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Which Way Wednesday – Crisis, What Crisis?

I love the market's attention span – or lack thereof…

No matter what happens, just a day later it's all forgotten and the dip buyers come in to buy things back to their highs.  We had this pattern back in 2006/7 and it was even a joke meme.  It's the kind of behavior that works – until it tragically does not.   

This morning, we've pretty much recovered half of yesterday's losses and we'll see where we end up but 2,712 was what we expected and we don't really care if it takes one day or two.  

Very much like in 1999 and 2006/7 investors have negative credit balances though, in 1999, it was just over -$100Bn and in 2007 it was -$75Bn and now it's -$300Bn so pretty much everything that was wrong with this strategy just prior to the other crashes is wrong with this strategy times 3!  

That's why, on the whole, this market is all about the Fed and even though we saw the trade war with China reignite yesterday, it's a good thing because it takes the Fed off the table as their minutes last week listed trade wars as a primary headwind that may cause them not to raise rates.  As long as rates remain ultra-low, those dip-buyers can keep on borrowing to buy those stocks and don't worry, this party will never ever stop and we'll never run out of money and the rates will never go up, right?

Well, maybe worry a little…  

Meanwhile, it only takes 10 companies to make up 20% of the S&P 500's earnings with Apple (AAPL) coming in at 4.1% these days.  Apple has boosted the Tech Sector to the top of the S&P with 26% of the market cap, followed by Financials at 15%, Health Care at 14%, Consumer Discretionary 13% and Industrials at 10%.   The Energy Sector, which once led the index, has fallen to just 6% of the S&P's market capitalization.

So, if we want to consider where the S&P 500 is going, we really only need to look at these 10 companies and consider their effect on their overall sector to know where the other 490 companies are likely to follow.  I've said for a long time, we called the top at 2,728 on the S&P because Apple is approaching a $1Tn Market Cap and that is a level that is very, very likely to be rejected so, even if we pop over for a short time, we're still likely to end up right back here again.

JPM, BAC and C have the same issues in a rising rate environment and there's nothing exciting going on with JNJ or PFE to think Health Care will begin to lead us higher and don't even get me started on Consumer Discretionary – the consumers have no money – that's something that became apparent in the recent earnings reports.  

Speaking of reports, Q1 GDP has been revised lower this morning – from 2.3% to 2.1% so not a huge revision (10%) but way, way below the 3% that was promised.  In fact, the whole of 2017 missed Trump's projections of 3% by almost a full point and, if we miss by that much going forward, we're going to have a $500Bn budget hole in the economy over and above the $1Tn hole that's PLANNED with the 4% growth that is FANTASIZED.  

Over in Europe, GDP growth forecasts have been cut as well – from 2.4% for 2018 to 2.1% and that's only -15% so, of course, no one will worry about that or consider the consequences of it when paying 100x earnings for stocks in a low-growth environment.  After all – what could possibly go wrong?

Just like our relentless dip buyers, our Governments have been spending and spending and spending, doubling down on debt in the past 10 years in an attempt to boost their economies and, $10Tn later in the US, we have 2.1% GDP growth to show for all of our efforts.  That $20Tn debt pile is now growing at AT LEAST $1Tn per year and, even at 3%, the interest on the debt alone is $600Bn per year, which is 20% of all Government collections.  

Japan's debt service is 40% of their Government's collections and they are still paying under 2% on their notes.  What will happen when rates go up to 5% and the US needs $1Tn (33% of collections) just to avoid defaulting on their loans.  For Japan, 5% would take up ALL of the Government's revenues – the country would simply exist for the purpose of paying debts – like Greece.  

Like Japan, the US is relying on increasing the GDP faster than the debt increases to bring down the Debt to GDP Ratio, which sounds good in theory but, so far, isn't working out in fact.  Since it's not working, the solution seems to be going much, MUCH more into debt and then seeing if that does the trick.  If it doesn't – I predict more debt.  After all, it's bound to work sometime, right?  

