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STRATEGY: Market Rebellion Conference Takeaways

…Market Rebellion Conference Panel Summaries

Market Rebellion Conference Takeaways

Mr. Ingrand started things off by talking about the community of Market Rebels and some of the formative principles at the center of the community. There was excitement in the air as many conference goers had likely done quite well from Merck’s announcement yesterday, which Market Rebels had given intel on. The lessons and wisdom from his intro were nonetheless poignant and relevant. He just stressed not to trade options if you don’t have the time to know what you’re doing. He mentioned the 400 years of trading experience on the Market Rebels team is aimed mainly toward educating and orienting people.

It is telling that Mr. Ingrand, who was a veteran of the German Military, used some of the slogans from some of the world’s toughest organizations, like the Special Forces. He also announced a partnership with Voyager, which Fundstrat has just excitingly partnered with as well!

Market Rebellion Conference Takeaways

This panel was led by CNBC’s Brian Sullivan and included, “one of the smartest guys you’ll ever meet in derivatives,” Todd Raarup. Jon Najarian amusingly told a tale about a show he used to be on where he would try to beat a monkey randomly throwing a dart at a board to pick stocks. Even though he always beat the monkey, the monkey still picked some winners. The Najarian brothers have a long and distinguished history in successful derivatives trading and they conveyed some of their core high-level rules. 

1. Cut your losses when things go wrong
2. Always have an exit strategy and a price you will sell at. More importantly, follow it.
3. Discipline dictates action (which is a saying often used by Pete)

These simple rules are ‘what has kept them around,’ according to the brothers. Interestingly, both brothers said that keeping in good physical health and having strong routines is, in their opinions, a prerequisite for mental acuity. Both brothers relayed funny stories about the days of trading pits in Chicago. People were regularly fined for throwing punches, they heckled their colleagues (much worse than twitter apparently too), and they regularly played amusing pranks on other traders. However, the intense competitiveness and harsh environment bred discipline.

Jon specifically mentioned the Merck trade and said that you shouldn’t always aim for trades like this. They only come along once in a while. He says his efforts are largely directed at hitting “singles and doubles.” Pete described his work ethic and attitude that got him through a lot of losses at the University of Minnesota, but without regret. His NFL career came out of  intense work ethic and focus. The same characteristics have been essential in trading. He stressed the importance of discipline. Pete then gave a particularly good piece of wisdom, “Marry your wife or your husband, but never marry a trade.” Wise words. 

When asked about the difference between a trade and an investment the panel agreed that this is really in the eye of the investor. The key is avoiding self-deception and setting goals prior to opening and closing positions. Your goals essentially should dictate whether something is a trade or an investment. The panel agreed that the main advantage hedge funds have is better technology and better information. Although, the playing field is being leveled.

Jon made a very interesting point, how people viewed derivatives in the 90s in the same light to how crypto is viewed today. With hindsight, we clearly see the economic value and rise of derivatives, but they were chastised with many of the same labels and arguments as crypto, yet they have redefined financial markets largely for the better. Najarian agreed that despite this fact, 85% to 95% of crypto coins will go to zero. This percentage is not much different than the percentage of internet companies that went to zero. 

The Najarian brothers talked about how they developed their “heat seeker” product which was largely based on insights attained while in the physical trading bit. Essentially, it is a tool that assists investors in identifying anomalous trades and following the smart money. Volume, volatility, and velocity are key planes across which markets are analyzed with the tool.

Market Rebellion Conference Takeaways

This panel, led by derivatives and behavioral finance expert Bill Johnson was particularly illuminating. We are all human beings, and we may not often recognize that we regularly engage in mental shortcuts that lead us to draw conclusions that are illogical and misinformed. The study of behavioral finance, pioneered by Richard Thaler focuses on how the human mind can lead to poor decisions in investing and how collective behavior can affect markets. 

The presentation focused on three key items that often ensnare investors in wrong-headed (while thinking you’re right) action. We really enjoyed this presentation and one of the recurring themes we regularly espouse at FSInsight is that investing is just much against a contest against your own cognitive bias as it is against other investors. The three key areas Johnson highlighted show why. 

1. Webers Law and the Range Effect
2. Sunk Costs Fallacy
3. Anchoring

Johnson showed several optical illusions that help the audience understand that their mind can indeed deceive them and make them completely sure something is true, even though it is not. If you take two identical black dots and surround one with smaller objects and the other with larger objects, your mind will trick you into thinking the dot surrounded by larger objects is larger than the one surrounded by smaller objects. The same thing occurs with the moon on the horizon. The moon looks larger to us when it is has a city scape in view because of the references. 

