The Cult of Personality, the Fallacy of Testimonials $VRX $GS $NFLX $HLF

We are fascinated in this country by celebrity, turning our most valuable asset constantly in their direction. We watch their tweets, buy their books and listen when they speak. 

When people become celebrities in the financial community we put them on TV, we listen to what they say and we give them our money. If we don’t give them our money, we follow them into trades thinking that whatever made them rich, will also make us rich. 

Thursday night I watched an episode of Dirty Money on Netflix. It’s an excellent series. The episode I watched on Thursday was titled ‘Drug Short’ and started off with Martin Shkreli and his legacy of acquiring the rights to Daraprim, a drug used in treating patients with HIV, and then raising the price 5000%. This action, although lucrative, is immoral. The documentary then goes on to investigate the pharmaceutical company, Valeant. 


Valeant ($VRX) took Wall Street, and particularly Bill Ackman of Pershing Square Capital, by storm. This company acquired drug companies, eliminated research and development (R&D) and raised the prices on orphan drugs, a la Shkreli. The stock price soared helped along by presentations by Ackman and Valeant’s CEO Michael Pearson.  

Ackman seems to have fallen for Pearson’s cult of personality, and much of the financial news industry seems to have fallen for the Ackman’s cult of personality.  

The last year hasn’t been kind for either of these two men. VRX is down about 90% from its highs and Pershing Square has had a horrible year, losing money when everyone else has been making money. Even after Congressional hearings when Ackman promised to look into pricing, nothing has changed about orphan drug pricing. Syprine, a drug used to treat Wilsons Disease, is still about 2500% higher than it was in 2010. 

On Friday at Fast Money Halftime, over half of the hour was taken up by the report that Lloyd Blankfein may leave Goldman Sachs. Although newsworthy, I’m not sure we needed to spend that much time with this, but again it points our fascination with personalities instead of performance. 

Just because someone is rich, doesn’t mean they are smart or gifted. It’s entirely possible they were lucky and we only pay attention to those that are rich, whether by skill or luck. 

We still pay attention to Ackman because he is still rich. Take a look at his big bet on Valeant, or his big short on HerbaLife and then tell me if you think he is smart/gifted? 

At the very least, we should be skeptical of what anyone says, especially celebrities, financial or otherwise.  

$AMZN goes Brick and Mortar in my Home Town. I’m celebrating with an Iron Condor.

In the Austin American Statesman, our local paper, it was noted that Amazon opened a bookstore in a mixed use area of north Austin called the Domain.  

The Domain is a happening place. Apple has a new store there specifically built for them and all the hip retailers are there, too. Even Tesla has a showroom there.  

This is the first store for Amazon in the state and follows other stores in Seattle, Portland, Los Angeles and New York. Notably, none of the other 20 finalists for HQ2 have a bookstore but I believe that one is coming to Washington, DC.

In celebration of this event, I’ve decided to open a new Iron Condor in $AMZN. I already have a number of other spreads open in the name, but with today’s little Gary Cohn blip I think the downside is set for a bit, at least until a week from Friday when this expires. 

An Iron Condor is the marriage of two credit spreads, one put credit spread and one call credit spread. All the options expire on the same date, and this date is Friday March 16. Typically, one will use this strategy when one feels the stock will close in a range on the expiration date in between the two credit spreads.  

For the credit call spread: I’ve sold the 1575 call for $880 and I have bought the 1585 call for $655. Spread credit = $215 

For the credit put spread: I’ve sold the 1500 put for $1225 and bought the 1490 put for $1000. Spread credit = $225 

The Total Credit is the sum of these two spread credits or $440. The Total Risk is $1000, which is the margin requirement of holding this strategy open. The margin requirement is half of what it would normally be because with these options expiring on the same day it is impossible for the price at the close of that day to be both above 1575 and below 1500. 

It may seem imprudent to risk $1000 to make $440 but remember there is no requirement to hold this strategy to that day. Frequently I will open new spreads around this trade. 

Another name looking to trade today is $NFLX, which someone downgraded. Seems like a buying opportunity of sorts.  

Good Luck today!  

Skip Intro. $NFLX is Next up on your Watchlist.

Jim Cramer was on Fast Money Halftime today and said something that caught my attention. He said that one of the big knocks on Netflix USED TO BE that they were having to pay up for content, both original and otherwise. As recently as January, Michael Pachter of Wedbush continued to call Netflix a ‘House of Cards’ and that their purchases of content would sink them.  

Today NFLX was up on a note from Macquarie Research that raised the price target $300 to $330 and from neutral to outperform. They based this on subscriber growth and quality of content.  

