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Tuesday, November 29, 2022


Just Another Manic Monday – The Inverted Risk Pyramid

This is going to be fun!


We already have a bigger boost than we expected in the futures market.  After extensively reviewing our picks (generally bearish) from last week's action we determined that even 55% is too bearish as we pop over our breakout levels.  So we added more picks to our very bullish Watch List, held an extensive conversation on Mattress Plays in Member Chat (just in case) and dug through the dirt looking for "green shoots" in our weekend reading – all to help us get more comfortable with the bullish plays IF we break over our watch levels and hold them (3 of 5 at least):  Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620.

Also, just in case, we reviewed the Collar Strategy, which is a very useful way to use options to lock in long-term profits, which can have nice tax advantages if you can benefit from hanging onto things over 12 months.  Japan is closed and Asian stocks fell off on low-volume trading.  “The question is whether the rally has over-extended beyond the confirmation of economic stability that we’ve seen,” said Jason Teh, who helps manage about $3.2 billion at Investors Mutual Ltd. in Sydney. “It’s still hard to know exactly where the world’s going to go, and the degree of growth remains very hard to quantify.”  The Hang Seng dropped 200 points (1%), back to 21,299 and the Shanghai fell half a point but India went the other way (industrial output up 10.4%), along with Singapore, who are claiming a 14.9% rise in GDP – how's that for a green shoot?

The futures went wild at 3 am, when Europe opened, and those markets are up over 1% on continuing news that the dollar is being dumped.  This time we have an article in Bloomberg indicating that Central Banks have printed over $400Bn in new money last quarter, bringing their holdings up to $7.3Tn, yet only 37% of that money went into the US dollar.  The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Sever Englander of BCS concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification. 

That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002.  “The world is currently flush with the U.S. dollar, which is available at no cost,” said Chris Kind of Frankfurt Trust.  “If there’s a turnaround in U.S. monetary policy, there will be a change of perception about the dollar as a reserve currency. The diversification has more to do with reduction of concentration risks rather than a dim view of the U.S. or its currency.”  

People didn’t like the dollar in 1995,” said John Taylor, whose firm has $9 billion under management. “That was very stupid and turned out to be wrong. Now, we are getting to the point that people’s attitude toward the dollar becomes ridiculously negative.”

Europe is very excited that Latvia has agreed to reduce spending and to raise taxes in a last-minute effort to satisfy its international loan donors.  The IMF, the EU and Sweden agreed to give Latvia a 7.5 billion-euro ($11 billion) loan in December and urged the government to adopt tougher austerity measures. Swedish PrimeMinister Fredrik Reinfeldt, who holds the EU presidency, on Oct. 5 said Latvia “must correct” its deficit while Riksbank Governor Stefan Ingves has said the country risks being “left in the cold.”  It's kind of like that new TV show, Flash Forward, where Americans get a glimpse of what will be happening to them in the near future….

Phillips Electronics jumped 6.2% this morning on an earnings beat and AIB got a big boost as the Green Party expressed support.  Swedbank was up 6.3% on relief over Latvia.   “Topline growth can support markets and even edge them further,” Kevin Gardiner, head of investment strategy for Europe, the Middle East and Africa at Barclays Wealth in London, said in a Bloomberg Television interview. “As economies move away from the recession, we’re going to see a rise in revenues. The story is growth is going to be restored over the next six months.”  Gosh, I think it's fantastic that so many Barclays people have taken the time to tell us how great everything is.  If you ever wonder why that is, just put your favorite stock symbols in this box and see who's in the list of top 10 shareholders

There is still room for stocks to rise, according to Barclays Capital Inc.’s Larry Kantor, head of research at Barclays Capital in New York, was one of the first economists to call the end of the recession, in March. Barclays sees GDP expanding at a 4 percent rate now, 5 percent in the first quarter and 3.6 percent for 2010.

Sorry, I am trying to be positive but this is all just such total BS that it's laughable.  While we discussed all the rosey GDP forecasts over the weekend as well as the math that points out that a 3% increase after a 6% decline still leaves you down at 96.82%, the markets also seem to have NO risk factor AT ALL.  There used to be something called a "risk-adjusted return," which Investopedia defines as: "A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and virtual portfolios."  The mere fact that I have to explain it at all shows how far off the path of investing and into pure speculation this market has gone. 

