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Wednesday Fed Watch – Do Interest Rates Matter?

Image result for fed rate hikes 2018It's Fed day! 

The Federal Reserve is expected to raise rates by 0.25% this afternoon but what matters more is what Chairman Powell has to say at 2:30.  In the last statement, the Fed eliminated a line from the March statement that said “the committee is monitoring inflation developments closely.” That seems to indicate they feel inflation is now at their 2% goal and clearly unemployment is below their goal so now the Fed must move to head off inflation pressure before it begins.

In fact, this morning's Producer Price Index is up 0.5%, miles above the 0.2% expected by leading economorons, who obviously do not shop where we shop or eat where we eat. This should bring the markets down from their perch and we can short the S&P (/ES) below the 2,790 line (with tight stops above) and, of course, the Nasdaq (/NQ) at 7,250 and the Russell (/TF) at 1,685 – all Sept contracts now (thanks Jeff!). Yes, we keep trying to short and it keeps failing but – ONE DAY!  

There are already many signs of wage inflation.  The recent Beige Book indicated all regions were having a lot of hiring pressures and once employers have to start competing for employees by raising wages and benefits – that's a genie that's very hard to put back in the bottle.  Wage inflation is bad for Corporate Profits and wages are about 30% of a Corporation's Operating Costs so a 10% increase in wages knocks 3% off earnings unless they raise prices – which adds to inflation and makes more workers demand higher wages….

Image result for wages profitsI remember working in the late 70s and early 80s when it was downright insulting if you didn't get a 5% annual raise just for doing your job 10% was fairly normal for doing a good job and when you took a job that started at $25,000, you fully expected to be making $50,000 in less than 5 years.  That seems like a fantasy these days as it's been decades since the workers have been given a fair share of the profits.  

At some point, the pendulum will swing back and some portion of those $2Tn in Corporate Profits will find it's way back to 165M workers as they begin to realize that just half of those profits would represent a $6,060 PER WORKER raise they are leaving on the table by not negotiating harder.  That's right, $1Tn is a lot of money and US Corporations are sitting on $2Tn in CASH!!! after being given massive tax cuts as they brought it back from overseas. 

Ultimately the taxpayers funded that tax break for the Corporations and they promised to use that money to raise salaries and hire more workers but none of that happened and don't think the Democrats aren't going to remind voters of that in November's mid-term elections.  The Republican's got elected promising workers they would make things better but the answer to the simple, standard question of "Are you better off now than you were two years ago" is, sadly, "No" for the bottom 80% of our population.

Image result for minimum wagesYes, there are more jobs but they are still crap jobs and, in reality, 200,000 jobs a month is barely keeping up with population growth so jobs are not really being created at any good pace.  The biggest impact is coming from one of the things the GOP would love to roll back and that's rising minimum wage requirements across the country – wages are going from $7.25 to $15 over time in many states – after years of stagnation.

Speaking of crap, we found out yesterday that Elon Musk will be laying off 9% of Tesla's (TSLA) workforce and, if you think it's hard to reconcile Musk's CLAIMS that Tesla will be doubling their rate of production by the end of the month with the FACT that they have decided to lay off 9% of their employees – then you must be too rational to trade the market.  Fortunately, TSLA investors have never been accused of being rational and they are still BUYBUYBUYing the stock this morning, pushing it to nearly $350/share.  We discussed how ridiculous this was in yesterday morning's report but we also cautioned waiting for the madness to subside before jumping in on the short position.

We added more hedges to our Short-Term Portfolio (which protects the Long-Term Portfolio) and our Options Opportunity Portfolio, which we reviewed yesterday and we will go over all of our Member Portfolios in this afternoon's Live Trading Webinar – right into the Fed meeting and Powell's speech – so it's going to be a very exciting day!   

Yesterday, in the Morning Report, we suggested an upside hedge using the Nasdaq ETF (QQQ) 2020 $220 calls which did fill at $2.03 in the morning and finished the day at $2.20 – up 0.17 (8.4%) in day one of 583 until expiration.  This is why we don't fear missing out on a rally as it only takes a very small percentage of our CASH!!! to make sure the markets won't fly away from us. 


