Just Another Manic Monday

The Dow is up another 125 points (0.5%) this morning.

The S&P is already up 22% for the year and, as you can see from this WSJ chart,  We've had lots of good years lately with the 2 down years in the last 10 combining for a total loss of less than 7% while the 8 positive years have added 142% but keep in mind that's cumulative, with the gains compounding each year – giving us the incredible new highs the market is at right now – despite having first dropped almost 40% in 2008.

On Fox News this morning, a guest was saying that we can't raise taxes now because the economy is so good that there's bound to be a recession coming so we need low taxes to fight off the recession.  Of course, when there is a recession – they'll tell us that they need to lower taxes too.  I've been watching a lot of Fox News this weekend as I'm on a ship and it's the only US news channel.  By the way, when are the Democrats going to stop harassing poor Presient Trump?

Our market rally has clearly been led by the Information Technology sector, which is up 36% and companies like Apple (AAPL), Chipotle (CMG) and Target (TGT) are up over 60% for the year, boosting the large-cap sector.  The S&P 500 is now trading at 20 times the earnings of it's components - another all-time high and significantly higher than other countries are trading.

When will the music stop – if it ever does?  The "normal" p/e ration for the S&P 500 is 16 – so we're 25% above that but "normally" there are other things you could do with your investment capital, like put it in the bank, bonds or housing but the banks and bonds now CHARGE YOU to hold your money in many countries and don't pay enough to keep up with inflation in the US while bonds are ridiculously low thanks to the Fed – certainly not a place you want to invest.

Real Estate is what led the last market correction so investors are sensibly gun-shy about tying up their assets in that sector again and that pretty much leaves…
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Non-Farm Friday – Is America Working?

Image result for census hiring by month"How "great" are things?

Job growth has been anemic all summer, starting with a depression-level 62,000 in May but June, July and August were all around 170,000 and September was back at the edge of a cliff at 136,000 and we've been told it's "no big deal" every time but it's actually a very big deal because the Government is hiring hundreds of thousands of Census Workers and even August, which clocked in at 168,000 official jobs had just 100,000 jobs if you didn't count the Census Workers and September job growth was near zero without the Census

In fact, the Census is still 500,000 jobs behind in hiring as the Trump Administration doesn't seem very eager to do their Constitutional duty and count the voting public – most likely because the demographics are turning against the GOP and they'd like to maintain the 2010 status quo for another 10 years if they can.  It's also possible Trump has been "saving" the hiring to be closer to the 2020 election – so he can boost his job numbers so he can brag about them next year – before they are all terminated at the end of the count.

In a presentation to the National Advisory Committee in May, the Census Bureau said they needed to begin canvassing in August (two months ago) in order to be done by December of 2020 (as mandated by the US Constitution).  More importantly (to Trump) the Census Bureau warned that any undercounting due to delays would disproportionately undercount Black and Hispanic voters as well as poor voters – who tend to respond less to Internet, Paper and Phone survey requests.  I guess that was all Trump needed to hear…

Image result for trump immigrant meme"Undercounts in the census lead to under-representation in Congress and Trump has already kicked over 300,000 people out of the country, leading to an environment of fear that will cause census responses to go even lower as people are suspicious that it's a trick to get them to reveal relatives who are potentially illegal.  Imagine if you were a Jew in Germany in the 30s…
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Fallback Thursday – China Trade Deal Once Again in Doubt

Image result for china agricultural exports"Now China is saying they doubt there will be a Trade Deal.

China's agreement to buy $50Bn worth of farm products did not have a specified time frame in the first place.  They historically buy about $24Bn a year so there's little chance, even logistically, that they could buy another $50Bn in a single year or two years.  We do not, in fact, even have an extra $50Bn worth of products sitting around – we'd have to divert products we sell to other countries to China – which would be idiotic.  Of course, you can never get a straight answer out of the Trump Administration but analysts have noted that China's farm purchases have already dropped to $9.1Bn during the trade war so simply going back to the old levels lets Trump claim he "added" $15Bn a year to what they were buying – smart!

