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Failing Thursday – Hedging for the Next 10% Correction

Wheeee!

This is getting to be fun, right?  It certainly is for our Members as we shorted the Nasdaq at 7,000 on Tuesday morning and, for those who missed that, we laid out a strategy for shorting the Dow in yesterday's Morning Report at 25,500, which paid $2,500 per contract and the S&P at 2,750, which also paid $2,500 per contract so – you're welcome!  Now we'll see if the rest of our prophesy plays out:

"…if the S&P can't hold that 2,750 line – next stop is 2,735 and below that is DOOM!!!"

DOOM!!! in this case is the 200-day moving average, all the way down at 2,557 but there should be interim support at 2,640, which is the 20% line on the Big Chart so we'll take short profits there and look for a bounce.  We're certainly not going to be bullish again until those 50-day moving averages are retaken (see yesterday's notes) and keep that in mind for next time when we urge caution.  

As we expected, our Short-Term Portfolio, which was $116,777.50 yesterday morning, jumped to $123,397.50 for a gain of $6,620 as our DIA June $255 puts moved back into the money and SQQQ climbed back over $15 but those trades "only" provide $100,000 and $40,000 worth of protection, respecitively, so it's time to consider the next layer of hedges – just in case this drop doesn't stop at the previous lows.

One thing we can do with DIA that doesn't cost much is to add a more speculative spread.  Our June $255 puts were at the money when we bought them and we sold 1/2 as many June $230 puts, capping our gains a bit but what if we added the Sept $240 ($8.50)/225 ($5.50) bear put spread for $3.  20 more of those is just $6,000 and gives us $60,000 worth of proetcion if the Dow drops 20% and, more importantly, it let's us take a profit on the $255 puts off the table (when we decide to) and then becomes a cover for the short June $230 puts in case we're wrong and the Dow continues lower.  

That's how we layer our hedges.  We plan in advance to dimantle our original hedge so we can take advantage of a change in direction – like we did last month when we flipped bullish on the 10% drop.  This time, we may not be as quick to flip though.  

We already added 40 naked long Nasdaq Ultra-Short (SQQQ) Sept $15 calls as the Nasdaq blasted higher 2 weeks ago and they are now slightly in the money at $3.65 and we should be able to sell the $20 calls for $3 today and that will free up $12,000 we can use for another hedge while still giving us $20,000 worth of additional protection and, as a bonus, with the Jan spread acting as a hedge, we'll be able to take profits on the Sept $15 calls when we need to and leave the new short $20s covered by the Jan $20/30 spread.  That's how one little change can flip our whole portfolio from bearish to bullish any time!  

The Nasdaq is still our most overbought index, led back to highs by Apple's (AAPL) 16% run over the past two weeks.  AAPL is about 17% of the Nasdaq by weight so, by itself, it accounted for almost 3% of the Nadadaq's 11% recovery.  Now, we think AAPL deserves every penny of that $180 valuation but not so much Amazon (AMZN) at $1,512, Netflix (NFLX) at $291 and certainly not Tesla (TSLA) at $350 – those are some examples of Nasdaq stocks that could drop 20% and still take 100 years or more to pay back the money they are asking you to put into a share of their stock!  

As I've been saying for years now:  Money, like Richard Gere, has nowhere else to go, so it's been forced into equities – pushing valuations up to extreme levels.  That doesn't mean, as the pundits like to say, that equities are the best place to be – just like standing outside your college dorm in the snow in your PJs isn't the best place to be when someone pulls the fire alarm at 2am – it's simply that you just have nowhere else to go – so you go there!   

Lost in the shuffle last week, Goldman Sachs (GS) said stocks could drop 25% if rates rose to 4.5% but it was the first thing I said to our Members on Tuesday - as well as a warning I gave to seminar attendees at the Trader Expo on Monday:

"Good morning!  

"Not sure what the markets are excited about.  Powell's written testimony seems to keep the Fed on a tightening path and NO ONE is talking about Goldman's call that the market will drop 25% when rates hit 4.5% but I bet GS's HNW clients are looking to lighten up as we test the highs again.

"Notice on the Big Chart the Nas is about 3.75% ahead of the Dow, RUT and S&P in recovering so watch out for any weakness on them to cause the rubber band that connects them to snap the Nas back down."

Image result for trump closing in investigation cartoonThe 10-year note is at 3% now and the Fed is expected to roll out 4 1/4-point rate hikes in 2018 so maybe 4% by the end of the year – if there are no outside factors that force our rate higher – like a loss of appetite for US T-Bills just as we're ramping up our borrowing to insane levels due to idiotic economic policies while maybe something like the trial of a sitting President is playing out on the World Stage.  Not too far-fetched, is it?  

Trump's 4th Press Secretary (Hope Hicks) quit last night, right after sitting down with the Special Prosecutor and that doesn't seem good for Team Trump, who are very busy gearing up for a Trade War with China that can throw the entire global economy into chaos.  Who says politcs don't matter in the markets?

Around the World, yields on unstable US Government Debt are at the highest levels in 4 years and that drives up the cost of insuring US Government debt, which then makes buying our bonds much less attractive to foreign investors (and it's also a sign that people are using faith in our ability to repay the loans, of course).  In fact, yields on 2-year TBills are 275 basis points (15%) higher than they are on 2-year German notes (still -0.52%) but the German notes are still a better deal as it costs 300 more basis points (3%) to insure the US debt against default. 

So rates are not entirely under the Fed's control and their move to push rates to 3.75-4% in 2018 are simply a starting point for where we might end up if the Dollar gets weaker or our Government looks more unstable (just a tweet away!).  Already, the data from fund-tracker EPFR Global showed that average weekly purchases of U.S. bonds by non-U.S. investors have dwindled by nearly a third to $9Bn so far this month, compared with more than $13Bn last year.  

