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Monday, February 6, 2023

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Monday Market Movement – Can We Go It Alone?

It’s lonely out there in Stock Land today

Everybody’s closed today except Japan and they are so thrilled with 94.5 Yen to the dollar that you can’t figure anthing out by watching their market add another 53 points this morning to finish the day at 11,339 but it was well off the gap up open at 11,400.  As I mentioned in the Weekend Wrap-Up, where we discussed our Super-Secret Strategy for making money off this nonsense – just because a rally is totally propped up BS doesn’t mean it isn’t, technically, a rally – does it?

With everyone else closed, the MSCI Asia-Pacific Index hit 19-month highs and copper climbed to $3.62 in overnight trading (when there were no traders) and gold hit $1,130 while oil hovered around $85.50 so we can infer that commodities are very, very popular with vacationing traders.  Asian traders were excited about our jobs numbers – obviously they didn’t read my analysis on Friday:

Overall, we are seeing positive signs about the global economy,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co., which manages $111 billion. “While developing nations are leading global growth, they are waiting for the U.S. to rebound. Recent reports are suggesting that the U.S. labor market and consumer spending are improving.”

Consumer spending is certainly improving at the Apple Store with 700,000 IPads going out the door in 48 hours, bringing AAPL an estimated $500,000,000 in revenues over the weekend.  I was in the NY Apple Store this weekend and there were about 200 IPads on display with lines 3-4 deep of people very patiently waiting considering the average person who touched one held on for a good half hour.  Keep in mind that the IPads that are selling now are limited Wi-Fi only models – the good, 3G ones don’t come out for another couple of weeks!

So, based on 2 days of sales, we can project AAPL selling $175Bn worth of IPads this year and that will make AAPL worth about a Trillion dollars, which is very likely to boost the Nasdaq back to 5,000…  OK, that may be a bit of an over-statement but we still cannot ignore the Apple effect on the market because it does look like they are going to move a tremendous amount of IPads this year and that will be good for chip makers and glass makers and BBY and App developers and bandwidth providers…  Put enough of those things together and you do have a rally!

We love the IPad because it’s a perfect top 10% product.  It’s relatively inexpensive for people earning $100K per year and there’s over 200M of us on the planet so it will be quite a while before we all have IPads (and don’t scoff unless you do not have an IPod), even at the sales rate of 700,000 per weekend.  The problem is extrapolating great IPad sales into a positive outlook for the entire economy.  Top 10%’ers bought IPhones and IPods during the market crash – what AAPL is very, very good at is identifying their target market – they don’t skimp to make machines for the masses.  Apple makes very high-quality stuff for people who don’t expect to even get a discount and, when the tech becomes cheap, THEN they sell them in quantity to the masses.

I think the real impact of the IPad won’t be felt until 2012 when, if the World does not end as forecast, we should be seeing the $199 IPad and Apple will have accomplished what "One Laptop Per Child" has struggled to do for a decade and THEN we will have an explosion of web access and utilization around the World.  Yes there are $200 laptops now but quality is still an issue – even to the poor and, just like the fact that there are $2,500 cars – there’s a difference between being able to buy a Tata Nano for $2,500 and a Posrsche Carrera for $2,500.  The $200 IPad will be the cheap Porsche of laptops and even the programs are cheap (or free) and that is the real game changer.   So congrats to Steve Jobs, who has probably changed the World this weekend – now it’s up to us to invest in the companies that will profit from it….

We’ve been in TTH, VZ and T for quite some time and we don’t mind waiting on VZ and T because they both pay 6% dividends on our long-term positions, we have also been playing GLW because, although they don’t supply IPad glass, the IPad uses 6x more glass than the IPhone and that has to put upward pressure on all pricing, especially for whichever competitors are going to try to play catch-up with their own devices.  The same goes for our chip plays and the SOX in general and we’ll be revisiting that group this week as they are going to be some of our top picks to play the Dow over 11,000 (if it holds). 

