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Thursday, October 6, 2022


Testy Tuesday – Waiting For the Fed

Wheee, that was fun! 

In yesterday's 9:40 Alert to Members I said: "I have to go with my gut initially and stick to our plan, which is roll up the USO and DIA short plays (rolling the open puts to higher strikes)."  We took two brand new short plays – one a TZA complex insurance spread that pays 100% for every nickel TZA is over $6.05 at July expiration (up to $8) and one ordinary DIA put that doubled up for the day and we took that money and ran, of course.  That's two weeks in a row we nailed it on our Monday Alerts and, as I said last week – no need to play further, just go on vaca and come back next week! 

We went into the close more or less neutral other than our oil shorts, which we stuck with although we'll keep tight stops on them if oil holds $77.50 and the market starts recovering.   We got exactly the bounces off resistance we were looking for and today we find out if they were bullish pullbacks or the top of our predicted bounce zones (listed on the charts): 

So holding the bounce lines we predicted way back in the crash is going to be critical.  We don't mind a bit of consolidation under those 50 dmas (red lines) while the 20 dmas (blue lines) catch up but if we fail those blue lines it will certainly be time to pull in our bullish horns and put on our bear costume.  What makes investing tricky in this kind of market is that, as we were reminded in May (twice) and June (once, so far), these markets are INSANE and we can drop 500 Dow points at the drop of a hat so we MUST have our disaster hedges on at all times in order to take any bullish long-term positions and we, unfortunately, still can't reconcile committing more than 25% of our cash to long-term positions at this time.

Staying mainly in cash is kind of annoying but also prudent.  We end up day-trading a lot and I just put up a very important post on managing short-term trades that's a must read for Members.  The nice thing about having a ton of cash is we can do "stupid option tricks" – plays that are margin intensive but relatively safe like selling XLF July $14 puts for .20, which means you sell contracts for $20 each (100 options per contract) and, depending on your margin requirements, you can expect about $250 to be held against the possibility you will be assigned the position

Your "worst case" scenario is that XLF expires below $14 and you are forced to buy 100 shares at a net cost of $13.80 (you keep the .20, no matter what) so $1,380 of your cash is committed to the trade but your best case is that any finish of XLF over $14 on July 17th and the puts you sold expire worthless and you keep the $20 and your $250 margin is released.  So your return on cash is 100%, your return on margin is 8% ($20 of $250) for a single month and your return on risk is $20 of $1,380 or 1.4%, still pretty good for a month and we sure as heck don't think XLF is going to go to zero by July 17th, do we?

So we can have a lot of fun with the cash that's sitting in our virtual portfolio – certainly more fun than leaving it in TBills or other "safe" places where we get a 3% annual return if we are lucky.  3% is actually great if you are betting on deflation and expect your 2020 dollars to buy you more than your 2010 dollars did but if we instead have a default, then those dollars become worth less (worthless?) and "safe" quickly turns into trapped, kind of like people who drown in their fallout shelters…

We may all be moving into fallout shelters today if the 10am housing numbers are bad (under 5.9M annual sales).  We also get the FHFA Housing Price Index for April, which needs to show at least a 0.2% improvement and that will be tricky depending on when stimulus wound down in the cycle.  I kind of hope they are because I'd love to see those blue lines tested and held.  I think housing is still 20% too expensive given the current wages and unemployment so either those turn up or housing turns down into the year end.  Although a 20% drop in housing prices would suck for banks and, of course, people who own houses, it does set the stage for a new generation of individuals and investors to buy with confidence and that then leads to a decade of gains where a person putting $40,000 down on a  $200,000 home finds themselves owning a $240,000 home in 2020 or maybe a $300,000 home in 2020 with a nice little bonus that they can retire on or, more likely, refinance and spend so we can have another exciting bubble economy because we will have forgotten all this by then.

Material Weakness

Commodity pushers should beware as 73,000 puts were placed on the XLB (Materials Sector) yesterday, which is 7 times the 4-week average with a single investor buying 30,000 July $32/30 puts in a bear spread with XLB currently at $31.14 so .80 is risked to make $2 with a break/even at $31.20.  “The trading implies that the investor is speculating on near-term weakness,” options strategists at Susquehanna International Group LLP in Bala Cynwyd, Pennsylvania, said in a report sent to clients today.  DuPont Co., the third-biggest U.S. chemical maker, is the ETF’s largest holding followed by Dow Chemical Co., Freeport- McMoRan Copper & Gold Inc. and Monsanto Co. The four companies account for 36 percent of the security

Asia generally pulled back today but nothing major and Europe is down about half a point ahead of the US open so it's up to us to do something impressive or lead the world lower on this Testy Tuesday.  ICSC Retail sales were down 0.5% for the week but up 2.5% from last year – I'd be more concerned about the weekly weakness there but Redbook Chain Store Sales were UP 3.2% for the year but that's a function of the combination of Father's Day as well as the fact that there are now 10% less retail stores than there were last year so of course same-store sales are up for the survivors. 

