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2018 Tuesday – How we will be Building our New $100,000 Portfolios

Image result for new year stock market 2018Happy new year!

I hope everyone had a nice holiday.  Over at PSW, we've been in CASH!!! since early December so we'll be starting fresh this year and setting up 4 new virtual portfolios so we can get a bit more educational and teach our Members both basic and advanced techniques for wealth building.  Our 4 Portfolios for 2018 will be:

  • Options Opportunity Portfolio (OOP) – This was orignally called the 5% Portfolio, as the goal was to use $100,000 to make $5,000 a month but, at Seeking Alpha, where we have a version of this portfolio, they felt is was confusing people to call it a 5% Portfolio, so we changed the name to what we do – look for opportunistic option plays.  Originally, we were more short-term but I realized not that many people have time to trade so actively so we went with more long-term trades, which still make plenty of money in the short-term.  While 5% a month may seem like a high goal, we were up over 100% in each of the two years we ran the portfolio.
  • Butterfly Portfolio – "Butterfly" refers to the type of spreads we use, though they are not typical butterflies as we use extended time spreads as well.  Since we began our first butterfly portfolio in 2006, it has been our most consistent player, easily averaging 40% annual returns with much lower volatility than the other portfolios.  Though the spreads are complicated, ofen with 4 or more legs, they are generally low-touch and their self-hedging nature means they have much lower volatility than our more directional bets we take in the other portfolios.  
  • Short-Term Portfolio (STP) – Our STP is part one of our larger, paired portfolio and the purpose of the STP is to protect the Long-Term Portfolio (LTP), which is generally 100% bullish.  So the STP tends to have shorter-term bearish bets and index hedges but we do take the occasional short-term plays if something interesting comes up.  We'll also use this portfolio for short-term speculation for trades which do not fit into our LTP.
  • Long-Term Portfolio (LTP) – Our LTP is our bread and butter portfolio and is much larger ($500,000) than the other 3.  The STP/LTP strategy is all about balancing risk and we use the STP to quickly tilt the combined portfolios more bullish or bearish by simply adjusting the hedges without messing around with our long-term positions.  In general, the LTP is a very low-touch porfolio and we ofen go two months without a single change.  Our core strategy in the LTP is to plant "trees" – stocks which will pay us steady incomes over long periods of time through either dividends or option sales. 

Image result for $100,000 portfolio Now that we have our portfolios in place, each with a fresh $100,000 (and $500,000 for the LTP), let's talk about how we allocate that money and begin to deploy it for the new year.  The first step in trading any portfolio is to identify what your target goal is.  There is little sense targeting a 300% return if your historical average is 8%!  While it’s possible and I’ve certainly seen some phenomenal traders achieve those lofty goals, it usually encourages you to force trades which can be particularly detrimental to your results. 

In fact, one of the greatest challenges money managers must overcome is the pressure to force trades to generate quick results in order to keep clients happy.  This is one of the reasons you hear about the ‘window-dressing’ phenomenon so much as the close of a quarter’s trading approaches; suspicion is rife that money managers conspire to artificially inflate prices to cloak an otherwise mediocre performance. 

I default to the general standard of 20% returns as a reasonable target when you start trading.  Of course, it’s feasible to do much better and following a well-informed, active trader enhances your chances of excelling beyond such a target.  At PSW, in this bull market, we've been running closer to 40% since 2013 (our last set of new porfolios) but we expect a more challenging environment ahead and feel sticking with a 20% annual target is more realistic – though we leave room to be pleasantly surprised, of course.  

Sometimes 20% can be dismissed as being inadequate in the context of options trading where 50%+ returns can be generated on any given day.  But you will never (or certainly you should never) have all your money in a single trade that might make 50%+ or go bust on any given day!  We generally targets a 20% annual return, which is why we constantly take our winners off the table when they get too far ahead of "normal" returns.  Once we take off 100% the starting balances on trades on both bull and bear sides, the rest of the year becomes playing with profits and we can get more risky but, intitially, let's make sure we lock in 20% as a good rule of thumb (see: "The Secret to Consistent 20-40% Annual Returns on Stocks").  

If you are struggling to accept 20% returns as being a reasonable number, factor in the impact of compounding and you can quickly see that you will be very rich indeed if you simply target 20% per year no matter what trading capital you begin with.  In fact, generating 20% per year for 20 years would yield a 38x multiple in a qualified account on your starting cash – which I think most of us would be quite content to have (see: "How to Get Rich Slowly")!   With $100,000 starting capital, that’s over $3,750,000, which should still be nice chunk of change in spite of inflation.

I know, for a lot of traders who are not familiar with our systems and strategies, 20% annual returns might seem like a lot to expect but let's give you a couple of simple examples of trades we like and see how much they will make for us.  

Apple (AAPL) is always a favorite stock of ours and not cheap at $169 but, at PSW, we teach our Members never to pay retail for a stock anyway.  Our favorite way to accomplish that is by selling a put option, where we are paid for accepting a contract that allows the seller to force us to buy his AAPL stock at a certain price.  The reason an AAPL stockholder is willing to do this is likely because they want to lock in gains or prevent a nasty market shock from damaging their position too severely.  For instance, we can sell the AAPL 2020 $140 put for $9.50 so we would be paid $9.50 per option (100 per contract) to promise to buy 100 shares of AAPL for $140 between now and 2020.

Mechanically, the seller of the put contract can order us, at any time, to give them $140 for their AAPL stock but, realistically, they won't do that if AAPL is over $140 – as they would get more money selling the stock on the open market.  By paying $9.50 to us, they guarantee they won't lose more than 20% on the position and AAPL will pay $5 in dividends over 2 years (and maybe a special dividend if they bring money back from overseas) so the cost of insurance is very low and the AAPL holder still gets all the potential upside of the position.

