Entries by Phil

Federally Funded Friday – Rally Continues on Rate Cut Expectations

I hope I get it!  

That's the chorus line the market pundits are taking this week and the Fed speakers have given them plenty of ammunition with Vice Chairman Clarida and New York's Williams making more doveish comments yesterday, which sent the indexes flying higher into the close and pushing the S&P 500 back over that critical 3,000 mark so it will look pretty for the weekend.  

Since the data certainly isn't supporting a rate cut the Fed has now turned to fortune-telling to justify doing Trump's bidding:  

“You don’t need to wait until things get so bad to have a dramatic series of rate cuts,” Clarida told Fox Business Network, citing economic research. “We need to make a decision based on where we think the economy may be heading and, importantly, where the risks to the economy are lined up.”

Clarida’s remarks line up with testimony last week by Fed Chairman Jerome Powell, and comments a bit earlier in the day from Williams, that have cemented expectations for a rate cut. Investors, weighing their words, increased betsThursday that the Fed will move by a half point at the July 31st meeting.  While the U.S. economy is “in a good place,” Clarida said recent global economic data have been softer than expected. “We’ve had mixed data, but I do think the global data has been disappointing on the downside,” he said. “Disinflationary pressures, if anything, are more intense than I thought six weeks ago.”

Lowering rates 0.5% with the market at record highs and the unemployment rate below 3% is unprecidented and very probably insane but that is what the market is now expecting a week from Wednesday.  

 

IN PROGRESS

 

 

Faltering Thursday – Failure at S&P 3,000

We did not hold it.  

The S&P finished "Will We Hold It Wednesday" at 2,984, dropping 19.62 points from Tuesday's close and, since our run was from 2,800 to 3,000, that wasn't even a weak retracement, which would have been 40 points so we're still on a very bullish path unless 2,960 fails today but, so far, the Futures are improving.

The Philly Fed came in quite strong this morning at 21.8 vs just 5 expected and 0.3 in the prior reading and we can add that to strong Empire State Manufacturing (4.3 vs 2 expected and -8.6 prior), strong Retail Sales (0.4% vs 0.2% expected and 0.4% prior), lower than expected Business Inventories (0.3% vs 0.4% expected and 0.5% prior) although we did have declining Import (-0.9%) and Export (-0.7%) Prices and Industrial Production (0% vs 0.2% expected and 0% prior) was awful and Housing Starts (1.25M) were a bit disappointing.

We will get Leading Economic Indicators at 10 am and they are expected to be flat and tomorrow we get the Michigan Consumer Sentiment reading, which was last seen at 98.2 and that's it for our data so mixed – no matter what happens with the last two.  

 

 

IN PROGRESS

 

 

 

Will We Hold It Wednesday – S&P 3,000 Edition

So far, so good.

Just a few days into earnings season but no major blow-ups yet and the S&P 500 is holding up over the 3,000 line but the volume finally increased yesterday and it was down volume, not up.  We have to hold 3,000 for the whole weak to make a meaningful breakout and this evening we get earnings from a lot of heavy-weights like EBAY, NFLX and IBM and MSFT reports tomorrow evening so we'll have some clues as to how Big Tech is doing.  

Bank earnings have been good so far and Dow components JPM, GS and even JNJ beat their estimates yesterday though the overall index still finished lower as sellers showed up and found not enough buyers to keep the prices level.  That's the great danger in a low-volume rally:  When it comes time to sell, there's no one to buy it from you and prices can drop very quickly.

 

IN PROGRESS

 

 

320% Tuesday – Global Debt to GDP Makes New Records

      $246,000,000,000,000.

That's what we just hit in Global Debt as of Q1 and, as you can easily see by adding up all the numbers in the chart on the right, our Global GDP is just under $80Tn so we're now hitting the 320% mark on the debt to GDP scale for the first time in human history.  And the US "only" has $22.5Tn of that debt so perhaps you are willing to ignore the complete inability of the US to ever pay that bill, but that still leaves $223,500,000,000,000 of debt divided by the remaining $60Tn, which means the rest of the world is getting very close to being 400% of their GDP in debt.

And what is the rest of the World doing about it?  The same thing we are – they are easing their policies and they are spending money on stimulus programs because NO ONE can afford a recession – even a mild one can quickly lead to a total collapse that will ignite this global debt bomb – and no one wants to see that happen so we are Globally "extending and pretending" and waiting for the debt fairy to come and forgive us our economic sins.  

While the Chinese Government is "only" about 100% of their GDP in debt, Chinese Companies make up for it with their own $21Tn pile of debt, 155% of their current GDP.  In fact, Chinese firms accounted for 42% of all Corporate Bonds issued in Emerging Markets this year and the IIF says there are now serious risks of default next year and in 2021.  Sonja Gibbs the IIF’s Managing Director for Global Policy Initiatives, said:

"It’s almost Pavlovian. Rates go down and borrowing goes up. Once they are built up, debts are hard to pay down without diverting funds from other goals, whether that’s productive investment by companies or government spending.”  