 As we expected, PCE came in at 0.4% this morning and Personal Income kept pace, also bumping up 0.4% while personal spending remained calm, at 0.2%.  This is inflationary in a stagnant spending environment – what used to be called Stagflation – back when we had such things as naturally-moving markets.  Durable goods were down 3.7% on Tuesday and Pending Home Sales were down 4.7% yesterday – and people wonder why the market dipped?

Be careful out there!  

 


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  1. Good Morning.


  2. Quickly back under our 50 DMA!


  3. FU LB!!!!!!!


  4. I mean that seriously but has there been a more corrupt or incompetent administration in modern times? Indictments, guilty pleas, resignations, investigations, cabinet members living the life of the rich and famous, family members getting loans for promises of jobs! We are getting scandal fatigue. The GOP spent 5 years investigating a supposed IRS scandal that turned out to be nothing because liberal groups were being scrutinized more than right wing ones. Next year could be interesting if the Dems win the Congress.

    And yesterday Trump talks about confiscating guns without due process! I am in favor of gun control, but we still have a constitution to respect. I guess it was right for gun owner to worry about the president coming for their guns, but it was not Obama, it's Trump.


  5. Speaking of guns, gun makers are getting cheap:

    http://ritholtz.com/2018/03/piling-up-losses/

    Started with Trump's election! I would not touch them but maybe they bounce back on the risk of confiscation LOL


  6. How is that helping the companies:

    https://hbr.org/2018/02/study-when-ceos-equity-is-about-to-vest-they-cut-investment-to-boost-the-stock-price

    We find that the more equity CEOs have vesting in a given quarter, the more they cut investment. This result holds for five different measures of investment and for both vesting stock and vesting options. In addition, vesting equity is positively correlated with the CEO just barely meeting analyst earnings forecasts — suggesting that it causes the CEO to focus on short-term earnings rather than long-term investment.

    That result is consistent with short-term behavior, but we considered an alternative interpretation. Could the investment cuts actually be efficient? Perhaps stock price concerns are motivating, because they induce the CEO to make tough decisions, such as cutting wasteful investment. If so, we would expect the CEO to improve efficiency in other ways as well, such as increasing sales growth or cutting other expenses. And we find no evidence of that.

    They are just in for the money and in the long run investors and employees pay the price!


  7. Batman – LB -  Let the dust settle a bit.  On VRX, the Jan 19 '15 puts look good and if we get an opportunity due to the market swings and VRX hits $12-$13, I want to initiate a 20 $10/$20 BCS , first buy 10s and wait to sell 20s so that the cost of the spread is minimal or zero.  I listened to the conf call yesterday and management mentioned that 1Q will be the trough due to strong comp comparisons from last year as they have divested non-core biz since then. So 3Q-4Q would be where revenues start to increase.  They have also filed for a shelf – so suspect some future dilution to equity to pay off their debt although they have nothing to worry right now until 2020 for any debt maturities. 


  8. LOL, Telsey downgrading LB to market perform and take down their target price from $70 to $52. Does that mean that they expect the market to go down 25% as well?


  9. Phil – "Money, like Richard Gere, has nowhere else to go, so it's been forced into equities – pushing valuations up to extreme levels.  That doesn't mean, as the pundits like to say, that equities are the best place to be – "

    Indeed, if that money went to economic endeavor, starting a business, lending for new business or expansion, rather than speculation and money shuffling, the story would be different. Economic actors make choices governed in part by Gresham’s law where the bad money drives out the good.


  10. Anyone else having trouble with TOS?


  11. Good morning!  

    Image result for julie andrews guns animated gif

    Trump's plan for teachers….

    Picking up where we left off, with the BS pump-up into the open quickly reversing.  I'm still agnostic – just want to see where things settle out for the week.

    Oil and gasoline still going down, /NG still don't care…

    Image result for honey badger don't care animated gif

    I guess /TF is worth a toss long at 1,500 if it holds but I'm taking a stop below 1,499 for $50 loss vs maybe it goes to 1,505 for a $250 gain on a bounce.  

    If we do bounce, we'll have to then see if they are strong or weak but strong is far away now. 

    Down 60, for example means 12-point weak bounce to 1,512 and 24 points just to make the strong bounce at 1,524 – still bearish until then and, if we don't make that by tomorrow – still bearish into the weekend. 

    More important (and also a good long play) is 2,700 on /ES so of course we're going to bounce off that – even in a huge sell-off and down from 2,780 is 80 so 16-point bounces to 2,716 (weak) and 2,732 (strong) seems like a lot of work.  

    Of course, if you need a short, if either of those fail their lines, then short the other one as soon as it crosses under and get out if either cross back over.   We're only 10 points above 6,800 on /NQ, down 200 points (2.8%) means we need 25 just to get back to the -2.5% line (6,825) and that's not even the weak bounce (40 points) at 6,840 and 6,880 would be strong.

    Notice we failed at 6,880 on the way down yesterday and then a bad test into the open.

    Big Chart – My death cross lecture on the Nas is already paying off.  There's no stopping it now, just a question of today or Monday as the 20 dma falls below the 50 dma.  That's about 4.5% below 7,000 (6,685) with -5%, of course, 6,650.

    On the RUT, you can see the very neat 2.5% move between the lines and clearly no reason, now that we're at 1,500, for there to be real support (other than the psychological 1,500) until 1,476 (the 2.5% line).

    LB/Jabob – Time for us to buy again you say?