From our perspective, we are getting paid $950 per contract to promise to buy 100 shares of AAPL stock for $140 – a 20% discount to the current price.  If AAPL never goes below $140, the contract expires worthless and we keep the $950 – free and clear!  We then use this as the basis to construct an option spread on AAPL as follows:

  • Sell 10 AAPL 2020 $140 puts for $9.50 ($9,500) 
  • Buy 10 AAPL 2020 $150 calls for $35 ($35,000) 
  • Sell 10 AAPL 2020 $180 calls for $20.50 ($20,500) 

Buying the calls gives us the right to pay $150 for AAPL through the same Jan, 2020 expiration date as the puts and selling the calls gives us the obligation to sell the stock for $180.  Since we have the right to buy for $150, if someone "makes" us sell them the stock for $180 (AAPL would be over that level, of course), we would make net $30 on the spread.  The net cost of this spread is $5,000 so the upside profit potential is $25,000 in two years.  

Though the obligation is to buy 1,000 shares of AAPL stock for $140 ($140,000) the margin requirement is only $10,055 because $140 is already 20% below the current price.  Still, it's a bit too risky in a $100,000 portfolio – as we simply can't afford the assignment if the market crashes, but this would be perfect for our $500,000 Long-Term Portfolio, which has $1M in ordinary buying power and can easily risk the assignment.  

Image result for 500% profitSo here's a single play that will return, at $180 or better, a 500% profit on $5,000 cash in just two years.  If we allocate our firepower to have 10 trades like that in the LTP, we could make $250,000 on a $500,000 porfolio in two years, which is 50% or 25% per year – right where we want to be when we begin building a portfolio!  

Now, I know a lot of our PSW Members are yawning at 25% annual returns but, when we begin building our portfolios from scratch, that is how we do it BUT, as these position go into the money and look safely on their way to hitting our goals, THEN we can either add to the position and get more aggressive or we can add new positions as the risk of assignment fades away.  But these things take time.  When we begin a new portfolio, we like to error on the side of caution (see our article on scaling in and out of positions: "Stupid Option Tricks – The Salvage Play" as well as the general notes from our Strategy Section).

Allocation strategies are very important as you don't want too much risk in one position or sector, for that matter.  As a rule of thumb, with a $100,000 portfolio, we expect to have $200,000 of buying power so we set up 10 allocation blocks of $20,000 and we look for diversified positions that will give us the best returns for our money.  

With portfolio over $200,000, we would rather have 20 blocks – so no single position risks more than 5% of our portfolio.  Now, it's important to consider what we mean by risk.  With AAPL, we do think they could correct 20% (easily) and, in a crash, 40% would not be too surprising.  From $169, a 40% drop would take us to $101 so say $100 and that means our $140 puts would be down $40 each of $40,000 – that is our realistic risk on the trade so, in a $500,000 portfolio with $1M in buying power and 20, $50,000 allocation blocks – we're not terribly worried abotu the risk on this trade – so it fits and we can pull the trigger.  

For the OOP, I would also love to own AAPL but I would only buy them AFTER they have a 20% correction – which then hopefully cuts down the additional downside.  Now, let's turn our attention to a divided-paying stock and we'll use Ford (F) at $12.49, which pays a reliable 0.60 (4.77%) dividend.  In this case, we can set up the following trade:

  • Buy 1,000 shares of F for $12.49 ($12,490) 
  • Sell 10 2020 F $12 calls for $1.50 ($1,500) 
  • Sell 10 2020 F $12 puts for $1.50 ($1,500) 

So here we are buying the stock for $12,490 and promising to sell it for $12,000 in exchange for $1,500 while promising to buy 1,000 more share for $12 in exchange for another $1,500.  So the net cash outlay for the trade is $9,490 and, if called away at $12,000 we will make $2,510 (26.4%) plus another $600 x 2 in dividends brings our total profit up to $3,710 (39%) – right on that line where we want to be with our trades (20% per year).  

Image result for allocation strategiesRemember, in our $100,000 portfolios, we have 10, $20,000 allocation blocks so this is really a half position to start though the risk of being assigned another 1,000 shares at $12 could fill us up.  Still, it's not about the maximum risk but the REALISTIC risk and we certainly don't think F will fall more than 50% in which case we'd have 2,000 shares (assuming assignment) for $9,490 + $12,000 = $21,490 or $10.75/share.  So our worst-case scenario is owning 2,000 shares of Ford at a 20% discount to the current price – not even including the dividends to be collected.  

Even if F felll to $5.75, our loss would be $10,000 so, at best, this is half of an allocation block that will make us $3,710. 

Not to get too confusing but, if Ford were to motor up to $15 the trade would be so in the money that we'd no longer consider it a serious risk and we would then release that allocation block for a new trade.  That kind of layering is how the portfolios tend to accelerate their performance over time – especially in a nice, bull market.  

This is how we start to build portfolios that will generate consistent 20-40% annual returns and this week we'll be spending a lot of time talking about the basics and, of course, building our Watch List – stocks we'd love to buy if they get cheaper.  Earnings will give us a great opportunity to pick up stocks for a discount as there are always ones that disappoint and sell off – even though their long-term prospects remain strong.  

We're going to be cautious through January as we're still expecting a market correction but, if we don't get one – then we'll have to run with the bulls until we finally get to the edge of that cliff – and, hopefully, we'll be nimble enough to avoid going over the edge.


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  1. Last chart of 2017! Hopefully we see some profit taking to give us better entries in new positions and a higher VIX! Tax rates are set now….

  2. Some interesting charts:

    Time to focus on the younger generations!

  3. Convenient regrets – a bit too late of course but soon enough for the next election:

    Sen. Marco Rubio (R-FL) said Friday that he believes the recently passed GOP tax bill did too much to help the bottom line of America’s largest corporations.

    “I thought we probably went too far on [helping] corporations,” the Florida Republican told the Fort Myers-based News-Press.

