23.7 C
New York
Monday, September 26, 2022


Tempting Tuesday – Stop Buying that Dip and GET OUT!!!

Related imageGET OUT!!! 

In this year's horror hit, "Get Out" the main character gets his warning just one time, early in the film.  I don't know if it's early or late in the Stock Market Film but I did, very clearly, tell people to GET OUT!!! in yesterday morning's PSW Report and I repeated that warning live at the Nasdaq at 10:30, causing the index to drop 50 points (sorry).  There may have been other factors in play – but I'll take the credit/blame for this one.

You can see a quick video review on my logic for why the market is 20% overbought here:


Yesterday we discussed the Global macro reasons why the current market prices are unrealisitic and, from talking to people, I thought it could be made a bit clearer if we focus on something more obvious and simple so we're going to look at just the 30 Dow components and think about how lower taxes would effect them. 

Since we don't have 2017 figures in yet, I'm using last year but, in general, there's not too much change in earnings.  The 30 Dow components have a market cap of $6.7 TRILLION, which is about 10% of the US markets and 6.7% of the World Market Cap so a good, representative sample.   



Market Cap Billiions


2016  Pre-Tax EBITA
2016 Taxes Percent Paid
AXP American Express Co 98.59
86 9.2 2.7 29.3%
AAPL Apple Inc 169.80
871 64.1 15.7 24.4%
BA Boeing Co 277.97
166 5.9 0.67 8.8%
CAT Caterpillar Inc 141.50
84 0.64 0.14 21.9%
CSCO Cisco Systems Inc 37.72
186 13.1 2.7 20.6%
CVX Chevron Corp 120.84
230 -1.9 -1.7 -89.5%
XOM Exxon Mobil Corp 83.57
354 8.4 -0.4 0.0%
GE General Electric Co 17.95
156 14.1 -0.5 0.0%
GS Goldman Sachs Group Inc 250.65
95 10.3 2.9 28.2%
HD Home Depot Inc 184.90
216 13.5 4.5 33.3
IBM International Business Machines Corp 156.46
145 12.9 0.45 3.4%
INTC Intel Corp 44.49
208 12.9 2.6 20.2%
JNJ Johnson & Johnson 139.01
373 20.5 3.3 16.1%
KO Coca-Cola Co 46.23
197 8.9 1.6 18%
JPM JPMorgan Chase & Co 106.95
371 44.4 9.8 22.1%
MCD McDonald's Corp 170.65
136 6.9 2.2 31.9%
MMM 3M Co 239.26
143 7.3 2.0 27.4%
MRK Merck & Co Inc 56.22
153 4.7 0.7 14.9%
MSFT Microsoft Corp 81.08
625 23.2 2.0 8.6%
NKE Nike Inc 60.10
98 4.9 0.65 13.2%
PFE Pfizer Inc 36.06
214 8.4 1.1 13.1%
PG Procter & Gamble Co 91.41
231 13.7 3.1 22.6%
TRV Travelers Companies Inc 136.36
37 4.4 1.0 22.7%
UNH UnitedHealth Group Inc 221.42
214 12.9 4.8 37.2%
UTX United Technologies Corp 120.04
95 8.2 1.7 13.9%
VZ Verizon Communications Inc 51.72
210 25.4 7.4 29.1%
V Visa Inc 107.43
244 12.3 5.0 40.7%
WMT Wal-Mart 97.01
290 22.9 6.2 27.1%
DIS Walt Disney Co 110.22
164 14.2 4.4 31.0%
DWDP DowDuPont Inc 72.13
168 XX.X X.X X.X%

As you can see, we don't have figures for DWDP due to the recent merger but the other 29 components earned $406.3Bn and paid $86.25Bn in taxes, which is an effective rate of 21.2%.  So how will cutting the corporate tax rate to 20% make enough of a difference to justify the Dow's 35% rise, which added over $1.7 TRILLION in market cap to the Dow in 12 months?  Do you really think earnings went up $350Bn (1/20th) to justify it?   

The earnings growth certainly don't justify it though with an after-tax p/e of 20.9, the Dow is a huge bargain compared to the S&P 500s p/e ratio of 27.3 but that's mainly because Apple (AAPL) is such a weighty component (and such a bargain).  This is my problem with this market rally – we're up in anticipation of tax cuts being a huge benefit to these companies but only 8 of 30 companeis pay more than 25% in the first place and clearly Visa (V) and United Health (UNH) need to fire their accountants!  

You'll notice that, the bigger a company is, the less they seem to pay – that's because they generally have more opportunities to mess around with offshore shells and such to move the momey around.  In any case, whether it's from the reading of the bill or the huge disappointment that will be suffered when companies calculate their Q1 tax liabilities and they turn out NOT to be very different than Q4 (assuming a bill is passed by then) – I think we're going to see a huge let-down when the reality of the tax changes hit the expectations of investors.  

So, while there are still buyers we are GETTING OUT of all of our positions in all of our portfolios and we will start again, from scratch, in 2018, with all new portfolios on January 2nd.  

Until then – it's time to go shopping! 



Notify of
Inline Feedbacks
View all comments

RH earnings tonight and HRB tomorrow before the open according to IB Brokers

Want That House? You’d Better Pay in Cash

"Want that house, better pay cash."  Its true.  Already recounted how houses here in top school district outside Phoenix are going quickly.  There was another bid at same time as mine (according to broker, but I believed him.)  He recommended the seller take mine because it was cash, though I did not pay full price.  Downsizing baby boomer with cash, as the article says.

