TDV Trade Update / Alert

Ed Bugos, TDV Senior Analyst

August 28, 2017

>> BUY Currencyshares Japanese Yen (FXY) December $90 Calls at US$1.25 or better

>> Reaffirm BUY Proshares Ultrashort QQQ (QID) Oct and Jan calls, as well as the ETF

>> BUY S&P 500 SPDR (SPY) 15 December 2017 $105 Puts at US$0.01 (1 cent)
>> BUY S&P 500 SPDR (SPY) 15 September 2017 $185 Puts at US$0.01 (1 cent)

Fed policymakers were ready to roll a plan to shrink its balance sheet but were increasingly wary
about weak inflation and some called for a halt to interest rate hikes until it was clear the trend was
transitory, according to the minutes. - August 16th Reuters news after FOMC minutes

In other words, the cat is out of the bag. In the Feds July 26the statement, a couple week earlier, it said, The
Committee expects to begin implementing its balance sheet normalization program relatively soon.

Now we know, relatively soon meant probably never, but

it caught the market off guard anyway. So much for the
bounce in the USD. It sure seemed that way, particularly in
the days leading up to Jackson Hole this weekend. The
financial markets tend to expect bankers to say something
profound on monetary policy at this annual event just
ahead of the stock buying season in September. But Yellen
and Draghi shied away from hinting on their next moves.

According to regular channels:

The Fed chair's speech was mum on monetary policy, which hurt the dollar by keeping uncertainty
high about whether the central bank would boost interest rates again this year, said Joe Manimbo,
senior market analyst at Western Union Business Solutions. Traders dumped the US dollar after
Yellen failed to discuss monetary policy, said market analyst David Madden at CMC Markets UK.

When most people look at the US economy they see soaring stock prices, wall street sources forecasting
bullish scenarios, a historically low unemployment rate, and government officials declaring that the economy
is growing smartly. Yet, I have been showing you the weak trend in economic data through the Feds own
GDP forecasting tool, and I have been showing you its causes - i.e., the slowdown in money and credit growth
that started in November. To be sure, this slowdown occurred after a surprise spike in front of Trumps

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victory, as you can see in the graph below where the year over year rate first jumped to almost 11% before
collapsing to the current post 2007 low (*5%), which historically is too low to sustain a boom.

That uptick explains the post Trump stock rally and a brief but surely uninspiring earnings recovery. But, the
subsequent plunge has now been behind the slower than expected growth rates in GDP in the first half.

Weve seen evidence of a wilting boom not only in the data to which the Fed is supposedly sensitive, but
also, in commodity prices, and anecdotally, in some instances. In fact, the weak commodity trend that fed
into the price data is what gave the Fed an in, i.e., some pretext in continuing the nearly decade long zero
interest rate monetary policy. Hence the Feds lapdogs wasted no time promoting the inflation narrative.

So, with stock prices at record highs, and both interest rates
and the unemployment rate as low as they have ever been,
almost ten years after it began to lower rates in response to
cracks in the subprime markets, and two years into a
tightening (which was promoted for > two years) pushing
the Fed funds rate up to barely 1.25%, the Fed is not sure it
wants to continue this so called tightening just because of a
small downtick in price inflation? Certainly, Wall Street
jumped all over it, pushing the Dow up 140 points on the
week, and the NASDAQ 100 up about 32 points, slightly
behind the DJIA in percentage terms.

But the US dollar suffered, especially in Europe. Traders

threw in the towel on a widely expected bounce off a previously sufficiently tested 92.5 level - from where the
bulls rallied the USD index (below left) by 10 points in the second half of last year and 7 points in 2016.

The red lines in the above charts are just a 200-day moving average, but traders and technicians use them as
indicators of where important price trend support or resistance might come into play. The conventional
technical analysis is to draw a horizontal line connecting the lows at 92.5 in the chart on the left above, and at
115 (connecting the highs in the 2015-16 trading range) in the chart on the right above. Both, the 92.5 in the
USDs case and the 115 level in the Euros case, have another meaning in the longer term trends, which are

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not apparent in the above charts. The 92.5 level in the USD index is the last highest primary trend low in the
7 year bull market, and the 115 level in the Euro may represent the last lowest primary trend high.

This was confirmed by the fact that the USD went to a new primary high and the Euro was one of the few
currencies to confirm that with its own primary low - the one that shook us out back in November 2016.

What this means is that if the USD index falls through 92.5 it would confirm the reversal in the dollars bull
market that I have been looking for. So I thought the bulls would have put up more of a fight at this level.