There's nothing wrong with debt if you are using it to make an investment in something that will pay for itself over time.  Tax cuts for the Top 1% and Top 1% Corporations do not pay for themselves over time.  Public Transportation pays for itself, Roads, Bridges, Dams, Power Plants, Schools – those are the things that give us a long-term return on investment yet those are the things we CUT so that we may give to the rich.  It's an asinine policy and it will doom us all if we keep it up.

The great and lasting achievements of the Roman Empire were roads and aqueducts, not the parties Nero threw at the palace.  The Colosseum stands to this day, built in the year 80 to entertain the masses and it was still in use 500 years later – THAT is a good investment in infrastructure!  

So, despite the rush of dip buyers – the big picture isn't changing and, until it does, my outlook remains the same and I don't see us blasting higher.  Much more likely, we bounce between our bounce lines – having stopped right at the Weak Bounce line on the S&P (2,684) that we predicted back in March.  

Using 2,684 as a bottom and 2,728 (strong bounce) as a top it's a 44-point range so we'll call it 9-point bounces within that zone to 2,693 and 2,702 and we'll short /ES at the 2,702 line with tight stops above in case this morning's move is a head-fake on the way to more selling.  If not, and we stay over the line – we'll see if we can get back to 2,728 – where we'll probably short again as nothing has really changed and I don't see a catalyst that breaks us out of this range at the moment.

 


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  1. Happy Wednesday, All!

    Join us for today's webinar at 1pm!

    https://attendee.gotowebinar.com/register/3196786468380695299



  2. Amazon war on retail:

    http://fortune.com/longform/amazon-groceries-fortune-500/

    Food could be part of that tipping point for Amazon. For the past few years, as the tech world has been making strides with artificial intelligence and machine learning, foodies have been moving in the opposite direction, pushing to deindustrialize the agricultural system. “Healthy and sustainable food is incoherent with the Amazon model,” says William Rosenzweig, who leads the Food Venture Lab program at UC–Berkeley. “I worry that the culture of Amazon doesn’t contain that gene set. Convenience, price, and speed—those are not the right values or core competencies of food.”


  3. Good Morning.


  4. Good morning! 

    Cause of death: Unknown - 


  5. Looks like Roseanne barr's career…. ;)


  6. I'm under hedged.  Bought some TZA.


  7. LOL 1020! And well deserved….


  8. Big Chart – NYSE has to get back over 12,560 (50 dma) to take recovery seriously.  As noted above, I like the /ES short at 2,702, which we're still above – that's the strong bounce line.  I'm shorting /RTY now at 1,640 – too good to pass up.  

    AMZN/StJ – It's a bit misleading because % who have shopped isn't the full story.  I went to TGT and I shopped at AMZN but the thing I ordered from AMZN was $22 while I spent $150 at TGT since I don't go there to get one or two things.  

    The bottom line is AMZN has $177Bn in sales and WMT has $500Bn and TGT has $72Bn.  AMZN sells everything: Food, Light Bulbs, Washing Machines…  Comparing it to any single store is silly, what matters is their percentage of total Retail Sales, which are $4,990Bn so 3.5% is the magic number to watch.  Retail sales overall grow at about 3% ($150Bn) and AMZN sales grow at about 20% ($35Bn) so they are capturing a lot of the growth but it will be many, many years before they can even get to WMT's 10% – and I doubt WMT will stand still waiting for them though only growing sales at about 2% recently.  

    QCOM/Albo – Seems like a reasonable bet here ($57.87).  In the LTP, we sold the 2020 $50 put for $6.70 on 4/16 and it's $4.75 now.  I don't want to jump in while the market is week and it looks toppy but the 2020 $52.50 ($11)/67.50 ($5) bull call spread at $6 makes a nice pair with a $9 (150%) potential upside on its own.


  9. AMZN / Phil – No argument from me but the point of the chart (at least for me) is to show how ubiquitous Amazon has become in our lives! Almost 7 out of 10 people have bought something from them in the last 4 weeks. That's pretty incredible.


