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Thursday, March 28, 2024

Which Way Wednesday – Beige Book Edition

The new Beige Book is here! 

Today we get the "anecdotal" information on the current economic conditions from each of the twelve Federal Districts, we find these reports very useful as they tend not to be sugar-coated and the last BBook release (June 10th) marked a clear top to the the last round of irrational market exuberance when there was no significant improvement in the Fed's outlook despite the market having rallied 10% in the month leading up to it.

That's all it takes to pop a bubble – the simple lack of additional air.  Members would do well to review the comments of that day as we got a quick read on the Book, which backed up our generally toppy view of the market and we jumped right on POT $105 puts for $1.15 at 2:03 as I had been targeting them as the most ridiculously overpriced stock and my quick read from the Fed confirmed it.  POT fell from $117.88 that day to $92.72 on expiration day and bottomed out at $82 on July 13th.  This is the way to play the Beige Book, you need to have a premise that is either confirmed or denied by the facts and you can make a play accordingly but you can't simply REACT to the information, it can quickly be too late by the time you figure out what to do.  Having a plan and alternatives based on various outcomes allows you to take advantage of market data as it comes out.  That's why we get so excited when we get our Beige Book!  

BBook days are often market movers.  This year's Books came out Jan 14th (down 250), March 4th (up 100 ahead of huge drop) and April 15th (up 100) and June 10th where we went down 130, up 100 and finished the day back down just 24 points.  Going back to my June 10th post, I see a lot of similarities, including the China bubble – which I also said was overdone at that time ahead of a 2,000-point pullback that began on the 12th.  Oil was $71.50 that morning and it's "just" $65.50 now and that's a ray of sunshine if it heads lower.  That was also the day I called for a class action suit against GS for their blatant manipulation of the energy markets – something I still have not found a law firm brave enough to take on! 

I sent out an extensive review of the Beige Book in a 2:35 Alert to Members and my key comments were:

Same as everything else, all the "good news" is outlook.  That 60% of consumers who are too dumb to realize their homes have declined in value also answer Fed surveys.  This is probably the biggest problem with economic forecasting, they base soo much on the outlook of clueless people that all data is skewed going forward…

"Vacancy rates for commercial properties were rising in many parts of the country, while developers are finding financing for new commercial projects increasingly difficult to obtain." – That last statement is a recipe for total disaster!  I have certainly seen better reports.  It’s not that this is so terrible, it’s just that this run-up into a report like this is in no way justified.  If we were at 8,000 and got this report, I would say "Yay, now we can go to 8,650 over time."  At 8,650, there’s a lot of stocks that have gotten way ahead of themselves based on assumptions that simply are not playing out.  This is very like to follow through to the downside once people get a chance to examine it

There is no need to remind you that we did, in fact, fall to 8,100 over the next 30 days but not before a "stick save" that day took us all the way back to 8,740 and we re-tested 8,800 that Friday but that's the last time we saw it until July 20th.  8,800 is now 300 points below us so we don't need to worry about shorting individual stocks if we get another problem reading today, we can just short the whole market!  We took our usual flyers into yesterday's stick, grabbing some extra DIA puts and QID calls into the bell but, generally, we still have a ton of bullish positions so we'll be hunting for bear plays if things really start to go south.

I just did a review of our now $112,007 Virtual Portfolio (we started with $100K on April 10th) and we put the breaks on our very bullish stance that we had flipped to in early July as we think the market has run it's course and we need to protect our profits in this generally conservative group.  In our $5,000 Virtual Portfolio, we flipped entirely bearish, giving up on our YUM calls, doubling up on our SRS $16 calls at $1.30 and taking a bearish vertical spread on WHR, ahead of this morning's durable goods report, which we don't feel will be able to sustain a $55 stock price for the appliance maker. 

We hit a home run today on Monday's MSFT play, where my 10:53 Trade idea for Members was: "Good spot to speculate long on MSFT as they held $23 before and word is YHOO gives up their own search engine to brand Bing, which would be a big win for MSFT…  I like the Jan $21s at $3.15 with $1 in premium over 6 months (.17/month)."  Those calls already hit $3.45 (up 10%) but today we got the news we expected as MSFT officially announces the partnership.  Again, this is another good example of seeing an opportunity (MSFT's earnings sell-off), reading the news (a rumor we considered credible AND timely) and making the right play BEFORE the crowd catches on.  Market moving information before the market moves ™ – That's what PSW is all about! 