Golds $20 jump today through a key level could be telling

us what is already apparent in the chart, the bulls have no
support at this level. Now, be warned, a failure of this level
still seems premature and it could be deceptive. We may in
hindsight find that the 200 day moving averages (the red
lines in the charts above but not the one in the chart here)
would hold, if you will. But I think our analysis of the
economy and the investment boom is spot on, and I think
the Feds sentiments in August reveal it. If the Fed doesnt
come out with a strong statement either way, i.e., either to
reaffirm its tightening policy or to announce QE4, it i about to lose a chunk of credibility, so who knows.

We could see a slide in the dollar as powerful as its 2014 rally. Many of the important currencies that trade in
the USD basket have already reversed their trends so we should at least get some confirmation in the USD
index. Should the Fed allude to abandoning its course now, I think all hell would have to break loose.

For it would just prove our hypothesis: it cant exit from (or normalize) its policy without causing disaster.

When Were Right Were Right, and When Were Right Were Wrong

The Canadian Dollar (FXC) and Euro (FXE) calls are the only option positions that have been working for us,
with the September expiries that we bought in April up 360% and 613% respectively as of yesterday.

FXC September $78 Calls FXE September $110 Calls

Unfortunately our British Pound (FXB) and Japanese Yen (FXY) calls went south after starting out strong in
April. Our British Pound options almost doubled right out of the gate. If you took some profits on that trade
(it was almost a double) you are nimble because the bid didnt last long. Even though Pound-Sterling

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continued higher into early August our calls never recouped that initial $1.10 high. The most they gave us was
75 cents when the FXB ETF hit a high of $129 on August 2nd, just $1 away from our $130 strike price.

The British Pound ETF (FXB) fell back to nearly $125 last week, practically wiping out that entire premium
on our September 2017 options down to about 5 cents. The market on the $130 calls is now 10 cents asked,
zero bid. Thats how fast these things move. Faster and less liquid than penny stocks, try to remember that.

At a 0.07 Delta the market is putting the odds of getting to $130 in two weeks at just 7%.

In other words, 1/14 odds on this particular play costs a dime. To get a 14x pay out the ETF has to move up to
about $31.40, i.e., it has shoot past our strike price by about $1.40 plus transaction costs. However, the closer
the ETF gets to that strike price ($130) the better the chance that those odds themselves change, and you may
see a bid at 30 or 40 cents, which is still a 200-300 percent return if you cash out before expiry.

To be sure, those arent bad odds. It only requires a 4.5% rally in the Pound in about the same time as it fell
from $129. If the USD continues to freefall, our Yen and Pound calls, currently trading at 15 and 5 cents, are
still in the game. Similarly, our Yen (FXY) September 90 Calls started out at a $1.60 premium, which
promptly collapsed as the Yen went sideways, while the Euro, CAD, AD, and even the Pound forged ahead.

As I write, after Mondays surge in gold prices, the Yen, which has been trading with gold, broke higher by
almost a full point. It is up 0.5% as of the time of writing. The Yen ETF above (bottom right corner) is likely to
reflect by morning. It has yet to break out and away from the above trading range between 84 and 89 on the
ETF but when it does the technically derived price objective is about $94, which is a couple points shy of the
2016 high, and could be part of a large three or four year bottom in the Yen/Dollar relationship.

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As in the Pounds case, if the USD is about to crack here then the Yen could easily shoot up a 5-6% percent.

We only need 4% to break even on this trade.

A 5% rally in the Yen in the next few weeks would give us a double on our original $1.60 entry price, or a
20-fold gain from the current 15 cent price. In this case the market is pricing the odds of a 5% rally by
September 15th at about 15%, which is two times higher than the odds for the pound. Of course, in these
trades, you can cash out on these options along the way at any time the market re-prices the odds. At any
rate, it would be better to buy the December calls on Yen and Pound while leaving the September contracts
alone just in case the USD cracks faster and harder than the market thinks, or than we think. I would prefer
to do this instead of adding to the FXC and FXE December calls as they are likely to be expensive.

>> BUY Currencyshares Japanese Yen (FXY) December $90 Calls at US$1.25 or better

If the Yen gets to our $94-96 target by December, which I think is more likely than the markets estimate of
the odds at 20%, our $90 calls would be worth $4-6 (plus a premium depending on when we get there).

I was tempted to put in a trade on the British Pound here too but held off. We already have enough exposure
against the USds demise to make more gains if it continues to melt. However, I will be on the lookout for a
firesale in the FXC, FXE, and FXB ETFs to add a December contract to our call positions.

