Friday Market Follies – China Trade Deal or BUST!!!

Donald Trump will save us.

That's what we're hoping as the market optimistically heads into this weekend's G20 Meeting, expecting some sort of Major breakthrough as Trump and Xi sit down for dinner on Friday.  In fact, the first image out of Buenos Aires is that of Trump, Trudeau and Nieto signing the USMCA (ie. NAFTA) after 18 months of negotiations in which our Negotiator-in-Chief got NOTHING better – to the point where Congress may not even ratify the thing as there are so many angy constituents.  

Keep in mind that we already had NAFTA – all Trump did was change the name and claim he invented it (after saying how horrible it was for years) and even THAT took 18 months.  We do not have a current trade deal with China and the chance of going from something to nothing over this weekend is about the same as the chance of Trump letting Xi pick the menu for Saturday's dinner.  

It's not actually clear that Mexico will ratify the deal either as this is effectively Nieto's last act as President of Mexico as he turns over the office to Nationalist successor Andres Obrador on Saturday and you might think "Oh good, another Nationalist, he and Trump should get along great" but that's not how Nationalism works.  We used to have lots of Nationalists and they all said "XXX First!" and they all ended up going to war and killing each other, which led us to an elightened age when GLOBALISTS took control and cut down on conflicts by realizing that nations had to compromise to achieve lasting peace.  That's all out the window now…

One of the key "accomplishments" of the USMCA is already a disaster that threatens to skyrocket health care costs as it protects drug makers from generic competition for 10 years (up from 5 in Mexico and 8 in Canada) which means companies can charge outrageous prices for medicine for much longer periods of time.

Image result for prescription drug prices chartOpponents—including generic drugmakers, insurers and the influential AARP advocacy group for older Americans—say the deal would make it harder to ease those rules in the U.S. and restrict competition regionally. The Association for Affordable Medicines coalition wrote to U.S. Trade
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Thursday Follow Trough – Well-Dressed Windows Ahead of the Fed Minutes

Wow, what a comeback!  

Fed Chair Jay Powell said some words and the market jumped up over 2%, adding $2Tn to the global market cap in a matter of minutes.  He should say those words every day, right?  Actually, he didn't have to say anything as the Dow (/YM) began rising from 24,900 (already up from 24,800 at 5am) at 11am to 24,950 at noon – before the text of Powell's speech had even been released and, by 12:05, we were already up around 25,200 and we continued on to a high of 25,370 at the close, up 600 points for the day (2.4%).

The market's exuberance hinged essentially on a single sentence from Powell's speech:

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy--that is, neither speeding up nor slowing down growth. "

Rather than focusing on "still low by historical standards" the media chose to focus on the much vaguer "just below the broad range of estimates" which shows a complete lack of understanding of what a range is – whether intentional or otherwise.  Fortunately, we know exactly what range Powell is talking about as it's the Fed's famous "Dot Plot" that shows exactly what the range for rate expections is among the 12 Fed Governors.  

As you can see from the chart of Sept 26th, the RANGE of the expectations is from 2.25%-2.5% at the end of 2018 (we're at 2.125% now) but the RANGE next year is between 2.25% and 3.75% and, by 2020 – there is only one outlying dot that shows 2.25% while the middle of the range is about 3.25% – that's 4 quarter-point hikes from now.

Also, not at all covered by the media – Powell also had slides (as well as 14 other pages of text) and he was also concerned about the massive increase in Corporate Debt, now well above the economic collapse levels of 2009 and matching the post-crash levels of 2002.  The difference was, in 2002 and 2009 the Fed was able to LOWER rates significantly to reduce the stress of outstanding Corporate Debt but, without
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Which Way Wednesday – Waiting on the G20

Well, we flipped the NYSE's weak bounce line green at 12,150.

We also hit the weak bounce line (24,800) on the Dow (/YM) futures so all is well(ish) at the moment as the Trump administration made nice noises on trade yesterday – essentially negating Trump's morning tirade and that gave us the pop that we needed to get back over the hump so now we are waiting to see if either the S&P (/ES) can take back their weak bounce at 2,710, Nasdaq (/NQ) 7,080 or the Russell (/RTY) 1,530 and, if any of them do – then we can go long on the laggard with tight stops if those weak bounce lines fail again.  

