Trade Alerts

If I couldn’t trade alongside these guys…I wouldn’t trade at all.

Adam Richardson, Co-Editor of Q Wealth Report here.

When my friends and professional investors Chris Tell and Mark Wallace from Capitalist Exploits decided to launch a Trade Alert service together with uber-trader Brad Thomas there were 3 rules they all agreed on.

Chris writes:

  1. We trade for our readers like we trade for our own accounts. This means exactly what it says. We’ve all learned the hard way that getting too fancy is rarely a good idea. Focusing on the fundamentals and trading the technicals is all that matters. It also means NOT attempting anything that doesn’t fit into a sound risk/reward strategy, which brings me to the next point.
  2. Always ensure we can live to fight another day. Statistically over 80% of traders lose money. Why is this? It is because they believe all the hyped, “get rich quick” plans perpetrated by scoundrels. It is because they are not disciplined, and it is because they are inexperienced.
  3. No bullshit marketing. Mark, Brad and I have all been consumers at some point of various online trading services and newsletters. Some of them have been extremely good, but most have been very poor. The poor ones typically offer the world and deliver a whole lot less. Their business model rests on sucking in the gullible with marketing copy designed specifically to ensure that you’re salivating with visions of a new Ferrari, yachts and supermodels. What any of these things have to do with trading I have yet to understand, but I’m a simple man who speaks the language of “black and white”. It either works or it doesn’t.


As I said, Mark and Chris make their living as investors and traders…but even they defer to Brad Thomas.  So what makes him so special?

Brad Thomas is the Editor of Capex Asymmetric Trader. Independently wealthy via his skill as a trader, Brad is a practical crowd “behavioralist”. First introduced to the stock market in 1985 by a school friend in New Zealand, he has been involved with trading ever since.

He was originally trained as an accountant and mathematician and holds a masters degree. Brad first started working on a commodities trading desk with a Japanese trading house. For 6 years he was mentored by a Japanese national on the art of beating the crowd through understanding crowd psychology and expressing views through the various trading tools. It was during this time Brad developed his own unique way of viewing and trading markets.

Brad then joined a multinational Merchant Bank and for 11 years managed a proprietary fund trading in equity options in both the US and Europe. Brad retired from “corporate trading” in 2007 to manage his own funds and to spend a little more time on having fun outside of beating the crowd.

Brad specializes in looking for deep value situations across asset classes in different countries where dramatic returns can be achieve from relatively little risk.

Adam again.

The service that this team has launched is called Capex Asymmetric Trader and I have been following along since the service was in beta.

 

Let me say two things about how things are going:
1.  So far, so very good.
2.  I’ve traded on and off for the past decade.  I’ve made $10k plus in a single day and lost even more!  I eventually realized that I am not a professional trader, that the “guru’s” I took advice from made more money selling advice than by trading and that the market these days is essentially rigged against people like you and me.  So I just stopped trading.
But the market is a sexy place and I’ve been watching from the sidelines for the past few years…waiting.

Since the inception of Capex Asymmetric Trader in the last quarter of 2013 I’ve been happily back in the market and I can honestly say that from now on, if I couldn’t trade alongside these guys I wouldn’t trade at all.

Each week Chris, Brad and Mark field questions from those who are actively trading within the service or are curious about joining but want to vet the process a bit. 

Below you’ll find all of the most recent of these questions and answers.  New material arrives weekly on “Friday Q&A”.
UPDATE:  Capex has just added the option to auto-trade Brad’s alerts, meaning execution of the trades can be done automatically with an online broker. It’s truly automated trading!

Capex Asymetric Trader Analysis and Q&A

Analysis and Q&A from May 16, 2014

We can all pretend that debt doesn’t matter. We can pretend that demographics don’t matter. We can pretend that raising taxes aids rather than frustrates an economy, and we can pretend that citizens will continue to bend over and be sodomized by central bankers.

But we’ll only ever be pretending, because in the real world all of these things matter, and in the real world human beings will always look out for #1. Darwin was right.

This is universal, but today I”m talking about the land of the rising sun, the land of Toyota, Mitsubishi, Saki, Yakuza and glowing fish. Fukushima dealt a huge blow to Japan’s economy, not least because Japan is no longer energy independent, but what will really kill Japan’s economy is its state of finances.