Former Federal Reserve chairman Alan Greenspan said yesterday on ABC’s “This Week” that the chances the U.S. economy will retrench after recovering from the worst recession since the 1930s “have fallen very significantly in the last two months.  There is a momentum building up which is really just beginning and it’s got a way to go.” Greenspan said the U.S. is “on the edge of a significant build-up” in inventories “and that is a self- reinforcing cycle.”  Of course, he has been totally and horrifically wrong in the past…

Speaking of people who are horrifically wrong:  Tim Geithner has "fixed" the problem of China being declared a currency manipulator in the Treasury’s Report on Global Currency Policies on April 15th and has circumvented the will of Congress, who already voted for sanctions based on the Report – by delaying the Report indefinately!  “We are disappointed, but not surprised, by the administration’s decision,” Senator Charles E. Schumer, a New York Democrat, said in an e-mailed statement two days ago. “After five years of stonewalling, punctuated by occasional, but halting action by the Chinese, we have lost faith in bilateral negotiations on this issue.”  The move will give China space to relax currency controls “without looking like they’re kowtowing to U.S. pressure,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.   

Speaking of the bottom 90%:  More Americans filed for bankruptcy in March than in any other month since personal bankruptcy laws were tightened in Oct. 2005. March saw 6,900 filings per day, a 35% spike from February.  Federal courts reported over 158,000 bankruptcy filings in March and filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.  

Fewer people are trying to save their homes,” Katherine M. Porter, a University of Iowa law professor and bankruptcy expert, said. “They realize their payments are not affordable, and bankruptcy judges do not have the power to adjust the mortgages to make them more affordable.  To file Chapter 13, you need ongoing income, and to the extent we have more people who are unemployed, they can’t use Chapter 13 because they don’t have that income to pay into the plan,” she said. 

Let’s figure the average person who declares bankruptcy owes $30,000 in debts (one would assume it’s more than a year’s salary).  That’s $4.7Bn a month in defaults!  You would think that’s going to impact someone’s earnings but, fortunately, US Banks don’t have to declare any asset impaired until they sell it so we can keep pretending none of this stuff matters for a long, long time – just like we pretend to get tough on China for depressing their currency and costing millions of Americans their jobs – leading them to Bankruptcy Court in the first place…  The European Commission is about to start its first investigation into Chinese subsidies, a probe that could potentially see a slew of new tariffs against Chinese firms that export to Europe.

In its annual report, the American Chamber of Commerce in China calls out Beijing for "a mounting number of policy challenges, ranging from the inconsistent enforcement of laws, to China’s discriminatory domestic innovation policies and regulations that limit market access into sectors that had been increasingly open to foreign investment."  I don’t know about you, but I’m beginning to feel there’s some sort of pattern here…  A top Chinese government economist says the U.S. decision to delay a report that might have labeled China a "currency manipulator" is a "positive signal" but a yuan adjustment is unlikely in the near-term. "We need to see whether China’s export recovery will be sustained and need to see whether companies can cope with a stronger yuan," he says.

The U.S. office vacancy rate rose to 17.2% in Q1, up 0.2% from Q4 and up 2% from a year ago. Average net rents fell 0.8% vs. 7.4% in the year-ago quarter. "As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement," the report’s director says.  We like shorting CRE but CRE short positions don’t like us as no amount of bad news seems to affect that sector.  Here’s a report that says office vacancy is 2% WORSE than Q1 of last year, when IYR was below 20 – now it’s at 50 – Imagine how high they will go when things stop going down!

We are long on individual builders but it seems very unlikely that the entire sector is in recovery so we’ll be looking forward to some spectacular failures down the road.  I’ve decided that I’m willing to call the recession over when they finally open New Jersey’s Xanadu Super Mall – now in year 3 of delays.  Fill that up and I’ll be willing to believe anything is possible!

We’re still waiting to see our breakout levels broken and held this week and today will be interesting as there’s no EU trading to move us one way or the other so it’s all up to the US trade-bots today and we are still sitting in cash and watching the fun in what should be yet another low-volume day.

 

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 Gel,
Glad you got the car today, I lost one believing that sanity will eventually prevail!

Pharmboy, do you have a link to your views on FRX?

