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TGIF – Markets Close Q2 In the Red for the Year

What a rally, right?

It's funny how excited people can get over nothing and, if you listen to CNBC or the rest of the Financial Media, you would think this market is completely unstoppable because we bounced off 24,000 on the Dow yesterday but that's only because they assume you are an uncritical viewer with no memory and no ability to step back and look at the big picutre which, as you can see from this Dow chart – does not actually look all that thrilling – even with this morning's 0.5% pop in the Futures.

The Dow opened 2018 at 25,250 so we're about 1,000 points lower (4%) at the moment and the S&P is basically flat at our 2,728 line and the Nasdaq is higher at 7,100 from 6,700 so call it 6.5% and the Russell is up 100 at 1,650 (also 6.5%) and the NYSE (the broadest index) started the year at 12,900 and sits at 12,500 so down 400 is -3% for the year.

So it's a mixed bag and not too exciting and, of course, this is the last day of Q2 with a very low-volume holiday week approaching which means a lot of the action we're seeing now is window-dressing and not at all to be taken seriously.  Also notice that, this morning, we can attribute ALL of the market's 0.5% gains to a 0.6% drop in the Dollar – which is the thing the markets are priced in.

When the value of the thing (Dollars) the market is priced in goes down, then you need more of them to buy the same share of stock so the VALUE of the stock does not change, but the price does.  It's a neat little magic trick the funds often pull at the end of the quarter to prop up their portfolios so they have pretty charts and graphs for you to look at in the prospectus – so they can sell you more crap next quarter!  

We had big volume on Monday as the indexes took a tumble but, since then, we've been extremely weak on volume as we've dribbled along to our weak bounce lines.  On SPY, you can see that all of the volume on Tuesday and yesterday barely add up to Monday's down volume yet the very, very uncritical Financial Media just waves their pom poms and tells you how wonderful the rally is and how strong the markets are:

Date Open High Low Close* Adj Close** Volume
Jun 28, 2018 269.29 271.75 268.49 270.89 270.89 76,601,900
Jun 27, 2018 272.26 273.87 269.18 269.35 269.35 105,110,700
Jun 26, 2018 271.64 272.56 270.79 271.60 271.60 68,547,400
Jun 25, 2018 273.44 273.62 269.10 271.00 271.00 137,854,200

And, of course, we have our beloved leaders running around telling us how great things are and how we can easily withstand a trade war with China and Europe and Mexico and Canada because none of them make up a major portion of our trading.  Really, that's what the "analysts" say on TV and in the press and nobody challenges them on their nonsense figures – unless of course we do some amazing amount of trade with Fiji I was unaware of (maybe the water?). 

There's simply no accountablity anymore in this "facts don't matter" World we've constructed.  If you feel like being bullish – just declare yourself a bull and deny any evidence that seems to be bearish and all will be well.  So far it's mostly working so more power to you, I guess…

You can believe we can not collect taxes from rich people or corporations and that the subsequent deficits don't matter and our failing infrastructure doesn't matter and all the social programs we're cutting don't have consequences and, because most people have the attention span of a gnat – you will seem to be right for a very, very long time.  The Roman Empire didn't collapse in a day but see if you know anyone who even had the attention span to read the definitive book on the subject.  Here's the cliff notes video.

Aside from pants, both Roman Empires fell apart after over-reaching, running up massive debts and facing rebellion from outsiders who were sick and tired of their self-righteous crap.  When you run around the World telling other people how to run their lives – you'd better have your own house in order and the second Roman Empire did not learn that lesson from the first and the third Roman Empire was essentially Great Britain which also lost control of everything over time and now it's Pax Americana, the Empire we began after World War II which has long been tolerated because we have never abused our power – until now.

Image result for trump trade war cartoon?What Donald Trump calls "weakness" of previous administrations is what used to be called restraint.  No one minds a giant in the village when he helps plow the fields and brings trees from the forest to build their homes but when he starts jumping up and down and demanding "fair trade" by insisting that a 5-foot villager should also provide 50 trees a day to "balance" the books – then the villagers tend to get together and decide it's time for him to go.

