3 weeks time).

Also note that how is inflation artificially manufactured is not important , there are in fact various way of doing this, namely: helicopter money, QE for the people, stimulous checks, central banks monetizing government deficits and so forth.

It's not important because the goal is always the same: inundating consumers with cash in the hope that they feel rich enough to start consuming again (acting on the impulse of purchasing again) and stop saving/investing (being fearful of the future and behaving in a risk averse manner)

So what's the play in the markets for the aforementioned scenario?

Government bonds carry a so called coupon, which is the rate of interest those bonds pay semi-annually to the holder. In almost all bonds (exception being the Inflation Protected Bonds) the coupon represents the nominal rate (not to be confused from the real rate which is nominal rate-inflation rate) . The coupon is dependant upon the prevailing rates which was in place when the bond was issued by the Treasury.

We've been in the proximity of the Zero Lower Bound for a whole lot of time after 2008, after a short rise during the Trump presidency COVID happened and we're back again at Zero.

This is a huge opportunity because all the bonds being issued by the G-20 Government since 2008 basically all have a coupon which is proximous to Zero.

As said earlier G-20 governments/Central Banks will be forced to manufacture some inflation and that would carry the Treasury bonds rate upwards as well (because savers would not bid over each other anymore for the privilege of lending to the Government at 0.25% because that would not protect them against inflation anymore)

What happens when inflation is manufactured and Treasury begins to issue bonds with a coupon which is more in line with an inflation which is rising (opposed to the strongest deflationary forces mentioned above)?

It means that the bonds issued 2008-present begin to look less attractive because they carry a coupon much smaller compared to the one of the newly issued bonds. When a bond become inconvenient to hold, people start looking for exits and buyers are hard to come by, in other words the price of the bond collapses (when the price of a bond collapses its yield rises).

As per the title says this thesis implies shorting bonds which were issued 2008-present because if the scenario outlined in the thesis is compelling, then investors who hold those bonds will head towards the exits and at the same time they won't find many buyers given that newly issued one will incrementally have a higher coupon to match the raising inflation manufactured by G-20 Governments and Central Banks

Potential risks in the thesis:

1) Central Banks actually go negative and banks manage to avoid passing the negative component to their customers. They get squeezed and on the brink of failure, but G20 governments keep bailing them out . The banking sector would become de-facto nationalized

Counter Example:

1) Central Banks go negative and banks pass the negative component to their customers. But banking being so important for the global economy and having globalization completely taken over the economy, then people will swallow the pill of negative rates on their deposits . After all when you withdraw money and store it in the form of cash you can do nothing but a fraction of what you are able to do if you have money in the bank (even if you collect a negative rate) . You can't move money anywhere if not in the very close physical proximity, thus if you are an individual or a company your purchasing options would be limited at the physical proximity vendors where you can physically bring cash (in the form of banknotes) to and pay them with banknotes. Also you'd have to protect the loot as it's an open invitation for brulgaries .

So what's the trade for this counterexample?

It's the opposite, understanding that the Central Banks don't have to manufacture inflation to go negative, hence they will go negative by following the deflationary pressures mentioned above . So today's bonds paying 1,25% are a bargain compared to what's about to come, hence migth as well go long on them

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SensorTower 2020 Review Mobile Trends

Posted: 02 Feb 2021 12:59 PM PST

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