We edge ever closer to a day when things in Japan go from manageable to, “Oh my God we’re all going to die…” unmanageable. Betting on such an event is not only intellectually sound it is financially appealing, since the amount of risk required to bet this way is heavily skewed in our favour.

Asymmetric trades which allow for substantial payoffs is exactly what my friend and partner Brad’s strategy has been for decades. Decades which have earned him tens of millions of dollars from applying methodical strategies based on his core thesis of finding global deep-value asymmetric trades.

Why do we think the day of reckoning is close? Well, financing debt requires capital inflows. Japan has managed to finance truly absurd debt levels due in no small part to its previous trade surplus and domestic savings pool. Both of these elements are being systematically eroded in rapid fashion, leaving Japan looking a lot like Wile E Coyote as he runs of the edge of a cliff, just prior to plummeting towards the earth.
Firstly lets deal with the domestic savings pool. This pool of capital is, as we’re all by now well aware mostly held in JGBs. It isn’t growing while the debt burden grows, and it cannot grow, as the demographic headwinds facing Japan are the most severe in the developed world. But don’t let such a dire situation get in the way of a solution. The government are funding so called “match making” parties in a desperate attempt to boost the birth rate. As if that was not absurd enough, they’ve turned to creating a robot baby… I kid you not. What, I hear you asking, is, “What is this meant to do?”

Well, it appears that the Japanese population is so devoid of emotion that they require these “bots” to “trigger the maternal/paternal instinct, causing people to “want” to have a baby. Trust me, I’ve had young babies and a crying bay, let alone a robot does nothing to stimulate anything in me, other than a headache. It is the last thing on earth likely to drive any rational human being to want to get horizontal!

Hopeless!

Now lets move on to a trade. I found this in the Wall Street Journal. It shows Japan’s waning trade. Put simply, the fundamentals for Japan are terrible.

Japan vs China
According to this recent Bloomberg article, Japan have just reported a widening trade deficit with exports by volume falling the most since June last year.

The deficit quadrupled from a year earlier to $1.45 Trillion yen ($14.1 Billion), larger than a 1.08 Trillion yen projection by economists. On a seasonally adjusted basis, the deficit grew to 1.71 Trillion yen.

All the while JGBs hold steady, the yen remains supported in large part right now from the uncertainty in Europe, with Ukrainian headlines causing capital to run to “safety”. Volatility in the Yen is low and the pricing of it is nothing short of unbelievable. Once again ideal hunting grounds for Brad.

In an email exchange with Brad he provided me his thoughts on the above topic:

While much has been debated about the affect of “Abenomics” on the Japanese economy, the “kingpin” to the outcome in Japanese financial markets is the Yen.  A material move to the upside in the USD/JPY will result in the Nikkei moving higher. There is absolutely no question about that. What is questionable is if there is a material rise in the USD/JPY, how much will Japanese equities rise in USD terms (if at all).

My suspicion is that a significant move to the upside in the USD/JPY will result in Japanese equities rising in USD terms and to a degree that surprises most.

Why? Well the answer rests in the JGB market.

A material depreciation in the JPY (rise in the USD/JPY) will cause inflationary pressures in Japan. Given that the 10yr JGB yield is trading at a mere 0.60% it should be obvious that the “Japan will continue to experience deflation for another generation” trade is one of the most crowded trades on the planet!

When this unwinds (probably due to inflation appearing) then the flow of capital out of the JGB market will be one of the biggest floods we have seen in a generation. Funds flowing out of JGBs have essentially two routes:

  1. to stay within Japan and the only viable home would be in equity markets (equities win) or
  2. out of Japan itself, which would result in further selling in the JPY which in turn would push the Nikkei higher (equities win again).

So a material depreciation in the JPY equals a win-win situation for Japanese equity markets. The real question is will we likely see material upside in USD terms?

Well put it this way – it wouldn’t be hard to achieve a material move to the upside due to two factors

  1. the volume of funds in JGBs (its one of the worlds most crowded trades) and
  2. the lack of liquidity in Japanese shares. So even a relatively small flow out of JGBs and into equities is likely to lead to material gains in Japanese equities in multiple currency terms.