WAG missed .04 (8%) and they too have tough comps against last year's flu scare that had everyone rushing to the drug stores in Q2.  That's a good theme to play with earnings as everyone from CVS to P&G who provide flu-related products will be likely taking a hit this earnings cycle… 

A NYTimes/CBS poll finds Americans are very concerned about our energy policy (what energy policy?) and, of course, the economy (what economy?), which is good because now that American Idol is over, it shows that some people are actually watching the news again.  Sadly, it's Fox News though and poor Obama is being hammered in the polls for not fixing everything yet.

We'll be watching our levels and keeping a firm eye on copper, which has had a very hard time getting back to $3 and is a very bad signal if they fail $2.85 (now $2.95) and if our XLB putter is right, we should see copper prices heading down.  Oil will also be flashing global weakness if they can't hold our $77.50 line with $75 spelling doom for that sector, which is barely getting it's legs back after the BP debacle.   OIH may be shaping up for a short here but we'll be patient. 

Fed day tomorrow, nothing matters until then so we watch and wait!



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 Humvee- I don’t think our ‘will’ is truly free. It comes down to the wiring of your brain. Present that brain with a specific situation, and the brain responds with a ‘will’ that your neocortex (the ‘you’ part of your brain) can choose to act on, or not. I think the ‘strength’ of one’s mind can be measured by how well can resist temptation to execute on one’s will. How did we come to this? We’ve always been this way. We’ve never before applied so much energy to figuring out how to manipulate will and break down restraint for commercial ends. That’s what changed. I remember a few years ago on the subway in NY there were all these ads for Bud Light that used the slogan "always worth it". On the surface that statement is almost meaningless. It’s not like you’re deciding a nuclear launch when the bartender asks what are you having. I think that slogan was probably very carefully designed to speak to deeper levels of the mind to break down resistance to will- as I’m sure most heavily funded advertising is. A lot of these companies employ psychologists now. I wonder if GS has done the same to figure out how to defeat it’s competition. What a sick, sick world we live in!

Phil and others,
I have 8 children. All are useful and productive. My only point is that if "smart" people reduce their numbers willfully, then the others (less smart ones I suppose) rapidy take over in a century or so. Then of course the "smart ones" have to make some decisions. Hopeully we can see the ramifications of that, especially when some group begins to think it is not happening fast enough to suit their ends.
Believing that men are different from animals( a premise), perhaps if we are smart enough to "be fruitful and multiply" we can also discover ways to thrive and survive.
I did think the site was a lot more about invesiteng strategies when I joined, so I think I’ll keep my mouth (typing fingers) shut and keep my questions to investing and trading from now on.

bps-try sitting through the movie Idiocracy. Its Mike Judge’s take on what happens when smart people decide to stop breading. I found it funny but it is a little scary when you can see the ways we are already heading in that direction.

I can spell breeding

Humvee/Palin  What would you say if Palin was a Steve and not Sara? Micheal Steele anyone?

 kustomz — QCOM still holds a substantial number of patents in CDMA which is still the basis of W-CDMA which is really what LTE is.  And QCOM bought Flarion largely for Flarion’s OFDM patents (which *may* hold establish a fundamental patent position in both LTE and WiMAX — however, that’ll be fought out in backrooms and courtrooms).  But, if nothing else, QCOM will continue to have patent licensing revenue from LTE.  In fact, as everyone seems to be moving to LTE, they might even have more; however, I’ve not looked at all to see what their per phone licensing fees might look like (but LTE combines lots of technologies that have a more diverse patent background — so one would expect QCOM to therefore get less per device/phone).  In terms of actual chip sales, I don’t expect QCOM parts to end up in an iPhone (or iPad).  Historically, QCOM just has never seemed all that interested in getting their power consumption down.  Something BRCM and Samsung (and now Apple with their A4 system-on-a-chip) spend a lot of time on.  All that having been said, QCOM still has a shot since they’ve deeper experience with the underlying CDMA technology.  But it’d somewhat surprise me (and several other people) to see QCOM parts in AAPL products.  AAPL likely picked their original silicon vendors because there was a roadmap to LTE that meant that they wouldn’t have to port their software several times as they moved from GSM/EDGE to GSM/3G and eventually to LTE.
It’ll certainly be interesting.  QCOM was quite behind on their CDMA/LTE chipset.  And with CDMA’s 20% marketshare, chipsets which fallback to CDMA had been getting less attention in the labs than those that fall back to GSM.
I’ll post this over on today’s stuff as well…in case everyone has already moved on…

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