    Also below support but broad market not helping.  No major hurry but I am watching the 2020 $35 puts, now $5.86, as that's net $29.14 and I'll take 1,000 shares at that price in the OOP!  That means it would be silly not to sell 5 of them and take 10 of the bull call spreads – the $35s are $13.40 and the $45s are $8.80 for net $4.60 ($4,600) less $2,930 puts us in the $10,000 spread that's almost all in the money for $1,670.  Let's make that official:

    • Sell 5 LB 2020 $35 puts for $5.86 ($2,930) 
    • Buy 10 LB 2020 $35 calls for $13.40 ($13,400) 
    • Sell 10 LB 2020 $45 calls for $8.80 ($8,800) 

    LB was our original pick for Trade of the Year for 2018 and we are THRILLED to get another chance to enter at this price.  The company is guiding to a disappointing $3.10/share earnings in 2018 so 15x a disappointing year still gets us to our $45 goal!  


  12. Phil – "if there are no outside factors that force our rate higher – like a loss of appetite for US T-Bills just as we're ramping up our borrowing to insane levels due to idiotic economic policies while maybe something like the trial of a sitting President is playing out on the World Stage.  Not too far-fetched, is it?"  

    Not at all, in fact its right around the corner. Throughout NIRP, ZIRP and QE risk free Treasury borrowing has crowded out private sector borrowing. The cost of loan funds has been and shall continue to rise, not through the traditional supply side driver inflation, but via stagflation and the demand side, government deficit borrowing.  Growing twin deficits and trade wars, can only lead to a much weaker dollar. And with something we have Nattered about here before, a larger number of foreign holders of dollar assets, when those dollar assets lose their luster, the consequences may not be pretty. Rinse and repeat.


  13. Learner / LB  - yes agreed need to wait…. shorted more mar 16 $50 this am… not much premium there but think it is safe.  Waiting for the downgrade police to hit today or tomorrow after earnings call.   The lowered outlook is not trivial….  

    VRX – Thanks for the color on the con call….   if it hits 13 that would be outstanding ….  will hold off


  14. PETX – anyone follow this stock on this board?  earnings in a week. 


  15. Phil:  I did lighten up on FTR before earnings, however I still have a fair number of shares that are uncovered.  I am wondering if I should sell these and put them money in the FTR preferred shares.  FTRPR.  These pay $2.78 a quarter for the next two quarters ($5.56) and then are converted into normal FTR common shares at a rate of 1.33 shares of common per share of preferred on June 29.  This means that the cost of FTRPR of about $12.65 less 5.56 equals a net cost of 7.09.  However, on June 29 you get a third more shares.  The current value of FTR is 7.1 so you get $9.44 worth of shares at the end of June.  

    One can view the "dividend" as really a return of capital and one is forced to pay 20% taxes on the dividend/return of capital, so the dividend is really worth $4.44, making the entry cost of $8.21, but still one is getting $9.44 worth of shares of FTR in June at current prices.  Obviously, the higher the price of FTR in June the more attractive this deal is, and the lower the price, the less attractive.  Taking the taxes on the dividend into account, if FTR is at a price of about $6.18 in June one begins to lose money, but at least there is a hedge to that point.  

    Am I right that it seems unlikely that Frontier will cut or eliminate the dividend on the preferred (which obviously would destroy the attractiveness of the trade)?  Is there anything I am missing here?

    Thanks.


  16. In the LTP, since we REALLY wouldn't mind owning 1,000 shares of LB, we can be a bit more aggressive and sell 10 2020 $45 puts for $11 ($11,000) and buy 30 of the 2020 $35 ($13.50)/50 ($7.50) bull call spreads at $6 ($18,000) so we're spending net $7,000 on the $45,000 spread that will still be easy to roll and adjust.  

    Best part is that we will then have no worries selling 10 short calls.  Even now, the April $47.50s are $1.30 so $1,300 x 10 sales would be $13,000 back on our $7,000 spread while we wait to see if we collect $45,000.  Man I love options!  cool

    Scandal fatigue/StJ – I was noticing in this morning's news clips (previous post) that half of them had the word Trump in it and I thought about it and went over them but each one was an impactful bit of news.  Some were scandals, some were idiotic economic pronouncements, some were major changes in the direction of the country – there's simply not enough time in a month to care about all the crap those people do in a day!  That's how they are getting away with it though, they are flooding us with constant BS (same strategy the Russians used in the election to cover up any bad news on Trump) and we are, in fact, just tired of hearing about it.  Meanwhile, they are winning – their agenda moves forward and the country spirals down the drain.  

    Guns/StJ – Maybe we've hit peak guns?

    CEOs/StJ – Well getting to be CEO is often the last stop before they fire you 3-5 years later so there's a perverse incentive to cash out before the board tosses you.  The shareholders and the board have a short-term focus so the CEO gets put in an impossible position and, seeing that, they make a fairly logical choice to look out for themselves since it's either hit the short-term goals, get rich and get fired or plan for the future, miss short-term profits and get fired without getting rich.  

    Nice pop in /TF and /ES already!  

    They've gotta bust those humps.

    Telsey/StJ – Why not, Goldman does…

    Image result for Gresham’s law

    TOS/Deano – Nope, paying out like a broken slot machine!  cheeky

    Downgrade police/Batamn – I think they are in the $45-50 range too.


  17. LB/Phil- I am on LB with call spread 40/50 and short 40 put(2020), I thinking I should remain my trade or you recon adjusting?


  18. LB/Dave – I'd keep the puts, the target is fine but kind of criminal not to roll the $40s ($11.58 last) to the $35s ($13.33 last) for $2.20 – unless you have better ways of using $2.20 to make $2.80 (127%) in two years?  The $30s are about $16.50 so $3.20 more and that's diminishing returns but, if you are going to be a believer – then put money in the collection plate and it will be returned to you TWOFOLD!  


  19. LB/Phil- I think I will play safe in a 2018, should I roll my 50 shorts to 45 or let it be and just collect the premiums. 

    The ALB adjustments you suggested into a butterfly, will that be an official LTP adjustment? 