This is not a group of borrowers with long experience of managing debt over economic cycles. Once you get into a downturn, a lot of firms have a lot of debts that they will have difficulty in paying.”

There's been a shift to shorter-term borrowing in Emerging Markets as the yield curve widens and that leaves
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Monday Market Momentum Continues

And we keep going higher!

The S&P is now up 15% for the year and 25% off the December lows and 10% off the June lows, so it's been quite a year for the senior index.  Citigroup (C) kicked off earnings season this morning with a decent report but tomorrow things begin to get serious and it will be a jam-packed couple of weeks as July 4th cost us a week so we're a bit behind in our reporting already.  

Income at C is up 7% from last year at $4.5Bn for the quarter, which is $1.95/share vs $1.85 expected but revenues were only in-line at $18.5Bn so we're not likely to get a very enthusiastic reaction with the stock already at $72 (we are long C with a 2021 target of $75 in our LTP).  There aren't many bank stocks we like but C is one of them so no surprise here.  Wells Fargo (WFC) tomorrow will be much more interesing and Johnson & Johnson (JNJ) also reports in the morning and we'll see what they set aside for their talcum powder scandal.  

These are probably the most fun earnings to play but it's early in the season and we have little to go on though we are already long on Skechers (SKX) and Cliffs (CLF) though SKX passed our $27 target long agao and we're just waiting to get paid as the spread is netting just $11,025 out of a potential $16,000 so it still has $4,975 (45%) left to gain between now and Jan 17th, 2020 even though it's +20% in the money – aren't options fun?

SKX Short Put 2020 17-JAN 30.00 PUT [SKX @ $34.11 $0.00] -10


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S&P 3,000 Thursday – Markets Up 350% from March 2009 Lows!

350%! 

That's 3.5 times more than the S&P 500 was valued at just 10 years ago.  That would imply economic growth of 35% a year for the past 10 years so kudos to all the believers although, to be fair, we thought the market was toppy at 2,850 last year and we're really only up 150 (5%) since then so let's not get too excited that we're finally  hitting 3,000 after trying for 18 months

All the heavy lifting, from 666 to 2,500 (275%) was done under Obama's watch and the economy was doing so well that the Fed was tightening and reducting their balance sheet.  30 months into Trump's turn in office and the Fed is hitting the panic button again, reversing course and actually going back to cutting rates to help stabilize an economy ravaged by rampaging deficits, political instability and pointless trade wars.  

And that's considered the "GOOD" news that traders are embracing from Powell's comments as he stretches to justify bowing to pressure from the President to lower rates despite all the prosperity the President claims we are enjoying.  Of course it makes no sense – but is that a reason not to pay all-time high prices for stocks?  $1Tn for Apple, $1Tn for Microsoft, $1Tn for Amazon… sure, why not?  After all, what's a Trillion anyway – we run up more than that in debt every 12 months now.  

We're on a path towards making money meaningless so why not spend it on over-priced equities.  As you can see from the chart above, it's been a pretty much straight up 10-year run with only 6 noticeable corrections so once every 18 months we average a pullback on our 350% run.  No wonder so many people are trained to buy any dip – it's been a winning formula since Generation Y got out of college – they don't know any better.  

Ignorance can truly be bliss in a bull market as traders are content to ride stocks like Amazon to the moon while more cautious investors might have taken some off the table half a Trillion Dollars ago.  Just yesterday, AMZN gained 1.5% or $15Bn in market cap despite the fact that only $10Bn worth of shares
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The Hemp Boca Portfolio

Related imageA new portfolio!

One of our PSW Investment Companies, Hemp Boca, has a weekly radio show that I'm often a guest on and I've been giving trade ideas to their listeners and we have now begun to track them in a new virtual portfolio that we started with $50,000 and we're playing this one small and conservative – so it is a great way for people to get started learning to manage a small options portfolio.

We initiated the portfolio on May 21st so just over a month and we're only up 1.1% so far – so these are still good for new trades and we will add to the portfolio over the course of the year with a goal of making 25-30% annual returns.  Initially, there's always a bit of a loss when you add new positions as you are penalized by the bid/ask spreads of the options since your broker always shows you the worst-case balance.

So far, we've deployed just $6,895 of our cash and about 1/3 of our ordinary margin.  As this is our first summary of the positions, I will make some comments on each one as to the logic of the position and we will use these reviews for reference (as you always should with portfolios) to remind ourselves if our premises are holding up and whether or not our investments are on track to our goals at time progresses.

For those of you unfamiliar with options – it's really not very complicated.   

