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Tuesday, April 16, 2024

Will We Hold It Wednesday? Industrial Production Edition

Whee, this is great!

Any excuse to take the markets higher and INTC was a good one last night.  We're thrilled because my 2:43 Trade Idea for members was "INTC Jan $17.50s for $1.28, speculative naked call with earnings tonight."  We don't do those very often but we looked primed for a pop and not much was expected from Intel, who were still expected to earn just 8 cents this quarter by the 44 analysts who are paid to follow them, despite the fact that they earned .11 last quarter (an 8-cent upside surprise) and had earned .28 last year in Q2.   That made the long call an excellent play since we were also willing to stick with them and add to the position if INTC had missed.   As it is, that should give us a nice 50%+ pop this morning! 

Other trades ideas from yesterday's Member chat were a GS put spread, AIG puts (and we can't wait for "earnings" on them!), DIA puts and calls as momentum plays, a YUM ratio backspread for the $5,000 Virtual Portfolio and a JPM bear put spread.  So we weren't overly enthusiastic in the run-up, mainly because we loaded up the truck in last week's dip with 18 bullish plays that I reviewed in the weekend wrap-up.  So we are looking for short plays to defend ourselves until we are sure what we have here is more than the proverbial "dead cat bounce" off our 33% retrace (which I discussed in Monday's post).  As I mentioned in yesterday's post, our upper targets to break the dreaded head and shoulders pattern are:  Dow 8,500, S&P 930, Nasdaq 1,825, NYSE 6,000 and Russell 510.  We're making good progress but nothing would be worse than failing this breakout and confirming the downward pattern so it will still be a tough week to get through, especially with todays manufacturing data, which we are concerned about.

David Fry INTC ChartI think David Fry summed it up for the skeptic's camp yesterday saying:

The AP headline today read: “Goldman Sachs’ $2.7B profit shows the firm’s prowess.” Good Grief! You have to hand it to Da Boyz, they know how to bedazzle Main Street. Anyone with a HAL 9000, their bad debts taken off their books, billions in public money to trade and most of their competitors (Bear Stearns and Lehman Bros.) eliminated should do just dandy. “Prowess”? My okole!

INTC did indeed have good earnings (if you throw out that pesky $1.8Bn monopoly settlement, of course) but they are a GREAT company and know how to adjust to changing markets.  That's the kind of investments we like to have in rough times and Intel did not disappoint with a 65% sales increase in low-cost, low-power Atom notebook processors.  R&D was down 11.2% from last year – why research very expensive new processors no one is ordering?  Gross margin was up as Intel slashed inventories, spending 4% MORE on SG&A than last quarter.  Again, a smart company clearing the decks by getting inventory out the door

So INTC having good numbers and outlook (they are a convicted monopolist, after all) doesn't make me think all of tech is fine, just as good numbers from GS don't make me think all is fine in the banking sector.  In fact, if my local savings bank were gambling with my money the way GS does, I'd be sticking a little more under the mattress instead!  I know it's ancient history but way back in November, our government had to step in and stop a collapse of the entire investment banking sector, including GS.  Now the idiots on CNBC are calling for Goldman to get back to $250, as if their model is virtually risk-free and deserves a 25x valuation.  Give me a break!  How do we go from irrational fear to irrational exuberance in 6 months?  Of course the media is to blame but have some filters people, this is embarrassing! 

Yes, yes, I'm the guy who called the bottom last week – get over it!  Just because I thought Dow 8,100 was oversold does not mean I think we should fly right back to 9,000.  This up and down nonsense is very dangerous.  I'm pleased that we are on the recovery track but runaway expectations can begin to cause damage as earnings season progresses. 

Speaking of runaway expectations, we got FAZ and FAS to cross at $45 and I will now give you the only sure thing you will ever get in the market – SHORT THEM BOTH!  That's right, the nature of an ultra-ETF is that, over time, they do not keep up with the undelying ETFs they track so shorting FAZ and FAS at the same price is neutral to start (one goes up, the other goes down) but, ultimately, has a great chance of paying on both sides.  I'll write more on this over the weekend but NOW is the time – short them both and there is almost no way you can lose and a good possibility you win on both sides (not a short-term play). 

You would think Asia would have been a sure thing last night but the Nikkei had a bad close, falling 75 points in the afternoon to finish flat on the day.  There was an attempt to bring the Yen back to 94 to the dollar but that failed and the Yen is now trading at 93.5, not at all good for exporters.  The BOJ held rates steady but that was no surprise and they also extended their quantitative easing measures – everything they can do to keep the Yen down and it's not working – perhaps they should try a stimulus program…  Everyone else in Asia had a great morning with the Hang Seng up 2%, Shanghai up 1.4%, India up 3% and the Baltic Dry Index jumping 4% to get back over 3,000 in style at 3,097.  Meanwhile, in the "all talk and no action" camp, China's foreign reserves grew by $177Bn last quarter to a total of $2.13Tn.  Guess who's been buying up all our notes?

Europe is off to the races, up over 1.5% across the board (9am).  Aside from INTC giving the tech sector a huge boost, EU new car registrations rose in June for the first time in 18 months.  Angus Campbell, head of sales at Capital Spreads, said: "The market is still very much in a state of flux at the moment, with both falls and rallies being short lived. The days of massive trading ranges from a year ago are well and truly over as investors attempt to build up some sort of base, which for the time being seems to be holding up well." Additionally, an investment outlook note by Morgan Stanley Smith Barney said expectations are for the financial markets to remain volatile over the course of the summer, as economic and corporate news is digested by market participants.  "It is likely that the equity market index lows reached in March 2009 will not be breached over the remainder of this year, and that the economic recovery which is beginning to take hold should be firming over the course of the third quarter and fourth quarter of this year," it said.

As we expected, the CPI was just as bad as the PPI, up 0.7% in June, also on high energy costs.  Core CPI, for those of you who don't use energy or eat food, was 0.2%, double the expected 0.1% by clueless economists, who have been looking for deflation where none exists.  Gasoline prices were up 17.3% in June and car prices rose 6.8% as discounts dried up.  Housing, which is 40% of the CPI, was flat.  The Labor Department reported that the Average Weekly Earnings of US workers fell 1.2% in June, indicating paychecks lost 3.2% to inflation for the month.  Gee, do you think that has anything to do with the poor Consumer Confidence numbers?

Industrial Production is a better than expected -0.4% vs -0.6% forecast.  Cap Utilization remained at 68% and this is all a nice improvement over May, when IP fell 1.2%.  Output for Q2 is down 11.6% annualized, a big improvement over Q1's -19.1% figure.  This bodes well for productivity figures (paying workers less and getting more production out of them) and we'll have to see whether it is reflected in the earnings along the manufacturing sector, which would be a nice surprise this season.  

Well the market has little excuse NOT to do well on all this sunny news so we'll be very concerned with any weakness.  We'll be testing 5% gains off our lows at around our upper levels and we will not be too impressed unless we see them broken AND held.  If we do get there though, we enter a nice bear squeeze territory that can take us quite a bit higher but, on the whole, I'd rather get there the hard way so we know we have a solid base, something that was sorely lacking the last time we went over the magic 8,650 line.



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