He used photographic settings as an example. Cameras allow you to double the light or the shade of darkness, but they won’t allow you to increase it 30%. Why? Because the human brain will not notice the difference of 30% despite their being a measurable difference. This is a result of the shortcuts our brains take to better assist us in perceiving and navigating the environment around us.

The second major area addressed was how traders use sunk costs. As difficult as it is for us to operationalize, sunk costs (defined as irretrievable costs) should not factor into future decisions, at all. This is a nearly identical fallacy that many of the people on their last deal at the casino tables often forget. The odds of winning a game are completely unaffected by how much you’ve lost. The table doesn’t know. The odds are always the same. 

Many traders will make decisions on future trades based on losses they have had during the past. This will always impair your logic and strategy. Sunk costs may be very relevant if you’re planning a military campaign, no doubt. However, as hard as it may be to remember, please try to never account for sunk costs as an input into your future decisions. It just mucks things up. 

The last of the three no no’s so-to-speak was anchoring. To describe this trick of the mind, Johnson used a particularly poignant and entertaining example. This is best summarized as an irrational bias toward an arbitrary benchmark. Remember, stocks don’t know you own them, so your entry price is quite irrelevant to any market movement of whatever stock you own. 

“If it’s the same thing at the same time, it has the same value,” was a phrase he said that explained why anchoring is false. This is also one of the logical underpinnings of the Black-Scholes derivatives valuation model that has been so instrumental in the prolific and consequential expansion of derivatives. 

So, if you want to buy a beer at 7-11 or from the Ritz Carlton, then going into this situation with different expectations for the value of the beer will confuse you and likely cause disarray in your valuation. You might think $4 dollars is a good price at 711, but that $10 dollars is acceptable at the Ritz. So, if you got a $6 dollar beer at the Ritz you would think you got a really good deal, while if you simultaneously paid that at 7-11 you’d think it was a rip-off. This logic seems to check out at first, but Johnson points out that this makes no sense. You should say from the beginning, I’m willing to pay $10 dollars for a beer. The venue does not change the value of what you’re buying in reality, only when we’re using the common fallacious thinking associated with anchoring.  We’ll leave one parting note we found interesting. He said the harder you try to beat the market, in his experience, the closer you get to market performance. It is paradoxical but that was his experience.

Market Rebellion Conference Takeaways

Bill Johnson walked the crowd through specific examples of how to measure the effectiveness of a hedge. Many will know that purchasing a long put to hedge a stock position is a straightforward hedge, but sometimes strategies can get exponentially more complex when you’re adding the use of short options. One key insight from this conference was that if you don’t have time to spend examining and analyzing derivatives along with the prerequisite knowledge for their uses, then don’t use them. If you are increasing risk to increase returns, then you are simply not hedging.

On the other hand, a proper hedge is when give up some potential gains to sharply reduce potential loss. You can never hedge 100% of your risk. This is impossible since hedging instruments cost money. If you had a 100% hedge on a position it means you’ve already exited it. Using the Black-Scholes model to identify underpriced contracts will generally probably save you a lot of time and heartache. 

Market Rebellion Conference Takeaways

This panel started off with Mr. Dwyer pointing out that one of the strongest correlations in the market is the direction of the market and direction of earnings, which he cited at 93%. He mentioned so many smart commentators on TV seem to miss the fact and get caught up in doom and gloom. Pete Najarian mentioned that everyone calls the people who just buy-the-dip silly have had to eat some humble pie. They laughed about how people who have bought-the-dip have done quite a bit better in markets than the doom and gloomers.

Dwyer pointed out that not only are interest margins going up, but loan demand is also going up simultaneously. This is not only a very virtuous thing for banks, but it also means an increase in Commercial and Industrial Lending (C&I) which is a significant harbinger of future economic activity. Dwyer lamented, “All of the sudden, you’re a moron for not owning banks.”

Brian Sullivan polled the crowd to see how many folks were under 40 years of age. While the crowd tilted a bit older than this age, there were plenty of members who raised their hand. Sullivan pointed out that if you’re under 40 then you have never traded in a raising rate environment. He mentioned many portfolio managers are under this age. Dwyer mentioned that it wasn’t only government behavior that affected things. He said pension plans, like CALPERS have become more and more reliant on private equity to achieve returns, which is really just a form of leveraged debt. 