Unfortunately, as you can see from the NYSE chart, recent weakness has already caused a "death cross" to occur as the 50-day moving average fell below the 200-day moving average and we really won't be out of the woods again until that reverses and that will take a couple of months above the 200 dma so, until we cross back over those lines – this market will still have a tendency to trend lower well into Q1 of 2019.

And it's not just the NYSE, the Russell has already crossed and the Nasdaq will cross early next week and the S&P will cross within two weeks and the Dow MIGHT avoid a death cross, but only if it gets back over 25,000 and stays there.  This morning, the /YM Futures are at 24,900 with a 160-point gain on the Dow overnight so it could possibly happen and the best bullish Futures bet at the moment is going to be going long on the Russell (/RTY) above the 1,500 line which will be confirmed by Nasdaq (/NQ) 6,750 and S&P (/ES) 2,700 so as long as all 4 of the indexes are over those lines, you can stay bullish on /RTY.

The big, positive spin for the World markets this morning is that Trump and Xi are scheduled to meet over the weekend at the G20 conference so, hopefully, there will be a resolution of some sort.  Also to be resolved is Brexit, which seems to be staggering forward without actually collapsing…
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Tariffic Tuesday, Part 12 – Trump Ramps Up Tariff Talk Ahead of G20 Meeting

Image result for trump robin hoodDoes he do it on purpose?  

As much as the President likes to complain about the market not performing well, more often than not he's the primary cause of poor performance.  Yesterday, for example, we were having a lovely bounce (albeit on very low volume) but then Trump suddenly decides to say he's moving ahead and boosting tariffs on $200Bn worth of Chinese goods from the current 10% to 25% – which is up 150% from where they are and will sock American Consumers with an additional $30Bn in tax, crippling disposable income and boosting inflation.  But it's $30Bn more in tax breaks he can give to his friends so – winning!  

In an interview with The Wall Street Journal, Mr. Trump suggested that if negotiations don’t produce a favorable outcome for the U.S., he would also put tariffs on the rest of Chinese imports that are currently not subject to duties.

"The rest" is another $267Bn with of goods and 25% of that would be yet another $66Bn picked from the pockets of American Shoppers.  So we're talking about $96Bn worth of additional taxes aimed at the people who can afford it the least and the chances of Trump not doing that but instead making a deal with Xi this weekend that widens his already out-of-control budget deficit by $96Bn are slim to none – just as I've warned about from the start.  These tariffs have nothing to do with China and everything to do with making middle Americans (the suckers who voted for him) pay for his tax cuts while wrapping it in a flag of patriotic protectionism that hasn't bought a single job back to our shores in two years.

Trump has done NOTHING for jobs and, in fact, Trump's first 22 months in office created just 4.1M jobs while Obama's last 22 months in office created 4.8M jobs – Trump inherited a triple and turned it into a double and, at this pace, it will dribble out into a weak single. 

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PhilStockworld November Portfolio Review (Members Only)

Image result for one million dollars animated gif$1,186,527!  

That's up just under 100% on our STP/LTP combination, which started with $100,000/500,000 on Jan 2nd so, all in all, it was a good year – as of 11/16 anyway.  Now it's Nov 27th and I haven't updated the positions on the spreadsheets yet due to the holidays but, in the exact same positions after a couple of wild weeks, the LTP now stands at $894,878 and the STP is at $354,962 so that's a combined $1,249,840 as the STP got bigger and the LTP didn't lose too much ground.  

That's for the UNTOUCHED positions but, as you'll see below, we did a lot of touching so it remains to be seen whether we made matters better or worse.  Meanwhile, $1,186,527 was up $46,011 from our September Review (I never collected the October reviews into a single post) so we're chugging along pretty much as expected now and what really saved the LTP was all those short-term trades we made back on Sept 26th (see Top Trade Alert) that are indeed giving us a $100,000+ pop into the Jan expirations on all those short calls we sold in anticipation of a correction.  

It's always a good idea to go back and read the logic we had at the time in retrospect so that, next time we have a similar situation, you'll have the experience of having gone through it before and you'll have a better idea of what to expect.  As a bonus – those 9 positions we picked are mostly still good for new trades as they pulled back as expected, so now we wait for the next bounce to sell more calls.

Meanwhile, the summary of our Reviews is as follows:

Options Opportunity Portfolio (OOP) – Part 1:  Don't forget, this is a quick review just highlighting changes.  Image is from 11/2, not the current but I'll note any adds if I can and please ask about anything I may have missed where action may be required.