  20. Couldn't find the right clip for a collection plate but this is the same movie – one of my all-time favorites that no one has heard of:

    LB/Dave – Then you would be collecting maybe $1.50 to give up $5 worth of upside!  Better to widen the spread ($35/50) and sell 1/3 of the April whatever is around $1 ($50s are 0.80).  A few sales like that and you collect the same $1.50 but keep the wider spread and your premise is you don't believe they'll hit $50 in two years so certainly you shouldn't be worried they hit $50 in 60 days, right?   Even if they do, you have 3x $15 spreads protecting you.


  21. Anyone playing /RB for weekend pump?


  22. Phil – Thank you for my ROFLMAO of the day with that graphic. Unfortunately false doctrine and economorons abound.  It's axiomatic and quite simple…

    Gresham's Law is a statement of the “principle of substitution” as applied to money: that money, forms of money, and even a commodity (or services) will be devoted to those uses which are the most profitable. 

    The good "money" or more valuable asset disappears because everybody wants it and buys it up, and what is left?  The bad "money" or less valuable asset. Thus, in the case of monetary flows, the bad crowds out the good, is apropos.   Now getting back on track…

    Phil – So rates are not entirely under the Fed's control… This is inflationary in a stagnant spending environment – what used to be called Stagflation.

    Amen Brother Phil, we have been banging the stagflation drum for years, and indeed market rates are not controlled by FFR or the FED. However, the Fed can and does influence credit allocation through policy viz. IOER and IBDD remuneration rates set by the FED. 

    Along with RISK FREE treasury borrowing, IOER and IBDD FED policy dis-intermediates the commercial banks from lending for economic endeavor, which affects the transactions velocity of money and the economy. Powell was warned as much by Congressman Jeb Hensarling who is chairman of the Financial Services Committee.

    "WHEN CONGRESS GRANTED THE POWER TO PAY INTEREST ON RESERVES, IT WAS NEVER CONTEMPLATED OR ARTICULATED THAT IOER MIGHT BE USED TO SUPPLANT FOMC AND IF THE FED CONTINUES TO DO SO, I FEAR THAT ITS INDEPENDENCE COULD BE ERODED." 

    Listen to that video where Powell makes one of his few non punch drunk reality based statements: IOER will remain the primary driver in setting the Fed Funds rate in the near term.

    "IF THEY MAKE LOANS OUT IN THE MARKETPLACE, THEY HAVE DEFAULT RISK THAT THE IOER DOES NOT HAVE. >> AGAIN, WE'RE TRYING TO MANAGE, WE'RE TRYING TO USE THAT TOOL TO SET SHORT-TERM INTEREST"


  23. /RB/Japar – They are really licking their wounds still, hard to say $1.88 is a bottom.  Don't forget there's no good reason at all that April should have been 0.20 more than March.  You can pretend any price you want but, if the consumers buck it, you're screwed (I think I already said that the other day, didn't I?).  

    See what I mean about not getting fooled by weak bounces!  

    Gresham/Naybob – That's not the same thing at all.  Gresham was specifically referring to coins under the system (at that time) of most coins having a base metal value that approximates the coin.  The point of the cartoon is people tend to simplify it and then misapply it as if it were some actual law that proved something else:

    In the absence of legal-tender laws, metal coin money will freely exchange at somewhat above bullion market value. This may be observed in bullion coins such as the Canadian Gold Maple Leaf, the South AfricanKrugerrand, the American Gold Eagle, or even the silver Maria Theresa thaler (Austria). Coins of this type are of a known purity and are in a convenient form to handle. People prefer trading in coins rather than in anonymous hunks of precious metal, so they attribute more value to the coins of equal weight. The price spread between face value and commodity value is called seigniorage. Because some coins do not circulate, remaining in the possession of coin collectors, this can increase demand for coinage.

    On the other hand, bad money is money that has a commodity value considerably lower than its face value and is in circulation along with good money, where both forms are required to be accepted at equal value as legal tender.

    In Gresham's day, bad money included any coin that had been debased. Debasement was often done by the issuing body, where less than the officially specified amount of precious metal was contained in an issue of coinage, usually by alloying it with a base metal. The public could also debase coins, usually by clipping or scraping off small portions of the precious metal, also known as "stemming" (reeded edges on coins were intended to make clipping evident). Other examples of bad money include counterfeit coins made from base metal. Today all circulating coins are made from base metals, known as fiat money.

    In the case of clipped, scraped, or counterfeit coins, the commodity value was reduced by fraud, as the face value remains at the previous higher level. On the other hand, with a coinage debased by a government issuer, the commodity value of the coinage was often reduced quite openly, while the face value of the debased coins was held at the higher level by legal tender laws.

    Copernicus made the observation long before Gresham and he couldn't give two craps about economics.

    Meanwhile, Powell is driving the markets up and down with each question he answers.  He's a bit too plain-spoken for a Fed head in the age of Twitter.  

    Image result for greenspan clarity

    Image result for greenspan quotes

    Image result for greenspan quotes


  24. Powell says we are "at or BEYOND full employment" – that's tightening language!  

    Boy I love Liz Warren!   She's coming down hard on Wells Fargo and pushing Powell to hold them accountable.  


  25. Phil:  You may not have seen my question from earlier today; I'd appreciate it if you would comment.  Thanks.

    JohnC1 
    March 1st, 2018 at 10:37 am | Permalink | Tweet thisIgnore this user

    Phil:  I did lighten up on FTR before earnings, however I still have a fair number of shares that are uncovered.  I am wondering if I should sell these and put the money in the FTR preferred shares,  FTRPR.  These pay $2.78 a quarter for the next two quarters ($5.56) and then are converted into normal FTR common shares at a rate of 1.33 shares of common per share of preferred on June 29.  This means that the cost of FTRPR of about $12.65 less 5.56 equals a net cost of 7.09.  However, on June 29 you get a third more shares.  The current value of FTR is 7.1 so you get $9.44 worth of shares at the end of June.  