That’s the “view” as attractive as it is, but what really makes this “trade” attractive is in the way that it can be applied to achieve an “anabolic” asymmetric payoff with relatively little capital outlay. If one looks at the cost of long term options (going out 1-2 years) on the Yen and equities you will observe that it is either at multi-year lows (in the case of equities) or very close (the Yen). So it won’t take much of a move in the JPY and or the Japanese equity market to translate into dramatic returns if one applies the view via long-term call options.

If you want to tap into Brad’s immense trading brain, try it out his asymmetric trading service for just $7 for the first month. You can cancel at any time, but I don’t think you will!

Analysis and Q&A from May 2, 2014

I had an interesting conversation with Brad covering the global macro situation which I decided to record. I’ve excerpted a slice of it below which I felt was pertinent to the types of trades that Brad hunts for, and then we answer a couple of the weeks questions.

If you have any questions, thoughts or comments for us feel free to drop them here. Brad’s specialty is trading and he looks at the global macro for his ideas first and foremost, looking for deep value asymmetric payoffs. Once again, send your questions and comments to us here.

Chris: Hey Brad, I know you’ve been busy with your trading. Tell me, what are you looking at right now?

Brad: Well Chris, we can buy options on a country index (redacted for subscribers benefit). These options are an at the money call option costing us 12% of premium. This is a December 2017 expiry, meaning we have 4 years for this to go up 12% for us to break even!

Now you might be thinking, oh well it’s priced like that because it’s stupidly overvalued and investors are no longer willing to pay for any upward movement within the next 4 years and you’d be wrong.

Let’s look at the valuation of this index. It is 1.16 book value, so only 16% above book value. The S&P in contrast is about 2.63 times. Price to sales ratio is just 0.6X. In contrast price to sales of the S&P is 1.69 so the S&P is over 200% more expensive in terms of price to book and over 280% more expensive in terms of price to sales.

Chris: Sounds like the Brad I know.

Brad: And obviously this is a deep liquid market.

Chris: You mentioned you had a few on your radar.

Brad: Right so, looking at a large global company where the December 2018 calls are trading for a 7% premium.

Chris: So we’re looking at 5 full years to expiry and our risk to break-even is for these calls to rise by just 7%? Nice. What’s valuation look like?

Brad: Price to earnings of 10, and a price to book of 1.3.

Look Chris, these are things you just buy and put them in your back pocket and leave them.They don’t come around every day but as you know I’ve made a living of ferreting them out and jumping on them when the time is right. I forgot to tell you the dividend yield on this is 4.8%.

So you could get aggressive and just by the call options and the only question is how much do you want to buy, or you could be conservative and for example put say $10,000 into the actual stock, collect your 5% dividend yield, then take roughly $2,000 and buy 5 call options at the money. You would now have roughly $17,000 exposure to the company, of which you’re getting a 5% yield on 10k, so after 2 years you’ve paid for those call options. Now, those options are delta 0.5 so as the price rises your delta kicks in and things get very very profitable.

We had a couple of questions, many on the same theme.

Question:

Dear Brad. Thank you for the excellent publications. I have interest in a managed account. Would you be kind enough to send details on how this would work through you, for instance:

  • Track record and history
  • Fees and charges
  • Minimum amount to start
  • Would this type of trade be best in an IRA or regular account
  • What  house or source  are funds traded thru and in whose name
  • Any other data that might be helpful

Your time is appreciated.

Answer:

Managed accounts are not something I take lightly. On an individual basis I typically will manage an account for a client, however the figures required are not accessible for most. What I’m setting up and will shortly have available is a fund. Individuals will be able to come into the single fund for a minimum of $50,000. If this is of interest then let me know or alternatively if you are a HNW wanting a specific managed account then once again let me know and I’ll be glad to share track record and so forth.

Question:

How can I find out more about your trading for private individuals. Can you send me information and what are the requirements? Also, can you send me information on your track record? Thank you.

Answer:

Ditto above.

Chris again.

Being busy people ourselves we know how great it can be when we can automate something. Technology has allowed us to do so much more with so little so we figured we’d solve a problem we’ve had personally with placing Brads trades and that problem is having trades auto-executed. We have therefore negotiated a broker who has agreed to auto-trade subscribers accounts for the Capex Asymmetric Trader.