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  1. Phil – are those the June futures contracts?

  2. Or the septembers that just got switched over? 

  3. Good Morning.

  4. Phil/OHI

    I want to hold on to my shares of OHI (paid $26.60 now $31.21), but I have June $26 calls that I sold for $1.88 now $5.10.  Can you help me make the right roll so I don’t have to re-buy the shares. I am finding it difficult to find anything to roll to. I am willing to sell both calls and puts. Dividend “record” date is the beginning of August. Thanks.

  5. 5% – I remember one of the reasons of starting my own business was the 'last' raise' I received was one dollar. 

    That was about a 6% raise back then. Now, a raise of 1-2 percent with a straight face is just :(

  6. Good morning!

    So far, no damage to the indexes despite very high PPI.  Maybe this market will never go down?

    HRB/DC – Earnings were great too, just guidance taking them down.

    Shares of H&R Block Inc. fell more than 14% late Tuesday after the tax-preparation company reported a first-quarter earnings beat and increased its dividend. H&R Block said it earned $1.14 billion, or $5.45 a share, in the quarter, compared with $783 million, or $3.77 a share, in the year-ago period. For the year, about 20 million tax returns were prepared by or through H&R Block in the U.S., a 2.5% increase over fiscal 2017, the company said.

    Fortunately, our spread is the Jan $22/27 bull call spread with short $25 puts so we're still in good shape as long as things calm down.  

    Big Chart – NYSE still hanging in there and Dow over the 20% line so does the Dow fail first or the RUT confirm the next bull leg over its 20% line?

    Futures/Jeff – I'm always using whatever TOS defauts to so Sept (/##U8) but thanks for mentioning.

    OHI/DC – Wow, that's a nice dividend!  Never noticed that…  So you have the stock at $26.60 and sold June $26 calls for $1.88 – I'm surprised you haven't been called away.  The dividend is $2.64 but let's say you sell 1/2 the stock for $31.56 and then sell that number of 2020 $30 puts for $4 ($2 per 1x), which is like rebuying for $26 and pays as much as the dividend over 18 months.

    Then you have $15.78 to spend and you can buy 3x (not 3x 1/2) the 2020 $27 ($4.70)/$32 ($1.50) bull call spreads for $3.20 ($9.60) and roll the 1x short June $26 calls at $5.50 to 2x the Sept $30 calls at $2 (-$1.50) so you are essentially rolling your loss on the short puts ($3.62) but putting $6.68 back in your pocket and you still have 1/2 your original shares for dividends and they are now only slightly covered by the short Sept $30s (which you will roll as well) plus you have 3 x $5 spreads ($15) of additional potential upside from the spread (as it has no additional cost basis).

    Raises/1020 – Younger people don't even think to ask for them, they pretty much only get them when promoted.  

  7. Definitely just general news but….I thought this article from Science News would be of interest.

  8. Good Morning, All!

    Join us for our usual weekly webinar, today at 1pm!

  9. API showed an 833,000 build in Oil and a 2.3M build in gasoline and a 2.1Mb build in distillates.  So fa, it hasn't affected oil much as it's $66.15 but, if EIA confirms those numbers, I think we'll see $65 again.  

    So we can play /CL bearish below the $66 line or if it has a silly spike up on inventories but tight stops above.

  10. Well, so much for that!   Somehow EIA is showing a massive draw instead so huge relief rally we can't bet against:

    EIA Petroleum Inventories

    • EIA Petroleum Inventories: Crude -4.1M barrels vs. -1.4M consensus, +2.1M last week.
    • Gasoline -2.3M barrels vs. +0.4M consensus, +4.6M last week.
    • Distillates -2.1barrels vs. +0.2M consensus, +2.2M last week.
    • Futures -0.59% to $65.97.