Gold Miner Insurance

On August 16th, we replaced our GDXJ August Puts, which were

bought merely to insure our gold stock positions, with the October
$20 GDX puts, which we recorded at $ 0.20. I didnt sell it too
hard as Im not that worried about our gold stocks despite my
bearish outlook for the stock boom. With the GDX ETF at $24 per
share the right to sell at $20 is worthless, and will remain
worthless on most declines to about the $20 level between now
and expiry on the third Friday of October.

Basically this put strategy will only protect declines of over 20% in
the GDX ETF. If our gold stocks fall more than the GDX it wont work that well, and if they decline just a little
bit it wont protect you against that either. The first 20% loss may be protected only partially at best.

However, the cost of the hedge is less than 1% for two months, so you are only giving up an annualized 5-10
percentage points for disaster protection. More or better protection will likely cost too much to be worth it.

The puts are down to a nickel now so we can still recover of the 1% cost, and if the GDX fell to just $22 in
the next few weeks Im sure we would still have a chance at reducing our insurance cost at the very least.

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TDVs Big Short

After a four month hiatus, we revived our big short against the overvalued tech sector in mid April with a buy
of the Proshares Ultrashort QQQ (QID) at $19.34 and some options strategies. The first set were 100%
losers but we reloaded in mid July to buy the October QID $17 calls (two months) at 95 cents and the January
$21 calls (five months) at 65 cents currently at 52 and 45 cents respectively (-45% and -30%).

This is one of my favorite trades because this is where there is too much speculative valuation that has
continued to stretch out and 1out with very little give and amid a drying pool of financial liquidity. The
October $17 calls are only two months away and trading in the 50 cent level. The market assigns only a 40%
probability to an 80 cent (+5%) rally from here over two months. Yet that would only take a hiccup of 2% in
the QQQ ETF between now and October, or a 3 point decline to $139 (in the chart above on the left).

Naturally, that reflects too much bullishness in light of the facts, and we have to continue to take that bet, so
keep buying both of these contracts. A 10% decline in the QQQ in the next two months would probably see
the QID ETF shot up to about $20, giving us a 200-300 percent gain at a 95 cent entry price but more like a
500% gain from the current 52 cent level. Thats just for a 10% correction in the QQQ to the blue line in the
chart on the left above (i.e., at about $130). The $21 January calls would still be worthless at the $20 price.
But, they might still double in value because the time premium in October after a 10% correction in the
market would still give us nice gains. At a 25% correction, down to around $110 on the QQQ, the $17 October
calls would be worth $7-8 and the $21 January calls would be worth $3-4 for gains of 1000% plus.

If you like this trade and the market corrects more than 10% in the next two months you stand to make
anywhere from a few hundred percent up to over 1000% on these calls. I am more bearish than that. I also
agree with our critics that bottom and top picking is for losers. That is not exactly what we are doing, but we
are betting on a reversal. Im not sure if we got the top and dont care. But if there is a good time to short a
rally it is when it is extended beyond all the statistical norms. At least the odds are on your side, as long as
you can pick a strategy with controllable or limited downside that will allow you to stay in the trade.

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Deep O-T-M Option Play

One way that people like to buy options is by betting on the longest odds possible, the deep out of the money
options. Along with the above trades on the QID ETF, back in April, we recommended buying some cheap put
options against the broader S&P 500 -or the SPY ETF more specifically, which mirrors the S&P.

I recommended the September $95 puts, and we recorded

the purchase at 3 cents. The ETF drove higher since then,
and the options sank to zero (1 cent offered). You can buy
them at a penny today. The odds that the index will drop to
$95 by September are now way less than 1/100. Each $1
drop in the SPY ETF may not even cause anyone to glance
at those options. The ETF may drop to $200 (~25%) and
those put options may remain at a penny. What you are
betting on with these is an unexpected change in volatility.

Its another way to play the volatility index (VIX), or to bet on a market crash. But what you want to do is to
find the best odds that a penny can buy. Using December as our preferred expiry, the highest strike price
available to us at a penny is $105. Note that the time premium climbs to about 10 cents for a strike price at
about $150, which is still a long way below the current $244 level. The reason I bring this up is that is only
$45 points from $105. So a $45 decline (25%) in the SPY could still give us a ten bagger if it happens quick.

A penny will get you the $184 strike price on the September 15th expiry, so that any hiccup in the next two
weeks may pay off, but you have to be quick to sell, and it has to be enough to be worth your while, as well as
the transaction costs at a penny, which could sometimes be prohibitive if youre not buying very much.