Image result for china agricultural exports"

The devil is clearly in the details and we were supposed to get details at the APEC Conference in Chile on Nov 17th but that's been cancelled due to riots (people like to eat) but it turns out China has been walking back the idea of signing a deal with Trump all of last week and, for their part, China never said anything about $50Bn in the first place – that was pure Trump fiction from a rally on the 11th, in which he told the crowd how his advisers wanted him to accept $20Bn but Trump heroically said "No, make it $50Bn!" and China immediately bent over and accepted his terms.  That's how it played out in Trump's head…

This renewed uncertainty is ruining Powell's Rate Party as the Fed did indeed cut rates another 0.25% yesterday, to 1.5% sending the Treasury ETF (TLT) back to our shorting zone above $140.  The last Fed Meeting of the Year is Dec 11th and it's doubtful they cut rates again but, more importantly, the minutes to this meeting should be out around Nov 21st  and we doubt the bond bulls will find much to love there.  In our Short-Term Portfolio (STP), we can add:

  • Buy 10


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Which Way Wednesday – Fed Edition

Things are going up, up, up – so why worry?

Things LOOK so good in the market that we've even capitulated on our CASH!!! position and moved some into new portfolios for Short-Term trades, Dividend trades and Earnings trades and our Butterfly Portfolio has always been open – as is our newer Hemp Boca Portfolio.

We wanted to go to CASH at the end of September in the old Long-Term, Short-Term and Options Opportunity Portfolios because they had done very well and we didn't want to risk it all into Earnings, Brexit, China Trade, Mid East Unrest, Impeachment and what looked like a Slowing Economy.  

The market did take a nice dive just after (or maybe because) we cashed out in early October but, since then, Brexit has been delayed, Earnings haven't been too bad, China sort of has a deal with us, the Mid East is a disaster and getting worse – but no one seems to care, Trump is being impeached and no one seems to care and the economy is definitely slowing – and no one seems to care.  

As a Fundamentalist, it's still kind of hard for me to want to take risks in this environment but I also have to go with the flow and the crowd is pouring back into equities so we'll take some quick dips, with as little risk as possible.  Our Short-Term Portfolio has the most risk but also is getting the most reward – up 16.6% for our 2nd month already on just 4 trades so far:

We're using  the STP to teach various options trading techniques to our Members.  The BKNG trade is one of our Extended Butterflies and the MJ trade is an Income Producer as we look to collect $800(ish) every quarter for an additional $6,400 over 8 quarters – it's great the way small amounts can add up.  That way, our $8,200 net cash entry drops to near zero and ANYTHING of value left in the spread becomes our profit – and it's a $45,000 spread if MJ climbs to $30 or more!  

FCX is what we call an artificial buy/write, where we use the bull call spread with the short puts in lieu of…
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Tempting Tuesday – Introducing our Dividend Portfolio

Image result for cumulative return dividend paying stocks"Dividends are very nice.

Over time, dividend-paying stocks tend to outperform the non-paying stocks by a pretty wide margin and they are an excellent way to build a retirement portfolio – even if you are off to a bit of a late start.  That's because the dividends themselves are kind of like an investing discipline – forcing you to take profits off the table on a regular basis or at least re-investing the profits into a conservative stock

Dividend stocks tend to be the one investors run to in times of trouble, making them outperformers when markets turn ugly as well.  On Friday, we initiated a Dividend Stock Portfolio, starting with a virtual $100,000 and our first 3 trade ideas were for Ford (F), Signet Jewelers (SIG) and AT&T (T) and they haven't moved much yet so it's very easy to catch up with us:

Of course, dividend stocks aren't supposed to move that much, we're not in them for the gains (hence the low strikes on the short covered calls), we're in it for those dividend payouts:

  • F is a net $5,780 entry that will be called away at $7,000 over $7 for a $1,220 (21%) gain and 0.60 ($600) per year in dividends is another 21% over two years so 42% return potential ($2,420) if Ford manages not to drop 20%.
  • SIG is a net $5,650 entry that will be called away at $13,000 for a $7,350 gain (130%) and $1.48 ($1,480) per year in dividends is another 26.2% over two years so 182.4% return potential ($10,310) if SIG does not fall $4.75 (26.7%).
  • T is a net $29,450 entry that will be called away at $35,000 over $35 for a $5,550 (18.5%) profit and the dividends are $2.04 ($2,040) per year which is another 13.8% over 2 years so 32.3% return potential ($7,590) on a very conservative target (10% below the current price).