  10. Wow !   Certainly no follow thru in OLED.  

    Still not willing to buy the stock, but am short some puts from earlier. 

    Looking at maybe selling some additional OTM puts.

    Phil, what are your current thoughts ?


  11. Somebody has bought a boatload of GreenCoin recently.

    That's a pretty big top wallet: 769M / 4.095B outstanding coins = 18.75%


  12. /RTY/Phil- wow 1650


  13. AMZN could also help local, distributed farmers, reach local, distributed foodies. Something drones would be ideal for. Not sure I agree with that article much.


  14. Re: Amazon, only $50B of Amazon sales are in the U.S. And, EVERY item is delivered by hand in a box.  Sustainable?


  15. Learner – IQ up big.


  16. Ubiquitous/StJ – That's for sure! 

    Dow up 200 now but I'm still adding /ES and /RTY shorts, 2,708 and 1,643.5 avgs.  Watching the volume:

    Date Open High Low Close* Adj Close** Volume
    May 30, 2018 270.50 271.90 270.44 271.63 271.63 18,873,176
    May 29, 2018 270.31 271.17 267.76 269.02 269.02 114,128,800
    May 25, 2018 272.15 272.86 271.58 272.15 272.15 56,374,800
    May 24, 2018 272.91 273.22 270.78 272.80 272.80 76,043,800
    May 23, 2018 271.17 273.39 270.99 273.36 273.36 61,021,700

    Same crap as usual, very focused, low-volume buying to undo a high (relatively) volume sell-off.  

    OLED/Albo – No actual notice that they are getting the contract.  Waiting for more data.

    GreenCoin/BDC – Wow!   Watch out, there have been a lot of 51% attacks, apparently.  

    51% Percent Attacks: Hacking a $2 Billion Dollar Cryptocurrency for …

    /RTY/Dave – Wow indeed but, as noted above, rally seems like BS to me.

    $50Bn/Taihu – Very good point, I didn't even think of that.  If you look at it in those terms, it's 1%! 

    IQ super-popping:  


  17. The dollar is falling fast! Helping the indexes!


  18. IQ – albo, thanks … Great when it works better than expected…  We need some of these to balance out the HMNYs…


  19. CG/Phil- you have the BCS expiring in 16 days in OOP, seem to be able to let it exp w max gain as long as CG recovers back to 22.5, it's quite close… gonna see how CG trades?


  20. Dollar/Deano – Yes, down about 1% is a huge boost for everything else.  Oil ripping up 2.5%, /SI popping too.

    Speaking of HMNY – they sure don't act like they are going broke:

    Helios and Matheson Analytics Launches Moviepass Films™ and Agrees to Acquire Emmett Furla Oasis Films

    Helios and Matheson Analytics Inc. (HMNY) (“Helios”) announced today that Emmett Furla Oasis Films (“EFO Films”) has granted Helios the exclusive option to acquire the entire film library and current production slate of EFO Films. The EFO Films library includes acclaimed titles such as Lone Survivor and Broken City and features A-List actors such as Mark Wahlberg, 50 Cent, Sylvester Stallone, Bruce Willis, Arnold Schwarzenegger, John Travolta, Denzel Washington, Nicolas Cage, Robert De Niro, Al Pacino, Kate Bosworth, Leelee Sobieski, Anna Kendrick and Ellen Burstyn. The EFO Films library also includes the upcoming titles Boss Level starring Naomi Watts, Mel Gibson and Anabelle Wallis, 2Guns, Escape Plan 2 and Escape Plan 3 starring Sylvester Stallone and Dave Bautista, The Irishman starring Robert De Niro, Al Pacino and Jesse Plemons, and The Iconic Video Game ASTEROIDS by ATARI, including others in production, with the goal of 12 to 15 films over the next year.