Phil/Car
Not all positive… oil is on its way to $100, so will be expensive to operate.

i’m losing one too thanks to drv and faz. i have to bring my broken brain to the doctor….i believe too much,that’s not the way of a good trader sigh..

Tus – no, not yet.  Did not have a chance to look at them over the weekend.  They still closed below S2 on my daily chart.

Phil, some help on several of my positions would be much  appreciated. Have had a major trauma in our family with my wife having kidney transplant surgery 10 days ago. Have barely been able to get some reading done, let alone focus on the market.
Have FAZ July 13/18 bull call spread at 1.29, sold July 13 put for 1.63. Seems like plenty of time and FAZ may turn around, but don’t want to let the position get to the point where adjustment are difficult.
Had USO April 40 puts at 1.04. Per your suggestion adjusted by rolling to May 39 puts, selling April 39 puts. Roll cost me .03.
Also sold FCX May 85 calls, but as you said to someone this morning, it’s just going to be painful for a bit.
Thanks for the assistance.

Pharm: going thru this helps give me an even greater appreciation for the important role pharmaceutical companies play in our civilization. Literally we can’t live without them.

Phil, Other tax experts – A question regarding section 1256 contracts.
I imported my 2009 trades in GainsKeeper and it classified all the option trades on index ETFs (e.g. DIA, SPY, FAS, FAZ) etc as section 1256 trades.
Is this correct? How do you classify your option trades on index ETFs? My first year doing such complex trades, so would really appreciate some expert advice.
Did some internet research on this and seems like this is a gray area. Clear guidelines are available on options on indexes but not on options on index ETFs.

I was looking at my 401k statement and noticed that Apple is 3rd in the S&P500 weighting at 2.01%, XOM is the 1st with 3%, MSFT is second with 2.09%:
http://www.indexarb.com/indexComponentWtsSP500.html
 
There are 3.5 banks in the top 10 (GE is the half).  So the higher the gas price, the longer the low interest rate persists, and we keep spending on my iPhone and T, we’re growing our 401k nesteggs.  Simple, huh?

tradansh,
Yup, it’s a gray area for options on the index ETF’s (SPY, DIA, etc.).  You can be aggressive and report them as Section 1256, i.e. pay less tax if you made a profit (60% as long term).  If the ruling goes against you, then you’d pay more tax later.  Of course, you can be conservative and NOT use Section 1256 to report them.  Same disclaimer that this is not a tax advice, just comments.

Peter D – Thanks for your "comments". Totally understood. In my case, total net on 2009 trades was losses (over 20K, on day/swing trades). What would be the tax considerations then and a more conversative approach?

tradansh, the reverse is true if it’s a loss, i.e. don’t use Section 1256 as it would have reduced your loss deduction (100% on short term loss deduction is more advantageous than 40% for short term loss with Section 1256).  Just use the normal short term capital loss reporting and show all the transactions.

Peter D – What do you recommend for option trades on commodity ETFs like USO or GLD? go 1256 or normal capital reporting?

Thanks for the Barron’s article SNS.  Below are my thoughts:
 
First, how nice is it to have all Barron’s picks already in our information here in PSW!  Barron’s recommended companies:  GILD (been selling premium since Sept), SPPI (again, recommended in Sept ’09), AMGN (Phil played them in Nov), ISIS (not on my LT list, but we did play the bounce a few weeks ago for a nice 40% profit) and GENZ (been in and out on the $50 level, currently trying to get the 50 Jan11 for 6.90, selling 1/2 straddle Apr10 for 2.4). 
GILD – what is not to love about them.  They are going to be a stalwart for the next 5 yrs or so, if not more. 
AMGN – not as high on them, as I want to see if their osteoporosis drug is as big as they think it will be.  Not convinced that the premium of once a year is worth it compared to generic oral drugs (e.g., Fosemaxx).
SPPI – could not agree more with these statements.  We (Barron’s) continue to like Spectrum Pharmaceuticals and reiterate our Buy rating and price target of $8. The company sells two oncology drugs in the U.S., Fusilev and Zevalin. It has a strong pipeline with a late-stage drug for bladder cancer partnered with Allergan, and Belinostat, a recently in-licensed late-stage blood cancer drug.  Expectations for Fusilev have come down significantly since the FDA’s complete response letter on Fusilev for the colorectal cancer indication in October 2009.  Due to Zevalin’s superior clinical data and label expansion in the first-line setting, targeted marketing, a doubling of the sales force recently and better reimbursement (starting in January 2010), we expect Zevalin sales to grow significantly in the coming quarters. Additionally, we believe the company could take a significant price increase on Zevalin by midyear. 2.5 Jan12S are 2.5, or 5/7.5 Jan12 bull call spread is ~ 55c.  Selling P on the spikes down is very nice.  Spreads are wide, so patients is a key on the entry.

