3.7 C
New York
Tuesday, November 29, 2022

Subscribe

Just Another Manic Monday – Tax Free Edition

The tax bill passed!  

That's right, the GOP Senate passed the Trump Tax Plan when all the GOP Senators voted for it – what a surprise.  In other news, water is wet.  Still, the markets are acting like it's a surprise with the Dow up 227 points in pre-market trading and that's up about 500 points from Friday's lows – in that brief moment we though Trump might be arrested before they pass the tax bill.  Now it looks like he won't be arrested until after the bill is signed – so all is well, I suppose.

Dow 24,500 is up is up 4,500 (22.5%) from the start of the year and up 6,500 (36%) since the election.  That's nothing compared to BitCoin (see this weekend's notes on that subject) which is up 11,000%.  Still, 36% is a lot and the Global Markets have driven higher as well, as one might expect but, as we were discussing in our series of market value discussions last week – the reaction is now far exceeding the reality.  

world market capFor example, in November of 2016, the total market capitalization of Global Markets was $65Tn.  That's about the same as our Global GDP ($80Tn), so not unreasonable.  Unfortunately, now it's not reasonable at all as we're about to cross (or may cross this morning) $100Tn.  That's up $35Tn (53.8%) in 12 months.  

Global GDP grew 3.4% in 2017 so let's say that's a gain of $3Tn .  The question then is – where did the other $35Tn of market growth come from?  The answer is, of course – Fantasyland – this is completely ridiculous.  You may think "tax cuts" are a good explanation but US Corporations paid just $411Bn in taxes in 2016 even is you took 100% of those taxes and drove them back into profits and mulitplied it by the S&P's insane 27x earnings multiple – that would only account for $11Tn and we'd still be $21Tn short, or about 20% of the total market cap.  

Image result for buffet tax sellingSo that, folks, is the correction we are expecting when, at some point, investors come to their senses.  Warren Buffett and I think that this late-year surge is being caused, not by rising values, but by a lack of sellers – as no one wants to take a profit in 2017 and pay 2017 tax rates when they can save a fortune by waiting to cash in under the new tax plan

That lack of sellers, plus a frenzy of late buyers chasing the market, is most likely what's causing this late-year rally.  While it's possible we may continue to head higher, a monkey with a dart-board can make money in this runaway market so, if it's going to continue, we're not going to miss much by cashing in ahead of the holidays – while suckers are still lining up to buy our shares at record highs.  Who knows if they'll still be there in January?

Goldman Sachs international analyst Christian Mueller-Glissmann also agrees with me, saying: "The bull market in everything" is about to come to an end. "the average valuation percentile across equities, bonds and credit is the highest since 1900," and it will produce two likely medium-term scenarios: "Slow pain" or "fast pain" as a correction creates a bear market.

"The current valuation percentile is most comparable to the late 20s, which ended in the ‘Great Depression’"

Image result for stock market sellSo, if I had an IRA/401K/529 with no tax issues in selling, I'd sell now.   For our taxable gains in our 4 Member Portfolios, we're already we'll-hedged but let's consider getting super-duper hedged (it's a technical term) over the next two weeks as well as cashing out those short puts on stock we don't really, Really, REALLY want to own if the market drops 20%.

That goes for our Top Trades as well – that's how worried I am about this market as we hit the $100Tn mark with a 54% Global Gain in 12 months.  Keep in mind, the US is getting tax breaks but we're "only" up 36% so the rest of the World is outperforming us by a mile – and they are payinig their taxes!  

Gee, maybe not paying taxes is costing us a substantial amount of growth?  

Meanwhile, if you are looking to hold on to your bullish positions until the last possible moment, I refer you to Mark Kolakowsi's excellent summary of "12 Forces that May Kill Stocks Despite Tax Reform Uphoria" : 

1. Vicious Feedback Loops

Computerized quant funds created a panic in 2007, when funds pursuing similar strategies sold heavily, sending prices spiraling swiftly downward, and prompting yet more waves of selling in a vicious feedback loop. Accelerated by high-frequency trading (HFT), these deadly downdrafts can crush the markets in minutes. (For more, see also: Could Algo Trading Cause a Bigger Crash Than 1987?)

2. Cyber Insecurity

As the financial markets are increasingly computerized and exposed to the internet, the odds of a catastrophic event stemming from hackers or systemic failures multiply. The parade of data breaches at major corporations and governments are evidence of the growing dangers. (For more, see also: Cyber Wars: How The U.S. Stock Market Could Get Hacked.)

