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Monday Market Momentum – Uptrend Continues with Trade Talk Hopes

Image result for lighthizer china cartoonSteve Mnuchin to the rescue?

Yes, I know it sounds ridiculous but that's why the market is up half a point this morning as our Treasury Secretary lands in Beijing this morning and maybe I'd be more optimistic if he wansn't accompanied by Trade Representative Robert Lighthizer, who lost the battle to keep China out of the WTO in 1997 and is now being given his chance at revenge by suggesting the US pursue WTO action against China and threatens to leave the WTO if China is not sanctioned – ie. bullying.

Politico describes Lightizer as "a decades-long skeptic of Beijing."  He has accused China of unfair trade practices and believes that China needs to make "substantive and structural changes to its trade policies, as opposed to only minor changes it has offered in the past".  He wrote: "The icon of modern conservatism, Ronald Reagan, imposed quotas on imported steel, protected Harley-Davidson from Japanese competition, restrained import of semiconductors and automobiles, and took myriad similar steps to keep American industry strong.  How does allowing China to constantly rig trade in its favor advance the core conservative goal of making markets more efficient?  Markets do not run better when manufacturing shifts to China largely because of the actions of its government."

Image result for china trade cartoonNow, there's nothing wrong with sending a tough negotiator to China but Lighthizer is more of an anti-China negotiator but even that may have a place if you have a highly skilled person keeping him in line but there's no indication that's the case with Mnuchin and, even if it were, it is complete folly for the markets to believe that this duo is going to be able to quickly resolve the many issues that the US and China are very far apart on in trade.

And when I say the US, unfortunately, I mean President Trump because the US and China were very much together for the past decade as both countries prospered and the trade deficit was widely considered to be "just a number" and China may have "stolen" factory jobs but no more so than Detroit stole them from New York in the early 20th Century.  Jobs move and economies move on – unless you elect leaders who are stuck in the past and look to right perceived wrongs from long ago.  

NAFTA was negotiated in 1994 and was the result of negotiations that had begun in 1980 (under the most sainted Ronald Reagan, who campaigned on it in 1979) yet Trump undid that in a year – only to replace it with almost the exact same agreement rebranded "brilliantly" as the USMCA, which only means the "US, Canada and Mexico Agreement" – I mean, WOW, what an improvement, right?

"It's time we stopped looking at our nearest neighbors as foriegners."  Shame on you, Republican Party for betraying everything you stood for – SHAME!!!

Image result for where does tariff revenue come fromOur trade negotiations with China took DECADES to cobble together and Trump is very good at tearing things down but seems to suck at building them up – especially without his Mexican contractors…  Anyway, the point is that it's not likely that there will be much progress in any meeting that involves Lighthizer and I think he's only there because Trump doesn't WANT any progress – he WANTS his Tariff money and he's already realized that the people he is taxing with these tariffs are so stupid that they don't even realize Trump is lying when he says the Chinese are paying for it.

The Congressional Budget Office estimates that in the last three months of 2018, U.S. Tariff Revenue increased by $8 billion, 83% compared with the same period last year, largely due to the tariffs imposed by Trump but tariffs paid by American companies in October alone amounted to $6.2 billion, an increase of 104% over the same period in 2017.  If November and December were $6.2Bn (and they should be much bigger with Christmas) it means US companies were paying close to $20Bn (probably over) in order for Trump to collect $8Bn for the quarter. 

Related imageClearly it's an idiotic system that doesn't work but, sadly, we know logic and evidence will not work on Donald Trump and, like the Hulk, it only makes him angry.   Trump is, in fact, looking to double down on his tariffs and, if he doesn't, he will increase his budget deficit by 10% – right when the Democrats have oversight of his budget.  If he does and the tariffs continue to hit US businesses 3 times worse than the money collected – he can single-handedly destroy the entire economy – finally undoing the last good thing Obama accomplished for us in 8 years of hard work.

It's very easy to tear down, it's the building that's hard and, speaking of building, where's that Infrastructure?  In your dreams when we already have a $1.2Tn deficit on tap for 2019.  That's my estimate.   Trump's team, projects "only" a $985Bn deficit, including tariffs which assumes no damage to collections from the tariffis.  In other words, Trump's budget mirrors Trump's words and works under the assumption that China will magically pay for the tariffs the way Mexico is paying for the wall! 