Trump is a bully who is encouraged by the "weak" responses to his tariffs from the rest of the World but, next week, they actually go into effect and if our former allies announce a full retaliation right when US companies are going to announce their forward projections for the rest of the year – look out below! 

6 major banks did not do well enough on their stress tests to be allowed to increase dividend payouts or stock buybacks (GS, MS, JPM, AXP, MTB and KEY) and Deutsche Bank flat out failed with "widespread and critical deficiencies" – these things are hard to square with a "robust" economy.  China's banks broke a 13-day losing streak this morning as the Government stepped in with more easing but it's a weak bounce, at best and the easing weakens the Yuan which then make the trade deficit even more "unfair" to the US.  The Bulls are betting China just sits there and takes this abuse – I'm betting they are taking their time and will strike back at an opportune moment.

Argentina is leading Emerging Markets down to Hell as their Peso is rapidly collapsing and this chart is against the Mexican Peso, which is also falling compared to the Dollar.  We will all cry if Argentina falls apart but it's just another major thing the markets are ignoring at the moment as there are simply so many things to worry about that this doesn't even rate a mention in the media.

In fact, the only thing doing well is oil, which blasted up to $74 just in time to completely screw over 200M Americans who will be filling their tanks over the holiday weekend.  That's because we've also clamped down on Iran Sanctions so the Saudis now owe Trump big time as his timing – the same week the Saudis said they would add 1Mb/day to production – means another $2.2Bn a month for the Saudis to play with.  This allows Saudi Arabia (who were also involved in campaign collusion) to strengthen their ties with – you guessed it:  Russia!  

No collusion, fake news… you know the drill.  

Meanwhile, 24,450 on the Dow (/YM), 2,730 on the S&P (/ES), 7,075 on the Nasdaq (/NQ) and 1,666 on the Russell are our weak bounce lines and we'll see if we can hold them today – otherwise, it will be time for more bearish bets into the holiday weekend.

Have a great weekend, 

- Phil


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  1. Not many tweets about the markets recently!

  2. Good Morning.

  3. Fascinating reading:

    At the heart of his and Tversky’s work is the idea that when we think, we use two systems. There is our “fast” System 1: automatic, effortless, intuitive, capable of providing instant answers to simple questions like “2 + 2 =” or “Do you love your mother?” Then there is our “slow” System 2, the back-up processor, which comes into operation when we need to stop and think about questions like “What’s 24 x 17?” or “What’s the endgame in Crimea?”

    While we like to think we are guided by our System 2s — that we are rational, calculating beings — System 2 is lazy, all too ready to endorse the snap judgments and impressions of System 1. We form mental shortcuts (“heuristics”) to simplify complex questions: so instead of “Is this party capable of leading Britain?” we ask, “Do I like David Cameron’s face?”. We are influenced by “anchors” — an estate agent telling us a two-bed flat in Hackney is worth £20 million — and by “framing devices” — whether the question is phrased “Should Scotland be an independent country?” or “Should Scotland remain part of the UK?” We are prone to use sensational stories to explain events rather than rationalise their probability — so if we hear of two cycle deaths in one week, we assume it’s a whole lot more dangerous on the road, even though it’s more likely to be random.

    One of the rules:

    Don’t succumb to “the illusion of validity”. Repetition and clarity can make “facts” appear true when actually we must continue to question them.

  4. Phil or anyone-- do you have an opinion on Brazil? 

    Weren't you a fan of EWZ in the past?

  5. Danial Kahneman's Thinking Fast and Slow is a great 'listen'…..

  6. Obviously, our POTUS read the book as well…..

  7. Obviously, he gets it all wrong….. :(

  8. Good morning!

    As noted above, it's all about holding the bounce lines and then we'l want to see those 50-dmas taken back and none of that matters if they NYSE still can't get over 12,800 so I'm ready for a week vacation as nothing that happens between now and Tuesday, July 10th is going to mean very much.  