Notice our big cash commtiment is on AT&T because it's a nice, safe stock to play and we'll pick up $7,590 in a stock we're pretty sure we'll keep for life but, overall, just these 3 stocks are going to make us…
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Monday Market Momentum – Fed Hopes Keep Things Going

AAPL $250!

That's where it looks like we're going this week as Apple (AAPL) closed at $246.58 and it up over $247 pre-market.  At $1.14Tn, Apple is just a bit more valuable than Microsoft's (MSFT) $1.074Tn valuation but Apple made $59.5Bn last year while MSFT "only" made $39Bn so AAPL is quite the relative bargain and we will see just how much of a bargain on Wednesday evening.  

That's not the only thing happening Wednesday, of course.  On Wednesday we also get our next Fed Rate Cut – or else!  Expectations are near 100% that the Fed will cut rates another quarter-point at Wednesday's meeding (2pm) and then Powell speaks at 2:30 to justify how record-low unemployment and record-high stock prices justify record-low interest rates and a record-high Fed Balance Sheet.  He'll probably use the "Chewbacca Defense".

Meanwhile, AAPL stock is up $50 since August and, as a Dow component, it ads about 8.5 points per $1 gained and that, like Chewbacca, does not make sense but it's the way the Dow is structured so that $1 gained by $1.14Tn AAPL stock has the same weighting on the index as $1 gained by $50Bn Walgreens (WBA) or $37Bn Dow Chemical (DOW).  Anyway, $50 x 8.5 is 425 Dow points and the Dow is up about 1,000 points so about half the Dow's gains are coming from Apple and that's true for the S&P and the Nasdaq as well.

We are waiting to see if other stocks pick up the slack – because that's what we'll need to break over to new all-time highs – Apple can't do it all unless it pulls a Tesla (TSLA) kind of move and pops 30% on earnings, which would be another $60 on AAPL.  Of course, that would be ridiculous but so was TSLA's gain and this weekend the company went into a full-court PR press pushing everything from Solar Panels to Trucks to keep the momentum going as Musk looks to re-capture $380, which would put Tesla at $78Bn in market cap – "only" 80 times their best-case earnings projections for 2020 ($900M).

After losing $702M in Q1 and $408M in Q2 this year, TSLA announced on Wednesday night
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Faltering Friday – Amazon and Other Earnings Not Enough to Hold S&P 3,000

We're slipping again.

Keep in mind, there's still the underpinning to the market that the Fed is going to save us next week with another rate cut on Wednesday.  40 S&P 500 companies reported mixed results yesterday with 3M (MMM), Ford (F), Twitter (TWTR), eBay (EBAY) and Amazon (AMZN) noteably cutting guidance and disappointing inverstors.   MMM said "the macroeconomic environment remains challenging" and F mentioned lower volumes in China – a theme with many companies as Chinese Consumers begin to avoid American goods altogether.  

With about 1/3 of the S&P 500 reporting so far, 81% of the companies reporting have beaten low expectations but still, we're on pace for a 4% decline from earnings a year ago, when the S&P topped out at 2,950 in October and fell to 2,350 (-20%) by Christmas.  We are still very much Cashy and Cautious and maybe this time is going to be different but down 4% from the quarter when the markets dropped 20% is a good reason to stay on the sidelines, isn't it?

 

IN PROGRESS

 

 

Thursday Thrills – Key Earnings Reports Bring the Bulls Back

ImageTesla (TSLA) made money!  