3. Bubbles in China

Chinese banks may be sitting on a mountain of bad loans, perhaps 20% of their total portfolios. Debt has ballooned to about 215% of GDP, the real estate market shows signs of speculative excess, and an increasing number of zombie companies are being kept afloat. When these bubbles burst, the impact will be felt worldwide.

4. Stock Exchange Crunch Time

U.S. stocks have 12 official public trading venues, which provide backup for each other. However, during the final 15 minutes of the day stocks trade only on their home-listing exchanges. Here closing prices are determined, vital for valuing a host of positions, accounts and portfolios. Current backup procedures in case of technical failure or cyberattack may not be robust enough, especially if order flow is particularly heavy.

5. Crowded Indexes

The rush to invest in index funds and ETFs? have created a very crowded set of investments, with valuations of their components being pumped up ahead of fundamentals. When investors sell en masse during a market decline, a crash of epic proportions may ensue.

6. Crypto Crash

Cryptocurrencies? such as bitcoin have a relatively small combined value right now, and their pricing on unregulated exchanges limits their appeal to cautious mainstream investors. However, they are likely to enter the mainstream if derivative products based on them are approved, such as options, futures and ETFs. This would magnify the dangers of a crash in their already volatile values. If digital currencies ever get accepted as loan collateral, a replay of the subprime meltdown may be on the horizon. (For more, see also: Nasdaq Will Add Bitcoin Futures in 2018.)

7. Overdue Recession

The current economic cycle inevitably will turn from expansion to recession. The only question is when. Meanwhile, quantitative easing by central banks has sent investors headlong into riskier assets in desperate search for ever-diminishing yields. When the recession finally comes, perhaps the result of excessive tightening by the Federal Reserve, a bear market should follow, and these risky investments will be hit especially hard. (For more, see also: Get Ready For The Coming Bear Market and Recession.)

8. Financial Domino Effects

The financial crisis of 2008 was a lesson in how a supposedly limited problem, such as mortgage defaults in the U.S., could trigger a worldwide financial and economic near-collapse. Lehman Brothers offered a corollary lesson about the domino effect from counterparty risk. The next eurozone debt crisis may be a catalyst for a global crisis, sped along by the post-Brexit? cracks in EU solidarity.

9. Japanese Debt Bomb

Japan leads all industrialized nations with debt at 240% of GDP. The aging population will send medical and nursing costs up rapidly, increasing the debt load, eventually sparking inflation, and thus likely to send Japan into financial crisis.

10. New Oil Glut

If an oil glut sends prices below $30 per barrel, oil consumers would cheer. However, marginal U.S. producers with low credit ratings would be unable to pay their bills, perhaps setting off a wider crisis.

11. Repo Choke Point

By mid-2018, only Bank of New York Mellon Corp. (BK

 

) will provide clearing and settlement services for the $2 trillion U.S. market for repurchase agreements (repos). JPMorgan Chase & Co. (JPM), the only other player, is exiting due to regulatory capital requirements that it finds too onerous. A breakdown at BNY Mellon could cripple the $14.3 trillion market for U.S. Treasury securities, and reduce liquidity for traders in stocks, corporate bonds, and currencies.

 

12. Crisis of Confidence

Once a crisis of investor confidence sets in, frothy asset prices will plummet, and leveraged trades will unwind rapidly. Such a crisis can be sparked by political, as well as economic, events. In the bear market of 1973 – 74, the S&P 500 dropped 45%, exacerbated, if not caused, by a perfect storm of events, as noted by longtime Wall Street Journal columnist Jason Zweig: war in the Middle East, a quadrupling of oil prices engineered by OPEC, the Watergate scandal that led to the resignation of President Nixon, and a spike in inflation, itself partly due to OPEC.

Bloomberg also has a list of 10 things to watch.  That's 22 things that could tank the market in a year when we've made fantastic returns and are heading into the holidays – why on Earth wouldn't I want to just cash out and take the rest of December off?

Please, whatever you decide – Be careful out there!  

 

156 COMMENTS

Subscribe
Notify of
156 Comments
Inline Feedbacks
View all comments

 VZ/Phil, Yodi

And good morning!

Thank you for your thoughts on VZ…up again?

Well, I will prob roll out the short calls. Don’t want to BUY calls to covert the shorts to a spread at this price as it’s too much, too fast, even if VZ earnings rise 50%.

Crazy!