Sullivan pointed out that there might be a lesson in investing from the Patriots’ NFL franchise. For most of his early life, they were considered one of the worst franchises in history, but today’s youth associate them with being one of the best. Pete Najarian gave some of his NFL wisdom, and mentioned that Tom Brady was probably mad about how he initially performed in the draft and then focused on increasing his physical prowess on the field, which greatly contributed to the success of the Pats. 

Jon Najarian mentioned the volume and speed of markets were fundamentally changing them. Dwyer followed up on his point by saying he didn’t even believe in support and resistance anymore as these concepts were driven by human behavior, which has largely been replaced by algorithms, not to mention that over 50% of investing is passive. The panelists discussed the rise of derivatives. Jon Najarian made a great point that many of the same criticisms currently being leveled against crypto are exactly the same as those raised against derivatives in the 1990s. 

The panelists, after mentioning how derivatives had affected markets, used an interesting modification of an old market saying to describe how the extraordinary level of 40 million options trades a day affected markets. It’s like catching a falling truck instead of catching a falling knife. 

The panelists mentioned Black Swan risks, by their very nature, are unpredictable, and that all investors should have some contingency for them. Brian Sullivan mentioned that we all assumed we were in an economic recovery before 9/11 came. Jon Najarian mentioned that when the next big market correction happens it will come faster and more furiously then in the past, and that March 2020 was a preview. He explained how people who sell short puts, for example, get longer and longer as markets drop and their only solution is to sell as quickly as possible. 

Pete Najarian then provided some great wisdom that seems so obvious, but which so many investors seem not to heed. Buy puts when you don’t have to. It is like trying to find an umbrella when it is already raining if you’re buying protection when everyone else is. The more people buying protection, the less likely it is to protect you and the more likely it is that you’re significantly overpaying. Buy your downside protection when everything is great, and even more importantly, cheap.  The panelists next discussed Evergrande. Dwyer mentioned a pretty incredible fact, Evergrande owes $305 billion or 2% of Chinese GDP. The largest US property developer is $8 billion in debt. This puts into stark relief that it is primarily a domestic Chinese issue, and as markets realized, there was very little financial contagion on this side of the Pacific from the failure. Dwyer was asked about the significance of whether we get more stimulus or not. He said he didn’t think it mattered, and any weakness from the fiscal fiasco would likely be a buying opportunity.

Market Rebellion Conference Takeaways

John Najarian started out by making a point that many great thinkers are not the best traders. He started his presentation with a picture of Mohamed El-Erian and a quote of his during the height of the pandemic where he said he believed the trend of investors ‘buying the dip’ would be interrupted by the extreme economic impact of the pandemic. 

This obviously didn’t happen. He then began talking about Bitcoin and the volatility associated with it in order to give the crowd some perspective. He said that if Apple traded 24 hours a day with the same types of leverage available to many retail investors, then it would trade in a similarly volatile fashion to Bitcoin as well. 

Interestingly, Mr. Najarian also seemed to imply that the risk assumptions associated with the Black-Scholes pricing formula might be more relevant for an asset that trades 24/7/365 like Bitcoin does. Jon Najarian said that too much leverage is definitely risky though. He described what he does as an investor as ‘surfing.’ To elaborate on that metaphor, he mentioned the hunter-killer algorithms that can exacerbate downside moves. So, he mentioned that he often follows the smart money. He even said that they cooperate with regulators and share data, even though it is anonymous to them. 

Market Rebellion Conference Takeaways

Risks vs. Danger in the context of this presentation primarily is within the context of derivatives contracts, however, some of the lessons are certainly universal for investing. Additionally, Johnson focused on how many people may think they are taking risks, relying on cognitive biases, when they actually are only creating danger. Firstly, let’s introduce a few definitions. Risks are not the same as dangers. Dangers, in this context, mean derivative positions that have very little, if any, upside, and disproportionately expose you to downside. This is especially important to keep track of in multi-contract, defined risk derivative strategies.  The principle of avoiding things with disproportionate downside risk compared to the upside opportunity is a crucial tenet of investing. As Johnson earlier said, the harder you try to beat the market, the more like consensus you often act. He stresses to analyze all risks with their relative risk and reward. This principle is crucial to achieving alpha and beating the market.