What this means is that as a valued subscriber you will be able to open an account and once we provide the broker the go ahead your account will be traded as per the following (in their own words):

“Once verified, we will activate the customer under your service to begin auto trading. Customers have the ability to set their auto trade allocation amount to a specific dollar amount, a percentage of account value, or a set number of contracts per alert.

When we receive an alert, we input the parameters into our proprietary auto trade system. Our system is constantly scanning balances and positions so that when an alert comes in, we can quickly determine who should participate and at what level. We will then enter one order to the market for all active auto traders. Once filled, we’ll allocate the options to each account at the executed average price. We do it this way to keep it fair and equitable for all participants. It also allows us to move quickly to execute the order. The order entry process literally takes just seconds to execute.”

Analysis and Q&A from April 25, 2014

Question:

Can you suggest a good platform for trading? I’ve been using Schwab but curious what you think is best. I’m not a newbie so I don’t need full service.

Answer:

I think the best all round platform is Optionsxpress. Its very user friendly, intuitive to use, and brokerage rates are competitively priced.

Question:

Hi Brad, first time I traded, I traded Forex with some guru and lost my entire account, second time I took some time and used some basic risk management and about broke even. I joined your service from when it was free and then when you gents began charging for it I thought to myself, hey this is expensive. My wife said something I won’t repeat about paying that kind of money and something else about Vegas, then I looked at my previous years and how much god-damn money I’ve lost doing this and then reconciled it with my account which I started with your then “free” months you provided, and I figure I’m just about to make back all my losses from profits you’ve helped me make. That’s why I’m still here and paying 🙂 Though I haven’t actually told my wife…

My question is this. If I’m trading spot Forex as apposed to say long dated calls/puts on an FX cross I just don’t get the leverage available to me and I can’t compound returns as fast. Surely with good stop losses in place the risk/reward to spot FX is greater than buying the long dated options?

Answer:

Yes the payoff of a leveraged spot FX position is better than with long dated options. However, that is only from a “theoretical” perspective. Practically the payoff isn’t better because if you get stopped out a couple of times on a spot FX trade before the trade eventually goes your way, the cost of those stop-outs will make even an expensive option look very cheap! Secondly, if you get stopped out a couple of times on a spot FX trade will you come back for a third or forth time? If you don’t put the trade on again after being stopped out and the trade eventually takes off, in what would have been your favour – what will this lost opportunity do to your self confidence?

I think people don’t give enough thought to the financial and emotional costs of getting stopped out in leveraged FX trades. People lose money in this game because they are emotionally incapable of doing what they need to do.

Question:

How do you go about figuring out lot sizes for your trades? I’d love an easy method of calculating what size I should position for each trade.

Answer:

I trade in options mostly. I have an easy “formula” for exposure to a single trade. For options going out 2 years 1% of capital, for 12 months 0.5%, and for 3-6 months 0.25%. If you find these amounts to aggressive then half them… so for 2 year options 0.5% etc. I try to keep things very simple, its easier and cleaner that way.

Question:

I’ve been following you from the start. Do you offer managed accounts?

Answer:

Yes I do manage accounts for selected high net worth clients and have been doing so since 2000.

Question:

I’ve been using a demo account for all your trades, which pissed me off because I realise that I could have been making real money, but wanted to be sure before “going live”. Now I need to find a good platform to trade on. I’ve been using a demo at Saxo so was going to just use that but thought I’d ask.

Answer:

I have found that demo accounts are only good for teaching you how to use a platform. They give you little or no insight into trading because trading is 80% emotion (or something like that). If you don’t have any skin in the game you won’t have any emotional attachment to trades. I have seen people do very well using demo accounts only to fall apart when making the transition to live accounts. My idea would be to start out by putting one or two contracts on for long term options… with amounts of money that you wouldn’t think twice about losing.

Question:

I know that you’re bearish JGB’s and the Yen. In the last Q&A Chris mentioned the sell-off in Japanese equities and the fact that the Japanese bond market didn’t rally. I’m sorry but I don’t understand how this is “meant to work”.

Answer:

Well it is meant to work like this. The JPY depreciates, making Japanese exports more competitive which, given that most large cap Japanese companies are export orientated, pushes the Nikkei higher. However, when the JPY depreciates it should lead to a rise in the cost of imports which leads to inflation… well at least after a certain degree of depreciation in the JPY! So with respect to the direction of JGBs all you need to know is what is going to happen to the JPY – if the JPY was to weaken materially then JGBs should collapse. The big problem with JGBs is their size, they are very big contracts and really only people with significant capital behind them should be entertaining the idea of trading this market.

