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Friday, December 1, 2023

Tempting Tuesday – Getting in the Zone

TLT WEEKLYIt’s hard to be in cash, isn’t it?    

I’ve been calling for cash for weeks and now I’m starting to feel like Braveheart, trying to get anxious Members to hold, Hold, HOLD in chat every day as traders, by nature, like to trade and sitting in cash waiting for market certainty is pretty boring.  Of course it’s a lot less boring than riding the market down all tied up in positions, isn’t it?  As you can see from David Fry’s TLT chart, we did get it right when I called a top on Treasuries at $105 (Sept 24th) but it did take it a little while before it really began breaking down – better early than late in your market timing!  

I was early with "October’s Overbought Eight" on the 3rd although, obviously, we had a few huge winners on our short-term plays as we caught that first dip on NFLX, PCLN, BIDU and  FSLR while AMZN is looking good as is TLT (Dec $102 puts now $8.50 from net .35 entry, up 2,328% and done, of course).  MOS, on the other hand, went up and up but is finally backing off it’s run.  Dec $62.50 puts at $2.10 should do quite well if they fail to hold the $65 line.  

CMG, on the other hand, has become our white whale, now up 27% from where we first looked at them.  The original play was a ratio backspread of 4 March $190 calls at $10.75 ($4,300), selling 5 Nov $175 calls for $8.75 ($4,375) which was a net credit of $75 on the spread.  The good news is the March $190 calls are now $51 ($20,400) but the very bad news is the Nov $175s are now $56 ($28,000).  We have, of course adjusted this trade several times but it is still very painful to wait out.  

An example of a simple adjustment on a trade like this is to roll the calls to 10 Jan $210 calls at $28 ($28,000) and rolling the March calls to 8 June $230 calls at $29 ($23,200) so an extra $2,800 put into the trade to buy a more manageable 6-month spread.  When you do this, you have to keep in mind that your net entry has gone up from a $75 credit to a $2,725 debit and killing the trade now would cost $4,800 more so the loss does not go away on the roll, it just redistributes from actual to potential loss again.  We do expect CMG to pull back to reality at some point so I actually like this spread as a new entry.  As I pointed out to Members last Thursday (and this is true for many high-flyers):

When a stock like CMG begins to sell off, people very quickly realize how few people are willing to allocate $230 (p/e 44) to a restaurant stock as each $230 there means they can’t buy MCD ($80, p/e 17)), YUM ($50, p/e 22), DRI ($50, p/e 16) AND BWLD ($50, p/e 24) in a more diversified basket.

That’s the greater question we face now – when will the market become "rational".  John Maynard Keynes famously said: "The markets can remain irrational far longer than you can remain solvent" and we often forget the word "far," which is key because it is truly amazing how long some things move in a direction that just seems plain wrong.  CMG ran up 20% from $150 from Sept 1st into earnings and then had good earnings and went up another 40% in the month since earnings, gaining $3Bn in market cap after reporting $48M in income for Q3 – so a very nice 60x bang for the buck there.  CMG is not a BAD company, it’s just hard to see how a projected $6.50 in 2011 earnings (up 20% from this year) is worth $230 a share.  That would be a p/e of 35, meaning it will take CMG 35 years to pay you back the money you give them.  And that’s IF they get their 20% growth.  

That was my logic for being short on CMG and so far, so wrong on that one.  The whole market is a bit like that now though, with inflation/QE2 expectations fueling a rally while investors seem to have forgotten the possibility of a crisis in Europe or Asia or Terrorism or War or Flash Crashes or whatever it was we used to worry about  investing in stocks as a risk class asset.  It’s one thing to think a company like CMG will flawlessly grow at 20% per year without a hitch but, once upon a time, you would take that bullish premise and then come up with a "Risk Adjusted Valuation" that compares that investment to other alternatives at various risk levels.  

We performed a risk adjusted valuation on the overall market in light of the low VIX, which pays us a low premium when selling options to hedge our stock positions and we simply decided it wasn’t enough and that CASH would keep us more flexible as we waited PATIENTLY for this market plateau to resolve itself.  Despite our other successes, getting burned on CMG reminded us just how dangerous it can be to short a market that is being manipulated by, not only the usual suspects in the Gang of 12, but by the Federal Reserve Bank of the United States as well!  Another valuable saying is "You can’t fight the Fed" but that doesn’t mean that you blindly swallow whatever BS they are serving and pile into overpriced equities in a bad economy.  

Inflation will only get you so far.  Even, as I mentioned yesterday, when the Fed is pouring money into the economy at an annualized rate of $1.8Tn this week (and the next two as well).  I compare this to a medical drama where Bernanke is the ER doctor and they wheel the US Economy in on a stretcher and Bernanke says "We need to put 4 pints of blood into this thing STAT!" and you (the worried investor) say "Oh my God, Doctor Bernanke – 4 pints of blood!  Is America going to live?"  "Oh, it’s fine." says Bernanke, "Just a couple of quarts low."