A 10% drop in the SPY before September 15th could easily produce a 10-bagger in these puts.

You want to buy a little more time? In October you can only get a $135 strike price at a penny while in
November you would only get a $115 strike price. In this case, the December $105 calls makes most sense, but
the September $185 calls are very tempting for an ultra short term bet. The odds are irresistible.

>> BUY S&P 500 SPDR (SPY) 15 December 2017 $105 Puts at US$0.01 (1 cent)
>> BUY S&P 500 SPDR (SPY) 15 September 2017 $185 Puts at US$0.01 (1 cent)

Is Gold Breaking Out?

Will the GLD ETF break $130 by mid September? It looks to be on

its way with the current break out of its summer range. We bought
our September 15th $130 call options on GLD at $0.80 on May 30,
as summer doldrums were just about to set in. The GLD ETF was
trading at $120, the middle of that range before it became a range.

The target of the breakout that occurred this week, as news hit the
ticker that North Korea launched some missiles over Japan, should

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be $130 easily this next few weeks. The market puts the odds at just 13%, reflecting the overwhelming bearish
sentiment in this market.

A 5% rally would guarantee a break even on our 80 cent entry price and more than a double on todays 30
cent asking price. That just requires a rally to last years highs on gold of around the $1380 level. Definitely I
like the odds on this trade still. Im not betting on things getting out of hand with North Korea. Any of the
gold demand related to that event will dissipate as quickly as it came in. The real story is in the USD, which
has nothing to do with North Korea and more to do with the Fed and the quality of the US economic boom.

Could North Korea be a diversion? Sure. Even probably. Who knows. But the boom is wilting either way.

What About Cameco (CCJ) and Our Interest Rate (PST) Bet?

The chart on the left is a chart of Camecos shares. Cameco is Canadas largest uranium producer. I have been
waffling on whether to include it in our portfolio. It has a couple fleas - hostile suppliers in Japan and a
revenue canada liability - but it is also really cheap. I have been waiting for the washout in stock markets to
occur before adding it to our defensive investor stock portfolio. But the washout has not come and the stock
price seems to have stopped wanting to fall. I almost regretted not buying it at $8 when first thinking of the
move... about a year ago. The stock shot up to $13 in January (this year). My patience has paid off for the
most part but in May - after the stock sold off - I recommended wading into the pool by purchasing the $12
September calls at $0.20. Those calls are now without a bid as the market has reduced the probability of
reaching $12 in two weeks to just 11% (less than 1/10). Its a 20% rally to be sure, and in this case I agree with
the market. This trade didnt work out but we only risked 20 cents per share to have upside exposure.

The chart on the right is the Proshares Ultrashort US Treasury bond index (7-10 year maturities). In other
words, the PST ETF shorts US Treasury bonds with medium term maturities. There is less leverage here than
in the TBT ETF that shorts longer term maturities. That was chosen on purpose. And the purpose of this
option strategy was a hedge against our stock market shorts. I reasoned that if the stock market would
continue to rise, bond yields would also. Well, i was wrong, probably because the rate of increase in stocks
has slowed, as has the rate of increase in consumer prices, the economic outlook, and the Feds rate hikes.

The Cameco trade expires this month but we have another six weeks for the interest rate ETF to work out; we
are at the $23 strike price; bond yields would just have to increase by 50 basis points to make us whole.

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 Summary

If you havent already, take some profits on the FXC and FXE calls, reallocate some of the proceeds into the
December $90 Yen calls. The Yen is breaking out along with Gold, the safehaven trade, which means that
stocks should be under pressure, and if the US dollar continues to slide through 92, watch hell break loose.

Almost all of our investments are working now except for the stock shorts and some of the other option
positions mentioned above. I strongly suggest adding to the QID ETF and the call options if you like risk.

Finally, if you like buying options at 1 penny, we like the December $105 puts and the September $185 puts -
make sure you buy the mid month puts (representing the third friday of each month) for added liquidity.

Legal Disclaimer: This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a
recommendation or determination by TDV that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any
investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide
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insured by any governmental agency, are subject to risks, including a possible loss of the principal amount invested. Generally, the investments in this blog may be more
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large spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately at the same price you purchased the stock. In some cases,
the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency,
economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and
financial resources. This blog does not constitute an offer to sell or solicitation of an offer to sell any securities in the United States. The securities have not been and will not be
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performance is no guarantee of future returns. TDV, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it
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