  11. FU NASDAQ!!!!!!!!!!!!!!!!!

  12. Good for the longs, at least. 

  13. Food truck evolution: Owners strategize as novelty wears off

  14. How Batteries Went From Primitive Power to Global Domination

  15. Phil/OHI

    Thank you for your suggestions.

  16. Trump Has Created ‘Worldwide Vacuum,’ Says Germany’s Top Diplomat

  17. Nasdaq completely out of control at 7,285 – up almost 1% on the day with the other indexes up 0.25%.  

    /SI blasting over $17 as the Dollar takes a dive back to 93.60 which is down 0.5% this morning.

    Gold is very lagging – just over $1,300 so /YG is a good long with tight stops below.

    I like /RB below the $2.12 line with tight stops as well.

    You're welcome, DC. 

  18. /RB/Phil- short?

  19. Buy back HRB $27s?

  20. Draper on Crypto.

    "I expect that since cryptocurrencies will increase the velocity of money, the current $86 trillion global market for currency will grow to be about $140 trillion in the next 10 years, and that growth will be in crypto. In fact, I estimate that fiat currencies will actually decrease in use, and that crypto will become as much as $100 trillion of that market. I expect Bitcoin to be about 10% of that market, or $10 trillion. There is a lot of room to grow there."

    Don't agree. The deriviatives market is already $700T to $1.5Q. Or more. That's the problem with fiat as a function of a manufacturing and real estate backed value system of trust: the Knowledge Economy is already 5-10X larger than the monetary system that its own self-existence has deprecated. That's why the mortgage crisis was so meaningful. It wasn't a mortgage crisis, it was a currency crisis! Derivatives are the de facto construct attempting to value the transactions that are actually occurring in this much larger New Economy mechanism (Knowledge).

    People low-ball these estimates, like Draper calling out "currency" being worth $100T in 10 years, so they can sound credible (don't "overdo it"). Why do that? That's boring. And more specifically, it's inaccurate: one only needs to look back and say how does this new, merging asset class go from $150M to $300B in 6 years while 99% of the "main stream media" observers were screaming tulip bulbs and beanie babies? There was just as many articles articles declaring bitcoin is dead and going to zero when it crashed from $15 to $5 in 2012 as there are now. For me personally there's an academic exercise here, to find and apply the reasoning for this phenomena we've witnessed, and will continue to witness, based on socioeconomic principals, that's what's interesting to me. I have no interest in articles like this. They teach me nothing.

  21. Short-Term Portfolio Review (STP):  I'm always surprised we're not down more on the STP. $174,200 is up 74.2% for the year and, although we have some very aggressive hedges that are killing us (insurance costs), we hedge our hedges by selling short calls and, of course, we have our short puts, which are mostly doing great.  

    Our last update was on 5/17 and we were at $175,267 and made no adjustments but then we got more aggressive on our hedges as the market went higher.  Overall, we're down $1,067 (1%) for the month, so essentially nothing – especially compared to the gains in the LTP.  If anything, it probably indicates we need more hedges as we're not losing enough in the STP on these huge up moves!  

    • SQQQ – We bought back the short calls and now we have very little value left in the Sept $15s but that means we can get a cheap roll (always look on the bright side).  This is why we have $182,000 in CASH!!!, folks, we use it to buy more insurance!  The Jan $15s are just $1.70 so + 0.80 and we can sell the Jan $25s for 0.70 so net 0.10 ($800) to do that roll and we'd still have $80,000 worth of protection so let's do that!  

    So here we're buying 3 more months of insurance 10% out of the money so we're giving away a 3% Nasdaq correction but our crazy LTP gains far more than cover that so no need to lock in 100% of our gains when we roll our hedges.  For SQQQ to get to $25, it has to about double and that would be a 30% drop in the Nas and I'm very confident we'll have time to add more hedges before that happens so there's really no need to spend more than $800 to adjust our hedge.

    Image result for hedgingThat's the key to these hedges, there's a big up-front cost but, if you maintain them correctly, they require very little effort to keep them working for you (kind of like hedges). 

