You’re being screwed, VIX explained, Nvidia, Pandora and more
Here’s the transcript from the latest live Q&A Conference Call.
Welcome to this week’s live Conference Call Q&A chat discussion debate. I should try to come up with a new way to describe it, but I am not a comedian. I thought I was when I was on TV sometimes. HaHa. Thanks for being here, everyone. Any questions before I jump in with an opening commentary?
Q. How is the family?
A. Amaris is so good. We all got home Wednesday. I was not in Albuquerque the whole time. I came back and forth with Lyncoln so that she wasn’t constantly there at the hospital and hotel and also to do work. My wife was there for 13 days with Amaris in the hospital (thought she did get a few nights at the hotel). We are all home and both Amaris and Lyncoln are as happy as a button. This morning I was singing them my favorite song by The Troggs, which is not “Wild Thing”, but “Love is All Around” and they were cracking up with me.
And, Lyncoln is awesome. Talk about a well-adjusted, all around sweet kid. She is three-years-old and we have a very special bond, daddy-play time that I do all the time with her. She loves being with her Dad, except when she is tired or hungry and then she wants Mom. Lori is incredible. She is a rock. Thanks for asking.
Opening Commentary: You saw my note last week about Trump/Obama Republican Democrat Regime where I just sort of commented about how if you step back from partisan propaganda and what you are hearing if you watch or read the news, you’ll see a very different reality. Every morning, I read The New York Daily News, The New York Times, Wall Street Journal and then I go through Scutify and Headlne to find other headlines. I read a lot. But even those newspapers are clearly partisan.
I read an article in the in the New York Times that was really fascinating about Mike Judge, creator of Beavis and Butthead, Idiocracy, King of the Hill and currently Silicon Valley on HBO. There was this overlying theme in the article about how now that Trump is President, Idiocracy really looks prescient. Even when I was reading it, the first time they mentioned it, I agreed in my head that it is amazing how prescient that movie turned out to be in the last ten years since it was released. I thought to myself, “It really is true today. Between Obama and Bush and Trump and the Clintons and where we are today with Republicans and Democrats, corporatism, and so much of the world being driven by corporate dominance –, well, you watch that movie and that is the underlying theme and much of it is very realistic already.
But then as you continue reading the article, you realize that the reason it keeps saying that it’s amazing how prescient Idiocracy is now that Trump is President, as if it wasn’t already prescient while Obama was in office.
The point of myTrump/Obama Republican Democrat Regime article last week was partly driven by reading that article. But I also wanted to underscore that any time I read any news source, or happen to hear cable news (because I don’t watch cable news on TV almost ever, though I might watch local news sometimes or if my wife has it on I might hear in the background) there is an underlying acceptance of the Republican-Democrat regime and the status quo and a partisanship in so every single major news source.
The other point that I would make is that if we allow ourselves to just sort of take these view points and these discussion points from everyone else, we do find ourselves in a bubble and not understanding the reality. Bush bombed the Middle East. Obama bombed the Middle East. Trump is bombing the Middle East. Every single one of them let executives from giant Wall Street banks run their economy and control the Central Bank for them. All of them created legislation that was written by giant corporations that profiteer off taxpayer monies.
There might be varying degrees in some of these things and there might be different selling points, but they are very real.
I get so confused about is that even during the bank bail-out, or today with the continuance of every emergency measure from 2008 and the financial crisis that they legislated, created inside the Federal Reserve, and/or were even questionable as to whether they were Constitutional to bail out these banks — they always sell it as helping the little guy that they’re stealing from to make it all happen.
The problem with bailing out the banks and gifting all this continued subsidization of their businesses is that it was all about protecting shareholders. There was no reason to protect Goldman Sachs shareholders after they gambled tens of billions of dollars at a casino called AIG that everyone paying attention, including me, knew at the time didn’t have the wherewithal to meet all of their obligations as there was a downturn in real estate across the country. The Republicans and Democrats always protected shareholders, billionaires and CEOs. They should have just protected the bank’s customers. You could go Libertarian and not protect anyone and just let the markets take care of it, but the most they should have done was protect just the bank deposits.
