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Monday, February 26, 2024

Thank GDP it’s Friday!

At 12:52 yesterday I officially went long on the markets.

This could be a big mistake (in fact, that's what I said to Members at the time) but the logic was Bernanke would be confirmed (he was) and that we'd have a big GDP number today.  Now the reason we're going to have a big GDP number is because we will have a big build in inventories (we discussed this effect on Jan 14th) as manufacturers got all excited and produced goods that nobody bought and, because it is assumed that goods are only produced in accurate anticipation of demand – this kind of nonsense comes in a positive to our GDP

Production collapsed during the recession as companies sold from their existing inventories but didn't order new goods, because of uncertainty about future customer demand. These inventory declines dragged on GDP for six consecutive quarters, the longest streak on record since 1948.  The turnaround in inventoris could give us a Q4 GDP in the 5% range.  Rational economists prefer to look at final sales to domestic purchasers, a subset of GDP that doesn't include inventories and trade, to better gauge U.S. economic activity. That category is likely to grow at only a 2% pace, similar to the third quarter but shhhhhhh! – we don't want to wake the rational economist – who has clearly been asleep since the the mid 90s…

So we went bullish (speculatively), not because we are going to be excited by a 5% GDP number that makes us look like some overheating Third World economy even as another 2M people lost their jobs in Q4. No, we're bullish because we cynically believe that the sheeple are clueless and will stampede into this number as if the US is recovering and nobody told them until this morning. 

chart of the day, google headcount vs revenue dollar per employee, 01/28/10Meanwhile, I have a message for the sheeple:  Please keep selling us your Google stock.  I think this chart of the day is self-explanatory but you never know.  This is a chart of the amount of money Google makes per employee, per quarter.  Currently they are generating $1.34 MILLION dollars for each person they hire (and they've been hiring).  For a comparison, Yahoo generates $500,000 per employee yet GOOG currently has a p/e ratio that is 1/2 of Yahoo's

Microsoft's 98,000 employees generate $623,000 each, ORCL's 86,000 employees pull in just $267,000 each.  It's not a definitve indicator but consider how well they have managed that number through the recession, which seems to have interrupted some pretty impressive growth.  I think Google is an exceptional bargain here and you don't have to pony up $534 a share to play along.  The bull call spread, buying the June $490 calls for $64 and selling the June $500 calls for $57 is net $7 on the $10 spread so if Google holds $500 or higher through June 18th expiration, you make $3 (42%).  42% in six month is nothing to sneeze at and keep in mind that the bet is that GOOG does not FALL MORE THAN $34 between now and June.  

Keep in mind that you have to buy options in 100-contract blocks so you need $700 to make $300 but to make $300 with as much Google stock as you can afford with $700 (1 share), you would need Google to climb to $884 by June expiration.  This way is probably easier, don't you think?  You can still set a stop at a $100 or $200 loss so it's not particularly riskier than buying a share of stock but the upside is SO MUCH better!  If you want to get even fancier, you can even offset the entire cost of the trade by selling the June $430 puts for $7.20.  The catch there is you need margin and, if GOOG drops below $430, you will own it (have it "put to" you) but if you like the idea of either owning GOOG at $430 OR getting a free $10 if GOOG holds $500 – this is a fun way to play!

8:30 Update:  Woo-hoo!  The GDP is up 5.7% (3.4% of it was inventory) and look at the sheeple stampeding into the futures as if they just discovered a new fact that no one else knew about.  It looks like our longs will pay off and, having gotten out of our short plays yesterday, we will be back to cash for the weekend (for unhedged positions, of course – we still love the stuff we picked up on sale), selling into this rally before the suckers get wise to this scam

Watch all the media types get whiplash flip-flopping from gloom and doom back to boom – wheeeee, this is fun!  Keep in mind that there is nothing to celebtate unitl we get back over our 5% levels and then past our bounce levles and hold them for the day (see yesterday's post for levels) but the futures are already up 100 points from where we flipped bullish so I'm going to go out on a limb here and predict and excellent day! 

Asia did not have an excellent day and if we break our bounce levels then the FXI calls should be a nice play ($40s are just .55 and FXI was at $44 3 weeks ago).  We were shorting RSX for protection (replacing the EDZs that we cashed out) and we can kill that one this morning too as oil will recover on this GDP and Mother Russia is all about oil (and, of course vodka).  The Nikkei dropped 2.1%, right to our 10,200 mark that we had marked as a break out ages ago.  TM has been a huge drag on that index and EWJ might make a nice momentum trade IF we break our levels.   Japan did have some good Industrial Production numbers but there are concerns that Yen strength will threaten that recovery but the GDP numbers should boost the buck against the Yen back over 90, maybe 91, which should cheer Japan up a little and 10,200 is a good bounce point anyway

Keep in mind that if we DON'T break our bounce zone, then this is one dead cat market and we'll have to go back into some of those disaster hedges, just in case…  At 10,200, the Nikkei is just synching back up with the Dow, which is fine, now it's our job to show a little leadership for the ride back up.  The Hang Seng fell 1.1%, once again with a huge drop off a big open but held our 20K line once again.  Not so the Shanghai, who failed to hold 3,000 with a 0.2% drop to 2,989 but the DJSH on Stockcharts is still holding the 200 dma so I'm not willing to call failure there just yet.

Europe is going crazy on our GDP numbers and those indexes are up about 1.5% at 9am with the FTSE at 5,215 (5,250 is breakout) and the DAX at 5,627 (5,750 is breakout) so it's up to the DAX to impress us today but even a 2.5% run won't do it so it'll be a "tune in next week" sort of thing.  Greece is just doomed it seems with the EU saying they have "no plan B" to keep Greece from defaulting.  I don't even know what plan A was, other than them flying over to Greece and tut-tutting over the books a couple of weeks ago so I wasn't expecting much from plan B anyway…   

Greece’s bonds have slumped on concern the government isn’t acting quickly enough to plug a budget deficit that was almost 13 percent of gross domestic product last year, more than four times the EU’s limit. The European Commission said Jan. 27 that Greece hasn’t done enough to tame the shortfall.

The cost of insuring the country’s debt against losses rose to a record yesterday, with credit-default swaps jumping 40 basis points, or 0.4 percentage point, to 414, CMA DataVision prices show. Swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is equal to $1,000 a year on a contract protecting $10 million of debt.  The swaps have risen from 121.8 basis points in October, and compare with 433.4 basis points for Dubai in the weeks before it received cash from Abu Dhabi on Dec. 14.

Other than that, things are the same, CVX had poor earnings and RDS.A's outlook for long-term energy demand is so poor they are cutting jobs.  But we'll ignore those pesky facts today and look to the future, where our President is looking to triple loan guarantees for new nuclear reactors to $54Bn, which is good for our SO (and this is why we went into them in the fall) and should be a good time to jump back into CCJ, where we can buy the stock at $28 and sell the June $29 calls for $2.20 and sell the June $26 puts for $1.75 for a net entry of $24.05, called away at $29 with a 20% profit in 6 months or having the stock put to you at $25, leaving you with 2x at an average of $25.03, an 11% discount off the current price.

The Jan NY Business ISM Index came in at a huge 72.6 (a 3-year high) so there are some green shoots out there and we're not going to be too cynical but we will be getting back to cash (no unhedged positions) over the weekend because who knows what the pundit patrol will have to say over the weekend.  I'm fairly sure Greece will be rescued but at what terms?  That will impact the next 5 countries that need saving so we'll have to wait and see.

Have a great weekend,

– Phil


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