The worst play we had in the $100K Virtual Portfolio was our new FXP puts, which we sold short last week but today's 489-point drop in the Hang Seng (2.5%) and a 5% drop in the Shanghai should help to get us back on track on what will be Sept $10 puts that we sold short after we roll them.  China fell sharply as their own earnings season begins with a wave of disappointing reports and only hopes of further stimulus are keeping the markets from falling further. "The [Shanghai] market does need to correct after five consecutive sessions of gains, and it will likely continue to fall in coming days," said Wu Dazhong at Shenyin Wanguo Securities. "I expect the market to resume its upward trend after corrections if the PBOC keeps its appropriately easy monetary policy."

Europe was in a much better mood than Asia this morning as the ECB reported that banks were requiring much less liqudity aid this quarter, a sign of stability returning to the market.  A lot of this has been driven by a significant tightening of lending standards by Euro-zone banks, but that's not as bad for Europeans as it is for Americans as their people are not living on credit the way Americans tend to.  "The market is proving very resilient," said Ioan Smith, director at Knight Equity Markets International, "but we will need to see people come in to buy it today for me to believe these levels can be sustained, as earnings are coming in mixed and sentiment [has] changed a little from this time last week."

8:30 Update:  Durable Goods Orders came in much worse than expected by "experts" (but just as we expected) with a 2.5% decrease in June, led down by Autos (duh, they shut down the plants!) and planes (duh, didn't BA just say so in their earnings report?).  The amazing inability of "economists" to actually read the news and consider its impact on the upcoming data led to the expectation that Durable Goods would be flat to slightly up after being up 1.1%  in May (as surprise at the time).  On the bright side, ex-transport, other durables were up 1.1% but overall activity in capital equipment financing is down 37% from last year – mainly because it's so hard for businesses to get a loan these days.  This is right in line with our general impression that the "right" range for the markets is 33-40% off the highs.  Now that that's out of the way, it's all up to the Fed later.

We'll continue to watch the dollar as it struggles along the low at 78.50.  There are the usual rumblings that we can't keep selling our notes or that the rest of the World will be moving to a new reserve currency but, until that happens, most people put excess dollars into commodities (including China) and we're seeing a turn down in oil, gold and copper this week and copper needs to be watched very closely as they broke below 250 today as stories of China's vast copper stockpiles (which we've been talking about for ages) finally begin to catch on in the MSM, casting a pall over the commodity hedgers.  Oil demand is also very much in question as the summer winds down with NO evidence whatsoever that demand for fuel is making a comeback, even at 1/2 of last year's prices

Goldman Sachs, JPM and others will be testifying before Congress this morning at the CTFC hearings and that will be entertaining but price of ICE makes me think that GS already has this one in the bag.  I still like the speculative play of the Aug $95 puts, now $7.75 into inventories this mornig, hopefully selling $90 puts for $5.75 (now $5) or better to make a cheap vertical.  The U.S. “must seriously consider” strict position limits on energy markets to curb speculation, Commodity Futures Trading Commission Chairman Gary Gensler said.  “The report should send an alert to Capitol Hill that we need regulatory reform that provides the agency with oversight into dark, over-the-counter markets,” Commissioner Chilton said in an e- mailed statement.  By the way, "Dark, over-the-counter markets" are pretty much the entire raison d'etre of ICE! 

We're in "take the money and run" mode on our puts as we'll be happy with a quick dip and a quick profit as we test our lower levels.  If the oil inventory shows a nice build as we expect, then the energy sector should lead us lower at 10:30 and that will give us a good look at supports.  Ahead of the Fed though, and with the GDP looming tomorrow morning – anything can happen but we can't wait to get a hold of that data this afternoon, hopefully it will clear some things up. 

Meanwhile, hold onto your hats today, it's going to be a wild one!

 

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