    “By and large, you’re going to see a lot of these multinationals buy back shares to drive up the price,” Rubio continued. “Some of them will be forced, because they’re sitting on historic levels of cash, to pay out dividends to shareholders. That isn’t going to create dramatic economic growth.”

    It's not like he had not been warned by most economists – what a jackass!

  4. Three investment lessons from 2017:

    Humility is a virtue
    Tops are harder to call than bottoms …
    Risk is rewarded only up to a point

  5. Top macro issue for 2018:

    In plain English, as the ECB slows and ultimately ends QE in 2018 the amount of cash flowing to risky assets such as credit and equities will slow down and ultimately dry up altogether. And for this to be a smooth exit new issuance and refinancings of credit needs to slow in sync, which seems highly unlikely to happen at the same time, see the second chart.

    The bottom line is that changing ECB forward guidance is likely to raise bund rates in 2018, and the significant slowdown in flows from Europe into US credit markets is likely in 2018 to widen credit spreads in US IG and HY, even if the US economic data continues to be good.

    Paging Naybob!

  6. Good Morning!

  7. Good Morning – hope everybody had a great holiday season.

    Do we have a stock of the year play?

  8. ARR always a great play

  9. CIM not to sneze at eather

  10. ED down 1% today for starters

  11. copper running hot FCX

  12. Market back to its usual tricks straight up.

  13. Phil,  What do you think of CMG here?  Thanks. Strether.

  14. GE for starters

  15. GILD still possible, if you missed the boat

  16. BIDU just cashed in a fat profit for my Jan 18 BCS but not a play for every one!!!!

  17. Good morning and Happy New Year!  

    WTF with that open?   The Dow blasted up to 24,866 but back to 24,780 already – 24,850 still a good shorting line but /NQ is hitting 6,475 and not stopping yet.  

    Income growth/StJ – I think that's a reflection of more people 65+ going back to work or staying at work, not that they, in particular are getting raises.  Back in the 70s, there was almost no one that age who still worked.

    Stock of the Year/Stock – It was HBI from back around Thanksgiving.  Hasn't moved too much.  LB was our first choice but, by the time it was time for the official pick, LB had already taken off – now it's a rocket.

    I might have something else to play at the end of the month, when I go on BNN but we'll see how things go.

    Was trying to figure out why I gained $2,000 this morning – turns out it was the /RB shorts, so I took that money and ran!  

    So my only open Futures trade is 4 long /DX at 91.885.

    ARR/Yodi – I definitely still like them and CIM.  FCX has had too much of a run for me to chase.

    CMG/Streth – It's tricky as sales are up 10% from 2016 but profits ($187M) not even half of what they were in 2015 ($475M) and they are getting, at $292, $8.2Bn for the company so at POTENTIAL profit, it's a very reasonable 17 p/e but, at actual profit, it's a ridiculous 44 that you could never justify for a full-grown chain.  How long will it take them to get back to $475M in profit but, even if they do, that really only justifies $300 so I would not be aggressive with them at all, but that's not to say I wouldn't play.  You can:

    • Sell 5 CMG 2020 $270 puts for $35 ($17,500) 
    • Buy 10 CMG 2020 $280 calls for $65 ($65,000) 
    • Sell 10 CMG 2020 $310 calls for $51 ($51,000) 

    That's a net credit of $3,500 on the $30,000 spread so 10x return on cash and TOS says $12,400 in margin – so nice and efficient.  Also, since I don't expect them to make any rapid recovery, we can sell 4 March $310 calls for $12 ($4,800) and, if we can collect $4,800 a quarter selling calls, that's another $38,400 while we wait to see if we clear $33,500 on the main spread.  

    Let's make that the first official trade for the new LTP!  

    What's great about this trade is that, even if CMG goes lower, we can recover our money just through the quarterly short call sales.  Makes it hard to lose!

  18. GOOGL pricy stock but the Jan 20 900 put at 52.20, looks very tempting

  19. Thanks Phil. That's clear and always! Strether

  20. Phil

     What would be a new trade on M ?  or wait 


  21. Any thoughts on CTL guys? Just looking at income long term play.  Thinking of buying a half position of stock and selling 20 buck calls and selling 15 puts in 2019

  22. suggesting TWTR for stock of the year play 

  23. Willsons – FWIW – I am still very bullish on CTL.  The CEO of CTL, the former CEO of LVLT (Now COO of CTL), and the former CFO of LVLT (Now CFO of CTL), have all committed to sustaining the $2.16 dividend.  I believe the street is seriously underestimating the strength of the former LVLT, what it brings to the table, and the synergies involved in combining it with CTL's Qwest network.

    Southeastern Asset Management, which was one of LVLT's largest shareholders, and now one of CTL's  largest, believes the dividend is safe and that the stock is worth in excess of $30 per share.. CTL is their largest position. They probably know LVLT better than almost anyone, having owned the stock for a number of years.

     If that's  true, the stock won't sell at a 12.5% yield.  If it moves up to sell at a 9% yield that's a 35% move up.  Not to mention the possibility (or probability) of locking in a 12.5% yield.

    I believe the stock is a strong buy. 

    Of course, I could be wrong.

  24. Thanks albo.  I appreciate your input!

  25. Phil// Are AAPL and F official trades?  Thanks,

  26. M/QC – Well, they are off the lows ($17) at $25 and still cheap here at $8Bn ($26) with $26Bn in sales and maybe $1Bn in profits (Q4 is half the year, so hard to tell).  I don't think Retail stocks will come off so great in 2018 – I was just loving them as they got stupidly oversold in the fall.  As a new play on M, I'd go:

    • Sell 5 2020 $22 puts for $3.75 ($1,875)
    • Buy 10 2020 $20 calls for $7.90 ($7,900) 
    • Sell 10 2020 $27 calls for $5 ($5,000) 

    That's net $1,025 on the $7,000 spread that's pretty much all in the money to start so $6,975 upside (680%) and the worst case is owning 500 for $22 ($11,000) + the $1,025 is $24.05/share.  From a portfolio perspective, I'd rather wait for Feb earnings and cross my fingers that they disappoint and plunge back to the lows, where I could take a more aggressive position.  