From Chris: What I meant by this is that if you look at risk off trade, this normally entails equities getting hammered and a bond market rally. In the case of Japan, equities have been hammered while the bond market failed miserably to attract capital flows. I think this could be a significant shift in sentiment. Time will tell.

Question:

I haven’t invested in any of the option trades so far. But I am going to put aside a portfolio amount. I was wondering whether Brad would be able to review each of the previous alerts and advise whether they are still worth investing in? Do the ones that have gone up still have upside? Do the ones that have gone down represent better value now? Or have times and implied volatility changed?

Answer:

All the previous trades I have talked about were selected for their long-term prospects/payoffs. Some of the trades have already closed out while most of the trades that are long dated (which is most of them) haven’t moved too much since I posted them up on the site and the ones that have still have significant upside on the offer. Now here comes the important point – I have no idea as to which trades are going to do the best. So I would say that if you are going to allocate capital to these trades do so equally across all trades – i.e. don’t favor the outcome of one trade over another. After many years trading I think this is one of the most valuable lessons that I have ever learned.

– Brad

Analysis and Q&A from April 18, 2014

We live in a surreal world dominated by central bank interference, liquidity driven markets and simultaneous collapsing credit conditions (China) and record bond purchasing (US). As if this wasn’t enough, we have the crisis in Ukraine forcing liquidity out of Europe. Over in Japan we’re experiencing a body slam to the Nikkei while the Yen strengthens and curiously the bond market has remained unmoved.

This may well be significant since, for those who’ve been paying attention, when a sell-off in equities occurs it would be typical that as a trader we would get long the bond market expecting capital flows to drive yields down as it flows into the “less risky” government debt. What has happened in Japan is that capital has flowed out of equities but NOT into bonds. Could this be the harbinger of things to come? Positioning to profit from these markets is Brad’s bread and butter. With 30 years+ experience in the trading trenches, Brad and our subscribers are well positioned to profit by “trading” the markets. If you want your questions answered by a professional trader shoot them through here and we’ll do our best to answer them for you.

On to this weeks questions

Question:

Brad, thank you for your excellent work, the emerging market currencies are on a tear. Will you be getting long any of these and if so where is the best bang for your buck?

Answer:

Yes emerging currencies have been on a tear as of the last month or so but I think it is only a “working off of an oversold condition” Let’s go back a month or so, there was a lot of bearish talk regarding emerging market currencies particularly surrounding the Turkish Lira. Those fundamental problems have not gone away and won’t go away for quite sometime. Furthermore, China continues to burn away in the background……nothing has changed. What has also happened over the last month is the cost of long term options has come down significantly. So rather than get bullish on emerging market currencies I see the strength in emerging market currencies over the last month as a great opportunity to open up more bearish positions on emerging market currencies particularly via long term options.

Question:

I’d be interested to know your overall long term views on equity markets, bond markets and currency markets. It’s probably not a short answer but if you could find the time to discuss these I think it would be very useful.

Answer:

I look at markets through very different eyes than most. Rather than competing head to head with other analysts via traditional means such as fundamentals etc I look more at how a market is positioned, in particular I try and workout the mystical ratio of strong to weak hands. Suffice to say this – I think that equity markets are by and large not widely held by the general investing public whereas bond markets are. How do I arrive at this conclusion? Well through various means, primarily via surveys of public opinion and sentiment. Here is one example, from Barry Ritholtz

“April 2: Anyone who thinks stock market sentiment is excessive today should speak to the American people. According to a Gallup poll in the first quarter, half of all Americans think putting money into the stock market is a bad idea.

In the 1999-2000 era, 67% of Americans thought putting money into the stock market was a great idea. Only 28% thought it was foolish. Fast-forward to today—more Americans think putting money into the stock market is a bad idea (50%) than think it’s a good idea (46%). We might be tempted to call this irrational non-exuberance  in light of the performance of the market over the past five years.”

So we have a long way to go before the majority of the population think that investing in equity markets is a good thing, until such time equity markets will go higher at the expense of bond markets.

– Brad