    I am going to head back to NJ next Thurs but decided to stay in Florida for the holiday (since we're already here and there's no school).

    Tweets/StJ – True!  Psychology true too…

    EWZ/Jabob – That was because the economy was being taken down over a beef contamination issue that was overblown.  In this case, the economy was being shut down by a strike (over now) that will not be easy to recover from and, despite the sell-off so far, we're still 100% higher than where I was pounding the table on the ($16).  What's at issue in Brazil now is how easily the striking truckers got their way (10-day strike), forcing even the CEO of state-run Petrobas to resign over fuel prices.   There's still talk of a possible coup as the Temer government has almost as many scandals as the Trumps – well, maybe 1/3 but that's still a lot!  

    If anything, I'd play PBR long at $10 as that's just $60Bn for a company with $88Bn in sales and oil at $75.  CVX has $134Bn in sales (1.5x) and has a $243Bn valuation (4x) and it's possible Brazil spins PBR private to get quick cash and get away from giving the people power over oil prices (and making it harder to blame the Government for them).  

    For PBR, the 2020 $12 puts are $3.30 and that's 13% off if assigned ($8.70) from here so let's sell 10 of those in the LTP for $3,300 and buy 30 of the 2020 $7 ($3.70)/$15 ($1) bull call spreads for $2.70 ($8,100) for net $4,900 on the $24,000 spread.  It's a good long-term hedge on high oil since we generally like to play it short-term short.  

  9. thanks Phil!

  10. Thanks for the good idea, Jabob.

    Wow, up 250 now on the Dow so over the weak bounce but it needs to be held for 10 days before it counts due to the holiday.  Meanwhile, this is why I was thrilled that the STP made $45,000 and the LTP lost $40,000 in the past week – I am so happy to be neutral while this mess sorts itself out! 

  11. As you have taught me/us Phil, the market up 1% with the dollar down .8% is not that impressive.

  12. Phil/Tech

    Can't believe there are any buyers out there until the full reaction (or retraction) is out on the burgeoning trade wars.  I think this guy (below) has some good points.  In gist tech performance has been very worthy, but the risks to that performance (in lieu of trade uncertainties) are worthy too.

  13. Not impressive/Deano – No, it's not but you still have to respect the technicals – if they hold.

    THAT is how you dress a window!  

    Someone is still worried about something…

    Congrats to the /SI believers:

    You could also day-trade WPM if you can't play silver futures:

    Or ABX:

    Risks/DC – I agree.  It's amazing how willingly people gloss over this stuff but I guess it's the same brain that gives Trump a pass on everything else.  

  14. hmny up 9c!

  15. OLED – Finally catching some bids.

  16. Boss, do you think SBUX marks and end of era?  Is this 70 Billion market cap company justified.  Compared to other trendy eateries – is it now out of fashion.  I am thinking there's a future in coffee and StarBucks is the vehicle?

  17. HMNY/Jabob – So annoying, I was hoping to DD again at 0.15!  Would have been 1/2 back out already even…

    Actually we did hit my target and forgot to buy.  It's my bad because I had 0.15 in my head but, when we did the math last month, I worked out 0.20 for the proper target to DD:

    Submitted on 2018/05/25 at 3:18 pm

    HMNY/John – Yes, we still have the short puts and fortunately they still have enough premium not to get assigned – so far.  I'm not adding to our already big position at the moment but I expect to do so when we finally get a proper bottom.  For example, the OOP has 50 $1 calls at 0.58 and 35 short $2.50 puts at $1.65 so net $0.85 on 3,500 and another net 0.40 loss on the calls means we "own" 3,500 for net $1.25 so if we convert those to stock (net $1.25) and add 6,500 more at 0.40 ($2,600), we're in 10,000 at 0.6975 ($6,975) and down $2,975 at 0.40 – I can live with that and even buy another 10,000 at 0.20 for $2,000 more to drop our average to about 0.35.