  • A call is a contract you buy (or sell) that gives the the right to purchase a stock at a certain price between now and the expiration date for that contract.  In the case below, we paid $4.20 for the right to buy IMAX stock for $17 between now and Jan 17th, 2020 – the expiration day for that contract.  Our bet then, is that IMAX will be higher than $21.20 (our net cost) on that date.  HOWEVER, we mitigated that cost by selling an equal number (10) of call contracts where someone paid us $1.78 for the right to buy IMAX stock for $21 between now and Jan 17th, 2020.  That lowers our net basis on the spread to $2.42 and now we're netting


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Which Way Wednesday – Waiting on the Fed (Again)

TODAY is the day!  

I blame Econoday, which had Powell speaking yesterday on Monday's Economic Calendar but it turned out he is speaking today and tomorrow to Congress so the market just drifted along for the most part – continuing the boring trend for the month as we attempt to get over the 3,000 line on the S&P 500 (/ES).  

We did the math for the 5% Rule™ in yesterday's Live Member Chat Room and decided that 2,976 would be the inflection point and we closed a bit over the line yesterday but we're right back on the line this morning.

Powell's testimony begins at 10am and goes on for a couple of hours but his official statement being released at 8:30 so we'll see a quick reaction (not necessarily the right one) ahead of the bell.  Oil and Gasoline are up 2% off a strong API Report and the EIA Report confirms or denies those numbers at 10:30 – so that's another market-mover to watch this morning AND we have the Atlanta Fed's Business Expectations Report, also at 10 am and, just in case Powell doesn't get us over 3,000, Bullard has a speech lined up at 1:30 – just ahead of the Fed minutes.

8:30 update:  So much for waiting for Powell as his statement has popped the Dow 100 points already and here are the key points from his statement:

  • Since June, uncertainty continues to weigh on the outlook
  • Inflation pressures remain muted
  • Uncertainty over trade, global growth
  • Business investment slowed ‘notably’
  • Brexit, debt ceiling are unresolved
  • ‘Crosscurrents have reemerged’
  • Fed will ‘act as appropriate’ to sustain expansion
  • Baseline is still solid economic growth
  • Economy performing ‘reasonably well’
  • Inflation to move back over time to 2% objective

Traders are keying off "Fed will act as appropriate to sustain expansion" which indicates they are 100% behind this rally but it's a bit of cherry-picking as Powell is also saying we are on track to hit the inflation target (so easing makes no sense) and the "worries" he has for the economy are still Trade and Brexit (and their effect on
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Tuesday Testification – Powell Speaks to Congress

Image result for trump fedTo ease or not to ease

That is the question investors will be looking for Fed Chairman Powell to address when he testifies before the Senate Banking Committee this morning at 10:00 am.  Friday's strong jobs report has led to a sell-off as investors now believe the Fed is less likely to cut rates at their end-of-month meeting and of course they shouldn't be cutting with record-low unemployment, rising inflation and a record-high stock market – that would be MADNESS!!!  

Of course madness is Trump's sweet spot and he's been hammering on the Fed lately to lower rates because Trump needs to stretch this rally out another year or there's no way he'll get re-elected and he's going to need the Fed's cooperation because this rally has already overstayed it's welcome and is quite overdue for a correction.  The Fed, for it's part, wants to RAISE rates so they are then able to LOWER them WHEN it is necessary.  If they lower rates when it's not necessary, what are they going to do when it is?  

Image result for trump baby balloonThat's the difference between thinking like a child and thinking like an adult, of course and, as our friends in the UK like to point out – Trump is essentially a giant baby with low attention span who likes to repeat catchy phrases with little understanding of the underlying issues and has an absolute melt-down if he doesn't immediately get what he wants.

Powell, like any Fed Chairman, is supposed to be the adult in the room and tries to intervene only when necessary – generally staying out of politics.  The need for an independent Federal Reserve has been recognized by every President in US History – until this one…  Even now, Trump is packing the Fed with his own people and is pressuring Powell to step down so he can put another sycophant in charge of our monetary policy – very scary stuff.  

Fortunately, the Fed doesn't answer to the President and they don't answer to Congress either but, twice a year, they are required to appear before Congress and explain themselves – though Alan Greenspan was great at making a mockery of that proceeding.   Bernie Sanders…
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Monday Market Movement – Morgan’s Misgivings

Morgan Stanley says we're in a Recession already.  

As you can see from this chart, the Treasury Yields are flashing signs we usually don't see until we are already deeply in a Recession only this time we're ignoring those signs, as well as dozens of other Economic Indicators that are screaming recession – to those who are willing to listen.  According to MS, "decelerations and disasppointments are mounting":

  • Cass Freight Index
  • Retailer earnings
  • Durable goods orders
  • Capital spending
  • PMIs
  • May payrolls
  • Semiconductor inventories


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