    CTL/Willsons – Well we already have FTR, thanks, so no CTL exposure as they are in a similar boat with $33Bn in debt and $222M in cash though CTL appears to be cranking out profits ($626M in 2016, about $400M in 2017) but not enough to justify and $18Bn valuation on $17Bn in sales, not when I can buy FTR, with $9Bn in sales for $560M at $7.16.

    It's a tough call on FTR as it seems almost certain they lower their $2.40 dividend, which is 35% of the $7.16 price.  We can be sensible and just sell the 2020 $8 puts for $4, which pays the same as the dividend but, in the end, we don't own the stock or we could buy the stock and sell the 2020 $8 calls for $1.25 and the $8 puts for $4 so we net in for $1.91 and $4.955 avg on 2x if we get assigned, but then we could sell $5 calls (now $2.25) for $1+ to drop our net to $4 and, even if they cut the dividend to just 0.60 total (75% cut), that would still be 15% of $4.

    So that's another one we don't want to miss.  For the LTP, let's:

    • Buy 2,500 shares of FTR for $7.16 ($17,900) 
    • Sell 25 2020 $8 calls for $1.25 ($3,125) 
    • Sell 25 2020 $8 puts for $4 ($10,000) 

    Here we're spending just $4,775 in cash for a stock that will pay us $6,000 a year in dividends if they don't cut it.  Getting called away at $8 is $20,000 so another $15,225 (318%) in upside potential if they don't go lower but really, on this play, we'd rather they go lower so we can DD at a lower price than "just" make $21,225 at $8+ in 2020 as this is using barely any of our allocation.

    For the OOP, I want to do the same trade but with 1,500 shares and 15 short puts and calls.  

    TWTR/BDC – I was loving them in the teens, now $24 I need to think about it.

    AAPL and F/Rookie – Neither one is official yet.  AAPL I'm certainly waiting for a dip, F I might want to see Q4 earnings.

  27. A $40k investment in Ethereum in July 2014 is now worth $120,000,000.

  28. BDC 

    How about ripple? Do you like it going forward? 

  29. Gotta short /NQ at 6,499.75 with a tight stop over 6,500 – risk/reward is way too good!  

  30. Phil / ABX

    I have 2020's 10 short puts strike 15 would you recommend any adjustments ?

    Thanks as always


  31. Phil,

    Would appreciate your thoughts on OMC (PE=14x, 3.3% div, P/S =1.1,PEG=1.8) debt may be a tad high.

    Seems to have caught a bid today but @72, down slightly below 50% in 2017 range (65-87); last Q numbers seemed positive. Last 5 years top/btm numbers have grown steadily, albeit slowly + 10% in 5 years.


  32. Paging Naybob… my peaceful slumber endeth, you hath invoked me for the New Year.  Spreads shall widen and rates shall increase, but this pales to the global plague of stupidity which grows to epic proportion, case in point… 

    StJL – Rubio's convenient regrets – a bit too late of course but soon enough for the next election:

    “I thought we probably went too far on [helping] corporations…. [buybacks and dividends] that isn’t going to create dramatic economic growth.”

    It's not like he had not been warned by most economists – what a jackass!

    We offer you now a little item called Rubio's Ignorant Regrets? 

    What was murder in one month was not murder in another.  They [those acts] reminded him of the directions in old almanacs – in such a month let blood – in such another take cooling physic.

    The sovereignty of the people was the most false, wicked and mischievous doctrine that could ever be preached to them. It was false, because they had no means of exercising their sovereignty.  And why was it broached? 

    Under a delusion, to strip them of their natural guardians, to kill the shepherd and his dogs, and make way for the wolves.  If the majority of the public was to be taken not by weight, but by tale, the most IGNORANT would elect, and none but the crafty and the wicked would be elected. 

    It was said to be dangerous to introduce an opposition of interest between the rich and the poor.  The man who possessed no property had as much interest in the constitution and good order of society as the man who did. True, an interest visible to every well informed man, but by no means so to the IGNORANT.

    The moment that equality and the sovereignty of the people was adopted as the rule of government, property would be to an end, and religion, morality, and law, which grew out of the property, would fall with it.

    The lesson? The more things change, the more they stay the same. The problem is the same as it ever was, there are far too many ignoramuses. FYI – That was part of the debate on Mr. Sheridan's Motion Relative to the Existence of Seditious Practices – Parliament 1793, when I was just a little younger and Out.

  33. Ripple / jeffdoc - It has had a stellar run recently due to rumors of being added to Coinbase. Likely a good 'buy the rumor, sell the news play' if you have time to watch it closely, but you are late to the party. Getting in on the ground floor of the next ripple might make more sense, IMO, but it takes a lot of research. I spent the holiday learning about cryptos, it quickly becomes a very time-consuming hobby…

  34. Cryptos – If you want a simple fun play, here's what I started doing in December and it works so far (i.e. profitable for the month).  It allows me to trade bitcoin in my IRA:

    Watch the 15 min candles on GBTC, a bitcoin ETF.

    Go long after the second green candle.

    Set your stop loss at $100 under buy.

    Every time it goes up $100 move your stop up that much.

    Get out by the end of the day (bitcoin crash prevention).

    So for example today I went long at $2040 with a stop at $1900.

  35. BDC – $40k. Would you put that much in it now? and what would hope to see as a return?

  36. Comment content omitted because it is too long.

  37. Well so much for /NQ, popped right over.  

    ABX/Pat – Adjust to what?  ABX is at $15 and you sold the 2020 $15 puts, which are now $2.35 for a net $12.65 entry.  What kind of adjustment should there be and why would it need to be made? 

