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What Now Wednesday? Suddenly India and Pakistan are Shooting at Each Other!

Related imageIt's always something!

Early this morning, India and Pakistan shot down each other's planes and now what used to be the World's most likely place for nuclear war to break out is once again the World's most likely place for nuclear war to break out – which says a lot since Trump's finger is still on the button but he's been bumped to #2 by this new tussle.  

This is still backlash from the terror attack on India, which killed 40 people we didn't care about on Valentine's Day and India retaliated and bombed what they claim was a Militant Base inside of Pakistan.  We still sell arms to both countries, so this war is great for us!   Actually, Pakistan already pissed off Trump and the GOP by switching to China as their main weapon supplier (much cheaper).

The Futures are already recovering from a sharp drop this morning as Nuclear War is way down on this Planet's list of things to worry about what with the planet boiling us alive and all the insects dying.  If that doesn't bother us – what's a little background radiation going to do?  

What's really concerning is the S&P's repeated failure to hold 2,800, which still has us wondering if this whole rally is topping out 5% below the September highs (2,940) and, of course, the Russell is still unable to crack the 1,600 mark – which we said last week was a big problem.  In fact, I also said in last Wednesday's Morning Report:

We had an in-depth look at /RTY in yesterday's Live Member Chat Room where we concluded:

So, that being the case, we would expect the 5% Rule to be obeyed between 1,440 and 1,800 which is 360 points so 72-point bounce lines to 1,512 (weak), 1,584 (strong), 1,656, 1,728 (weak retrace – where we failed before) and 1,800.  So expect good resistance at 1,584 and no more than a strong retrace of that run from 1,440 (if we're bullish)  which is 144 so 29(ish) down to 1,555 (weak retrace) and 1,526 and we'll see how that goes.

In other words, our 5% Rule™ predicted a run to 1,584 and now the 200 dma is 1,587 so we're pretty confident taking a short up here with very tight stops over the line that risk a loss of $50 per point, per contract so let's say we call 1,580 the shorting line and 1,590 the stop (though I would add another short at 1,586 to average 1,583) so the risk would be losing 8 points over 1,590 ($400 per contract) and our pullback goal is 1,555, which is 25 points (from our initial entry) for a $1,250 per contract gain and possibly 1,526, for a total of $2,700 per contract at that level.

As you can see, we made a pretty perfect call that day and we dropped to 1,570 on Thursday for a nice $700 per contract gain (better than expected) and we got another entry and another drop already this week so now we go back to flat and see what happens if they test 1,584 again – but we only start a short on the cross back UNDER our line – not while it's going up!  That saves you a lot of money.  If we keep going down, 1,555 is back in play but, so far, this is not a bearish move – just healthy consolidation near the top.  We like the bear side as the macros tell us we'd rather be short than long up here but the technicals are still strong.

Meanwhile, this month is already over and Friday is March!  Spring is in the air though there's one of those nasty Arctic Blasts coming across the country next week as GLOBAL WARMING pushes warm air into the Arctic which then displaces an equal amount of cold air that normally stays in its place.  That's what these blasts are – a destablization of our Planet (Earth)'s entire weather system and you can see on the right-hand side of the chart how the same displacement is sending ridiculously hot air to Greenland.

This is why we are still long on Coffee (/KCN19) Futures (see Monday's Morning Report) as it doesn't take much temperature variation to destroy fragile coffee plants.  So far, all the forecasts have been for great crops this year and the warehouses are already nearly full so there's a tremendous amount of short interest in the Futures and the market is ripe for a very nice squeeze if the weather changes the mood next week.  /KCN19 is the July Futures contract, now $101 and each $1 move in the Coffee price is $375 per contract (and it requires $2,970 of margin to trade a contract).  A good squeeze could easily pop the contracts back over $104 for a $1,000+ per contract gain – so worth playing over the weekend.