I'm a real estate guy and did well when I had cash; never used financing until I got greedy, and then I got slaughtered.  Oik, oik, oik, ooowww… darkness

:Phil, yes RH is certainly too dicey to short.  Yahoo Finance shows :

~~Short % of Float  –   71.53%

Phil – I always learn more from you managing the losing positions. The winners tend to manage themselves!

Looking at TOS option prices, it looks like on the WYNN trade mentioned above the Jan 19, $130 calls are quoted at $41 and not $30.80 as shown in PowerOptions. Maybe the Poweroptions screen needs an update?

Don't know where the smiley face came from.  Fat Fingers ?

Phil/RH and HRB,


I was just giving notice on the earnings but thanks for the input.  Not crazy about HRB because of the elimination of tax deduction, supposed simplification, etc.  Still have   short calls at $27 but got rid of everything else at even.  RH is trickier so I''ll ask.  I have several 2019 puts at appr. $40 but the $120 call got away from me when they pre-announced. (Guess I wasn't watching the deltas carefully enough.)  Anyway, could just dump the short call, or roll it up, or buy back everything at even, or let it all ride.  Big question is if they pre-announced, can they really go higher?

Baron – You wouldn't think so, but when there's that big a short position, anything could happen, such as a very positive outlook for the next quarter, buyback programs, etc.  Really anything could spook the shorts and cause a squeeze.  Dicey.

Baron still holding HRB in an amchair trade, You might have a point with tax simplification, But just come out of the forest where again I have chopped 42 trees, also armchairs, all which are on top of the scale, however Phil might have a point with HRB, they are on the lower part of the scale. Not sure about RH did not play them again as I lost quite some money on them but they are very high and after today they might have a good drop.

Your top five picks for 2018 would form a good core for the new portfolio (CHK, CLF, HBI, TEVA, GE).   Working on opening positions based on your 11/19 post recommendations. A little patience and you can get the entry prices indicated. 

Winston, I’m showing $30 on those calls. 


So, no agreement.  Still, looking at the RH chart, I don't see a short squeeze after the pre-announce.  I see a small retrace with buying and then a cup forming back up with less buying.   So i guess the shorts are not showing concern and the longs are not pushing their luck.  The safe thing would be to drop my short call and let my puts ride out to their eventual glory, and next time, be more careful about short calls.

PHM/Phil – what a run.. do you see any negative implications for builders like these guys (and TOL, KBH, etc) with the new tax thing? Or will that be juicing the market for such 'assets?'

Phil, after all these years I still don’t understand how you choose to start a position with short puts or BCS. What do you look for to decide that?

WYNN dyslexia – my bad – apologies for the confusion.

Copper very weak today.  Covered some FCX with OTM Jan 2019 calls.

BOTZ – buying the dip… just a $1000 today.. may go lower, but starting.

Yodi… the image of you chopping down trees, then your arm chairs… lol, I imagine you spending all winter building chairs from the trees…

Phil, can you give me your thoughts on adjusting the WMT butterfly position?  Thanks.

I haven't heard anything about capital gains taxes, does anyone know if and how they are affected? 

IBB… looks like has found some support. do I dare? well.. not today.


Below I did set up a play you should study. I tryed to explain it as good as possible.. Looking at the same today you could even set the BCS 30/45 but here you will pay a bit. Setting up the BCS the stock should have dropped or on the lower side of the scale, See HRB today,  positive cash flow and the difference between long call and short call in the BCS should be at least 50% meaning your delta should be below .50.

Selling the leap put should be some what in line with the long call or lower. Here from some days ago:

Interesting play with MU dropped from 49 to 41 approx. Here my conservative entrance to this play. Buy the Jan 20 35/45 BCS @ 4.46 x 4, sell the Jan 20 32 put for 5.05 x 3, sell the Jan 18 45 call for 1.82 x 2 and sell Jan 18 37 put for 1.09 x 1, setting it up as above you will start with a credit of 204.00 excluding commissions.

Obviously MU would have been looked better at 35$ or even 30$ but looking at it from the positive side, you have two years of selling some good cherry calls.

The company shows a positive cash flow and has a PE of 9.52 and no div. to talk about. So I cannot understand why anyone would buy the stock except for capital gain. Even if the stock lands up Jan 20 at 35 you should have lost no money on the spread and would have profited on two years of selling cherry calls. My BCS entries are, to begin, always small and for anyone’s budget to start.


No just taking somewhat Phil's warnings a bit more serious. Not making chairs but using some trees for the winter as fire wood!!!! I trust next year we will have a better picture, possible Trump will have chocked on his Christmas meal.

I have closed the above MU play BCS 30/45 cost @ 7.28 x 4sold 4 Jan 20 puts for 5.00 and sold 1/2 Jan 18 45 call for 1.61. So as you can see to enter this play will cost you relative little to start with a 15 $ spread and many cherry calls to sell.

Pharmaboy – any thoughts on VSTM? The stock looks attractive and there are many big institutions holding shares. Potential catalysts early next year. Thoughts?


Looking strong today, must be shorts covering, probably should do the same.

RH  Baron For me I might be wrong, but if I had the stock I would sell.

Yodi, oh I agree. it's just the image of you physically chopping the trees, and not being satisfied you start on the furniture… gave me a smile 🙂

Sorry Do not know how the smiles work on this site. There is no smile list on top here!

Stay Connected


Latest Articles

Would love your thoughts, please comment.x