    OLED/Albo – I think people think they are back in the running with AAPL as they announced the need for a 2nd supplier. 

    SBUX/That – International is the key for SBUX.  $70Bn doesn't matter, MCD is $123Bn and I'd much rather sell you a $4 cup of coffee than $4 worth of McNuggets!  As shark Kevin likes to say, what matters is the MONEY and SBUX gets $22Bn in 28,000 stores ($785K/store) and drops $3.3Bn to the bottom line (15% for a p/e of 21) while MCD sells $23Bn worth of crap in 37,000 stores ($622K/store) and drops $5.2Bn (22.6% for a p/e of 23.6) to the bottom line (franchise model). 

    So, essentially they are priced about the same but I would say SBUX clearly has more room for growth as you KNOW many people who have coffee at SBUX 3-5 times a week while people who go to MCD 3-5 times a week usually don't socialize.  cheeky

    Consider China and India (half the world) still drink tea so PLENTY of room to expand and I personally walked over two blocks the other day without hitting a Starbucks in Midtown – and I wanted one, so I was pissed!  

    Starbucks Infographic

    46 feet between SBUX on 33rd and 5th – I don't know how people can last…

    At least they are making them big enough now:

    Image result for starbucks stores near each other

    You're going to bet against that?  

  18. Kudos to jabo for going from being ignored to getting a star by his name.

    MCD/ Phil      HaHa  People who go to MCD three to five times a week dont live very long.

  19. Finviz went down so the charts are wonky.

    SBUX reminds me I was considering QSR because Tim Horton's is rapidly expanding (they also own Burger King and my personal favorite – Popeye's).  They are priced about where SBUX is so not "cheap" at $60 (p/e 21) but I don't know if they'll get any cheaper.  I think we should take a good look after the 10th but I think expanding Tim Hortons down from Canada is going to be a home run because DNKN really, really sucks and my teens and their friends get very excited when they hear a Tim Horton's is coming near them (and by friends I mean US-based chat groups).   So far, there are 850 Tim Hortons in the US (3,600 in Canada with 1/10th the population) and it's a pure franchise model so they aren't taking a hit on the rollout but, on the downside, it makes it a very slow grind…

  20. Phil/Tech

    I am not sure there exist a very high bar for Trump’s tarries to succeed “in his own mind”.  Perhaps that is what people are betting on;  that it won’t last.  Hell, they haven’t even been executed yet!  

    I believe they are short lived, but not before a reaction from the other side(s).  I like your 6500 target on the NAS.

  21. To me SBUX still falling like a rock, possible some Mexican beans in the coffee.

  22. Phil

    You think copper will continue to move higher?

    Maybe a trade on FCX or BHP?


  23. 6,500/DC – Only a 10% correction but seems very far away.

    SBUX/Yodi – Wait until coffee prices spike, then they'll get hit harder.  Shultz retiring is the proximate cause. 

    Copper/QC – Just a Dollar move today and also China's stimulus but not a good long-term bet if overall economy slows on trade.  There's a lot of copper supply in Chinese warehouses (popular form of collateral there) that can flood the market if the Shanghai tanks and loans get called in so I don't like to bet copper unless it's under $3 for no reason (this week, there are reasons).

  24. CNBC running a TSLA commercial every hour today – 5-min segment about the history of the company (all good) and the stock price (all up).  

    Article this morning says they are running 4,200 cars/week but that is on a massive surge in effort – not very sustainable.  Also, who knows what the quality is but now they are spinning 4,200 as "close enough".  