Also on Monday morning, we discussed playing oil long off the $56 line and I outlined the following options trade for those of you who are Futures-Impaired:

Of course, as investors, we have yet another way to hedge this because we know that, if oil is lower in the Summer, then Airlines will do better than last year as fuel is 30% of their operating costs.  Alaska Air (ALK) is one of our favorite Airline stocks (now $62) so what we can do is promise to buy 200 shares of ALK for $60 ($12,000) by selling 2 July $60 puts for $3.20 ($640).  So now our hedge looks like this:

  • Sell 2 ALK July $60 puts for $3.20 ($640)
  • Buy 5 UCO June $20 calls for $2 ($1,000) 
  • Sell 5 UCO June $23 calls for $1 ($500) 

Now we have a net $140 credit and, if all goes well, the short puts expire worthless and we collect $1,500 on the spread and that would be a net gain of $1,640 – covering almost the entire anticipated increase in gasoline costs and our worst-case scenario is that we're forced to buy 200 shares of ALK for a bit under $12,000 (we still have the $140 credit) and we would then sell options against that to further lower the basis.

Trading is FUN & PROFITABLE when you have the right tools at your disposal and understand how to use them.  These aren't complicated concepts and, if you own a business that spends money on commodities, whether it's gasoline or heating oil or soybeans, wheat, copper or coffee… you SHOULD learn how to hedge your commodity costs – you'll save a lot more than you do by going with cheaper toilet paper!

UCO has barely moved and it's only been a couple of days but the ALK July $60 puts have dropped to $3 ($600) and the June spread is now $2 ($1,000)/1.04 ($520) so a net $120 credit is up $20 (16.66%) so far but still good for a new trade with plenty of room to run and I'm mentioning it so soon because the new Gasoline contracts (April delivery) are already up 0.20 from last month, which are just terminating  and that indicates some very bullish sentiment which means this trade now has a higher probability of success than it did on Monday – based on this new information.

Powell speaks to Congress at 10am and we also get Factory Orders at 10 so we'll see how the indexes hold up into that.  Powell could not have been more doveish yesterday if he'd have sprouted wings and started cooing so I can't imagine that anything he says today will really help get us over 2,800 and there's plenty he can say that can send us lower during the Q&A so please – be careful out there!  

Oh yes, and tomorrow morning, at 8:30 am, we get our Q4 GDP Report, which is bound to be below 2%, down from 3.4% in Q3 so it would be silly to be long into that!  


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  1. Good morning, All!

    It's webinar day! Join Phil at 1pm, here:

    https://attendee.gotowebinar.com/register/7961461839270884109



  2. ROFL:

    https://www.motherjones.com/kevin-drum/2019/02/just-say-it-and-people-will-believe-you/

    Yesterday he complained that Democrats were moving too fast on their joint resolution to overturn President Trump’s border emergency. “We’ve had no time to review the bill and no committee has held a hearing or marked it up,” he said.

    Via Martin Longman, who caught this remark, here’s the full text of the resolution:

    Pursuant to section 202 of the National Emergencies Act (50 U.S.C. 1622), the national emergency declared by the finding of the President on February 15, 2019, in Proclamation 9844 (84 Fed. Reg. 4949) is hereby terminated.

    Gonna take a long time to review this one…  And have hearings about it.


  3. Zillow seems to have ambitious goals:

    https://thebasispoint.com/zillow-is-now-the-netflix-of-homes/

    Rich now rotates back to CEO to run day-to-day on Zillow’s new 5 year revenue target of $22 billion, while Lloyd rotates to Rich’s executive chairman slot and Spencer rotates to board director so the two of them can run the long game.

    Now the Netflix connection: Rich has been on the Netflix board since 2002, which was 4 years before he launched Zillow.

    As they say in the movies: this is no coincidence.

    Like Netflix went from DVDs to streaming AND original productions (on Rich’s watch), Zillow is going from home listings to realtor/lender leads AND home buying, selling, and financing.


  4. Good Morning!


  5. FTR up .90 boy o boy!


  6. Good morning!  

    Not much to do but wait for Powell's Q&A – lots to unpack in the Webinar.  As noted above, I don't see GDP helping tomorrow so I still like the short plays at 26,000, 2,800 (if we get there), 7,100 and 1,580.

    LOL StJ – What a ship of fools!  