    One can view the "dividend" as really a return of capital and one is forced to pay 20% taxes on the dividend/return of capital, so the dividend is really worth $4.44, making the entry cost of $8.21, but still one is getting $9.44 worth of shares of FTR in June at current prices.  Obviously, the higher the price of FTR in June the more attractive this deal is, and the lower the price, the less attractive.  Taking the taxes on the dividend into account, if FTR is at a price of about $6.18 in June one begins to lose money, but at least there is a hedge to that point.  

    Am I right that it seems unlikely that Frontier will cut or eliminate the dividend on the preferred (which obviously would destroy the attractiveness of the trade)?  Is there anything I am missing here?

    Thanks.


  26. Phil,

    A theory/strategy question from the back of the class:

    Given that SQQQ does have a decay factor, in addition to the bcs you suggested, it seems there would be a rationale to sequentially selling puts (15s – Apr then May…) and closing out or rolling forward if the mkt shows renewed strength - admittedly, difficult to determine. Bias toward selling premium even at expense of less profit. Thanks

    Your thoughts appreciated.


  27. Morning, All!

    The webinar replay is now available!

    https://youtu.be/T7II-_JGy70


  28. AAXN;   Somebody knows what´s going on in AAXN ?.

    $10  up in one day….


  29. Allan Greenspan had good macro view on CNBC this morning. https://www.cnbc.com/video/2018/03/01/alan-greenspan-we-are-in-a-bond-market-bubble.html


  30. advill – AAXN – Good earnings plus the CEO relinquished his salary for a 10 year performance based compensation package.  It is based on Mkt Cap, Sales and EBIDTA and is split into 12 tranches.  The package is modeled after Musk's.


  31. MO/Phil- What you think about Altria? just raise dividends to 6.1%


  32. Dave bought more MO for armchair trades realistic price now, but could get even cheaper.


  33. AAXN/ Feltok;

    Thanks!, but how can a CEO salary package jump the stock from $28 to $40? is a good model to implement in all the blue-chip companies!


  34. I'm not Doctor but I think the Dow may be having a heart attack listening to Powell:

    Sorry John, I did miss it.  If I answer a question after yours first, the odds are I missed it (or it was so complicated I was going to get back to it).  I find if I skip something there's a 90% chance I forget to come back – so I very rarely skip anything.  

    Anyway, I understand your math but if you buy 1,000 shares of regular FTR at $7.28 and sell 10 2020 $5 calls for $3.05 and sell 10 2020 $5 puts for $1.55, then you net into 1,000 shares at $2.68 and, even if you are assigned the other 1,000 shares at $5, your average on 2,000 shares is $3.84, which I believe is a lot less than $7.10 and, of course, if called away at just $5, you have a near double – and it's long-term capital gains.  

    I believe cutting dividend on the preferred would essentially be a default as they MUST pay the preferreds UNLESS they can demonstrate an inability to pay – which would not be much different than filing for BK – rarely happens unless, of course, a company is actually going BK – then you are screwed either way.  

    SQQQ/8800 – In a market where we aren't subject to regular 10% drops, that makes a lot of sense.  Don't forget, it's a hedge – it's insurance – we expect to lose the money so we shouldn't run to negate the insurance by covering the position.  Selling some – as noted in the post above, can be fine but I wouldn't fully covered because that's not why we bought the SQQQs is it?  If you feel the need to sell calls against a spread, try T of PFE or some other stock that doesn't go anywhere for years.  

    AAXN/Advill, so annoyed we didn't get back in.

    Greenspan/Tx – Well he's right but people don't listen to him like they used to though I think he's still pretty sharp.

    MO/Dave – I love them and I predict they'll get into the Pot Biz and rocket higher.  Been waiting for them to come down to $60.  Almost there.

    In the LTP, we should take advantage of the higher VIX and MO's drop by selling 5 2020 $65 puts for $10 ($5,000) – just so we're reminded to get a bull call spread soon (the $55 ($11.50)/65 ($6) looks pretty good but I want to pay under $5 for 10 if possible.


  35. Phil – "Meanwhile, Powell is driving the markets up and down with each question he answers.  He's a bit too plain-spoken for a Fed head in the age of Twitter. "

    Perhaps, but that is the price we pay in this elevator version, sound byte, twittering, ADD afflicted society where most are too poor to pay attention.


    • Trump says we will institute tariffs on steel and aluminium next week.  
    • Putin says he has new nukes that can't be intercepted by other missiles.  
    • NoKO says they will counter any US sanctions.   
    • UK has a winter weather alert – everything is shut down.

    As I said before, more things to worry about in a day than you have time for in a month!  

    Yet the market is at an all-time high.  

    Image result for this too shall pass


  36. phil,

    Understood – SQQQ is a hedge/insurance, but I was asking about selling puts not covering with short calls.

    The short puts would act like insurance – just not as much and cheaper.

    Thanks


  37. AAXN    I´m taking the money and run…just in case! but is a company that surely will try to buy again.


  38. SQQQ/8800 – Ah, sorry, thought you said calls.  We do, sometimes, take those plays with short puts too but then you are doubly screwed when the market goes higher so I prefer to pay for the spread with short puts on stocks that we REALLY want to own if they get cheaper, like the LB or MO puts we just put on today.  

    Good call Advill, was a really good run to catch.


  39. Phil,

    Clear – SQQQ, thanks.









  40. NAFTA’s Economic Impact


  41. A LOT of comments for this that is coming today, from this side of the ocean in Europe it looks as the first step in a trade war.

    President Donald Trump is set to announce steep tariffs on steel and aluminum imports Thursday, people familiar with the matter said, in what would be one of his toughest actions yet to implement a hawkish trade agenda that risks antagonizing friends and foes alike.