Related imageSpeaking of the wall, Team Trump can't even get a country that's already $22,000,000,000,000 in debt with a $1,200,000,000,000 deficit agree to spend $5,700,000,000 (seems like nothing, right?) on the first stage of a border wall to keep out the evil Mexicans and their caravan of 2,000 people seeking refuge in a country with 326,000,000 people that has a pressing need for workers and 1,367,793 unoccupied homes.  In Flint Michigan alone, 7.5% of the homes are vacant and in Detroit 1 in 20 homes (5%) are unoccupied yet these are cities that march to keep out immigrants?

So I wouldn't get too excited about today's rally, it's Monday and Monday's don't matter (and next Monday is a holiday!) and tomorrow we'll be looking to see if the 200-day moving averages hold up.  We have 5 Fed speakers this week and, finally, the Retail Sales Report on Thursday as we missed the critical Christmas Report due to the shutdown.  Other than that, the big excitement is the Altanta Fed (Weds) and the Empire State Manufacturing Report with Industrial Production and Consumer Sentiment on Friday – so the most exciting day of the week will be the one before the 3-day weekend!  

Also this week, we begin to wind our way down through the last of the 1,000 companies to report over the next three weeks.  Still some big ones out there:


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  1. Good Morning —hoping to get back into some of Phil's amazing  portfolio trades that I have sadly missed

  2. I guess we'll see this week how much appetite there is for a shutdown over things that the majority of people don't want!

  3. Amazing how much companies bought back before the last big crash!

  4. Good Morning!

  5. Good morning! 

    Portfolio/Savi – Well be careful, my kids' college accounts are still in CASH!!!  I think China will break down in March and we'll re-test our lows.  

    Speaking of portfolios though, the Butterfly Portfolio made a lovely comeback thanks to AAPL, back to 40.6% from 9.4% on the 18th – not bad for 3 weeks!  

    Now that AAPL has calmed down and we're back on track, I will sincerely try to add a couple of more income-producing plays for 2019 as it's that steady income that keeps this portfolio consistent and getting too Apple-heavy cost us a whole year's work (in the 1/18 snapshot) so we don't want to let that happen again.  

    Of course we still have $25,925 riding on AAPL being above $175 at June 2021 expirations, but I do feel really good about those and we have a bull call spread you can drive a truck through ($120/210) that's good for covering 2 years of sales so that bit of pain we went through leaves us with a 15 contract spread where we can sell 5 April $175s for $5 ($2,500) using just 66 of our 858 days so 10 sales like that would be another $25,000 and that trade alone is enough to pump the portfolio up another 50% plus the $82,500 the June 2021 $120s would pay even if we're just at $175, which is $15,000 more than the current net of the spread.  

    So the AAPL trade alone, which is currently a net $750 credit, will pay us back $82,500 if AAPL is over $175 in June 2021 AND we expect to collect another $25,000 in short call sales along the way.  I guess the position was worth the pain it took to work into and I guess it's still MAGNIFICENT as a new trade!  

    Hopefully we'll be able to say the same about OIH one day though, at the moment, it's all pain and no gain…

    Big Chart – Sadly, it looks like rejections at the 200 dmas to me and this morning is BS so let's be very concerned if today turns red.

    Buybacks/StJ – Yes, almost as much as they are buying before the next crash….

  6. Oops, silly me, it was net $750 credit when we started, now net $40,787 but still a very nice return on a fairly conservative entry.  

  7. We'll do a webinar this week but not next week as I have to go to NYC for a couple of meetings, taking advantage of the short week but I'll be here to close this Friday as it could be crazy into the holiday weekend.

  8. Thanks Phil—-maybe watch until you are more positive

  9. phil-if you get a chance,anything on twtr feb 15 32/35 b.c.s.

  10. NGL with a blowout quarter.  Stock up sharply.  Still yielding 13 % +.


    NGL Energy Partners beats on top and bottom lines 

    Reports Q4 EPS of $0.64 vs $0.11 Capital IQ consensus; revs of $6.4 bln vs $5.7 bln consensus.

  11. Found this to be an interesting article (over the weekend). Basically says that if the S&P is trading above it's 200 DMA own it. If not, move into bonds. Evidently, this beats a buy-and-hold strategy. Also, if you miss the worst days you also miss the best performing days.