    Durable goods up 1.2% and that's better than expected but ex-Transports is just 0.1% – worse than expected.  I'm going by CNBC – I didn't even know Durable Goods was out today.

    Wholesale and Retail Inventories both up about 1% in Dec (bad) so factory orders will be interesting.  I think CNBC was mixing up Factory Orders with Durable Goods as they seem to be 0.1% vs 0.6% expected by leading Economorons though an 85% miss is pretty good for them.

    FTR – Congrats to all those who patiently stayed with it! 


  7. Table banging in our time:

    Submitted on 2018/01/02 at 12:36 pm

    CTL/Willsons – Well we already have FTR, thanks, so no CTL exposure as they are in a similar boat with $33Bn in debt and $222M in cash though CTL appears to be cranking out profits ($626M in 2016, about $400M in 2017) but not enough to justify and $18Bn valuation on $17Bn in sales, not when I can buy FTR, with $9Bn in sales for $560M at $7.16.

    Now down to $16Bn at $14.50 but not really low enough for me to get excited about them – especially after seeing FTR go down and down and down and down, despite $9Bn in revenues (1/2 of CTL), they have a valuation of just $215M at the moment, that's 1/84th CTL's.  CTL should make $1Bn this year so it's not about value for me – just the sentiment in this sector means I'd be more comfortable around $12Bn – so 20% lower, which would be the Fall 2017 lows around $12.

    Submitted on 2019/01/25 at 3:13 pm

    FTR/Crs – Unfortunately, it's a very long-term turn-around and the progress will be measured in quarters so no, no update.  They need to show progress this year after we gave them a pass last year and rising rates give the bears a lot of ammunition to call their financials into question.  

    Chart

    So basically, if their debt ($17.6Bn at about 8.5% avg) gets 30% more expensive (Fed rates go from 3% to 4%) then their cash flow goes bye-bye.  Of course, they think they have it handled (most of the loans are fixed, not floating) and intend to drive more profits to the bottom line:

    We are targeting a $500 million run rate benefit to EBITDA by year end 2020…we anticipate revenue enhancement initiatives in both commercial and consumer to drive approximately $150 million to $200 million in EBITDA benefit. Second, we expect operational improvements to drive another $150 million to $200 million in EBITDA benefit. And finally, customer care and support opportunities driving approximately $125 million to $175 million in EBITDA benefit.

    Also, they are aggressively upgrading their network:

    This last quarter, we’ve been investing around those speed sales and probably manifest itself is really around either some older equipment they got changed out, that was perfectly suitable for what they were taking at the time to next generation equipment and also investments in the links in the transport system in the network. Our view is that we will have the entire network in 2019 fully capable ubiquitously at 1 gig. So, whatever the competitive environment looks like, we’ll be well positioned.

    FTR Revenues are $2.2Bn/qtr ($9Bn/yr) yet you can buy the whole company for $210M at $1.98 while S has $32Bn in revenue and $46Bn in debt yet they are a $25Bn company.  If you bought FTR, paid off the debt for $17Bn, you'd have a company that's dropping $2Bn a year to the bottom line with room to improve but, then what would be the next move – BORROW MONEY TO EXPAND – that's how the telco business works so punishing FTR for being a telco is a bit silly.

    OOP Review:

    Submitted on 2019/02/14 at 11:04 am

    • FTR – We sold the $5 puts for $2.70 and now they are $3.10 so let's take that loss ($1,200) and spend $6,780 more to buy $3,000 more shares, which will make our average cost $3.40 and we'll buy back the 15 short Jan $8 calls for 0.15 ($225) and that profit more than cancels what lost on the short puts so we have a clean $3.40 on the stock and we COULD sell the 2021 $3 calls for $1 and drop our net to $2.40 but let's just see where earnings end up first on 2/26.

    LTP Review:

    Submitted on 2019/02/15 at 3:12 pm

    • FTR – Having a good day.  Let's double down and buy 10,000 more longs at $2.65 ($26,500) and buy back the short Jan $8 calls at 0.15 as they are not worth the space and we'll keep the short puts and see what kind of run we get.

