The Buffett Indicator

[WaltzCee]

A little while ago when Tesla (ticker: tsla) was trading below $400 a share I thought to
myself I should buy some calls. I did not do that. However, if I had bought a contract, 100
shares, that position would be worth a little over $400,000 today. The contract would have
cost around $5,600. I feel like kicking myself in the you-know-what.

It would have been an options trade. Derivatives. Highly speculative. :-)

So I thought maybe if I start a thread and started talking about my ideas in the market it
might generate some interest and also keep me a little more focused. Naturally I'm going to
talk about US equity markets.

I'm going to begin by talking about an indicator that I find very interesting. Here goes.

Known in investing circles as the “Buffett Indicator,� the measure is simply the total
market cap of all U.S. stocks relative to the country's GDP. When it's in the 70% to 80%
range, it's time to throw cash at the market. When it moves above 100%, it's time to lean
toward risk-off.

The trend is

With the Q2 GDP Advance Estimate, we now have an updated look at the popular "Buffett
Indicator" -- the ratio of corporate equities to GDP. The current reading is 131.4%, up from
123.3% the previous quarter.

moving up. According to Buffett's indicator this market is overbought. From what I've read
all World Markets as a function of the world's GDP is overbought. What's a speculator to
do?

All ideas are welcome. Expect this to be a PC free zone. If your feelings get hurt easily this
might not be your thread.

If you have any questions about options trading I will do my best to answer them.

[Fletcher]

Funnily enough I was thinking about such things just the other day. Short term loans to the bank are no longer a 'safe' investment (interest returning circa 1.0%). No cash flow upside.

I was thinking about shares and the big indexes. Selling short or long. Futures etc. Maybe foreign exchange or Gold and Silver. Trouble is I know next to nothing about these markets or the terms I just used, and have never owned or traded shares etc. Maybe join a fund scheme ?

I did look into Crypto Currencies a year or so ago but after doing some research I felt the whole thing was a game being manipulated and spruiked by many bottom feeders. The big boys, startups, and the desperate and bleeding coin and token owners. Aka .. The Wild West.

Know a little about bricks and mortar.

I'd welcome any experienced advice, opinion, or commentary you could offer Walt. The world's gone mad so why not add to the insanity ;7)

[johannesbender]

i have been unfortunate enough to have been envolved in a trading scenario , where the trader alledgedly ramped my money up to about 1 000 000 , when finally i wanted it transfered in to my bank , i was met with a lot of excuses for a long time , and eventualy it came to light through the newspaper , that unmentioned person , did the same to many many onthers , and the excuse was that they traded the money and lost it all .... something to that effect.

just be carefull if you go in to something like this , i think if i had to get in to it ever again i would only do so by doing everything myself instead.

[eccentrically1]

It's a great single indicator. The other times were 2000, 2008, and 2018. Yikes. Bubblicious.
This time probably won't be any different. Market mood and volatility is usually ruled by certainty and uncertainty. Between the pandemic and the election there is going to be a lot of the latter.
Buffett's best advice is only invest in the business you understand.

[daxwc]

The economy was put into a coma on purpose there was not a financial meltdown, so I am not so sure GDP is a good indicator yet. Will the consumer listen to panic driven Chicken Little media or will they resume life. Will governments become like deer caught in the headlights till their financial situations implode.

I kick myself for not buying Crypto Currencies when they first came out, but decided how can a bunch of heat put into a computer be worth anything?

I don’t think anything is super safe out there. Find stocks that got panic sold and haven’t fully recovered but will due to money funneling from the cancel culture. Where do you think the investment money is headed Walt there is no making money on interest in the money market?

[daxwc]

All ideas are welcome. Expect this to be a PC free zone. If your feelings get hurt easily this
might not be your thread.

This quote already hurt my feelings.

[johannesbender]

buy toiled paper.

[daxwc]

Toilet paper is a great example of something that never really was out of demand or should have been. It was fine till the panic public started hoarding reacting to media self-feeding off each other, something I can’t get any of my wheels to do. I don't even understand it. People were not worried about the food supply chain that if it broke down they wouldn't have anything to shit anyway. I know people that will not have to buy toilet paper for 3 years. Probably not a good place to park your money now.

[johannesbender]

lol yeah funny stuff , but anyway .