  12. Did LB cut the dividend?  Did I miss that?  

  13. Wow, that rally didn't take long to fade out.

    TWTR/Tstep – See Friday's commentsIn the OOP, we have the Feb $32/35 bull call spread at $1.60 and now the $32s are 0.15 with just this week to go so I don't see much to do with it other than close the long calls and then we're down $2,900 on 20 but my new theory is that TWTR, for whatever reason, has been pushed into culling all the bots and fake subscribers and THAT is why their growth seems anemic and that's why they are no longer going to report subscriber growth – just income, which is up nicely from last year (and revenues are up 24% too).  

    So I think this is just TWTR's pain of cleaning house but that will make them more marketable in the future so we can now bet on the future (and get our money back) with the following for the OOP:

    • Sell 10 TWTR 2021 $25 puts for $4.20 ($4,200) – TOS ordinary margin is $2,514
    • Buy 15 TWTR 2021 $25 calls for $10.50 ($15,750) 
    • Sell 15 TWTR 2021 $37 calls for $6.00 ($9,000)  

    That's net $2,550 on the $15,000 spread that's $7,500 in the money to start so all TWTR has to do is hold $30 and we are profitable, even after our $2,900 loss on the first poke.  Cash-wise, we're only doubling down off our loss with the potential to get back a $9,550 profit (175%) on our net $5,450 investment.  Not terrible for one we got totally wrong to start.  

    And, of course, I'm doing 15 with the intention of selling 5 short calls down the road.  The April $33s are 10% out of the money and pay $1.20 so 5 short would be $600 using 66 of our 704 days.  10 sales like that would at $6,600 to our bottom line – but not yet.

    S&P/Soma – As I said, my kids' college funds are in CASH!!! as the S&P has not proven itself about the 200dma so – bonds for now.  As I've mentioned before, you can only buy ETFs with the tax-free college funds and the choices are super-limited and no inverse funds so you can't protect them so, since they were adequate to pay for my girls' colleges, I didn't see the sense of risking a year's education on a 20% drop – especially since any extra money left in the fund is taxed 50% so, outside of expensive grad schools, there's little benefit to letting it ride.  Still, if I think the market is strong enough, no sense not putting $500,000+ back to work but the risks still outweigh the rewards at the moment with China and another shutdown possible and, of course, a President that's likely to be impeached.  

    JPMorgan’s analysts do see real GDP slowing in 2019, for four reasons:

    • “First, the fiscal stimulus from tax cuts enacted late last year will begin to fade. …”
    • “Second, higher mortgage rates and a lack of pent-up demand should continue to weigh on the very cyclical auto and housing sectors.”
    • “Third, under our baseline assumptions, the trade conflict with China worsens entering 2019 with a ratcheting up of tariffs to 25% on USD 200 billion of U.S. goods. Even if the conflict does not escalate further, higher tariffs would likely hurt U.S. consumer spending and the uncertainty surrounding trade could dampen investment spending.”
    • “Finally, a lack of workers could increasingly impede economic activity. … With the unemployment rate now well below 4.0%, a lack of available workers may constrain economic activity, particularly in the construction, retail, food services and hospitality industries.”

    The cautious tone JPMorgan set in its outlook for the U.S. economy continues in its view of the investing environment for 2019.

    “Investors have recognized that trees do not grow to the sky, and that the robust pace of profit and economic growth seen this year will gradually fade in 2019 as interest rates move higher. While history suggests that there are still attractive returns to be had in the late stages of a bull market, the transition away from quantitative easing and toward quantitative tightening has contributed to broader investor concerns. Many equate this new environment to walking on an investment tightrope without the liquidity safety net that has been present for over a decade.”

    “This leaves investors in a tough spot – should they focus on a fundamental story that is softening, or invest with an expectation that multiples will expand as the bull market runs it course? The best answer is probably a little bit of each.”

    JPM’s allocation suggestions for the new year: “We are comfortable holding stocks as long as earnings growth is positive, but do not want to be over-exposed given an expectation for higher volatility. As such, higher-income sectors like financials and energy look more attractive than technology and consumer discretionary, and we would lump the new communication services sector in with the latter names, rather than the former. However, given our expectation of still some further interest rate increases, it does not yet seem appropriate to fully rotate into defensive sectors like utilities and consumer staples. Rather, a focus on cyclical value should allow investors to optimize their upside/downside capture as this bull market continues to age.”