    So the movie company gets 80% of the ticket sales in week one and 70% in week two which means, without any cooperation at all from the theater, MoviePass recoups 75% of what they lay out for the tickets yet they get to book the Subscription Revenues AND the Ticket Sales.  Then there's overseas sales and DVDs, selling to cable, etc.  If they can actually jam 2M extra people in on opening week – that's a $20M box-office boost to the movies they put out.  If those people bring just one friend – that's a $40M boost and makes any movie they get involved in a hit.  

    I just bought 5,000 more HMNY at 0.47 for the kids so 10K @ 0.56 avg.  

    CG/Dave – Yeah, we're in the ballpark ($22.50) for the full gain and the $20 calls at $2 would still give us $2,000 off the net $1,450 entry (not counting the Sept $22.50 puts we sold for $1,150).  So I'm good with where we are – especially after riding out yesterday's dip.

    • Crude oil prices surge following a Reuters report that Saudi Arabia and the other OPEC and non-OPEC producers would stick with the current production agreement until the end of the year; WTI +2.1% at $68.18/bbl, Brent +2.4% at $77.20/bbl.
    • The oil market is moving towards balance and fundamentals are better than last year, “but the group is not ready yet to fully lift controls,” Reuters reports, citing a "Gulf source" that also says any rise in output when needed would be “in a gradual and deliberate fashion.”
    • Prices have been pressured in recent days by expectations that OPEC would lift output to help offset output losses from Iran and Venezuela.

  21. ~~TSLA – Tesla lifting: Consumer Reports now recommends the Model 3 after software update improved braking performance . 



  22. Phil// Any recommendation for a trade on IQ?  It has a potential to be as big or bigger than NFLX.  What are you thoughts on their biz model and their competition.  Thank.s


  23.  The two sides of my armchair trade. On 5/23 I did recommend a play on CLX Sell Jul 115/120 strangle for 5.18 and buy the stock for 119.35. Obviously at the today’s market instability, it was my intention to cover more on the put than on the call. Today CLX is trading at 126.20. The first side of the trade, it looks like I can sit back smoke my pipe and do nothing. Possible outcome I got 518$ in my pocket and they return my 120 strike price for a credit of 65$. That is why I call it the armchair trade!!! The second side is I will have to keep an eye on the caller. Ex div is 5/31. Do I wish to collect still the 94 $ on div, or let it go. Do I wish to hold on to the stock, I have to gamble with the caller. The value of the caller close or before expiration, 5/20 should never excide the than current value above 120 plus .96 cents equals 100% ITM. Looking at today’s position stock @ 126.20 plus .96 equals 127.16. So the value above my 120 strike is 7.16. However today the caller still wants 7.95., so we still have an extrinsic value of .79. So no wise man will call for the stock. The same calculation I have to do before expiration. If there is no more extrinsic value left, you have a good chance someone will call for the stock. Now looking at the present level of the stock, I might consider to pay the piper his due and roll the caller and compensate the expenses with another put sale same month as I have rolled the caller to. Not clear any questions well come.


  24. By the way a similar situation we have with AMGN. You can let it go, I bought the stock at 168.70, or one has to roll. There are actuall three sides to the armchair trade. 1. You lend up with more stock, 2. you get paid out for the stock and 3. You can roll. Simple but mostly only a slow way to get rich.


  25. Given that AAPL is slightly down, I think they may use it to stick us into the close. Careful!


  26. Nothing too exciting in the Webinar but we will have to adjust our hedges.  Notably, we need to dump DXD July $8 calls, last at 0.60 but I'm asking 0.70 (need a Dow dip) and then we'll transfer to new DXDs in the STP.

    IQ/Rookie – Where were you?

    Submitted on 2018/05/23 at 10:38 am

    IQ/Learner – $16Bn while losing $1Bn a year almost makes NFLX look attractive at $144Bn while making $500M.  NFLX has $12Bn in sales, IQ about $4Bn so if IQ made $12Bn, I bet they'd be profitable too but I doubt they are getting $10/month from Chinese people though I'm sure they can get content much cheaper….