I bring this up to show a flaw in fundamental analysis. Here an analyst in the past (maybe still now) has been bearish on a stock for the same reason that another analyst now says is bullish for the stock. 

Previously I have said there are flaws in technical analysis. If it was easy to call price movement based on technical analysis, everybody would be rich. Same with fundamentals. The truth is that we should all be skeptical of all the analysis. There is no guru that gets it right all the time. Most don’t get it right most of the time.  

What do I base my decisions on? First, I think that the macro trend is the most important. If the market goes up, most of the time that is a tailwind for other stocks. When consensus is overwhelmingly positive, that’s the time I’ll put on either a put spread or a calendar put spread and if there is a pullback in the market or the individual name, then I write credit spreads against them. 

I also love it when a name I am interested in pulls back for no real reason. For instance, I bought calendar call spreads in WalMart after its pullback and then added put spreads when it gets a little strength.  

As for $NFLX, I was already long May/April calendar put spreads. I rolled up and out on a few call spreads which I was able to do using the ‘custom’ strategy on my trading platform. I sold a March 16 260/270 call spread and bought a April 20 300/310 call spread in its place. I was able to pull 3.4 out of each set of contracts with this.  

I think the bull run in NFLX continues and I will keep buying calendar spreads on the way up. 

Trump Holds Firm on a Trade War, Let’s Hope it Gets Derailed.

Aside from Wilbur Ross and Peter Navarro, almost everyone disagrees with Trump’s new steel and aluminum tariffs. Even Paul Ryan today admits he is very worried. And worried he should be. 

I promised last post to outline why I think these tariffs may very well pose a real hazard to the market and the value of our trading and investing accounts.  

The corporate tax cut has predictably accelerated the economy. The problem is we didn’t need the stimulus right not. Stimulus should be saved for recessions. But, the reality is that the tax cuts have passed and been signed. No going back. 

Predictably, the tax cuts have ballooned the deficit. Trillion and a half, more or less. No problem, say its proponents. Accelerated growth of the GDP will take care of it, and in the meantime, interest rates remain low.  

But now with these tariffs there is real concern that growth could stall because input costs could rise. If input costs rise then finished products cost more. Voila, inflation! 

Inflation could hinder the growth of the GDP and inflation could force the Federal Reserve to raise interest rates more quickly. If this happens then our ever-widening deficit could become much more expensive to finance. Voila, recession! 

I think this line of reasoning is why the market took a knee jerk swoon when Trump announced these tariffs. Should they become enacted against the wishes of everyone but Trump, Ross, Navarro and every steel and aluminum CEO, we might see a repeat.  

I’m holding out hope that someone can talk him out of it, but I keep coming back to this quote by the Existentialist, Ralph Waldo Emerson: 

“A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall.” 

” . . trade wars are good, and easy to win.” Wait . . . . whaaat? $SPY $QQQ $DIA $IWM

” . . trade wars are good, and easy to win.” 

Uh . . . no, they are not good, and they are not easy to win. 

President Trump tweeted these words, among others early this morning. During my morning run, my last for a while here on Maui, I heard some reporting about how the announcement yesterday came to be. 

Apparently the announcement of the new steel and aluminum tariffs was on again and off again. The CEOs were gathered in a room awaiting the President and after about a half an hour away in another meeting he returned, summoned the press to the room and then polled the room before making his decision. 

After the announcement the market reaction was swift, and lower. Well, except for steel and aluminum stocks.  

Though we may never know exactly how this President thinks, there are some theories on why he did it and how he did it. Among these theories: 

  • The President tends to play to the audience he is in front of. In this meeting the audience was predominantly steel and aluminum executives. He certainly made them happy and they responded enthusiastically. Reporting said that Gary Cohn argued against them but was a lone voice in the discussion. 
  • The President is shoring up his Rust Belt support. After all, he just announced his re-election bid, the earliest an incumbent has annouced before. He is also playing to his base, who love restrictions on free trade.  
  • The Russia investigation is heating up and there is chaos in the White House and there is need for a new distraction. Hope Hicks just left and Jared Kushner has lost some security clearances pouring more gasoline on the need to distract. 
  • The President truly believes that trade wars are good, and easy to win. 

The last theory, the one where he believes this is a good course would be the most disturbing. There is no other voice besides Wilbur Ross that thinks this is a good idea. 

We can only hope that The President listens to someone else than Wilbur Ross over the course of the next week. 

In my next post I’ll outline why I think that if this policy is actually played out, it could be a real monkey wrench in this market rally.