    The 8 short puts – We sold about $30,000 worth of puts on 8 stocks we'd love to own in the Long-Term Portfolio if we can buy them at those strikes.  As long as we REALLY want to own, for example, 500 shares of IBM for $140 (it's $147 now), then it's really just free money to promise to buy it for that price.  

    That's how we fund some of our hedges, simply promising to buy things we want to buy anyway.  It's only been 5 months but we've already gained about $10,000 or 1/3 of what we sold.  This is one of the most neglected strategies in the market – even by "professional" hedge fund managers.  

    • DXD – These things are getting complicated now.  DXD reverse split so we now have 50 of the Oct $32/36 bull call spreads per our last adjustment and we added 100 of the July $31/32 bull call spreads at net 0.40 and they are still 0.60 in the money, so not too worried so far.  
    • IQ – This was a great play except we also sold 4 short calls and those went flying higher and now we'll have to roll our way out of them.  We're in the spread for net $5,700 and it's a $15,000 spread if all goes well and, at $12.50 in the money, the short calls are net $6,250 so actually still a nice profit – even if we don't fix this.  Since we have tons of cash let's do the following:
    • Sell 20 IQ 2020 $15 calls for $22.60 ($45,200) 
    • Roll 20 IQ 2020 $22.50 calls at $17.80 ($35,600) to 40 Jan $35 calls at $8.20 ($32,800)
    • Roll 5 July $22.50 calls at $12.35 ($6,175) to 10 Jan $35 calls at $8.20 ($8,200) 
    • Buy 50 2020 $25 ($16.50)/$40 ($11.50) bull call spreads for $5 ($25,000) 

    That adds $19,200 to our cash pile and, if those short calls expire worthless, whatever net is left on the spread is more profit!  THAT is how you adjust a spread…  We opened the spread at net $5,700 and we've taken a $13,700 profit off the table and yes, we still have the risk of the short calls going more than $15 over $35 and blowing our covers but then we'll just roll and do it all again.   And we haven't even sold puts on this one!

    • TZA – We added the Oct $8/13 spread to our July $10 calls as they are looking hopeless unless there's a real catastrophe.  After the Fed, I may be inclined to roll the July $10s but really, they are essentially dead money.  

    That was easy.  Not too many positions but a good amount of downside coverage and plenty of room to add more if we need it.  That leaves us free to keep being aggressively long in the LTP. 

  22. officially the stupidest idea I've ever heard.

  23. /RB/Ravi – Yes, see above.  You are starting to get the hang of this.  Very important that we see a lot of exports in the 1pm report or we'll have to get quickly out of /RB.  

    HRB/Knight – Yes, good idea.  In the OOP and the LTP let's buy back the HRB Jan $27 calls at $1.20 as this seems like an over-reaction.

    Derivatives/BDC – It's all gaslighting as there is not $700Tn and certainly no $1.5 Quintillion as there are ONLY about $250Tn worth of actual assets in the World and, no matter how many times you trade them back and forth or how many notional derivative contract bets you play against those assets – there's still only $250Tn of actual value.  

    As noted in the chart, the actual supply of money is $37Tn, covering about 15% of all assets and all crypto together isn't $1Tn and trading cyrpto back and forth 1,000 times doesn't make it "worth" $1Qt, just like trading a share of TSLA back and forth 5M times a day doesn't add $1.5Bn in value.  I don't know how people can even talk such utter nonsense.  

    Stupid/BDC – Yeah but they raised $42M!  It's a PT Barnum World out there and they are just lining up the suckers…

  24. Contracts between private parties (transactions) are what define a market economy and it's value in the first place, all of which of course, is a figment of the human imagination. Therefore, all "value" is a human construct, and all of which is imaginary.

    Please note that you've asked to remain civil for purposes of having good discussions and you insulted me twice in your post with the gaslighting and nonsense comments. I'm challenging my world view, and I'm reporting it here in the low probability anyone else is interested. If my comments are not appropriate to your board I will be more than happy to immediately take them elsewhere.