My point is that it is amazing is that what we did was gift trillions of dollars to bank shareholders and that both the Republicans and Democrats from Bush to Obama to Trump sell it as friendly for the little guy whom they’re actually screwing. To this day, people, the little guy, the inner city person, the small rural town blue collar farm worker, the guy who owns a ranch, the guy who works at the grocery store — everyone still accepts that the Republicans and Democrats today and the way that we do the government today, which redistributes trillions of dollars into banks and giant corporations through tax policies and protections and not enforcing anti-competitive measures. All of that stuff creates corporate profit margin growth and corporate profit growth. The focus on stock market bubbles, 0% interest rates, and forcing people into riskier assets like the stock market are also a part of the bigger picture that you can only see if you step away from the partisan rancor and observe in real-time. If you allow yourself to just look at the partisan viewpoints and just accept those viewpoints, you miss that bigger picture and its impact on your portfolio, the stock market, your wealth and society at large. We want to be objective. That was the impetus and reiteration of my morning overview.
Let’s open it to questions, please.
Q. Is there a way to buy Samsung puts? In Hong Kong or something?
A. The answer is “Yes.” If you have the ability to have an account or trade somehow in South Korea or where Samsung does trade, perhaps as an ADR, you can buy puts. I doubt they do in Hong Kong, but they might. At any rate, it is a huge company and you could certainly by puts if you have the ability to trade and desire to trade on other foreign stock exchanges. I, as you know, think it is hard enough to focus on the US stock markets and make sure my money is protected here in the best ways I can and I don’t do much in foreign markets. I’m not trading billions of dollars or something. If I were running a $100 billion hedge fund I am sure I would have money in foreign stock exchanges and in some ways to hedge those portfolios. But, I am not running and hedge and I am trading my own money and I don’t need that kind of hedging. The best way to short Samsung in the United States is to buy puts on the $EWY ETF. At that point, it is only 20-25-35% of that $EWY, so it is still not a direct short on Samsung. But there you go. By the way, tThe company has market cap as it is measured in South Korean currency of 330 trillion right now or more than $150 billion market cap. Interestingly, Google will tell you that Samsung Electronics is the second largest information technology company by revenue, which is $177 billion. Of course, that includes their washers and dryers, batteries and things that would be a stretch to call information technology.
Q. Can someone simply explain the VIX/VXX and how it differs from just a “standard” hedge against the market? Seems like when the market drops, it rises (and the opposite) — where does “volatility” come in? Why are so many people saying the VXX is overdue to go up — is that based on the market’s (till now) bubbly upward trajectory? I don’t quite understand what volatility means. When the market goes up $VIX goes up and when the market goes down $VIX goes down. Of course, you talked at some point about doing puts on it. How does that differ from volatility?
A. The question is all about volatility. $VIX and $VXX were mentioned also. Let’s start off about talking about volatility and then we will talk about $VIX and $VXX. Volatility by definition is the ability of something to change rapidly. In stock markets, when you talk about volatility you are actually talking about the stock market going up and down quickly. The rate of change almost. A lot of pundits and a lot of writers and a lot of people you see on TV, when they talk about volatility, they are actually meaning the markets are going to go down and they use it that way as such, thereby confusing everyone.
So now, when we are talking about volatility are we using there definition, which means that the markets are going to go down and probably sharply. Or, does it mean what it does? Which is both up and down quickly. At this point, in 2017, it is such a muddy definition, I am not sure how we should define it. I do try to define it as quick of change in either direction.
Now, let’s move to the $VXX and $VIX. The $VXX, as found in Yahoo Finance Fund Summary: The investment seeks to provide investors with exposure to the S&P 500 VIX Short-Term Futures Index Total Return. Index Total Return (the “index”) is designed to provide access to equity market volatility through CBOE Volatility Index futures. So, that is the $VXX which is directly correlated to the $VIX.
VIX is the abbreviation for the CBOE Volatility Index, which is a measure of implied volatility of the SPX 500 Index Options which is calculated and published by the Chicago Boards Options Exchange (CBOE).
They are both supposed to move with volatility in the stock market both up and down. In general, the market when it goes down, these things go up. The partly a function of money moving in and out of the options around them. It is also mostly a measure of what the stock market is doing and the snapback being what it does, especially in a bull market, it sort of a disruptive thing. It is not the trend. So, it does show up more during a move down in a bull market, conceptually.