  25. Canada announces final list of retaliatory tariffs

  26. Well, this must be frustrating for the bulls – giving up another nice gain into the close.

    Have a good weekend, 

    - Phil

  27. TSLA went down hard at the close too.

  28. Volatility in AAPL at the close as well.

  29. Damn was short es at 2736 almost all day got out for 50.00  because I wanted to start weekend early and woosh  into the close . Well finished the day green and no risk into next week

  30. 2018 now 2 Q's in the books. 1st quarter was interesting with the drop starting Feb 5th. Q2 was foreseeable: push/pull with bulls/bears, but ultimately, still down. Phil's first chart (2-yer DJ) says it all: trump market sailed along swimmingly in 2017 at the tail end of Obama's economy. Then Jan 26h hits, barely a year in, and it's all over. I mean there is zero chance of recovery at this point in my opinion. Lower highs and lower lows just like what we've seen. Nothing trump is doing will reverse this and in fact quite the opposite, acceleration of wealth accumulation to the top percentile is already a proven failure, now mixed in the punch bowl with chaotic rhetoric, decaying infrastructure, loss of American global leadership and this idiotic tariff tirade. It's happening in so many places at once it is hard to watch and keep track, but Pruitt is the epitome of the canary in the coal mine: 100% grifter with no other intentions whatsoever, carelessly dangling the safety of american health (EPA is about human health, not the "environment") while he instead appropriates first class flights to himself and his family's taxpayer-funded trips to Monaco. This time around we get to watch a market collapse on steroids.

    The next 4-5, maybe 6, quarters is where it all plays out (probably this next Q is pretty boring IMO, but then afterwards look out). No need to change my current predictions for this year set forth in January:

    1) 2018 will end lower than it started, and

    2) volatility will be higher

    If the big crash doesn't come this year it comes in 2019. Buy a front month SPY put every month for the next 18 months. If you spend $1 each month, currently that would get you the 259 puts, so ~12 bucks out of the money, that means you need the market to drop 11% in one of the next 18 months to break even (259-18 = 241, or 11% lower than 271 now). Is there a 50/50 chance of a 11% market drop in one of the next 18 months under Trump? That's the math. Seems like a good bet to me, IMHO.

  31. Nice whoosh down in bonds (almost a point) on the last half of the day as well w/no countermove in equities. Great week!

  32. BDC – I agree with the analysis 100%, but I'd also add that Trump is likely a traitor, and I hope Mueller gets his man!

  33. biodieselchris 

    Thanks, good Advice

  34. Phil – if I want to buy some stock and sell calls a year out against it, is there any rule of thumb about how to choose strike price and option price and know if it is a fair deal or not?

  35. From Morningstar GE

    We Downgrade GE’s Economic Moat Rating to Narrow and Reduce Our FVE to $15.70




  36. Japan to US: Auto tariff would damage US, world economy

  37. biodiesel …. thanks


    a friend recommended "What The Health" on Netflix.  Any opinions on the subject?

  38. US ambassador to Estonia resigns in frustration over Trump

  39. Will Mexico Get Its Donald?

  40. N.J. shutdown: It’s crunch time as Murphy, Democrats have until midnight to strike budget deal

  41. stockbern – personally I have a lot of opinions on the health, food and drug industry subject.

    I offer that personal responsibility has a lot to do with it (and by that meaning also societal training coming from parents). For example the first world nation of Japan largely has access to the same pharmaceuticals (and pharmaceutical pressures) that we do in the US. My grandmother takes statins after all (Japanese very much believe in the power of modern chemistry). They are by no stretch of the imagination largely vegetarians. Typical meals in Japan always include some of beef, chicken, ham, eggs, fish of course, and pork. Here is a typical japanese school lunch. Compare that to here.

    What seems very different to me is 1) processed food, and 2) the amount. I watch "My 600 lb life" often. The psychology of the people, like hoarders, is very much so an OCD. Food is like a drug. People get addicted to it. Food helps with anxiety, and anxiety is natural human emotion that internally we go in spades to avoid (myself included). Drinking, drugs (even caffeine), food (pleasure response to food mimics drugs for humans), OCD's like hoarding, tics, etc, they all service anxiety in one form or another. 