    OMC/8800 – They are huge and making enough to cover their debt but no growth in revenues or profits, so they don't deserve a high multiple.  Note that, several times, they have dove like a rock and dropped 10%, so I don't see the point in picking them up in the high end of a channel.  They support themselves through buybacks, which I hate but, in the low $60s, they are not too bad but $72.50 is a bit much.

    Wolves/Naybob – I think technology has finally killed democracy as it's made it possible to efficiently exploit that loophole in the system.  

    Good system Mr M.

    PMI Manufacturing Signals Strongest Manufacturing Growth Since March 2015

    • Eurozone manufacturers ended 2017 by ramping up activity at the fastest pace in more than two decades.
    • IHS Markit's December final manufacturing PMI for the bloc was 60.6, matching an earlier preliminary reading and above November's 60.1.
    • "Forward-looking indicators bode well for the new year: new orders rose at a near-record pace, while purchasing growth hit a new peak as firms readied themselves for higher production," said Chris Williamson, chief economist at IHS Markit.
    • The Gremlins are coming! After eliminating Lockheed Martin (NYSE:LMT) and Kratos (NASDAQ:KTOS) from its program to develop a "flying aircraft carrier," DARPA is narrowing in on prototypes of privately held Dynetics and General Atomics.
    • Phase 3 will decide on a contractor to build swarms of killer drones – launched from a transport aircraft – in 2019.
    • The drones would have a lifetime of around 20 uses and reach targets of as much as 300 miles away.
    • At least twelve people have now died in the demonstrations against the Islamic Republic's government and a clerical elite, which began on Thursday and have drawn in tens of thousands of people.
    • Those protesting the government are frustrated with the economy, which has suffered rising prices and high unemployment, as well as expensive proxy wars in Syria, Iraq and Yemen.
    • Warning of a crackdown, authorities have blocked access to the Telegram messaging app and Instagram.
    • Crude oil benchmarks, Brent and WTI, are both starting the year above $60 per barrel for the first time since January 2014.
    • "Growing unrest in Iran set the table for a bullish start to 2018," the U.S.-based Schork Report said in a note to clients.
    • Iran is the third-largest producer in OPEC, which agreed last year to extend its oil output cuts through Dec. 31, 2018.

    • Russia reports continued growth in oil production during 2017 to a 30-year high of 10.98M bbl/day, although the pace of growth slowed from 2016 because of its participation in the OPEC-led global supply agreement.
    • Data from Russia's energy ministry shows oil and gas condensate production totaled 10.95M bbl/day in December, up from 10.94M in November, while full-year 2017 output averaged 10.98M bbl/day vs. 10.96M bbl/day in 2016 and 10.72M in 2015; Russian natural gas production was 63.5B cm in December from 60.6B cm in November.
    • In its deal with OPEC, Russia pledged to cut production by 300K bbl/day from the 30-year monthly high of 11.247M bbl/day hit in October 2016 and achieved the targeted cut by Q2 2017.

    Coal beats competitors for power plant heating in eastern U.S. record cold

    • The bitter cold weather across much of the country has made coal the leading provider of electricity for heating in the eastern U.S., beating out all other forms of power in the federally overseen PJM electricity market, which comprises a dozen eastern states plus D.C.
    • Coal provided ~47K MW of electricity on Saturday, with natural gas offering 21K MW and nuclear power 35K MW, while this morning oil-fired power plants surged to a record high of more than 10K MW, natural gas plants crested above 30K MW and coal remained at slightly more than 47K MW, according to PJM market reports.
    • The government's final weekly coal report for 2017 showed a strong end of the year for coal, with full-year production totaling 760.4M short tons, up 6.4% Y/Y.
    • ReneSola (SOL +3.4%) says it connected more than 90 MW of rooftop projects in China during H2 2017 and plans to hold at least 70 MW of the projects and provide EPC services for the other 20 MW.
    • SOL says it continues to pursue opportunities in small-scale projects in diversified regions and believes its strategy meets the development trend of solar energy.
    • SOL currently has ~212 MW of operating projects globally, with 187.2 MW in China, 15.4 MW in Romania and 9.3 MW in the U.K.
    • Goldman Sachs says it sees more risks to the upside than the downside for metals demand in China, downplaying concerns of a sharp decline from policy changes in the country.
    • “Ongoing supply side reforms and environmental cuts in China translate into higher commodity prices and less Chinese production," which benefit metal producers apart from China, Goldman writes.
    • The firm sees an upside to demand for zinc over the next six months and prefers copper to aluminum over the longer term.

    • PG&E (PCG -1.6%) is lower after getting whacked by two analyst downgrades, to Neutral from Buy at Goldman Sachs and to Sell from Neutral at Guggenheim.
    • In his downgrade, Goldman's Michael Lapides says the resolution of claims from the California wildfires, if inverse condemnation is applied, could take years and "cash flow/balance sheet impacts could prove significant still."
    • Lapides, who also cuts his PCG stock price target to $50 from $60, believes financing risks remain and lowers his earnings estimates for 2018-20 well below consensus.

    Cowen cautions on Tesla Q4 Model 3 deliveries miss

    • Cowen lowers its estimate on Tesla (TSLA +2.6%) Model 3 deliveries to 2.25K vs. 9.1K prior and 5K consensus. Model S and Model X deliveries volume is expected to be solid for the quarter.
    • "[W]e still are convinced that investors aren't fully acknowledging the competitive threat that is growing in 2018 and 2019 in the EV segment, and the cash burn that Tesla will experience in the coming years (the narrative in the last few months has shifted from cars to Class 8 trucks and recently pickup trucks). The recent bond offering is now trading below par and we believe another equity raise will be needed in the next 3 to 6 month," writes analyst Jeffrey Osbourne.
    • "The narrative around high volume manufacturing of the Model 3 and hitting the 25% gross margin target will need to be amplified by management in order for investors to digest such a capital raise in our view," he adds.
    • Cowen has Tesla rated at Underperform with a price target of $170 versus the Street average of $333.