    Submitted on 2019/02/25 at 1:33 pm

    FTR/Batman – It's a long, slow grind to justify the acquisition and many years to pay down the debt so I'd be thrilled with "no bad news" but not sure how my fellow "investors" will feel.  We didn't have a hurricane though the Government Shutdown might have affected them – it's always something..

    Submitted on 2019/02/26 at 12:44 pm

    No matter how good a market is or overbought things are – there will always be a Macy's or KHC or FTR just sitting around waiting for a long-term investor to come along.  There's no harm in waiting and there's certainly no harm in learning to leave a portfolio alone and just let things go.


    • EIA Petroleum Inventories: Crude -8.6M barrels vs. +2.8M consensus, +3.7M last week.
    • Gasoline -1.9M barrels vs. -1.7M consensus, -1.5M last week.
    • Distillates -0.3M barrels vs. -2.0M consensus, -1.5M last week.
    • Futures +1.64% to $56.41.

    That's a massive draw!  Go UCO!

    Don't forget it was a holiday weekend – of course there was more driving.

    • IMAX (NYSE:IMAX) is up 10.4% after the company tops estimates with its Q4 earnings report.
    • Bloomberg Intelligence says the company's backlog of theaters in China and "cost-constraining" measures are impressing investors.
    • IMAX is now up 21% over the last 90 days.
    • Previously: IMAX beats by $0.01, beats on revenue (Feb. 26)

    Long Call 2020 17-JAN 15.00 CALL [IMAX @ $23.05 $2.21] 30 10/25/2018 (324) $21,000 $7.00 $1.80 $6.20     $8.80 - $5,400 25.7% $26,400
    Short Put 2020 17-JAN 22.00 PUT [IMAX @ $23.05 $2.21] -10 10/25/2018 (324) $-3,500 $3.50 $-1.68     $1.83 - $1,675 47.9% $-1,825

    IMAX/StJ – $17.50 to $19 is the usual bottom of their channel and $25-26 is the top.  Will this time be different?

    Submitted on 2018/11/19 at 3:50 pm

    • IMAX – Good for a new entry.  Let's buy back the 20 short 2020 $30 calls for 0.55 (not worth keeping) and wait for the next spike to sell more

    Submitted on 2019/01/18 at 2:04 pm

     

    • IMAX – Not only is DIS giving them mega-content this year but Aquaman had blowout numbers too.  We got very aggressive on the October dip and we only just passed it going the other way.   Great for a new trade.  

    Submitted on 2019/02/15 at 3:33 pm

    • IMAX – Waiting for the big superhero movies this summer.

  8. So much happening today:


  9. Former Trump attorney Michael Cohen: “Mr. Trump is a con man. He asked me to pay off an adult film star with whom he had an affair, and to lie to his wife about it, which I did. Lying to the first lady is one of my biggest regrets.”

    Rep. Elijah Cummings (D-MD): "Do you, Mr. Cohen, recognize the gravity of your offenses? You are a lawyer, right?" Michael Cohen: "As of yesterday, I am no longer a lawyer. I have lost my law license, amongst other things."

    At Cummings's request, Cohen is outlining what happened with the Stormy Daniels payment. He said that the decision to make the payment was repeatedly discussed with Trump in advance. He says Trump Org CFO Allen Weisselberg was in the room when the decision was made.

    Cummings: "Donald Trump wrote you a check out of his personal account with he was serving as President of the United States of America to reimburse you for hush money payments to Ms. Clifford. Is that what you are telling the American people today?" Cohen: "Yes, Mr. Chairman."

    Michael Cohen claims Trump threatened schools to keep his grades, SAT scores secret

    Last April: Trump calls Cohen "a fine person" who he likes and respects. Today: Cohen calls Trump a racist, a cheat and a conman:

    Michael Cohen: "Mr. Trump called me a rat for choosing to tell the truth, much like a mobster would do when one of his men decides to cooperate with the government."

    Here are 3 years of financial statements from 2011-2013 that Cohen offered to support his testimony

    "The country has seen Mr. Trump court white supremacists and bigots…In private, he is even worse."