    NFLX was doing $4Bn in 2013 and made $11M though.  IQ just IPO'd last month at $17 and already $23 after collecting $2.3Bn, which funds them for a couple of years.  They only have 60M subscribers out of 1.4Bn but, of course, that's probably 500M households, which would be the real number.  

    Metric

    Netflix

    iQIYI

    Subscribers

    119 million

    60 million

    Sales in 2017

    $11.7 billion

    $2.7 billion

    Sales Growth in 2017

    32%

    55%

    Market Cap

    $144 billion

    $13 billion

     

    From my brief check, it seems like they charge $3/month (20 Yuan), so of course they are popular.   That's the price of a Big Mac in China so they should be able to raise prices, the way NFLX did once people became addicted but, to make NFLX's revenues, they'll always need double the subscribers, so they are farther behind than you think.

    Still, the massive premiums on the 2020s make them interesting and I do like the 2020 $15 ($11.80)/$22.50 ($8.20) bull call spread for $3.60 as we can absolutely make all that money back by selling short calls.  It's going to be crazy, so let's put it in the STP and play and with it.  Our trade will be:

    • Buy 20 IQ 2020 $15 calls for $11.80 ($23,600) 
    • Sell 20 IQ 2020 $22.50 calls for $8.20 ($16,400) 
    • Sell 5 IQ July $22.50 calls for $3 ($1,500) 

    That's net $5,700 on the spread and we're using 58 out of 604 days to sell our first round.  If we have 10 more sales like that, we can sell $15,000 worth of calls just doing 1/4 sales (so little chance of getting blown out) while we wait to see if we collect $15,000 on the spread.  

    If they crash, we can consider selling puts but, for now, I don't trust crazy Chinese companies but this one did spin out of Bidu, so they're probably legit.  

    Good notes, Yodi – thanks.

    AAPL/Deano – Down on slow phone sales report, not likely to pop.

    • Mary Meeker’s annual internet trends report is out and it says that 2017 was the first year where smartphone unit shipments didn’t grow. (Read the entire report at Recode.)
    • Meeker also notes that the global smartphone ASP is declining despite the high-profile releases of premium phones like the $1,000 iPhone X.   
    • According to new IDC data, the global smartphone market declined 0.3% last year and will contract again this year before returning to growth in 2019. 
    • IDC expects smartphone shipments to drop 0.2% this year to 1.5B units but expects a roughly 3% annual growth from 2019 on with shipments reaching 1.7B in 2022 and a five-year CAGR of 2.5%.
    • China’s smartphone market dropped 4.9% last year and IDC forecasts a 7.1% drop this year before “flattening out” in 2019. 
    • Forecasts for shipments and market share by platform: Android (GOOG +0.5%)(GOOGL+0.7%), 1.24M (84.8%; -0.5% Y/Y); iOS (AAPL -0.3%), 221.4M (15.1%; +2.6%); Others, 0.7M (0.1%; -66.8%).     
    • Previously: Meeker report: Amazon gains market share, China gains on US (May 30)

  27. Phil,  I sold my DXD pre-reverse split hedges yesterday when we were down big.  I want to reestablish a DXD hedge in the new option series.  Any suggestions?  Thanks.


  28. RTY/Phil- ES down, I guess you going to hold the shorts overnight?


  29. DXD/John – We were looking at the Oct $32 ($3.10)/$36 ($1.85) bull call spread at $1.25 that pays $4 back on not much of a move down in the Dow.  

    Fututes/Dave – Well, if I get even I get mostly out, of course.  2 is about right overnight, not 8 or 10!  Looking good on /RTY and hopefully /ES can get below 2,720 again (I need 2,717.375).


  30. Hmmm, might want to consider putting GOGO back in for a spin….

    I'd have to see how bad things are but, at $4.90, the 2020 $5 puts can be sold for $1.65 so net $3.35 entry and that can be paired with a $3 ($2.40)/8 (0.80) bull call spread at $1.60 so net 0.05 credit on the $5 spread that's $1.90 in the money seems nice.  