    • Department store stocks jump on the first trading day of the year as investors continue to give the sector a second look after a strong holiday retail season.
    • Notable movers include J.C. Penney (JCP +9.8%), Kohl's (KSS +3.2%), Macy's (M +3%) and Dillard's (DDS +1.5%).
    • Based on the schedule from prior years, Macy's and J.C. Penney are both expected to update on holiday sales later this week.
    • Specialty retailers and chain stores are moving higher on more enthusiasm from investors that tax reform will lead to a wave of consumer spending. The rally is broad-based and extends on some late 2017 strength.
    • Notable movers include Genesco (GCO +9.2%), Boot Barn (BOOT +4.3%), Francesca's (FRAN+4.5%), Abercrombie & Fitch (ANF +3.6%), Buckle (BKE +2.5%), Stein Mart (SMRT +2.6%), J. Jill (JILL +2.2%), Fred's (FRED +1.5%), Dollar General (DG +1.4%), Costsco (COST +1.7%), Kroger (KR +2%), Smart & Final Stores (SFS +4.1%), Finish Line (FINL +2.3%), Barnes & Noble (BKS +3.7%), Five Below (FIVE +3.1%), Pier 1 Imports (PIR +2.4%), Tailored Brands (TLRD+3.8%) and Lands' End (LE +4.9%).
    • Loup Ventures founder Gene Munster issues the bold prediction that Amazon (NASDAQ:AMZN) will acquire Target (NYSE:TGT) in 2018. Key snippets from Munster's note on the retail bombshell idea are posted below.
    • "Amazon believes the future of retail is a mix of mostly online and some offline. Target is the ideal offline partner for Amazon for two reasons, shared demographic and manageable but comprehensive store count."
    • "As for the demographic, Target's focus on mom's is central to Amazon's approach to win wallet share."
    • "If Amazon acquires Target’s that would jump its store count to about 2,300. As for anti-trust, the Trump administration won’t do any favors for Jeff Bezos, but the market share numbers suggest the deal will be approved."
    • Munster sees a takeout valuation on Target of $41B, about a 15% premium to Target's current price.
    • Shares of Target are up 1.73% premarket to $66.38. AMZN +0.46% to $1,174.97.
    • Robert W. Baird lifts L Brands (NYSE:LB) to an Outperform rating after having the retailer set at Neutral.
    • The Victoria's Secret business is seen as set for a turnaround under its new management.
    • The investment firm hikes the price target on L Brands to $70 to rep 17% upside potential for shares. The 52-week high for L Brands is $68.44.
    • LB +1.08% premarket to $60.87.

    • In a typically outspoken set of predictions for 2018, T-Mobile (TMUS +0.5%) CEO John Legere says his company will "leapfrog" the industry's top two carriers, Verizon (VZ +0.8%) and AT&T (T-0.6%), to be first to a "real, mobile, nationwide 5G" network in 2020.
    • He credits the company's actions in the 600 MHz spectrum auction, "one of the most under-reported stories" of the past year: "Our epic low-band spectrum haul blankets the country from coast to coast and ensures we can do two VERY big things: First, though our coverage ALREADY goes toe-to-toe with Verizon and has all the carriers scared to death — we'll continue to grow and strengthen our LTE coverage today, and second, we announced we'd use part of that spectrum to build nationwide 5G."
    • Meanwhile, he's criticizing the emphasis on millimeter wave usage at the top two vs. T-Mobile's low-band approach, saying "Dumb and Dumber" are focusing on "5G hotspots that won't work when you leave your home."
    • The final 2017 box office estimates from comScore indicate a 2.4% drop in North America to $11.12B and 2.9% increase globally to a record $39.92B.
    • Disney's (NYSE:DISStar Wars: The Last Jedi topped $1B in worldwide box office revenue by pulling in another $124M over the New Year's Eve weekend.
    • The Last Jedi has now brought in $571M in the U.S. to already rank as the eighth highest grossing domestic movie ever.
    • Sony's (NYSE:SNEJumanji: Welcome To The Jungle took in $117.6M globally over the holiday weekend and 20th Century Fox's (FOXFOXAThe Greatest Showman generated $43.8M.

    • Netflix (NASDAQ:NFLX) is an early mover after Macquarie Research upgrades the streamer to Outperform from Neutral for being "miles ahead of peers" in subscription over-the-top services. Disney is seen as being two years away from offering a competing product.
    • "We believe Netflix is taking several steps to improve this beyond the market's obsession with sub numbers to date," writes analyst Tim Nollen in today's note.
    • "A second round of price increases is now coming through, Netflix is expanding its distribution relationships with cable operators and telcos globally, international growth is taking off on a concerted strategy to develop local content offerings, and Netflix is beginning to work on ways to reduce password sharing, which could drive even more subscribers," he adds.
    • Macquarie lifts its price target on NFLX to $220.
    • Shares of Netflix are up 1.74% premarket to $195.30.
    • Amazon (NASDAQ:AMZN) and Salesforce (NYSE:CRM) want to move away from Oracle (NYSE:ORCL) software and towards an open-source database software, according to The Information sources.
    • Why leave Oracle? One part financial and one part the company picking fights with its customers including notable slams against Amazon Web Services, which competes with Oracle’s cloud product.  
    • Salesforce wants to develop its own software while Amazon turns to NoSQL.  
    • In the December earnings call, Oracle co-founder Larry Ellison said Amazon would continue to “buy Oracle technology to run their business” and said Amazon had spent $50M on software that quarter.
    • Amazon shares are up 1.2%
    • Salesforce shares are up 1.7%
    • Oracle shares are down 0.9%.  
    • Amazon (NASDAQ:AMZNshipped 5B items to Prime members during 2017.
    • The company didn’t disclose the number of Amazon Prime members but said that more new members joined last year than any previous year.
    • The Fire TV Stick and Echo Dot topped U.S. Prime purchases.
    • Amazon shares are up 1.1%.  
    • Previously: Retail jolt: Amazon seen making a run at Target (Jan. 2)