And Phil, thanks for the heads up on the overall market….I am hedged with short calls and DOUBLE SHORTS on GOOGL, FB ( with stops, of course as one can still get singed with this market continuing up another 20% before awakening occurs)

Phil, I'd be all for starting the portfolios over.

Me, too!

Yes to all new portfolios in 2018!!!!!

new portfolios!! way to go!

regards

DF – previously opened a long combo (short march 10 puts, long march 12 calls) for net credit of .40. Now looking to cover half with Jan 12 calls for .45.

Yes, from me also re: new portfolios…Please start over in January!!

New portfolios again!?  I'm happy I've been here long enough to be able to say that! Looking forward to it.

I have mixed feelings about the new portfolio idea.  I'd prefer a house cleaning but understand the logic.  Many of us hold the FU stocks so I think it would be important to include them in the new portfolio so we can hear your thoughts on those businesses on a regular basis.

You mean dump everything?  Will kind of trash the prices won't it? Especially for shorted positions currently way under water but that will not be at expiration.

Phil,

I’m all for new portfolios. 

options_alpha 

 

Here!  Here !

New portfolios for me

FCX/Phil – in kid's accounts have some FCX which is at breakeven right now. Considering selling half (the LT higher cost shares) … but taxwise is not going to be significant so really wondering, do I bother? Want to keep the shares? Add? or Kill the whole thing? No dividend these days..  Do I recall you saying you like them again?

Phil/ new portfolios

I am in!

However, to be fair and to follow the big time losers like FTR/M/TEVA and others, we should transfer these over to the new portfolios. I say this not to look at the returns on these stocks, but because some of us have them and it would be easier to discuss them going forward.

Adjustments will need to be made and this will provide all an opportunity to learn as well as redeem the positiones over time with your help.

If dump the FU stocks, how will we know what adjustments to make going forward. 

The winners, of course…no problem.

also, CBI should be transferred

Phil – "in that brief moment we though Trump might be arrested before they pass the tax bill.  That's right, the GOP Senate passed the Trump Tax Plan when all the GOP Senators voted for it – what a surprise.  In other news, water is wet."

In my best Tommy Lasorda – they couldn't hit water if they fell out of a fuckin boat.

As for arresting things,  we weighed in today, our Flynn Trump timeline (much better than others) concludes tomorrow.

Maya, VZ is aswell a stock which skyrocked. I closed some 60 positions today, finding still suckers buying.

Simply looking at the chart of one year from TOS, if the stock is on top of the scale I am cutting it down.

VZ aswell is in a bubble, if you really want to hang on to the stock I would roll not higher than April 50 call, this aswell can give you backing on a dip, Phil has promised. On the other hand I would sell the stock and eat the caller, hang on with your cash and wait for the explosion.

My big question would be what to do with that WYNN butterfly?

Definitely would like a new portfolio.

Only request would be when you post trade ideas using call spreads and selling puts or calls that the ideas are likely to be executable.

For example, the last HBI trade was great timing but could not be executed at the prices you posted. 

If a put is 3.30–3.50 saying to sell them at 3.50 usually will not fill unless it goes against you at first.

Sometimes (not always) there are trades posted that need to go up and down just to get filled at those prices.

But I love your idea about starting the new portfolios and asking about adjusting FU stocks.

The market is coming down, but none of the consumer discretionary is.  What does that say?

Vz/yodi

I totally agree with you.

I rely on the tax beneficial dividend but that’s not a reason to hold on to the stock and see it go back down 10-15% to $45.

So, I will let you know what I decide to do…have to look up when the next dividend payment is

Thanks!

FCX/Phil – thanks. I follow the idea (if not your math or pricing of the May $12 calls) for selling in the money calls now. 

I chopped some of VZ down already. Even on a day like this where I am in a closing and cutting down mood, Some stock / call combinations are hard to close out. So I think it will be much harder to find suckers on the down hill!

FCX/Phil – with a cost basis of 14.55.. and if I sell May $12 for 3.15… and if I get called, I will be 'selling' the stock for $12.. (with a net cost of about $11.40 with the call, so net win).. That's how I understand it.. Not sure what you man by in the tax window, unless you mean the possibility it is called away before end of year?

Baron – "I don't know about the rest of the world, but I, at 57, am not buying more towels."

OMG you are older than dirt.  Of course I remember, soda pop machines that dispensed bottles; Coffee shops with tableside jukeboxes; Newsreels before the movie; intermission during the movie; Butch wax; Telephone numbers with a word prefix (Trump-6666); 78RPM records; and of course bucking my laundry in the old days. That was long after those apes were bangin around me in my high school photo.  Where is Towelie when you need him?  Out. 