Sure it was only $143M but it was enough to send the stock $8Bn higher in after hours trading, giving Elon Musk a 56x return on his book-cooking.  Well, maybe it's legitimate – who can say these days.  We sold short puts and calls in our Hedge Fund and $300 is right at the edge of our comfort zone on the calls – though we'll clean up on the puts – but now we'll have to see how it goes.  

Still, my short bias aside, $300 for TSLA is $46Bn in market cap and they lost $1.1Bn in the first half so add $143M and now they've "only" lost $957M for the year and that's still "so far" as there's no actual evidence they can put together two consecutive quarters of profit.  In fact, Revenues were down a bit but "cost cutting" led to a profit anyway – not necessarily account manipulation.

CapEx fell from $510M to $250M, for instance despite opening the China factory and ramping up production on the Model 3 and preparing for the Model Y – all things Musk claims to have accomplished without spending any money.  TSLA does now say they have $5.3Bn in cash on hand, so it would make no sense at all if they go out to raise money – there was $383M in positive cash flow, in fact.

Tesla benefited by recognizing deferred revenue — money that had been set aside because it came from customer payments for features not yet activated, such as aspects of the Autopilot system. Autopilot uses radar and cameras to drive Tesla cars with little input from drivers. In September, Tesla activated the Smart Summon feature, allowing the company to recognize some deferred revenue in the third quarter – despite many saying the feature was nowhere near ready to roll out.

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Tesla sold 97,000 cars in Q3 and are now guidling 360,000 for the year, at the lowest end of their 360,000-400,000 range they have been promising all year.  Also, the mix of cars has shifted to a vast majority of Model 3s, accounting for
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Which Way Wednesday?

ImageEarnings are now a mixed bag.  

75 S&P companies have reported so far and 43% (32) have beaten expectations and the ones that have missed have been hit with average 3.9% drops vs the historic 2.4% so not much tolerance for failing to hit those expectations while the ones that beat have only gone up 1.6% – indicating that good news is mainly priced into the current prices.  The Banksters have led us so far – now we have to see if Tech, Industrials, Consumer Goods, Energy and Services can hold up.  

Caterpillar (CAT) is often regarded as a good proxy for the Global Economy and they just reported earnings that are down 8% from last year on 6% lower revenues AND they lowered their guidance to the $10.90-11.40 range, which is not bad for their $133 shares, which are already 20% down from last year's highs.

Image

We like CAT but we'd like them a lot more around $110.  Yesterday, we initiated a new, $100,000 Earnings Portfolio to give us something to do while we wait for a proper correction.  As noted in yesterday's Morning Report, we went with Boing (BA) as our first official play and we added IRobot (IRBT) and Cliffs (CLF) as the day progressed:

Though BA didn't have much encouraging to say this morning, the lack of additional negatives has pushed the stock back to $350 so we're on our way to goal on that one already, which could net us a nice $13,250 (122%) profit at that level.  CLF beat by a mile at 0.33 vs 0.24 expected and, keep in mind, that's just one quarter on a $7 stock – so silly!  Our main premise there is a China deal will really get them going.  

Unfortunately, we didn't win them all and IRBT was a big disappointment as tariffs are hurting them badly.  We did think that was a possibility, which is why we did not sell puts initially but now we will sell 5 of the 2022 $35 puts for $10 ($5,000) and then spend $5 ($5,000) or less to roll the 2022 $45 calls down
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Toppy Tuesday – S&P Back to 3,000 – Again

Can things get worse for Boeing (BA)?

Since Thursday's close, BA has dropped $40, from $370 to $330 and that's 10.8% in two sessions so we'll watch the $333 line (10%) to see if they can getg back over that and then we'd look for a weak bounce at $340 and a strong at $348 but the news on BA has been very, very bad with two downgrades yesterday as rumors came out that BA had lied to regulators – leading to hundreds of deaths.

BA booked a $5.6Bn charge in Q2 and estimated the 737 Max grounding would cost them $8Bn overall but that was 

 

IN PROGRESS