    Apple analyst says low iPhone X estimates still "too high"

    • CLSA analyst Nicolas Baratte says any Q1 volume estimate for the Apple (NASDAQ:AAPL) iPhone X that exceeds 35M units “will prove too high.”
    • Apple shares pulled back last week after a Taiwanese media report that the company was cutting its Q1 X demand from 50M to 30M units. 
    • ”We maintain that 2017 fourth-quarter iPhone X volumes were at 30 to 35 million and we are very skeptical that volumes will increase in the first quarter of 2018,” writes Baratte in a note to clients. 
    • The analyst says anyone who wanted an iPhone X in December now already has one.
    • Another take: Piper Jaffray reiterates its Overweight rating and $200 price target following a survey of iPhone users. 
    • Analyst Michael Olson now expects the mix of iPhones sold in FY18 will include a significant number of newer models. 
    • Both analysts say Apple could offset any dwindling volume with an iPhone X price cut.    
    • Apple (NASDAQ:AAPL) instructs Apple Store employees to offer the $29 replacement batteries to anyone who owns an iPhone 6 or newer.
    • The internal instructions follow reports of Store workers refusing the discount if a phone’s battery passed a diagnostic test. 
    • Apple can still deny the discount if the phone has damage or third-party components that could interfere with the battery. 
    • Those seeking a replacement through an AppleCare warranty claim will need to go through the diagnostic test to see if the phone has less than 80% of its original charge capacity. 
    • Apple shares are up 0.4% premarket.    
    • Previously: Apple's apology letter to consumers includes $29 batteries (Dec. 28, 2017)
    • Previously: Apple roundup: iPhone tops 2017 tech sales, more battery woes (Dec. 29, 2017)

    Bitcoin's Path To $1 Million: Why This Bubble Is Not Bursting Anytime Soon 

  38. Phil,

    I definitely like ABX but I am thinking of improving the margin efficiency. I routinely increase the size of my portfolio by adding more cash each month but I feel 10 Puts as of now is a big position margin wise so wanted your opinion on improving efficiency.

    Thanks as always


  39. Mochaccino –  Crypto – "a simple fun play"

    Simply brilliant, shine on you crazy diamond. That epic 1990 video of the short version is from my good fiends, HM Maria of Welwyn and Lady Catherine of Knebworth, or as I call it Knobworth in the Hertfordshire.

  40. For aficionados or those who have never heard it, here is the FULL version of the song.  It's a New Year, IV time, all us lucky bastards should enjoy and Out.

  41. Phil

    Additional info on the puts, I sold the 2020  $15 puts for 2.50

  42. Technology killing mr democracy – demise of "fairness doctrine" in late 80s led to proliferation of nut job news networks like FauX.  And now onto twtr FB, etc. Maybe time to revisit that.  Some people are literalists and think rights are absolute.  Same silliness in  Citizens United ('Money is speech').

  43. Rexx – "Same silliness in Citizens United ('Money is speech')."

    Indeed, in Dred Scott 1857, SCOTUS decided that black people were chattel (property), not people, so they had no rights; because that is something only a person has. 

    153 years later, in Citizens United 2010, SCOTUS decided that corporations, which are property, have rights and can exercise them under the 1st amendment as people do.

    Those two decisions spanning 15 decades clearly demonstrate that our judicial branch is inhabited by prostitutes as corrupt and morally bankrupt, as our executive and legislative branches are.

    Only the rich can afford Lady Justice because she's nothing more than a big fat blindfolded whore for sale to the highest paying John, and Out.

  44. never trust a judge who doesn't own at least 40 acres somewhere. and never trust one who does.

  45. Rumors that AMZN is going to bid on TGT.  

  46. GBTC – out at 2300, 260/share profit on the day.  System still works!

  47. ABX/Pat – Well there's not much you can do as it's a 2020 so, unless you don't believe in the target, it's best to just leave it alone.  If you want to cut margin, sell a few calls but, since we think ABX is too low, that's kind of risky – especially as the calls don't pay that much (April $16s are only 0.63).

    Justice/Naybob, Rexx – I think this country could use a good revolution but replace it with what is the question.  

    I know this is important to Jabob cheeky:

    • Teva Pharmaceutical Industries (TEVA +1.3%launches its generic version of Allergan's (AGN+4%ESTRACE CREAM (estradiol vaginal cream) in the U.S. The product is indicated for the treatment of moderate-to-severe symptoms of vulvar and vaginal atrophy associated with menopause.
    • According to IQVIA, the U.S. market is ~$426M.

    • Cryptocurrencies are rallying to begin the year. Boosting investor confidence today is word from The Wall Street Journal that Peter Thiel's Founders Fund has piled up "hundreds of millions in bitcoin" across various funds.
    • Bitcoin is +12% to 14,613 at last check, while Ripple (+3.1%), Ethereum (+15%), Bitcoin cash (+13%), Litecoin (+12%), IOTA (+13%), NEM (+11%) and Stellar (+10%) are also tracking higher.
    • Comex gold finishes higher for the eighth straight session, adding 0.5% to settle at $1,316.10/oz. for the highest finish for a most-active futures contract since Sept. 20.
    • The weaker dollar, which last year logged its biggest annual drop since 2003, helped lift gold by more than 13% in 2017, surging $55/oz. in the last three weeks of the year alone.
    • Along with the weaker dollar, gold prices also are finding support from “solid ‘safe haven’ buying and some short covering” amid protests in Iran, says Wolfpack Capital chief investment officer Jeff Wright.
    • Iron ore and steel stocks rank among the day's biggest gainers, with Chinese iron ore futures continuing to rise as investors anticipate the world's top buyer to restock the material ahead of an expected end in production curbs this spring.
    • Iron ore on the Dalian Commodity Exchange closed 2018's first trading day up 2.6% at 543.5 yuan/metric ton.
    • Iron ore miners Vale (VALE +4.3%), Rio Tinto (RIO +3.5%), BHP Billiton (BHP +3.1%) and Cleveland-Cliffs (CLF +9.8%) are all higher, as are steel makers including U.S. Steel (X +6.1%), AK Steel (AKS +11%), Nucor (NUE +4.2%) and Steel Dynamics (STLD +4%), as well as aluminum names Alcoa (AA +1.6%) and Century Aluminum (CENX +8%).
    • FedEx (NYSE:FDX) is up 2.76% and reached an all-time high of $256.90 earlier in the day.
    • The transportation stock was named the 2018 Best Idea by Stephens on the firm's view that FedEx will benefit from an improved global economy.
    • Stephens sees Fedex running to as high as $350 over the next 18 months as the TNT Express integration issues fade away. The 12-month price target from Stephens on FDX is $306.
    • Source: Bloomberg