  42. Wheeeeee!  That was fun!  

    STP up 30% now.   LTP only up 4% so we lost ($30,000) about what we gained ($30,000) – Gotta love a good hedge!  

    Any lower than this and we'll need to add the next layer. 

    2,680 was a good line to bounce /ES down 80 from yesterday so 2,696 is a weak intra-day bounce and then 2,712 but I think we're heading lower still.  

    Trade War/Advil – It's like people have never studied history, or economics, or political science – this is the kind of thing that happened in barbaric times that led to two violent World Wars – I had thought we'd evolved but then comes Trump.

    Image result for republican devolution

    We went from the US joining the TPP and happy with NAFTA to total chaos in one year!  


  43. LC/Phil – not seeing any news on them… any idea why would LC spring up so much today?


  44. LC/Scott – It's essentially an over-priced penny stock, any little rumor can send it flying up or down. 

    One piece of good news is that the company recently dealt with its largest liabilities from the 2016 scandal, settling both federal and state class action shareholder lawsuits. The bad news: LendingClub has to pay plaintiffs a total of $125 million, with $47.75 million covered by insurance, leaving LendingClub on the hook for the remaining $77.25 million. That amounts to roughly 12% of the company's liquid assets and about 5% of the current market capitalization

    Moreover, the company still has investigations by the Justice Department, Securities and Exchange Commission, and Federal Trade Commission hanging over it, which means it must retain higher-than-normal legal costs. But management said the recent settlement was its largest financial liability, and that cost is now behind the company.

    So great news, I guess!  

    large and growing market for personal loans has invited competition, and consumers are shopping around. The most notable new entrant is Goldman Sachs (NYSE: GS), which entered the market via its new branchless bank, Marcus. The Marcus personal loan product, unveiled in 2016, has already grown to $2.3 billion in total originations. While impressive, that's still less than one-fifth of LendingClub's $11.9 billion in loans outstanding, and Goldman doesn't yet disclose granular loan performance, as LendingClub does. The online personal loan market is young and evolving, so it's hard to know how Goldman's entrance will play out. 

    Some fear that the new competition is making LendingClub work harder to generate the same number of loans. LendingClub's marketing expense as a percentage of originations was 2.39% last quarter, which marked an improvement over the first half of the year but is still higher than pre-scandal 2015 levels of 1.96%. That means the company is having to spend more on marketing for every dollar it loaned last quarter. CEO Scott Sanborn claimed most of the increase is due to the company's tightening of credit since 2016 but also conceded increased competition likely played into some of it as well. 

    Just a stay-away stock to me.


  45. Don't mean to step on Jabo's toes but………..FU ABX!!!!!


  46. ABX/Phil- anyone did ABX trade, was wondering if we should take some profits from the short 20 calls?


  47. mostly out of this market (have been since Feb 2). Some short stuff to hedge remaining longs. When the market recovers (a year or two and post-trump), watch cleantech and decabronization space. Huge. Bigly. Inverse Sad!


  48. ABX/Dave – Too soon.  It's just a couple of days trading – how many time do these things reverse?

    I agree BDC, this administration has put the Future on pause, but they can't stop it.

    /NQ hits -2.5% at 6,700 so that BETTER be some kind of bounce! 


  49. Gresham's Law – "That's not the same thing at all. Gresham was specifically referring to coins. The point of the cartoon is people tend to simplify it and then misapply it as if it were some actual law that proved something else.  Copernicus made the observation long before Gresham and he couldn't give two craps about economics."

    I could give two shits about the economorons that get sucked in by the false doctrine presented in your cartoon, or if Gresham was referring to coins, chronic or Copernicus.  And now Garret Morris from the New Jersey School for the hard of hearing….  TO REPEAT, TONIGHT'S TOP STORY….

    Gresham's Law is a STATEMENT of the “PRINCIPLE OF SUBSTITUTION” as applied to MONEY: that money, forms of money, and even a commodity (or services) will be devoted to those uses which are the most profitable.

    The above statement is succinct, there is no ambiguity, simplification or misapplication there. If one does not get that, they don't understand money, nor the profit motive much less English.

    I will now give another proven example of how the AXIOM in Gresham's Law is a STATEMENT which applies to money and flows.

    Transactions involving "bad money", used for speculation, RE flipping, money shuffling, transfer payments (interest), derivatives and arbitrage purposes, which mute transactional velocity and economic potential have grown exponentially since 1970. 

    Thus, the "bad money" crowded out the "good money" in transactional circulation, viz. good money – that which is invested and lent for real economic endeavor. This condition or the axiom in Gresham's Law in action, is what precipitated the 2006 RE and 2008 stock market crashes.

    In order to fathom this, one must know that each flow of credit, which increase in magnitude while the bubble is growing, has its balance sheet counterpart in increased debt levels for firms and households. But it is only through real economic activity, not paper shuffling, that debt is ultimately repaid.

    It's a slow painful death by a thousand paper cuts, which we have all been witnessing for decades, and the long term consequences or chickens are coming home to roost, again in the right here and now.  When real wages don't keep up, the pyramid scheme collapses, and that's when the shit hits the fan. Coming sooner than you think to a town near you.

    In fact, the axiom in Gresham's Law can also be restated and applied to ECONOMIC theory, BAD theory drives out GOOD theory. One can go straight to scholarly sources for validation of my succinctly stated and already proven application of said axiom above, and said reapplication to economic theory. 

    Gresham was right, the bad crowds out the good, and that axiom can be applied to many different things Ol Chum. Now if you got an axe to grind go argue with Professor Chick at GRESHAM UNIVERSITY. A most stimulating read and one must pay close attention to page 5 and 6, required reading for all investors. For my part I'm done and so is Garrett Morris, we're gonna go quietly burn some coin and chronic and Out.