  • BJO – is now JO, apparently and on track at $42.81.
  • TZA – Hedge is doing it's magic, now up $8,000 but

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Merry Monday Markets – Holiday Losses Magically Erased

Nasdaq is up 1.5% this morning!

That's 100 points and that erases all of Tuesday, Wednesday and Friday's losses but we're still, unfortunately well below our 6,870 failure line (10% correction) and the weak bounce line for that is way up at 7,080 – so let's not injure ourselves patting each other on the back on a no-volume pop in the Futures.

I would much rather see the market consolidate and form some sort of proper base before climbing back up – when you build a recovery on low-volume rallies, you have nothing but a house of cards, ready for the next economic wind to collapse it all over again. 

Mexico said it would deport a group of Central American migrants who rushed a fence separating Tijuana and San Diego and were dispersed by U.S. Border Patrol agents using tear gas.The good news this morning is progress on Brexit, hopes that the US and China can make trade progress at the G20 and oil has finally stopped falling at $50 – so the energy sector is having a bit of a relief rally.  Also, border patrol agents seem to have saved us from that deadly migrant caravan by gassing women and children who dared to approach the US Border to file legal claims for asylum, rather than trying to sneak in.  I guess that's why they call them terrorists – those children sure look terrified (cue music "Proud to be an American").

Now we have to see if the markets can cross the border back into positive territory for the year but 2018 has been an exceptional disaster with 90% of all 70 standard asset classes now down for the year, the worst overall performance since data has been kept, starting in 1901 so it seems Trump has indeed set a record that may never be broken because, not even leading up to the Great Depression have stocks, bonds, metals, munis, energy, metals – even crypto currencies – ALL down for the year!

I had predicted way back on Jan 25th that 2018 was going to be a stock picker's market (our favorite kind) and, oddly enough, Apple (AAPL)
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Friday Market Failure – Weak Finish to a Weak Week

Down and down we go.

The Futures are off about 200 points on the Dow (/YM) at 24,250 with 2,625 on the S&P (/ES), 6,500 on the Nasdaq (/NQ) and 1,470 on the Russell (/RTY) and on Wednesday Morning we put up this chart of the bounce lines and that means the Dow, S&P and Nasdaq have now all turned red and only the NYSE is still above the DOOM!!! line, below which we have to start looking for the next 10% leg to our correction.  

And CORRECTION is what it is as stocks move towards CORRECT prices that are more closely matched to their values and some stocks are even below their fair values already – but that won't stop them from going lower just the same – because stocks can become as undervalued as they were overvalued.  That's what makes stock-picking so much fun!  

Meanwhile, before we go bargain-hunting, we have to make sure we are well hedged for the next downturn and Wednesday we published an SQQQ hedge in our Morning Report and it had already gone out as a Top Trade Alert on Tuesday afternoon and this morning, unless we get a 200-point bounce early on – we're going to add it to our Short-Term Portfolio as well, to give us another $50,000 worth of protection because this is starting to get ugly folks – though today is a low-volume half-day in the US – so we can't be sure anything we see today is real.

China's Shanghai Composite brought the pain this morning, dropping 2.5% into the close.  As you can see from the chart above, the Shanghai did it's own weak bounce on talk of a resumption of Trade Talks between Trump and Xi but comments made by China over the past couple of days indicate the two countries are miles apart and Trump is now asking that all US allies stop using Chinese Tech Giant Huawei (World's 2nd largest phone maker) amidst unproven allegations of spyware. 

Certainly this is not a good way to broker trade deals though Trump may think this is some kind of bargaining chip he'll be able to use as in "Sure they're spying on us but,

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Will We Hold it Wednesday – Weak Bounces into the Holidays

Wheeee – this is fun!  

As I told you yesterday, I was preparing to call for a bounce and we laid out why we had called a top so you'd understand that we don't take these things lightly.  The chart on the right is the SAME EXACT LEVELS WE PREDICTED ON 10/30 ("10% Tuesday Correction – Have We Fallen Far Enough?") and yesterday the S&P (/ES) bottomed out at 2,631, the Dow (/YM) at 24,355, the Nasdaq (/NQ) at 6,449, the Russell (/RTY) at 1,463 and the NYSE 12,016 causing me to say to our Members in our Live Chat Room at 2:03: "We're taking about $100,000 off the table on the STP and flipping a bit bullish for a hopeful bounce but, if we don't get it, we will re-deploy that $100,000 to buy another $200-300,000 of protection."  

