Finding Greatness in Junk (HYG,AMZN,XRT)

Finding Greatness in Junk (HYG,AMZN,XRT)

 

You don’t find too many great men these days.  Our guess is that there were a lot more at one time.

 

That’s not to say that there aren’t a lot of rich men, or powerful or influential men.  There are plenty of those.  There are a great many intelligent men, too.  And a whole cadre of those who possess abundant stores of knowledge and know-how in this field or that…

 

But greatness?

 

To our mind, greatness doesn’t reside in amassing fortunes or achieving military victories in far-flung lands, or in getting re-elected for a thirty-third term.  There’s a great deal to be said, of course, for those who achieve these things.  One might point to their determination, their creativity or ability to think strategically.  And there’s a good deal to be said for honoring those who get the best out of themselves, or see the potential in others and help them to exploit it.

 

But greatness, to our mind, resides elsewhere.

 

True greatness is a function of wisdom, and wisdom is an ethical matter.

 

By ‘ethical’, we don’t mean well-behaved, though it’s nice to see that quality in people, as it has become rather rare these days.

Indeed, there still are a great many well-behaved individuals about.  But does that constitute greatness?  Is it fair to call proper manners ‘wisdom’?

 

We suppose there’s something to it, but true wisdom is a much more profound affair.  True wisdom, of the type possessed by genuinely great men, resides in knowing HOW TO BEHAVE IN ALL CIRCUMSTANCES.

 

And that includes both love and war, business and pleasure, with family, friends, acquaintances, competitors, rivals and foes.

 

Knowing how to respond properly, in a manner that causes you absolutely no regret whatsoever, in all situations that confront you – therein lies true wisdom.

 

That, of course, might require you to be kind when it’s called for… and cruel when it warrants.

 

For there’s “a time to every purpose under heaven.”

 

It also means that a truly great man can live a life of near perfect quietude, never making a splash, never finding his fifteen minutes of fame, indeed, remaining unknown in his greatness by all save the few who are closest to him.

 

The Danger of Fame

 

Some, of course, will rise to prominence, and history will record their triumphs.  But most of the truly great will pass through this world in obscurity.

 

And why is that?

 

Because they learned early that prominence and triumph bring with them tests that only few can withstand.

Remember that.

 

Our society lionizes the famous.  It makes ‘stars’ and ‘icons’ and ‘celebrities’ out of those who succeed in business, sports, politics, and entertainment.

 

And then it destroys them.

 

The wise man sees this.  And he flees from fame and honor like the plague.

May we all aspire to respond to life’s vicissitudes coolly, humbly, and with poise and forethought, and avoid ever having our name splashed across the front page of the New York Times.

 

Today, We Flee!

 

We’ll turn to our effort for this week directly after addressing a single open trade.

 

On May 16th we engineered a trade for our letter called Pin the Retail Donkey, that asked you to buy the XRT January 19th 42 PUT for $2.81 and sell the AMZN January 19th 680 PUT for $5.85.  Total credit on the trade was $3.04.

 

The thinking was that bricks and mortar retailers were going to underperform the likes of Amazon for a while to come.

 

And while that may still be the case, we feel it’s best not to wait too long on this one.  Amazon could be upended any day in the ongoing tech storm that’s now swirling through the market.  So we say ‘jump’.

 

Today, the XRT PUTs trade at $3.45, and the AMZN PUTs at $3.70.  Sell the first and buy back the second, and you net $2.79 on nothing expended.  Accounting for minimal commissions, that’s a gain of 1760% in a month, or an annualized return of 21,120%, if you want to go brag about it.

Who’s running this show?

 

We were caught by surprise this week when CNBC informed us that just 10% of all stock trading is performed by human beings, according to estimates by JP Morgan.

 

Now, we’re all aware that robo-brokers are all the rage, and algo-led trading by quants up and down Wall Street have laid a heavy hand on the business in the last decade.  But just 10% of business comes from some guy looking over the numbers and thinking…?

 

Astounding.

 

If the JPM estimate is accurate, there are numerous conclusions to draw, but the most obvious is that wild moves in the market will be the rule going forward rather than the exception, because machines don’t stop to reassess.  There’s no reflection and there’s no puzzlement.  There’s just the trade, adding to the trade, reversing the trade, and reversing harder.

 

The assumption behind flicking the ‘on’ button and letting her rip – letting the machine do the profit-making for you – is that all the inputs can be known and all the permutations and exigencies have been accounted for.

 

And that’s just hubris.

 

It’s also why we have to fall back on a much simpler calculus in making our recommendations.

 

With all that computage, our indicators are simply not offering as clear a picture anymore.

 

Consider – last week saw the second largest weekly inflow of funds into the market IN HISTORY.

 

A full $33.6 billion was shoveled over, even as investors were buying crash protection at their fastest rate in a decade.

 

Look here –

Hunh?

 

Not since Lehman Bros. melted the market have we seen such fear.  Or is that just the algos hedging their long positions?

 

Because we can’t answer that question, we’re tending toward safer territory this week, and recommending a bullish position in high yield.

 

And our reasoning is simple.

 

  1. Junk bonds trade off equities.
  2. Their downside is cushioned by their fat yields, and
  3. Much of the recent weakness in the sector is attributable to falling energy prices, which are now beginning to firm.

 

A look at the iShares iBoxx High Yield Corporate Bond ETF (NYSE:HYG) shows a solidly bullish setup –

Last week, the stock struck new 52 week highs (in blue), and inflows have also been very strong.  The current test of support should be complete by week’s end (red line), and RSI and MACD show no signs of overheating (in green).

 

So…

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And four months free play on the long option!

 

With kind regards,

 

Hugh L. O’Haynew

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