The H.E.A.T. Formula-Holding the 50 Day
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The H.E.A.T. Formula is a radically different way to look at investing your portfolio.
H- Hedges, you should always have hedges and be agnostic as to being long or short. Bonds are not a hedge
E-Edges, you should always look for edges. Preferably these are edges with some sort of psychological underpinning, structural edges, or some sort of barrier to entry.
A-Asymmetric. Everything you do, be it trades or your overall portfolio, should be designed so that heads you win a lot, tails you lose a little.
T-Themes. You should always be invested in the top themes. Most everything else is just noise.
We will continue to build out our resources here to help. In the meantime we have a model Hedges and Edges ETF portfolio.
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Our Next Webinar will be January 23,2025 at 2pm EST.
How to Make Money In Markets During 4 Years of Trump
-Three Major Investment Themes Nobody is Talking About
-Why Crypto is a Must Own and How to Trade it With Asymmetric Risk
-Three ETFs That You Want to Almost Always Be Short
-Dangers of Covered Call ETFs and a Better Approach
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Participating in a webinar on January 9th, details below:
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Little bit of a selloff on Friday, albeit on low volume. SPY and QQQ both held the 50 day, and closed well off the lows. As long as this holds I wouldn't read too much into Friday's action.
As a reminder, I like to short (long puts) high flying stocks that start to break down. Normally, on a down day I find all sorts of interesting set ups. I couldn't find anything of interest on Friday. I also like to look for ETF sectors that are breaking down, couldn't find anything interesting there on Friday either.
From a dip buying perspective nothing looked interesting Friday either. I expect it is likely we see more of the same this week.
This may be the most interesting chart at the moment....
Despite 100 bps of easing, the 10 year is looking to close out the year 75 bps higher than where it started. You have to think something has to give here. This is the S&P earnings yield vs. the 10 yr. You would expect some combination of yields coming down and/or prices declining.
Themes
AI
The Data-Center Boom Eats Up a Lot of Land. Atlanta Says It’s Gone Too Far.-WSJ
Now, Atlanta is pushing back. More residents and lawmakers worry that the pace of data-center growth—and the amount of land and resources being devoted to it—has gone too far. They say it is starting to compete with more pressing real estate needs, like housing and retail stores.
In September, the city council banned new data centers from opening in neighborhoods near transit and the Beltline. An ordinance that would have created an exception to allow data centers in Adair Park was withdrawn this month.
Opinion: Fund managers see AI delivering big gains for these 5 stocks — including Duolingo-MarketWatch
Interesting article, DUOL is a name I had seen as an AI loser and have shorted it a couple of times, without success. TEM is a below the radar screen name that I like, but it is volatile as hell. I own KTOS and AXON is a holding in GUNZ.
AI Power
America’s Big Natural-Gas Footprint Is About to Get Even Bigger-WSJ
Natural-gas investors are looking ahead to potential growth after a year in which historically low prices dinged profits and drilling plans. At the same time, the Biden administration questioned the benefits of making the U.S. liquefied-natural-gas-export machine—the world’s biggest—even bigger.
AI Is Reshuffling the Ranks of Utilities Stocks. Here Are the Likely Winners.-Barron's
Utility stocks have had a strong year, rising 20% after a difficult 2023. Now the industry is dividing—between names that can profit from the explosive demand from artificial intelligence, and those likely to grow more slowly. Some probable winners include Louisiana-based Entergy, Indiana’s NiSource, Idaho’s Idacorp, Pennsylvania’s PPL, Arizona’s Pinnacle West, and Minnesota’s Xcel Energy.
AI Needs So Much Power, It’s Making Yours Worse-Bloomberg
Why tech giants such as Microsoft, Amazon, Google and Meta are betting big on nuclear power-CNBC.com
“A new data center that needs the same amount of electricity as say, Chicago, cannot just build its way out of the problem unless they understand their power needs,” said Mark Nelson, managing director of Radiant Energy Group. “Those power needs. Steady, straight through, 100% power, 24 hours a day, 365,” he added.
After years of focusing on renewables, major tech companies are now turning to nuclear power for its ability to provide massive energy in a more efficient and sustainable fashion.
Crypto
The Crypto Casino Is Booming. Coinbase Is the Winning House.-WSJ
Argentina
The Hedge-Fund Trade of the Year: Betting on Argentina’s Chain-Saw-Wielding President-WSJ
The hot new trade on Wall Street has nothing to do with crypto, electric vehicles or artificial intelligence. It’s Argentina—the country infamous among investors for serial debt defaults.
Hedge funds and other money managers have piled into Argentine markets this year, betting President Javier Milei can overhaul a long-suffering economy. The trade has paid off handsomely, with Buenos Aires stocks on pace to finish 2024 as the world’s best performers and government bond prices soaring. An exchange-traded fund tracking the MSCI Argentina index is up more than 60%.
Asymmetry
After Another Bad Year for Bonds, Investors Lose Faith in a Turnaround-WSJ
For the most part, bonds are an awful investment. We teach investors to structure trades, and portfolios, for asymmetric returns. Heads you win a lot, tails you lose a little. With most bonds, it's the opposite, heads you win a little, tails you can lose a lot.
The HEAT Formula is highly customizable, the way I use it I do invest heavily in T-bills. Not as a portfolio diversifier or to generate income, which is why most people invest in bonds. I do it more as a "portable alpha" approach. Approximately 80% of my portfolio is in T-bills, with approximately 20% in options. I can tailor my options positions to mimic a fully invested portfolio or a leveraged portfolio if I want, just manage delta accordingly. Unlike a traditional fully invested portfolio, where my losses are pretty much unlimited (see 2008-9), as long as I hold the T-bills to maturity, my max loss is somewhere under 20%, and for that to happen, all of my options would need to expire worthless.
Speaking of options....
A Thrill-Seeking Trade Amps Up Heading Into 2025-WSJ
What articles like this fail to grasp is that options are a tool, and just like any tool they can be used a number of ways. You could use them like a lottery ticket, but you can also use them to reduce risk. Here's an example:
Let's say you are bullish on AAPL and you want to participate if it goes up in value. The stock is currently trading at about $255, so buying 100 shares would cost $25,500 (not including any commissions). What's your maximum downside if you are wrong? Technically it's the entire $25,500, but let's assume AAPL isn't going bankrupt. Could it go down 10 or 20% in a correction? Sure. If it went down 20% you lose $5,100. Let's say instead you buy an at the money call option. For this example I use the 2/21/25 255 Calls. 1 contract gives you the ability to buy 100 shares. Currently, this is trading around $7.90 on the ask, which equates to an investment of $790. What's your maximum downside on the calls? It's premium paid, $790. What's your maximum upside? It's unlimited. This is an example of how options can be used to design trades with asymmetric returns.