  48. Phil,

    Thanks for the cautionary OMC valuation thoughts.

  49. ;-)

  50. GSK – Hey Hey G-S-K!  Been waiting for them to signal up.. and what a signal.

  51. Rexx – "never trust a judge who doesn't own at least 40 acres somewhere. and never trust one who does."

    I know what StJL might say and ask…. Judges commit egregious errors, apply inconsistent logic and make unfair rulings on a daily basis, while judicial corruption and party cronyism have plagued our judicial system since its inception.  My rejoinder is… can AI be bribed or will it vote along party lines? Guess it depends on who is doing the programming?

    While you were sleeping, since it is now LAW… IF your employer or corporate sponsors religion does not approve of your religious, sexual, recreational or birth control practices, they now have the legal right to not hire you or terminate you, on those grounds.

  52. Phil – "Justice/Naybob, Rexx – I think this country could use a good revolution but replace it with what is the question."

    Remember this… That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed, that whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it, and to institute a new government, laying its foundations on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

    It's a New Year, better get on it, back to my IV and Out.

  53. Legalization Is Here! Shrug.

  54. replace it with what is the question.  

    How about our constitution? We haven;t used that in quite a while.

  55. These guys are shameless. They were predicting +$70 all year and think the latest run up allows them to brag….jeez


    ~Energy Stat: Affirming $65/Bbl WTI Forecast for 2018 – And, Unlike 2017, Stocks Should Outpace Oil
    J. Marshall Adkins | (713) 789 3551, Pavel Molchanov | (713) 278 5270
    While 2017 oil prices averaged well below our original year-ago forecast of $70/Bbl, WTI did exit the year well above consensus expectations, hitting its highest levels (just over $60) since mid-2015. Brent exited the year even higher, in the mid-$60s, reflecting the wider WTI-Brent spread. For most of the past year, oil fundamentals (i.e., oil inventory reductions) were actually more bullish than we had anticipated a year ago. Natural gas averaged at a three-year high, although below our originally forecasted $3.25/Mcf. While we feel tempted to take a proverbial victory lap about the recent commodity backdrop, we also have to acknowledge that the year was mostly disappointing for energy stocks (which, to be blunt, is what ultimately counts).
    Here is what our crystal ball suggests for 2018. First, we think oil still has room to run, with upside of around $10/Bbl (or 15%) to current 2018 futures strip pricing. Second, we expect a down year in gas, and thus our traditional preference for oil-centric stocks remains intact. Third, we think energy stocks will generally outperform oil, in contrast to last year's frustrating multiple compression.
    WTI averages $65 in 2017 (or about $10 above the strip).
    U.S. gas market set for a down year in 2018, and not getting any better thereafter.
    Energy stocks mostly lagged oil prices in 2017, but we think that will reverse in 2018.

  56. It's the new trend Latch – to brag about things that you have not done or have no influence over :-)

  57. JeffDoc —  yes! I love XRP (ripple). One of my favorites and a real laggard IMO. I think it's the one that can become institutionalized the fastest. Totally IMHO (crypto is ver hard to "predict"). But with that said, and assuming crypto is going to continue running the way it has, I can see 10-100x here ($0.1 to 1T market cap). Maybe the first to break $1T even. 

    Use: open up a account.

  58. Latch / ETH $40k. It went 3000x in 3.5 years. Anything less than -90% is a win!  But really, who knows with these things. At $87B in valuation how much more can it really run? I'd consider 10X in anything under 5 years very good. Here some thoughts:

    1) I don't think it'll go away / get hacked / completely die. Low probability. Loss -100%. Timeline: could be 5 minutes from now could be in 10 years.

    2) It could crash and wallow for months or years. BTC did this from Jan 2014 to Sept 2015. Down -50%-90% (but fine for very-long-term-holders because it comes back eventually). Mid-probability. Timeline 1-2+ years before coming back.

    3) Melt-up / run continues mostly unabated (with occasional pullbacks, dips and "mini crashes"). Mid half-trillion valuations are achieved. This is about +500% from here. Mid-probability (also my prediction for XRP). Timeline 2-5 years.

    4) Homer – crypto begins (or continues) to change the nature of fiat, banking forced to adopt it or get priced out, etc, etc, – +10X to 100X. Low probability. Timeline at least a decade. 

    Highest probabilities are 2 and 3. This amounts to some OK return but need to be able to weather a downturn. #4 homer and #1 complete loss are less likely IMO.

  59. Morning rumors in Europe

    Apple might be looking to buy Netflix.

  60. What Investors Need to Know About Europe’s Big New Mifid Rules

  61. Trump is nakedly fragile

  62. The Republicans’ Fake Investigations

  63. 2 Democrats to be sworn in as senators, narrow GOP majority

  64. Good morning!  

    Plugging away at a Watch List Update – super busy.