Not only are the markets and commodities "priced to perfection" but we have inverted the entire "risk pyramid" to the point where options, and futures (including commodity contracts) are now the PREFERRED investment and cash ain't nothin' but trash.  Indeed the risk factor being applied to owning futures contracts, commodity contracts and individual equities has gone negative (you pay a sharp premium against normal returns for them) while most of the World's Central Banks are just half a point away from having to actually pay you to take a cash loan.

Gregor MacDonald has a great article this morning titled "The Alignment of Asset Reflation and a Collapsed Economy" in which he rightly states:

If all the highly informed people who’ve been waging a war the past six months against rising stock prices would just step back for a moment, they would perhaps understand better that their macro views are supported, not negated, by asset reflation. For it’s this asset reflation that hints at the singular and doomed strategy of our monetary policy, and its overlay on our collapsed economy. Just so that I’m clear: there is no macroeconomic recovery occurring in the United States. What’s unfolding currently is snap-back from last year’s crash, which led us to the bottom of a spider-hole. The positive bits of macro data, dribbling out here and there, are really just about getting us back to zero. A kind of steady-state, expected to carry on for some time to come. And that’s a best-case scenario.

Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption. Because the spread I see opening up everywhere in the US economy is what I call the Prestige-Performance gap, whereby the assertions of our elite no longer comport with observable reality. If the chairman of the Federal Reserve will not allow that the greatest credit bubble ever has now burst, or that it ever existed, then this partially explains why he would think stuffing the banking system with fresh capital would revive the economy.

For those who recognize a rising stock market as evidence of disarray, what we should anticipate now is the recognition phase where the wider public finally comes to understand the nature of our inflationary depression. My marker has been 100 dollar oil and 15% unemployment in California. That should finally get the message across. But other combinations will do: 1300 dollar gold, 1300 on the SPX, and more problems with Commercial Real Estate will also suffice. Like the prestige-performance gap, the divergence between the economy and asset prices apparently has to become even more grotesque before people will understand.

So happy Monday to you!  MacDonald is very likely 100% right and we are heading off a cliff but, as he also points out, gold and the S&P can rise 30% before we get to the jumping point.  The strategies we discussed this weekend along with our Watch List and long index vertical plays will allow us to play along without losing our heads – just in case we wake up one morning and find that the cliff was a lot steeper than we had imagined!



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I have what is likely a silly question, and hopefully just an oversight.  I’m having trouble figuring out what Phil means by the following:
ENP (10/8) is a nice little E&P operation but they zoomed up on me, probably for good reason.  Even at $17.43, they pay a $2.05 dividend (11.7%) and you can sell the March $17.50s for $1 and sell the March $15 puts for .90 for net $15.53/16.51
So, the underlying is 17.43, and net credit 1.9 for the sale of the put and call sides.  Silly question time – The $15.53, thats the price of the underlying if you were to exercise?  The $16.51 is the cost if you are assigned?  I understand how we get the $15.53, and the $16.51 (underlying+strike) * 0.5 + (call credit + put credit) * 0.5, but not sure I get what it means…
Thanks in advance (newbie to the site)

Phil – sorry, just read you last post on the BAC 2012  Jan 17.5/22 spread.  I understand the bull spread…on the 2X side, R U referring to selling 2X 17.5 and 1x 22, while selling 1X straddle at 17.5 (or whatever is $2 – Not quite getting the 6.4 on the longs.  Thx.

Dlast – 15.53 is if called away by your caller (17.43 – 1.9  =15.53) – so you understand that one.   If the puts finish in the money, stock will be put to you – so say 100 shares — call side (17.43 – 1.9) +  Put side (17.5) = (15.53 + 17.5)/200 = 16.5….

What are your thoughts on YRCW buy/write for the Nov 4’s, $2.41/$3.21?

Many Thanks Pharmboy.

Gotcha, thx, my brain was not working well last night…

Pharmboy: Did a bull spread on SPPI  Feb. $5/$7.50. Now  ouy of $ 7.50 and have net loss of $1.00. What’s next ?  DD now,hold, or bail out? thanks

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