[daxwc]

On a longer vision one would think lithium and cobalt mining companies should take off if electric cars are to make any real headway and no better battery technology is advanced. Companies like SQM could be cheap if that happens and if the US tries to fend off China’s rare mineral stranglehold. Will the PolyMet mine get pushed through or will Glencore’s Africa legacy get it put on various funds breach of the ethical guidelines that coal companies did and activists pressure banks not to fund them? That mine is still years away though.

[MrTim]

Buy silver; It's harder to make small change from gold. ;-) Also, stock up on canned food, shotgun shells, and ciggies (more useful in a barter economy... ;-)

[WaltzCee]

You're a smart man, Mr.Tim. However I don't see a Mad Max world any time soon. I've
been looking at Gold. Some might think at about $2,000 an ounce that's a little bit too rich
for them. There is an exchange traded fund (ETF) ticker GLD, that tracks gold. It trades
about a tenth of an ounce.



A block of shares is 100 shares. 18 Grand might be a little too rich for some people also.
You might consider buying a contract of call options. They're called derivatives because
their value is determined by the underlying security. One contract equals 100 shares.

I'm going to attempt to demystify the concept of derivatives or option contracts. Like any
contract there is an expiration date. The date I'm looking at is 9/17/2021. The last asking
price for this contract was $4.29 a share. The cost of the contract will be a hundred times
that or $429. That amount is referred to as the premium. The price I'm wanting to buy GLD
is called the strike price. These are call options. Obviously I'm expecting gold to go up.

There are other terms to the contract. By paying $429 I'm entitled to buy a hundred shares
of GLD for $250 a share. As you can see by the price of the stock it wouldnl't be too smart to
exercise that contract today. These contracts are called out of the money (OTM).

Gold has had a pretty good run. Why should I expect some upside after all it's done? If you
look at the chart, you'll notice the volume at the bottom spiked. I see that as the market
makers stepping in and putting in a floor. They did some buying.

Also, I don't think we're out of the woods of this kung flu. That combined with the manner
central banks have been pulling currency out of there backsides. Trillions! It's speculative
however I just can't help myself.

[WaltzCee]

So if GLD goes to $260 I could exercise the contract, buying at $250 and selling at $260. I
would net that $10 minus the premium I paid. To exercise that contract, I would need
$25,000 in my account. Maybe some people wouldn't happen to have that much. Well you
just sell the contract. Believe me someone will buy it. That $10 is called the intrinsic value
of the contract. If there's time left in the contract that's called the extrinsic value. You get
paid for that also. It wouldn't be too surprising for that contract to be worth $20 a share.

My speculation is based in part on a gut feeling and also I've read other people's
speculation. Some seem to think that gold is going to double over the next three years. If I
hold that contract until GLD it's trading at $300 a share, it will have $50 of intrinsic value.
That puts the returned at 5 grand. The downside being if I hold it and it only manages to
get to $240, well. :)

The stock market isn't for everyone. It's the most sophisticated numbers racket ever
devised by man.

[Fletcher]

What about building and selling an APP Walt. Good money in those if you have a winner. Where you can plug in the starting figures for your derivatives and it auto updates and tells you your position and risk, time to expire, hourly, daily etc ?

Might even have an auto sell option ?

[WaltzCee]

Most brokerages have apps. Years ago a data feed from NASDAQ was $1000000 annually.
I'm sure they raised their price. That's only one Exchange. I think the terms of use from any
brokerage firm would really frown on you using their data feeds. They really don't like
competition.

A trade you might qualify to do would be selling naked puts.

10 put contracts that expire 4th of September 2020 sold for $11.60 a share.
That volume showed up Friday . So 10 x 100 would be a thousand shares.
If you had $171,000 in your account you could cover that naked put. The
strike price is $171.50.

You would be the one collecting the premium. That would amount to $11,600. In a month.

This is how puts work. Suppose the market falls to $150 a share. When the contract expires
someone is going to buy the stock at $150 and put it on you or make you buy it for
$171.50 a share.

For this to work for you, you need a couple hundred thousand sitting around collecting dust.
Also you would have to be comfortable owning a thousand shares of GLD. Some Traders
use the strategy when they want to buy a position.

If you did get tagged with a position, you could start selling me calls. :-)

These days I think gold is safe speculation.