    More notable to investors is the letter to investors from Darrell L. Cronk, CFA, President of Wells Fargo Investment Institute, which concisely presents some of the headwinds that loom ahead.

    • “The end of cheap capital: As interest rates rise from generational lows, consumers and businesses will have to rationalize how rising costs of capital affect borrowing and spending decisions.”
    • “The end of outsized job gains: Multidecade tight labor conditions put upward pressure on wages, making it difficult for employers to attract and retain needed talent for growth. This, in return, should slow job growth.”
    • “The end of extremely low volatility across equities, rates and currencies: One of the hallmarks of this cycle has been the extraordinarily low volatility regimes for most major asset classes. We believe that this began to change in 2018, and we expect this trend to continue throughout 2019.”

    Cronk does provide one glimmer of light, however:

    “The end of equity returns driven by only a few sectors: Outsized investor performance has come from only a few equity sectors through much of this cycle. We see the range of opportunities broadening, resulting in appealing valuations across a number of equity sectors.”

    Charles Schwab’s Jeffrey Kleintop paints a gloomy picture for the global economy, and international stocks, for the coming year.

    “Global growth may slow in 2019 as the economic cycle nears a peak, with increasing drag from worsening financial conditions combining with full employment and rising prices. Global stock markets may peak in 2019 if leading indicators signal the gathering clouds of a global recession.”

    “If we borrow the severe weather scale for storms and apply it to the global economy and markets, we aren’t forecasting ‘Recession Warning,’ meaning a recession is here or imminent. A better term is ‘Recession Watch,’ in which conditions are favorable to a recession if a number of risk factors (e.g., trade, interest rates, inflation) deteriorate.

    “For all the concerns about trade policy, Brexit and other issues, 2018's big stock market declines generally were driven by inflation and interest rate concerns. These are the indicators investors should watch most closely in 2019. Historically, when unemployment and inflation rates have converged to become the same number – signaling an overheating economy – it has marked the beginning of a prolonged downturn for the stock market, followed about a year later by a recession. The gap between the unemployment rate and the inflation rate is close to one percentage point in major countries like Germany, Japan, the United Kingdom, and the United States.”

    2018 largely was a down year for commodities. Oil prices made the most noise with their precipitous drop, but gold – despite a year-end revival – finished the year lower, too. However, BofA sees rosier times ahead for several commodities in 2019.

    “The outlook for commodities is modestly positive despite a challenging global macro environment. We forecast Brent and WTI crude oil prices to average $70 and $59 per barrel, respectively in 2019.” Respective 2018 year-end prices of $53.80 and $45.41 would imply potential annual gains of 30.1% and 25.2% at those averages.

    “Weather-induced volatility is expected in the near term for U.S. natural gas, as cold weather could propel winter natural gas over $5/MMbtu (million British thermal units), yet we remain bearish longer term on strong supply growth.” Natural gas closed 2018 at $2.94 per MMbtu; thus, BofA’s outlook implies gains of as much as 70% for winter natural gas.

    “In metals, we remain cautious about copper because of Chinese downside risk. We forecast gold prices will rise to an average of $1,296 per ounce, but could rally to as high as $1,400, driven by U.S. twin deficits and Chinese stimulus.” That target average price of $1,296 is a mere 1% higher than gold’s 2018 close of $1,281.30, but the high-end projection of $1,400 would represent a more substantial 9% gain for the yellow metal.

    LB/Jeffl – From 0.60/q to 0.30/q.  Still 5% as they are only at $26.68.  

  14. CMG popping up over 600 again 

  15. Phil / AAPL – is the April '19 $175 short call an official trade?

  16. CMG/Batman – Annoyingly resilient.  

    AAPL/Batman – No, just looking at what's out there.  I think it's too soon to sell short calls.  

  17. Likewise, the OOP is really jumping fast, up $38,377 since our 1/17 Review, where we only made a couple of adjustments after our big 12/26 special adjustments (to take advantage of the bottom).  This isn't a review but just a snapshot to check our updates (today's trade not included, of course).