  50. GM and F / Phil – Getting whacked today.  If the tariffs were to impact them, I am sure Trump will back off somewhat or make exceptions.  Phil, any thoughts on bets here?


  51. Auto stocks getting killed on steel tariffs.  Completely insane policy.  The steel industry was one of the US's worst polluters and became one of the US's biggest industry collapses – leaving empty husks all over the country.  It's an industry that doesn't need to be brought back in a modern economy and probably won't be as the cost to open manufacturing would require them to believe the next 5 administrations will also protect them.  

    Meanwhile, X has 29,200 employees and GM has 180,000 and F has 200,000 who will be adversely affected by rising steel prices and possible shortages.

    Putin Puppet wins again!  

    Image result for putin puppet

    Still wrong, Naybob but, as usual, way too exhausting to discuss something with you since you can never be wrong.  Fortunately, there are entire research papers written with extensive citations backing me up (but I'm sure they're wrong too):   https://www.tcd.ie/Economics/assets/pdf/SER/2005/Noel_Sullivan.pdf

    GM/Stu – As I said above, Agent Orange has accomplished his mission.  There's no mistake there.  


  52. History / Phil – It seems mostly that one party has not learned from history and tries the same failed solutions. Or refuses to learn from science. Basically, an anti-education, anti-fact party. Some simply fake it for greed, others are actually stupid!


  53. Wow, now we're having trouble getting back over 24,500?  Also 1,500 on /TF?  Not good.

    Nas popped right off the -2.5% line and already back to -2% at 6,730 so that's weak and 6,760 is strong (intra-day).


  54. Go VIX, go….


  55. Market still not below where it was on Feb 9th but this time seems more distressing to people.  Is that because of where the moving averages are now or…  ?


  56. Dollar index dropping to keep market afloat?


  57. And now we are popping for no reason – such fun! 

    Even Kudlow is on CNBC saying there's 200,000 steel workers and 5.5M people who use steel for their work and this is an insane policy!  Not to mention the inflation push caused by the tariffs and not to mention the repercussions as other countries won't take this lying down.  LUNACY!  

    Maybe not no reason, Hope Hicks just glossed over what Trump said. 

    Interesting:

    Averages/Tangled – I think it's looking more like we put a top in and people are still not sure where else to go with their money.  

    • The major averages are down 1.5% or more on trade war worries, and upped hawkish rhetoric out of the Fed.
    • Fixed-income appears to be benefitting, with the 10-year yield sliding nearly five basis points to 2.815%. Also working today are cryptocurrencies, led by bitcoin's 5.7% advance to $10,919.

    Dollar down very sharply, good note That.

    Interesting timing. 

    • "Gradual" has been the Fed's favored word to describe the current tightening cycle, and it's thought to be code for three rate hikes in 2018.
    • Enter FRBNY President Bill Dudley. Taking questions following a speech in Brazil, he says four hikes this year would also fit into the "gradual" description.
    • Dudley is retiring from the Fed this year, so there's that. His comments also come as Fed Chairman Jay Powell is testifying to the Senate about the economic and monetary outlook. One wonders how Powell feels about an outgoing Fed member trying to box him in (or did Powell give the green light for the boosted hawkishness).
    • Stocks have turned noticeably lower since the comments, with the S&P 500 (NYSEARCA:SPY), Nasdaq (NASDAQ:QQQ), and DJIA (NYSEARCA:DIA) all down about 0.6%.
    • The 10-year Treasury yield remains modestly lower on the session.
    • Industrial shares are taking a heavy beating into the final hour of trade amid concerns that Pres. Trump's tariffs on imported steel and aluminum could ignite a trade war: MTW -6%CMI -4.4%RRD -4.1%LMT -3.8%SWK -3.5%CHRW -3.4%BA -3.4%UTX -3.2%CAT -3%EXPD-2.9%NOC -2.9%RTN -2.8%SNA -2.8%PCAR -2.8%TXT -2.7%ROK -2.5%.
    • Barclays economists say Wall Street is overreacting to the tariff news, believing the effects will be contained because steel and aluminum amount to just 2% of total imports and thus should not drive prices appreciably higher or crimp broader economic growth.
    • "Meanwhile, any inflationary impulse from higher tariffs depends on whether firms view the increase as permanent and if the current state of the business cycle would contribute to a high pass-through rate from tariffs to final goods," Barclays says.
    • U.S. auto sales fell in February as the confluence of higher interest rates and lower discounting kept many consumers on the sidelines.
    • Though automobile execs are pointing to tax reform benefits down the road, some analysts think the leveling out of demand is likely to continue.
    • For the month, all three Detroit automakers posted year-over-year volume drops, while Japanese automakers Mazda (OTCPK:MZDAY) and Toyota gained market share with solid months.
    • Another drag on the sector today is news of steel and aluminum tariffs being applied by the Trump Administration. Industry execs are lamenting the extra costs that will result from the action.
    • Automobile sector: Fiat Chrysler Automobiles (FCAU -3.1%), Ford (F -3.4%), General Motors (GM -4.3%), Toyota (TM -3.3%), Honda (HMC -2.8%), Nissan (OTCPK:NSANY -1.3%), Ferrari (RACE -2.7%), Volkswagen (OTCPK:VLKAY -2.2%), Tesla (TSLA -2.8%), Modine Manufacturing (MOD -3.9%), Dana (DAN -1.8%), Lear (LEA -3%), BorgWarner (BWA -1.9%), Aptiv (APTV-4.4%), Cooper-Standard (CPS -4.2%) and Meritor (MTOR -2.2%).
    • Best Buy (NYSE:BBY) is up 4% amid a broad market that's in negative territory.
    • Even though the retailer generated $2.8B through its online business during the quarter, it's the brick-and-mortar results that are catching attention.
    • The impressive results point to the strength of Best Buy's brick-and-mortar footprint, notes Moody's retail analyst Charlie O'Shea.
    • In an interesting aside, O'Shea says the strong store-level results at Best Buy reinforces the view of the firm that consumers still value the store experience.
    • Previously: Best Buy beats by $0.39, beats on revenue (March 1)
    • Previously: Best Buy smashes comparable sales estimates (March 1)
    • U.K. gas system operator National Grid (NGG +0.3%) issued a rare “gas deficit warning” earlier today, indicating the country could run out of natural gas because demand is running high amid unusually harsh weather conditions.
    • NGG estimates U.K. gas demand today of 404M cm, up from an initial forecast of 396M cm, while supply is forecast at just 376M cm; the system had opened more than 50M cm after an unplanned outage at the South Hook LNG facility added to other outages affecting domestic production.
    • The “Beast from the East” is the most severe winter storm seen in the U.K. and much of Europe in many years.