All of this stuff can be used as a hedge. You can buy call options on the $VIX. In a bull market, when the market has that pullback, they $VIX usually goes up. It doesn’t always, though. Again, if it is a slow drip down, the $VIX might barely budge. If there is suddenly a gap up, the $VIX might spike. So, it is an imperfect hedge for the long term portfolio for a bull market. It is a hedge for disruptions in both up and down, especially downwards in a bull market for the broader markets I guess. You don’t see me write about the $VIX or trade the $VIX very often. I’ve probably done it 2 or 3 times the last six years since we’ve been doing Trading With Cody. There is a time and place for everything in the portfolio, but I am not a big fantrying to trade the $VIX. And, again, the problem with some of that stuff is that it is such a derivative from the stock market and what you are trying to do. You’re trying to hedge a portfolio and you can end up out there hedging it with call options on an index that sometimes reflects the market when it goes down and it will go up as a natural hedge. Do you really want to do much of that? Probably not.
Subscriber response: Just to be clear, if one is thinks the market is close to doing a very volatile drop. It’s very clear it is going to drop a lot. Is $VIX something you think about? If you think it is going to drop a lot, do you do calls on the $VIX? Or do you buy puts on the $VIX?
A. You would buy call options on the VIX. You would expect the $VIX would spike from currently 14, you would expect it to spike to 18 or 20, if the market pulled back 5% over a week or two. There are times when, in 2008 it spiked all the way to 59-60. Earlier this year, range is 10 on the low side and 26 on the high side. If you put up an interactive chart, comparing the $VIX with the $SPX, you will see on a 10 year chart, that when the stock market has dropped, the $VIX has usually gone up and sometimes huge. The problem with buying call options on the $VIX, in addition to it being an imperfect hedge, is that the options are inherently expensive because they are in such a demand as a hedge against a crack in the market. In a bull market, there are so many people that are net-net long, that a lot of the hedge funders themselves specifically are out there buying call options on a $VIX. Call options on a $VIX at this moment, even short-term call options out one month to May (5 weeks away from expiration), and the call options are at $16. The $16 call options which are out of the money will cost you $2. The $19s would cost you $1. If you bought the $VIX May 17 call options with the $18 strike price for $1, you would be betting than somewhere in the next 5 weeks, the $VIX goes above $19. Because it is at $18 and it cost you $1. So, before you even break even, the VIX would have to all the way $19.05, you make $0.05 if you held it to expiration. If it goes to $20, you double your money. But, looking at a chart, going back to November 3rd, 2016, on November 4th, the $VIX spiked to $23, that would have paid you. But that would have been the last time you could have made money buying the $VIX $18 strike price out 5 weeks. The options are pricey. That is one reason I don’t buy call options on the $VIX, even if I think it is going to spike. It has to spike a lot to get paid on those options.
Q. Thoughts on GOOGLE’s new TPU processor and. The threat to $NVDA?
A. Google has released a new TPU, which is a tensor processing unit. Google has come out with a lot of hype about how it is better than Nvidia and Intel and their graphic processing units. Long story short, you always have to respect Google going into any market. That being said. Google is not actually going to market with this thing anytime soon.
Even Nvidia came out today and said “Hey, even those benchmarks that Google was using to stay they are faster than our chips and better than our chips, are nonsense.” Like everything, it is a lot of hype. A lot of propaganda that we have to sift through to get to the truth of things. Regardless, Nvidia is not just about the chips at this point. It is a platform for self-driving cars, for artificial intelligence/deep learning and that isn’t something that Google there with at yet in this way. Google has an entirely different approach obviously and has a lot of different irons in the fire with self-driving car technologies, artificial technologies of their own right, much of which is software-based at a higher level in the platform than the Nvidia chip/software platform, that Nvidia is sort of whole-selling out there. It is very early in all of those markets.
There will be dark horses that could out of nowhere and kill Nvidia’s entire concept. We need to be aware of those things. We need to be watching Google and their TPU and everything else out there. But, that is part of a big picture that we keep our feet on the tectonic plates that these things shift slowly over time. Until they break and then of course you have a volcano when Blackberry goes from $100 to $8 and Apple goes from $1 to $140. That was slow coming, but you saw it coming. By the way, I guess Apple didn’t go from $1 to $140 in that same timeframe. From 2008 to 2013, the first 5 years of smartphones, Apple went up 500-600% and Blackberry dropped 90%, but you could have seen it coming. You guys follow me and we did see it.