    Since we were actually showing a negative balance on 12/26 – all these gains came in just over a month!  

  18. Phil/TWTR   I'm confused on the TWTR trade.  Why is it a $15,000 spread? 

  19. TWTR/Stock – Oops, I was originally using the $35s but then decided the $37s were worth the risk so actually an $18,000 spread so better than I thought.

    Money Talk Portfolio up very nicely ($23,000) since our 1/30th review.  That's why I think these rallies are ridiculous – you can't go on just printing money like this without consequences…  I'm a little worried we're not hedged enough but nothing I can do now.  I guess we'll have to consider this $23,000 of ill-gotten gains to be a bit of a hedge as well.

  20. Hi Phil.  Nice move on NAK!  Thoughts on buying more?

  21. Phil,

    To expand upon your market concerns above, what would be your best hedging vehicles for:

    (1) initially short-term -shutdown #2, trade talks disappointment, less optimistic eps projections for Q1

    (2) intermediate term: uncertainty attending impeachment (great for the country but the mkt traditionally doesn't like uncertainty), Brexit, widespread national debt levels, slowing US growth and productivity, etc).

    Trying to prepare for a downturn in advance.


  22. NAK/Taihu – Well, at this point ($1.02) it's a bit chasey as we had all year long to buy at 0.50 and it only just popped.  In the OOP, we already doubled down to $10,000 and that's plenty for a speculative play and we've aggressively sold the $2 puts as well so we should just be THRILLED if we hit our target and not be greedy.

    Hedging/8800 – The SQQQ and TZA hedges above in the OOP and the MTP are the same as the ones in the STP, more or less so that is certainly my "best hedging vehicles." – especially SQQQ in an AAPL-heavy portfolio.

    The best preparation you can have is not to have positions that are overexposed.  If the spreads are two wide – look to tighten them up or sell some short calls against them.  Don't be naked bullish on things and, of course, have some hedges and plenty of CASH!!!

  23. Short-Term Portfolio Review (STP):  Speaking of the STP, we're now up a ridiculous $613,113 so, although the LTP may be using half it's cash – the other 1/3 is really right here.  TSLA and XRT were perfect for us as well as SCO paying well along with MSFT – all in all, a very good month and, once again, our timing taking the long call money on 12/26 was PERFECT! and gave us almost a double since then. 

    Now we have to go the other way and get more bearish but it's not that hard – we're just playing the top and bottom of the channels.

    • AAPL – No worries.
    • CELG – Not worried.
    • DIS – Not worried.

    Those are just bullish offsets that have long-ago paid for index hedges.  

    • CAT – This was an offset but we turned it into a play and, if the play goes bad, it will move toe the LTP but looks OK so far.

    • MJ – We SHOULD sell some short calls against the long position but I keep hearing so much good news in cannabis and we can afford to take the risk, so we will.
    • SQQQ – The 100 March $22 calls WILL expire worthless and we don't need the margin but I'd rather spend my money buying back 100 (1/2) of the short 2020 $30 calls for $1 ($10,000), which will make us a lot more flexible.  
    • TZA – Let's buy back the 200 short 2020 $25 calls for 0.55 ($11,000) not because we think they'll be hit but because it leaves us more flexible to adjust and let's also close out the 300 short April $15 calls at 0.22 ($6,600) and spend $1.05 ($21,000) to roll our 200 2020 $15 calls at $1.15 ($23,000) to 200 2020 $10 calls at $2.20 ($44,000).  So, on the whole, we're spending $38,600 to lock TZA down here and protect our other gains.

    Now I feel better about the holiday weekend.  

  24. Phil:  Just out of curiosity, what is your reaction to S&P's take on HBI:  

    February 08, 2019 08:19 am ET… Update – CFRA Maintains Sell Opinion on Shares of Hanesbrands Inc. (HBI 18.64**): We keep our 12-month target at $12, a forward P/E of 6.8x against our 2019 EPS estimate of $1.76. We keep our 2020 estimate at $1.61. Near-term, we expect HBI to be pressured when competitor Gildan Activewear Inc. (GIL **** 34) names "the largest mass retail customer" it has secured a large private label men's underwear program for in 2019. According to unconfirmed reports by Bloomberg News and Research in November 2018, Walmart Inc. is GIL’s largest mass retail customer. Walmart accounted for 18% of HBI’s sales in 2017 and we see heightened risk for HBI’s assortments if GIL begins manufacturing WMT’s private labels, given the limited shelf space. GIL is expected to report earnings on February 21. /Camilla Yanushevsky

  25. Evening Phil & all.

    I have been trying to adjust a MU play I have but could not come with any attractive way with current option pricing… If you have any ideas, this would be most welcome. I have:

    - 2020 Short $42 puts (sold for $5.07);

    - 2020 Long $40 calls (bought for $12.99)

    - 2020 Short $55 calls (sold for for $6.51).