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26 Granny Shot Ideas:
26 Granny Shot Ideas: We performed our quarterly rebalance on 07/30. Full stock list here –> Click here
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POINT 1: Daily COVID-19 cases 85,868, down -16,300 vs 7D ago…
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Current Trends — COVID-19 cases: 
– Daily cases   85,868 vs 102,168 7D ago, down -16,300
– Daily cases ex-FL&NE   81,876 vs 96,460 7D ago, down -14,584
– 7D positivity rate  6.0% vs 6.8% 7D ago
– Hospitalized patients   64,798, down -13.0% vs 7D ago
– Daily deaths  1,819,   down -10.3% vs 7D ago
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*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

The latest COVID daily cases came in at 85,868, down -16,300 vs 7D ago. As indicated by the consistently negative 7D deltas, cases are currently rolling over. At the individual state level, we’ve recently been at the critical stage of case rollover as more states begin to turn. We will continue to monitor all relevant data closely, but as long as 7D deltas remain negative, case rollover will continue. 

Market Rebellion Conference Takeaways

Rolling 7D delta in daily cases remains negative…
As shown in the chart below, the rolling 7D delta in daily cases remains negative. The negative rolling 7D delta further emphasizes the case roll over.

Market Rebellion Conference Takeaways

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
The “Parabolic Case Surge Tracker” monitors the possible parabolic surge in daily case figures. In the table, we included both the vaccine penetration and the recent case trend for 50 US states + DC. The table is sorted by the multiple of their recent peak daily cases divided by the daily cases when their case surges started.

– The states with higher ranks are the states that have seen a more significant rise in daily cases
– We also calculated the number of days during the recent case surge; a state with a high multiple but low number of days since its low means the state is facing a relatively rapid surge in daily cases
– The US as a whole, UK, and Israel are also shown at the top as a reference

Market Rebellion Conference Takeaways

Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over 
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over 

Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways

POINT 2: VACCINE: vaccination pace trending up once again…

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Current Trends — Vaccinations: 
– avg 0.9 million this past week vs 0.6 million last week
– overall, 55.6% fully vaccinated, 64.4% 1-dose+ received
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Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent. 

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC). 

– Currently, all states are near or above 80% combined penetration
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, and DE are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

Market Rebellion Conference Takeaways

Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration >60%/70%/80%/90%/100%. As you can see, all states have reached 90% combined vaccination + infection. 90.0% of US states (based on state population) have seen combined infection & vaccination >100% (Reminder: this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within the state is either infected or vaccinated).

Market Rebellion Conference Takeaways

There were a total of 798,378 doses administered reported on Sunday, up 66% vs. 7D ago. We are once again seeing the vaccination pace pick up as booster shots are becoming more widely available. Also, the same catalysts remain in place:

– Proof of vaccination required by many US cities and venues
– Booster shots
– Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
– Biden’s vaccination plan

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

Market Rebellion Conference Takeaways

61.1% of the US has seen 1-dose penetration >60%… 
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 45%/45%/50% of its residents fully vaccinated, displayed as the orange lines on the chart. Currently, 100% of US states have seen 40% of their residents fully vaccinated.  However, when looking at the percentage of the US with at least 45% of its residents fully vaccinated, this figure is 96.1%. And only 81.6% of US (by state population) have seen 50% of its residents fully vaccinated.

We have done similarly for residents with at least 1-dose of the vaccination, denoted by the purple lines on the chart. While 98.7% of US states have seen 1 dose penetration >50%, 87.1% of them have seen 1 dose penetration >55% and 61.1% of them have seen 1 dose penetration > 60%.

Market Rebellion Conference Takeaways

This is the state by state data below, showing information for individuals with one dose and two doses.

Market Rebellion Conference Takeaways

The ratio of vaccinations/ daily confirmed cases has been falling significantly (red line is 7D moving avg). Both the surge in daily cases and decrease in daily vaccines administered contributed to this.

– the 7D moving average is about ~8 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case

Market Rebellion Conference Takeaways

In total, 399 million vaccine doses have been administered across the country. Specifically, 214 million Americans (65% of US population) have received at least 1 dose of the vaccine. And 185 million Americans (56% of US population) are fully vaccinated.

Market Rebellion Conference Takeaways

POINT 3: Tracking the seasonality of COVID-19

In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases, hospitalization, and deaths. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.
The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors

If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.

We created this section within our COVID update which tracks and compare the case, hospitalization, and death trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.


CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities. 

Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.

Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways
Market Rebellion Conference Takeaways

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