  31. Here's why I wanted a fat short today:


  32. Good close on /ES – Almost even and yes, I did leave them all on. 

    I just couldn't find any reason not to stay short….


    • The American Petroleum Institute reportedly shows a build of 1M barrels of crude oil for the week ending May 25, vs. a draw of 1.33M barrels last week.
    • Gasoline reportedly shows a draw of 1.68M barrels and distillates show a build of 1.46M barrels.
    • Nymex June crude recently was at $68.23/bbl in electronic trading, little changed from today's $68.21 settlement price.

  33. Good morning!

    Just drifting along from yesterday so far.  

    Germany is selling off, so I'm keeping an eye on that 12,700 line:

    2,720 has been holding on /ES so far.

    Dollar looks like it found a floor:

    Notes back in free-fall:

    • Japan +0.83%.
    • Hong Kong +1.37%.
    • China +1.78%.
    • India +1.13%.
    • London +0.19%.
    • Paris +0.16%.
    • Frankfurt +0.01%.
    • The outlook on U.S. economic growth remained “upbeat,” despite concerns about the ongoing international trade spat between the U.S. and its trading partners as manufacturing activity shifted into "higher gear," a Federal Reserve survey showed.
    • The central bank’s Beige Book economic report showed the U.S. economy and inflation expanded at a modest pace, wages increased,
    • The Fed hinted at a faster pace of consumer inflation, citing "some Districts also noted that their retail contacts were more able to pass along price increases to their customers than in the recent past.”
    • The release of the Beige book did little to shift the narrative on monetary policy, drawing a muted reaction in markets, as traders continued to expect the Federal Reserve will hike rates at its next meeting in June.
    • Source: Investing.com
    • A major jump in energy prices – with Brent reaching $80/bbl this month – pushed eurozone inflation in May back to the ECB's target of "below, but close to 2%."
    • Policymakers will now have to assess the current 1.9% rate, ahead of possible plans to begin tapering bond purchases in September and end the QE program in December.
    • Washington does not want a trade war with the EU, but whether there is an escalation or not will depend on the bloc, U.S. Commerce Secretary Wilbur Ross told Le Figaro.
    • The U.S. today will likely announce import tariffs on steel and aluminum originating from the EU, as well as issue a decision on Mexico and Canada, either before markets open or after the markets close.
    • In retaliation, the EU has said it will set duties of €2.8B on U.S. exports, including jeans, bourbon and motorcycles.
    • Related tickers: HOGDEOBF.BWSKY
    • Previously: WSJ: U.S. to follow through on Europe steel, aluminum tariffs (May. 30 2018)

    • China's factory activity grew more than expected in May, with the official manufacturing PMI coming in at 51.9 – the highest level since October 2017 – boosted by strong demand factors and gains in global commodity prices.
    • Meanwhile, China's reported services PMI was recorded at 54.9 from 54.8 in April as the manufacturing giant  continues to transition to a services and consumption-driven economy.

    Mass layoffs at IBM Watson Health

    • IBM (NYSE:IBM) has reportedly laid off 50% to 70% of the workforce at its Watson Health operation, primarily at recent acquisitions for which Big Blue paid at least $3.6B.
    • Those include cloud-based services Explorys and Phytel, as well as medical image company Merge Healthcare and Truven Health Analytics.
    • One former employee wrote "the message was that there are about 7,000 people in Watson Health today and this was a cost-cutting exercise."

  34. API showed very poor demand over the holiday weekend.  If EIA confirms it at 11 – oil should take a dip. 

    $67.50 is the next good shorting line but tight stops above and don't risk the report.

    Over $77.50 on Brent would be a bad sign for bearish bets.

    Any build in /RB will send it down so I like shorting below $2.175 with tight stops and $2.18 with a bit more conviction.