 
GENZ – the manufacturing problems persist, and I did a writeup on them here.  Also noted plays from last week above.
 
I do not know as much about PMBs or drug store chains, so it is hard for me to comment on them.  I do like Medco and CHSI, both of which we played last year but they are not ‘chains’. I see WalMart and Costco expanding this base, but again, not my area of expertise.
 
As for DVA etc., don’t know about them as well.  They are a lab service from my readings in dialysis, and LH is my preference there (although they are pricey here), but this corner could be better served by DCAI – smaller version that has tons of room to grow for dialysis.  I bought them last year, but stepped out for a small loss. 
 
Medical device and diagnostics are my biggest players right now, esp. if they are covered by insurance or medicare/medicaid.  GPRO, MYGN, VIVO, VOLC, and others are good ones to look at.
 
Otherwise, read my last writeup linked above for Pharma – those are the ones I am most interested in…and yes JB, drugs are the best medicine!!!  I know pharma takes a bad rap for the pricing components, but without them, we would not live as long.  I guess it is the necessary evil.  BusinessWeek has a great article on the price of life…..

Tradansh, someone pointed out that Commodity ETF’s may have different treatment.  Please go back a few days of posts to find the link (I think it’s an early post one day last week).  For USO stock, you’d need to be careful as I heard that it’s a partnership, so you might need to file the K-1 form.  USO options can go as normal stock option (in my opinion).

Was just reading this — a worthwhile article on inflation:
 
http://www.frbsf.org/publications/economics/letter/2010/el2010-11.html

Who needs Barrons when we have you Pharm 😉

Grant you might want to restart your modem and wireless router if you have slow Internet.  I know PSW was offline for a few hours over the weekend but its been running like a champ for me and i reset my gear with my laptop off and it always fixes the the problem.

Spring break has brought many tourists to SF, had a chat with a rest manager and he mentioned it was slow due to bad weather past month but SB has helped. Less vacations and more IPads!!

 

Pharm,
 
Do you have any recommended plays for GILD?

 Bord, I have a few GILD positions.  My current position:  I am long GILD 40 2012 Leap Calls for about 9.8 and I have sold Jan 45 Puts for 2012 for around 6.5.  My Calls are uncovered at the moment.  I believe GILD is undervalued, has a decent pipeline – their new quad pill will do well (I believe)

ajaytoo, just saw your tax question in the Weekend reading post.  I found that TOS tax tool is very easy to do.  You need to first get the transactions, then making sure that you match all those "unmatched" Corporate action transactions, then exporting them to TXF file.  It does also export to CSV format (highly recommended as you can rerun it later without losing the matched transactions).  Now, the year end heldovers are exported to a separate CSV file.  You’d need to manually match those with the current year transactions which would have the Jan 1st open or close date.  If you have the SPX, RUT and NDX trades, those are considered Section 1256 transactions, which are in fact easier to report as you can do 1 line per brokerage in Form 6781, and not need to report every transaction.  You can then import multiple TXF files (from your various accounts) into the tax software.  If you have over 1,000 transactions per TXF file, TurboTax may crash on you, so split them out to smaller files.  There is a 3,000 transaction limit in Turbotax, so you can either trade less, do manual Schedule D1, or try the indices (SPX, RUT, etc.) so that you can report multiple transactions in a single line.  Thinkorswim does have a good instruction in a Powerpoint format that you can download.  Good luck and please do not consider these tax advice, they just came from the top of my head.

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