I am always worried for any company that we own, so let’s be worried about Nvidia, of course. I would be looking to nibble back some. I think we sold some at $105 a few months ago. We still got a nice chunk and a nice gain in it. I am not in a rush to add to it. If you don’t own any Nvidia, I do think around $95-$96, get a 1/3 tranche toe-hold position in there and hope that it does drop to $85 and we can get a second tranche after you get the first one on there. It is a relatively attractive entry opportunity. I like it a lot better long term to enter here at $96, than six weeks ago at $118. The valuation is not cheap. The multiples expanded more quickly than revenues, which are also growing quickly and earnings growing quickly. The multiples over the last year have gone from $30 to $100 as obviously the market cap has tripled too. The valuation is not cheap. Revenues didn’t triple last year. It is not as cheap as when we bought it. It is not as expensive as when we trimmed it. I am not ready to nibble on it again yet. If you don’t’ own any, I might take a look at nibbling just a small tranche.
Q. Many of us our still short on $P. I think it may have dropped down into single digits. It has gone up and down. Are you still as down on it as you were/have been? Do you still think it is kind of a losing thing and that it doesn’t offer any attractiveness to the company being bought out by someone else? Just generally, where do you stand on $P.
A. The short answer, I am still bearish. I don’t see how $P competes against the bohemiths that continue to evolve in the music industry to places $P was never ready to go. Amazon Alexa is such growing and dominant force, not just in what I expect smartphones, and not just as a de facto standard, but a de facto operating system. It is not a pure operating system, but it eliminates the need to interface with a visual operating system like Android. You can listen to Pandora on your Alexa, but in addition to Amazon being up and coming in music because it makes it easier to listen to your free Amazon music on your Amazon Alexa. Aside from that Spotify has won this next phase of the battle for being the de facto standard for music platforms for streaming and on demand music. Pandora spent a lot of money and time trying to figure out how to compete with Spotify. And, of course, you have Apple and Apple Music and they have spent billions of dollars trying to compete with Spotify. Meanwhile Pandora is “stuck in the middle with you”. (Here, Cody says outloud: Alexa who sang “Stuck in the Middle With You?” Alexa answers “Stuck in the Middle With You is by Gerry Rafferty and Stealers Wheel.”)
I think $P is screwed. They just have so many things going against them as they have since we shorted them at $18 and I think we covered a little bit along the way down and covered a little bit the last time it was in the single digits. We put more on the last time it spiked to $15 a few months ago, if I am not mistaken. My analysis has not changed. I think those guys are in big trouble. They have $300 million in debt (whew) and down to a couple of $100 million cash. Be interesting to see their cash balance at the end of the last quarter, when they report soon. Even if they had a billion dollars cash, I would head lower. But they don’t have much money left, $2.5 million market cap. Yes, I think it is headed lower. We might even consider some puts six-nine months out on $P. The big risk with $P is it being a potential acquisition target. Even this morning, I heard someone on CNBC saying they wish $AAPL would just buy $P. For $10 billion, he said. $2.5 million market cap. Good luck with that. Someone could come in and pay $15-$18 for $P, and I bet those guys would be happy to sell, especially with the cash balance issue they might be looking at. They are going to need to do something soon to raise money in the next three to six months. I don’t know how friendly the markets would be. The banks will only give you money when you don’t need it. I am going to do some more research on $P. There might be an opportunity to buy some $9 or $10 puts, dated six or nine months out. I’ll do some work on that.
Subscriber comment: Are you aware of what happened with Burger King and Google and the ad they ran. They ran an ad heard by, I think Alexa or Echo, and they said something about Burger King has a lot of great stuff in it but we can’t talk about it all in 15 seconds. Okay, Google what’s in a whopper. So, it signals the listening device to go to Wikipedia and tell what’s in a whopper.
Cody: Oh, man that was funny.
Subscriber: People started changing the words in Wikipedia to add different words like arsenic, so Burger King has changed ad so it doesn’t trigger device.
Cody: You guys remember a couple of weeks ago when I was talking about Amazon Alexa and Samsung and when I finished my sentence, Alexa started telling me all about Samsung’s latest Galaxy 8 release. There are privacy concerns with all of this too, but that is just a funny thing that Burger King did on purpose and got great press on it today. I think there is a Burger King across town in Ruidoso that I have never been too.
Subscriber: (Ha-ha). You’ll probably just be having tacos.
Cody: That’s true unless my wife is asking me if she can bring lunch today, which durn it there isn’t a message so looks like tacos for me today. I am not a Burger King guy. I do go to McDonald’s on occasion. I had breakfast the other day driving to the hospital and it was good. I can’t deny.
Guys, thanks for everything. Thanks for being subscribers. Thanks for calling in. Thanks for the prayers and well wishes for my family. I’ll talk to you guys next week.