You KNOW this is BS.  You KNOW America is in deep trouble.  You KNOW that other countries may be in even worse trouble (did you know the Shanghai Composite fell 4% this morning, now down 10% in a week?)…  So why then, my friend, are you buying companies with ridiculously high valuations when we’re not even sure that the economy isn’t still contracting?  Forget shocks – we may simply be going lower as the entire planet takes a breather from growth for a year or two.

It’s all based on expectations of inflation but inflation is not value.  Even worse, the Fed is having trouble engineering inflation because the economy is SO DEAD (again see yesterday’s post) that you can shock it with $600Bn, $1.2Tn or $1.8Tn and you’ll get a bounce, but you are not going to get a heartbeat until you come up with some policies that put people back to work.  

Last Tuesday, I called it a critical bottom test for the Dollar at 77.  A week later, we’re up at 78.80, a very nice 2.3% move up and that has been accompanied by a 2.3% move down in the markets.  As we expected this bounce (in the very least) our move last week was to short oil at $87.50 and copper at $4, as I outlined in the morning post.  Also in the morning post I liked selling the PCLN Jan $450 calls for $16 and they dropped to $12 already for a nice 25% gain in week 1.  I reiterated that trade idea for Members in the Morning Alert at 9:48 and we added the FCX Dec $100 puts at $2.75 as a non-futures way to short copper.  Those shot up to $4.65 yesterday (up 69%), and we’ll be done today if they don’t fail $100 because more than 50% in a week is PLENTY, isn’t it?  

Also in Member Chat we went long on CIM with complex hedge and we did a more simple bullish play on UUP (again playing the Dollar for the bounce), buying Dec $22 calls for .49 and selling the Jan $22 puts for .33 to knock down the premium.  That was a net .16 entry and that worked out nicely already with the Dec $22s hitting .85 yesterday and the Jan $22 puts at .15 for a net .60 gain – up 375% in a week.  That’s what I mean when I say we’re going to cash – it doesn’t mean we are hibernating for the Winter – just that we are going to concentrate more on nice, short-term opportunities until we think it’s safe to construct longer-term trades again.  

Even our TZA hedge that day was short-term with my 1:20 call in Member Chat as follows: "TZA Dec $18 puts can be sold for $1 and that helps pay for the Nov $18/20 bull call spread at $1.15 for net .15 on the $2 spread that’s $1.73 in the money at the moment."  The Nov $18/20 bull call spread is already $1.70 and the Dec $18 puts fell to .70 so net $1.40 is up 900% for the week is a good start with TZA looking good for our goal at $20.75.   That was our last trade of that day as the markets started falling and we were, obviously, well-positioned for the move.  Our question today is – are we completing the move we expected down to our 10% lines or is this just stage one of a cascading failure?  

To some extent – we don’t care.  We are nervously moving back to cash as this support test comes in conjunction with the first round of POMO – which isn’t having much effect on day 3 so far.  Asia was off across the board with the Hang Seng following the Shanghai down 1.4% and the BSE fell another 2% and blew the 20,000 line.  Even the Nikkei went down despite accomplishing 83 Yen to the Dollar for the first time in a month.  Europe is down over a point ahead of the US open and there is NOTHING the Fed can do to fight of a flight to the safety of the dollar so today we’ll be watching that 79 line, on the way to our expected bounce to 80.

Cash is good, cash is nice, cash is flexible.  We did a couple of quick shorts yesterday on the Dow and the S&P but that was it and today we may take a pot-shot at some long positions but our hearts would not be in it. Industrial Production was flat in October vs. up 0.3% expected and Capacity Utilization remained at an anemic 74.8% so I’m not sure what kind of retail season we are expecting if no one is making any merchandise.  The Baltic Dry Index has been in free-fall for the past 30 days so I don’t even think our Christmas goodies are on a slow boat from China.   The October PPI was up 0.4%, less than 1/2 of the 0.9% expected by clueless economists and it’s much, much worse than that as the Core CPI FELL 0.6%, 700% worse than expected, as rising food and energy prices sucked money away from everything else.  

Adding insult to grievous injury, Net Foreign Purchases of Long-Term Securities was off a whopping 37% in September as NOBODY wants our paper anymore.  If all of Ben’s money ends up going towards buying TBills – where is the stimulus in that?  Have I mentioned I like cash lately?  Cash and a few shorts – that’s how we’ll likely be getting through this week, especially if those 10% lines fail to hold.

Be careful out there!  



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