  25. I am not sure you read my comments on HRB, was only mend for the early risers! As expected the puts have gone up considerable and the calls have come down in the same manner. I did not find any suckers anymore this morning buying my Jul 25 puts for .20 cents. However picked up some stock for 23.90. At the same time have put in an offer to sell the Oct 25 put for 2.30, in preparation for the next armchair trade.
    Phil's suggestion to buy back the Jan 19 27 caller for 1.20 is gone up already to 1.33. I decided to leave it as it is part of my Jan 19 armchair trade. Let’s see how it will work out.

  26. Armchair trades on CLX, given to you on 5/23 and 6/8 are doing very well.

  27. A further trade I initiated today ENB sold the Jul 30/32.5 strangle and bought the stock. No div during this short period but having a yield of 8.3%.  A Company operating in the US and Canad, is in the transportation of oil and gas and energy in general. Do your own study and if invest do it in small doses.

  28. Geez, BDC, Phil's an east coast guy; that's normal friendly conversation.

  29. LOL/snow, ok ok I know. :P

  30. information as a value-based probability function is coming into sharper focus.

  31. Holy cow !   GNC is up 34% in the last week.

    Phil, I listened  to their webcast at the Morgan Stanley conference, and thought it sounded pretty good, but not this good.  Shows you what can happened when stocks really get out of favor.

  32. GNC – Could it be as the financing deal gets closer to conclusion?  When it was announced, the stock was at $5?

  33. TWTR 01/18/2019 35.00 C +1,863%

    Good grief. That was free money

  34. Boy those Webinars are exhausting – I hope you guys get something out of them!   

    Gaslighting/BDC – Well it wasn't directed at you personally and I can't help it if you take everything personally but you're not the one I was referring to by any stretch.  

    HRB/Yodi – Both valuable and timely advice, thanks!  

    GNC/Albo – It always amazes me how long things can remain undervalued and then get "suddenly" discovered and violently correct.  

    So, in case people missed the Webinar, the Fed did what we thought they'd do and the market pulled back like we thought it would and now we'll see how things settle out over the next couple of days. 

    The ECB meets tomorrow and if they turn more hawkish – look out! 

    I cashed the original /NQ and other index shorts from this morning (after a rough ride) and now have just 3 shorts at about 7,245 and also a couple of /RB shorts at $2.125 avg and the long /YGs and the usual /NGV7s, of course.  No /KC at the moment.

    GNC/Mito – The big deal is with the Australian company and that's not getting noticed and probably won't get a proper reaction until its official.  Long-term patience play to me.

    TWTR/BDC – They should have made me CEO two years ago – I said it was all about raising the character limit to unlock the ad money (getting a tweet-happy President has also helped). 

  35. Mito – Meanwhile, the stock has pulled back sharply.

  36. NFLX back to where I have to short it.  

    Hard to pick a short with so many tempting choices:

    Uh-oh – more news on TSLA as Musk announces he bought 72,500 shares of Tesla.  Gosh, that's $25M out of his $10,000,000,0000 so nothing more than a publicity stunt – and a cheap one at that!

  37. Phil/no worries - yeah I take stuff way to personally sometimes. It's a weakness, I'm working on it

  38. Phil

    Hello from Texas- been traveling the past 4 weeks! (Took your advice!)

    Could not help but notice AT&T diving after the verdict.

    People have know about this deal for 18 months, and unless they were expecting the ruling to be negative, I don’t understand the price action today.

    And if we think T is paying to much, WE HAVE KNOWN THAT TOO!

    What is your take on buying T at these levels?

    (I have been selling puts around this price, the 30’s and 31’s specifically)

  39. Phil/NFLX/TSLA

    I have been dying for an opportunity to short these two.

    So, please bang the table…when you decide to act…personally, I think we should allow them to move a little higher, bas3d on the charts.

    However, The tariffs taking eff3ct could be the day for a market top.

  40. Mueller Requests 150 Blank Subpoenas

  41. Ah, therapy. Reading the tweets of Ana Navarro.