    Mathematically, one can simply not gain weight by eating more than 2000-2500 calories per day. If 70% of a population is overweight, that means 70% of the population eats over this amount. The correlation is 100%. 

    I haven't watched the netflix special yet but I want to. However, my gut reaction is negative. The US is a rich country. There's always a bunch of money involved with anything anywhere, it's just how our economy works. It has shock value to show how much money moves into government campaigns from food and drug industries and all of that, because, there's always a lot of money moving from industry into government and vice versa. However, this throws a lot of shade on personal responsibility – at the end of the day no one is forcing anyone to overeat. 

    Then, when we really need it, we want that pharmaceutical industry to be there for us – like beating back an infection with an antibiotic (that in the 1930's or earlier would've killed us), or lidocaine in our gums when we fill a cavity, so we don't need to writher in pain.

  42. BDC-thanks for your post.  I am offering the following for your consideration.

    Personal responsibility is key, but does not overcome certain basic scientific facts.  Much of the food chain in the US is of lower quality than in many other countries.  Some countries do not permit the processes used here because it lowers the quality of the food (funny how socialized medicine causes governments to be more interested in these things).  NPK fertilizer make produce look great, but much of it is still low in nutrients.  Selenium is a particularly important mineral that is depleted in much of the soil here.  

    Various natural substances that alter brain chemistry are concentrated in food to give people a psychological reward when eating.  Simply, this sells more product since you are now driving sales with hunger, taste and a 'high' (dopamine for example).  

    There is a wealth of research published that demonstrates that weight gain can be caused by fluctuations in hormones caused by fluctuations in blood sugar (high glycemic foods).  Corn is high glycemic and liberally used in many foods in many forms (corn starch, corn syrup etc.).  There should be another USDA calorie consumption survey out soon, but recent surveys have actually indicated a decrease in calorie consumption.

    Pharmaceuticals are not always the best or most cost effective treatment.  They are essential in some cases, but we use them almost exclusively and that has driven a significant portion of the increase in the cost of healthcare.  The pharmaceutical industry is not incentivized to produce cost effective solutions.  Google 'akkermansia mucinphilia' for a perfect example.  A. mucinphilia is an intestinal bacteria that has been proven to have a substantial positive impact on obesity, diabetes and inflammation.  All of the studies proving efficacy used the bacteria itself (both human and mice).  However, the product that will be produced is AMUC 100, a purified protein.  This sort if thing is done because you can patent the process  and charge more money for it, and you will sell more product because it won't implant in the intestine like the bacteria will.  No, there isn't an issue with manufacturing or overgrowth of the bacteria in the intestine.

    Not disagreeing with you or abdicating personal responsibility, just  noting that the topic is complex.  How much of the difference between them and us is discipline and how much is genetics combined with the nonsense that goes on in a corrupt system?  I would like to know the answer myself.

  43. seer

    akkermansia muciniphila - Do you have more details on this?  I'd like to know if there is a form of this that you can get without daily supplements   One article I read said cranberries contained high amounts and mice were fed fish oil….   what else is there?  Thanks for your help

  44. Good morning!

     The Shanghai Stock Exchange went from 2% to down 2% and our futures are plunging as well! 

     Could get very ugly as the Nikkei looks like it fell off a cliff and we are only down a bit so far:

  45. Watch Europe, if they go lower, we’ll follow:

  46. All downhill with Team Trump

  47. Road rage: NYC turns parking spots into car share-only zones

  48. Oil/Phil- trump tweet on oil, care for shorts?

  49. If Congress Changes Food Stamp Requirements, Kids Will Go Hungry

  50. Investors seek cover as trade battles rattle world markets

  51. Bank of Japan survey shows corporate sentiment worsening

  52. Any thoughts on /KC at this level? 

  53. It had a big sell-off but we don't know why yet so remind me to check the news later.