Stick – as I posted last week, I had four days in a row of profitable stick plays on /YM in the last hour of the market.  I'm not playing it today, the market is too frothy, but I'm thinking that if They can't stick it again today, it might say something about diminishing firepower in the buyers…

MSFT – so anyone follow what is their deal today?

PHIL,

Do you see a long trade on /SI at this level? Seems to be holding 16.35

Canada – Phil / BDC – TSX Venture exchange (with bitcoin fever) does well in an accelerating market.  Cannabis stocks have been exploding and valuations getting very rich.  It is a land grab with valuations placed on growth capacity in terms of how many kilos can you grow and they are getting as much money as they need.  Very much reminds me of fiber in the ground metrics for new telcos in 1999 when investment bankers funded too many new entrants and then 90% imploded.  Money is too easy to get.  Having said that I am going to hold some select positions.  EV battery penny stocks also jumping well.  American Manganese that you mentioned Friday up another 27% today and Elcora I mentioned up another 13% from Friday close.

FTR – Buy stock and sell Dec 15 $8 call for $8.00 with stock at $9.20 and collect the December $.60 dividend seems like a good risk/reward play.

maybe a broken stick today for a change?

ThankBDC

Do you know anything about sparklecoin? Supposedly it’s intended to be used more easily for day to day transactions? I don’t know anything about cryptos but have been hearing about this from a few people and wanted to get your thoughts. 

Thanks! 

BDC

Whoops! Stupid iPhone typo at the top there. 

Think we took one too many whacks with that happy stick, may need to look for a new one. 

Hello everyone – I have been following the discussion and learning from all of you, but haven't been active on the board. Wanted to share an observation and a question on FTR.   Seems like the December calls are priced with little to no premium (e.g. the $8 Calls at $1.2, $9 Calls at $0.5 with the stock at $9.2), is that an indication the ex-dividend is priced in? 

People who bought the Calls can theoretically exercise on 12/13 and grab the dividend, right?   So the idea to Buy-Write, keep the dividend, and have the stock called away may not work as expected?

mitomeio / FTR  – The stock is ex dividend on 12/14 so stock must be owned unit end of day 12/13 to get the dividend.  I have been toying with the idea of selling the 8 or 9 dollar calls for both Dec and Jan – the Dec calls are on some shares i'm selling as a LT loss to offset other gains.  The ones in Jan are half of my remaining shares.  I expect that there are lots of people buying this for the .6 dividend and on 12/14 will dump it.  I'm not sure where it will settle but i expect it will be quick and probably more than the .6 dividend price.  If you look at the historical chart, the price dropped between .7 and 1.0 on the ex dividend date.  I'll wait till i think this has stopped going up ( but no later than Friday or Monday) to sell my short calls.

Phil/New Portfolios

I understand the push to renew. Why not just keep a small FU portfolio?  After all, how many FU holdings are there?  Sure would be nice to see them through to fruition.  REAL FU's:  FTR, GNC, TEVA (I hold only 2)

Either way is fine with me.  I like what I own, and most are my own trades, or versions of yours anyways.  Seven years does that to you!  Thanks Phil!

Thanks batman – I guess FTR is also bottoming too as some people also recognize the value and margin of safety at the price where it is.   If it did drop more than the dividend previously, it doesn't seem to make sense for those just trying to capture the dividend (they will be worse off…)? Maybe opportunity for us then

What does everyone think – all new portfolios for 2018?      YEAH… 

I am about 1000 hours into learning about investing.  While, I have tried other websites along the way, they don't teach or focus on selling premiums and certainly don't have your mindset.  Anyway, I have a lot to learn and look forward to the new portfolios.   

So, thank ALL of you for being patient and teaching others how to "Be the House and not the Gambler"!

FTR and in the money short calls,

Having experienced it a couple of times with other dividend stock, don't be surprised if the stock is called away after hours between the 13th and 14th.  Seems that the morning prior to market opening on the ex-dividend day is particular popular.  If this happens you will loose the dividend as you can't buy the stack back prior to ex-dividend day.

FTR/TOS question.

When I look on TOS, I see two chains for FTR 18 Jan 2019, one has some Yellow text "6/100 (US $9.45)".  Based on what I have in my portfolio, this is the option chain for before the split, but what does the yellow text mean?     TIA… 

Stay Connected

159,636FansLike
407,692FollowersFollow
2,130SubscribersSubscribe

Latest Articles

156
0
Would love your thoughts, please comment.x
()
x