  58. And down we go again.  Told you it looked like a heart attack.

    STP gained another $6,500, LTP lost another $20,000 so it's time to add more hedges if we break lower tomorrow.  Still nowhere near the lows:

    Nikkei is (weak Dollar) so we'll watch them tonight.


  59. TK/Phil – been flat forever,, consolidation for a new base, or is oil never coming back and all these shippers are going to fade away?


  60. Nas fails the strong bounce – that's the whole story for this close!  


  61. Not a pretty day!


  62. TK/Scott – Over 200 ships and some are LNG and oil is still getting shipped but not scarce so rates not great.  It's such a marginal business at the best of times I can never get interested and it can literally take you 100 years to sort through all their loans and lease agreements to figure out if they are solvent or not.

    Year End 31st Dec 2012 2013 2014 2015 2016 2017 2018E 2019E CAGR / Avg
    Revenue $m 1,981 1,830 1,994 2,450 2,329 1,880 2,349 1,219 -1.0%
    Operating Profit $m -150.4 62.7 427.2 625.1 384.3 6.70      
    Net Profit $m -160.2 -114.7 -54.8 82.2 -123.2 -151.7 17.8 -2.96  
    EPS Reported $ -2.31 -1.63 -0.76 1.12 -1.56 -1.76      
    EPS Normalised $ 1.88 0.64 -0.78 1.87 -0.19 0.32 0.23 -0.030 -29.8%
    EPS Growth %   -66.1         -29.6    
    PE Ratio x           23.8 33.8 n/a  
    PEG x           n/a n/a n/a
    Profitability

    This is not a new company, they've been doing this since the 70s and they are net -$500M in the past 6 years so what compels you to buy the company for $700M?


  63. Phil, ALB was down another 4 today, from a new trade perspective, wait a bit?  LTP setup?  Please share your thoughts.  Thanks


  64. Put/Call ratio closed at 1.3.  Finally showing quite a bit of fear.


  65. SGYP – tick tock…


  66. TK/Phil  – i'm not buying, and next to no idea how to 'value' them, but always wondering how or if they are going to survive.  they have had big runs in the past. TK hasn't had such a dead run since 1998-2000.


  67. Looks like SGYP had a nice beat and the company slides on Trulance show a nice linear trend in adoption and market share gains… hopefully some upgrades and valuation reset soon… 

    Inputs from Pharmboy? 


  68. Don't know how that going to fly in the White House:

    https://talkingpointsmemo.com/livewire/nbc-mueller-preparing-possible-charges-against-russians-for-email-hacks

    NBC reported that “it could not be learned” if Mueller would make allegations about Russian President Vladimir Putin in the potential indictment, but one unnamed former FBI official told the network that Russian government officials would likely be charged.

    Not going to help the relationship with Russia.



  69. SGYP - Pharm posted in January "it is time to bail".  I lost quite a bit on this one, stay in at your peril.




  70. Exclusive: FBI counterintel investigating Ivanka Trump business deal


  71. When Jeff Sessions finally called Trump’s bluff


  72. Trump Roars; China Yawns





  73. Think the White House is in chaos now? Just wait.


  74. Corporate America Is Suppressing Wages for Many Workers


  75. Both parties give the all-clear for Robert Mueller to take down Devin Nunes







  76. Good morning!  

    Dow down another 200 points as Trump tweets "trade wars are good"!

    Tell me Putin isn't running this operation to destroy the United States?  Do you really think Donald Trump is capable of dismantling all the gains our country has made for the past 40 years on his own?  

    "Easy to win" – what a moron!  For one thing, the things we import that give us a trade deficit are oil and metals we can't survive without, like rare earths from China.  It would be one thing if we stopped using oil but what Trump is doing is like fixing the blood deficit for someone who needs a transfusion by refusing to accept blood.  A win on the balance sheet isn't necessarily a win for the economy – and certainly not for the people. 

    DAX down 2.3% so really nasty and Nasdaq testing 6,700 already, which is that death cross of the 20 and 50 dma and DOOM!!! if we fail it.  Oh, who's kidding, we're about to fail it! 

    So DOOM!!!! on a Friday, DOOM!!! I say…

    Actually, we might bounce here if Trump can keep his mouth shut long enough for them to spin his comments less insanely.  

    We're lined up with 24,400 on /YM, 2,660 on /ES and 1,495 on /TF and I like the Dow and the Nasdaq best to play bounces, but tight stops below (if ANY of them go below it's game off).

    Oh and watch the Dollar – it's down below 90 and more downward pressure on the indexes if it pops back up.


  77. DAX and Euro Stock 50 already at Sept & April 2017 lows. Our indexes still have a lot more to fall to play catch up.   And I posted alert at 358 for TESLA.

    denlundy
    February 26th, 2018 at 3:15 pm | Permalink | Tweet thisIgnore this user

    FTR  Expecting earnings improvement trend to continue

    TSLA at 358