    All bought in the same number, so I have spent $141 per spread when setting up. Which was when MU was at $51 so kind of looked ok but not anymore.

  26. PhilAAPL,

    What is happening with it? Just not able to be go in green… you see further down movement in short term.


  27. HBI/John – Well, there's always something in retail and that's why they are trading at 7x earnings but Hanes was founded in 1901, so they've had a few ups and downs along the way and even if Gildan were able to ramp up and go head to head on every single product category HBI has (mens, womens, T-shirts, bras, sneakers (Champion)….) and competes with their DKNY and Polo as well – it still is likely to take more than a year to push HBI completely off the shelves – even if that was WMT's nefarious goal.   Simplistic BS analysis like this is the reason why you can buy stock for 7x earnings – people are morons and will accept any ridiculous premise if they think it's coming from an authoritative source.



    MU/Alter – The 2020 $40 calls are $6.60 and you paid about $6.40 for the spread so your best bet is to take back that investment and roll to the 2021 $30 calls at $13 so you invest $6.40 more to buy $10 in position and a year in time.  If you can, it would be nice to at least 1/2 cover those with the short 2021 $50 calls at $6.40 so you get half you money back right away and still have a very manageable spread.  The $43 (no $42s) puts are fine and easy to roll at $10 and the 2021 $38 puts are $8 but I'd wait as the $43 puts are 50% premium still.

    AAPL/Pat – It's a $1,000,000,000,000 company – do you expect it to just snap right back?  It's consolidating exactly where we thought it would have to consolidate for a proper break-up.  It could go up or it could go down – you can't sit there and worry over every wriggle of a 2-year trade.  

  28. Wow, is that the day already?  This flew by for me.

    Not a very good day for the bulls but at least the RUT is still green and NYSE too.  

  29. Brexit Bulletin: Atomic Bomb

  30. California governor to rebut Trump in 1st State of State

  31. How Trump Has Hurt the Gun Lobby

  32. Good morning! 

    Shutdown averted (so they say) and we're blasting 1% higher on the news that we're not going to be idiots again.  

    Lawmakers Agree in Principle to Fund Border Security

    Senior lawmakers said they had reached an agreement in principle to fund border security and avoid a partial government shutdown this weekend. 18839 hours ago

    Funded all the way through September!   

    The deal would include $1.38 billion for 55 miles of modern physical barriers along the border with Mexico, according to congressional aides from both parties.

    The biggest question is likely to be whether Mr. Trump will sign the congressional deal. Mr. Trump had sought $5.7 billion to build a border wall and the agreement’s funding is far lower than that. Mr. Shelby said lawmakers had been in regular contact with White House representatives and that Mr. Trump had made clear to him he wanted Congress to send him a deal.

    “He told me more than once that if you can work out a legislative solution to this, do it,” Mr. Shelby said. “We believe from our dealings with them and the latitude they’ve given us, they will support it,” he said of the White House.

    Unfortunately, Trump will likely "prove" that those 55 miles are more secure and use it to justify the next 1,500 miles and, at that rate, sounds like $30Bn+ for the whole thing.

    Dollar tested 97 but rejected so far.

    How Bad Is the China Slowdown? U.S. Companies Offer Answers

    Fourth-quarter results from U.S. companies indicate that slowing growth in China is modest, but broad. Retailers and other companies catering to Chinese consumers face signs of weakness among the country’s growing middle class. Analysts fear a brutal quarter ahead. 10419 hours ago

    OPEC Production Falls Significantly on Saudi Output Cuts

    OPEC significantly reduced its crude-oil production in January, making good on its latest deal to curb output and rebalance an oversupplied market, the oil cartel said.