The Short-Term Portfolio is where we keep our hedges to protect our Long-Term Portfolio and we had just finished making bullish adjsutments to the LTP in the morning, taking advantage of low prices to add to our existing positions.  Taking down the hedges from the STP turned us very bullish into the close.  In the very least, we're expecting at least a weak bounce from our indexes as the first attempt to fail our support lines led to strong bounces so, even in a proper bear market – there are still enough idiots out there to buy this last dip before giving up so – why not take their money?

Back in October, we looked at the "30 Risks to Markets in 2018" and that is why we expected the correction and those risks are still out there for the most part but now many of them are REALIZED by investors – so they are less likely to cause panic selling when they bubble up in the news cycle and that means we MIGHT stablize here – down 10%, but I'd still feel a lot better about buying if we weak bounce here and continue on to a full 20% correction.

From 7,700 on the Nasdaq, that would be 6,160 – another 500 points down from here.  






Tumblin’ Tuesday – FAANG Failure Freaks Out Investors


Facebook (FB) is 40% off it's 52-week high ($215) and Netflix (NFLX) is not far behind and even our beloved Apple (AAPL) is down 20% as news spreads that Apple has slashed orders from their suppliers of about 1/3 of the 70M unit production schedule for the iPhone XR, XS, and XS Max models that were unveiled at the September event.  That, of course, is sending ripples throughout the tech sector as Apple's suppliers get hit hard but all tech manufactuers are now selling off in fear of some sort of sudden global slowdown because – if AAPL can't make sales – then who can?

I've been the outlier all year saying that NFLX and Amazon (AMZN) were better shorts than longs and we even made money in our Short-Term Portfolio with shorts on both of those stocks and the Nasdaq Ultra-Short (SQQQ) is the primary hedge in our portfolios but I certainly wasn't expecting Facebook (FB) to fall 40% but they have been plagued with scandal after scandal – that my Mom and her freinds know nothing about.  

Image result for facebook cartoon scandalsIn other words, I don't think many of Facebook's 3.6Bn users are going to delete their accounts over privacy issues, election hacking or whatever until there's a better place to share pictures of their puppies and children.  Likewise, my kids couldn't even contemplate life without Instagram and they have no idea its owned by Facebook and people in Europe aren't going to drop WhatsApp and start paying for their phone calls (much as the telcos who fund the political and media attacks would like them to).  

Unlike Amazon or Netflix, Facebook is a real company that makes real money – not projected future money to justify its current market cap.  FB, in fact, made $16Bn last year and they've made $15.25Bn in Qs 1,2&3 so far this year so call it $20Bn in 2018 and, at $130, the market cap of FB is down to $375Bn, so they are now trading at just 18.75 times their current earnings vs. 85x for AMZN and 100x for NFLX.  FB is being attacked for things that don't really have anything to do with whether or not they make money and it's…
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Monday Market Movement – China’s New Stimulus Falls Flat, Trade War Continues

When at first you don't succeed…

China has been attempting to boost their own small companies with promises of financial support for local businesses and Chinese investors are hoping and praying that their Government will perform another market bail-out, like the one they did in 2015 when it put $483Bn into a bullish, state-run margin trading firm to stop the bleeding.  $483Bn is 5% of China's real economy – that would be like the US putting $1 Trillion into the markets – of course it's going to have an effect but of course the effect is simply an unsustainable illusion that will fade over time and, eventually, you either do it again or end up having the same correction you put off the last time by spending hundreds of Billions of Dollars.  

Unlike the US, China doesn't bail out Capitalists at any cost.  The last time China was crashing, too many farmers had put their life savings into the market and the repercussions of a major crash would have been too painful.  Now they have all been warned and all had their chance to pull back their cash and a lot more foreign money (thanks to "reform") is now at risk in Chinese markets so the state would rather spend 10% of the GDP AFTER the crash – to buy up those companies when they are cheap.  In China, the Government plays the markets as well!  

As you can see from the chart above, a massive effort was made just a month ago to rescue the market and, since then, we've drifted along but still haven't filled the gap that occured in October that took the market down 15% and even that is just 1/2 of the overall 30% decline since January.  

We tend to think of China as "them" but THEY have people, just like us and THEY have a Government, just like us and that Government is full of good and bad, competent and incompetent people – just like ours and THEY do what they can to fix the markets and please their constituencies but, just like us, THEY have a country to run and budgets to manage and, ultimately, THEY live in a World with the rest of us and…
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