    Former Trump attorney Michael Cohen: “Questions have been raised about whether I know of direct evidence that Mr. Trump or his campaign colluded with Russia. I do not. I want to be clear. But, I have my suspicions.”

    "He (Trump) was a presidential candidate who knew that Roger Stone was talking with Julian Assange about a WikiLeaks drop of Democratic National Committee emails."

    "Trump knew of and directed the Trump Moscow negotiations throughout the campaign and lied about it. He lied about it because he never expected to win the election. He also lied about it because he stood to make hundreds of millions of dollars on the Moscow real estate project."

    "Mr. Trump would often say, this campaign was going to be the 'greatest infomercial in political history.'"

    "He (Trump) once asked me if I could name a country run by a black person that wasn't a 'shithole.' This was when Barack Obama was President of the United States."

    "This $35,000 check was one of 11 check installments that was paid throughout the year — while he was President. The President of the United States thus wrote a personal check for the payment of hush money as part of a criminal scheme to violate campaign finance laws."

    "He (Trump) finished the conversation with the following comment. 'You think I'm stupid, I wasn't going to Vietnam.'"

    Indexes recovering as doveish Fed trumps all else…


  10. /KC coming back nicely:

    Back to 2x now and my average is just under $101 on /KCN19, so up about $250/contract after all that fuss.  If we fail $101, I go back to 1x and then start the DD cycle again at $99 (2x at $100) and 95 (4x at $97.50).  






  11. China Shifts, and Detroit’s Big Bet Goes Sour


  12. We looked at TOL and WTW in the webinar but nothing we want to trade.  

    CHK is doing nicely.

    We got super-aggressive in our last OOP Review:

    Long Call 2020 17-JAN 3.00 CALL [CHK @ $2.98 $0.35] 25 1/8/2018 (324) $4,500 $1.80 $-1.10 $1.05     $0.71 $0.20 $-2,738 -60.8% $1,763
    Short Put 2020 17-JAN 4.00 PUT [CHK @ $2.98 $0.35] -25 1/8/2018 (324) $-3,000 $1.20 $0.16     $1.36 - $-388 -12.9% $-3,388
    Long Call 2021 15-JAN 1.00 CALL [CHK @ $2.98 $0.35] 30 12/26/2018 (688) $4,050 $1.35 $0.77     $2.12 $0.32 $2,295 56.7% $6,345
    Short Call 2021 15-JAN 3.50 CALL [CHK @ $2.98 $0.35] -30 12/26/2018 (688) $-1,950 $0.65 $0.22     $0.87 - $-645 -33.1% $-2,595

    Submitted on 2019/02/14 at 11:04 am

    • CHK – I really believe Nat Gas exports will send prices higher – one day…  Let's roll our 25 Jan $3 calls at 0.45 ($1,125) to 20 more of the 2021 $1 calls at $1.70 ($3,400) so now we have 50 of the 2021 $1 calls that are $1.50 in the money ($7,500), partly covered by $3.50 calls and the short $4 puts – so that's our target and, if correct, we net out $12,500+ for our troubles.  

  13. Short some /NQ here and watching CPB go. I didn't manage to sell puts into earnings last night but bought some calls in, selling them back out through the day. 


  14. … I meant selling CPB calls to re-cover stock :)


  15. Hello Phil and the Gang.  Great webinar Phil.  You always have good comments.  GREAT analysis on FTR.   A question about FTR.  You talked about selling the 15Jan21 $3 puts and calls for around $3.05 which with the stock at $3.00 would yield you around a 100% return on the trade annualized to 50%. 

     

    Why wouldn't you look at a shorter term option as they has significantly more profit potential.  IE.  The 17May19 (80 days) $3 puts and calls you could sell for $1.30 which if called away would be 43% return or 170% annualized ( if you can do this 4 times).  After you walked through the earnings slideshow I am convinced FTR is not going anywhere in the near future (3 – 5 years).   I know it is a lot more work managing quarterly options verses a two year leap but it looks like to me the difference in return is worth it.   

     

    Would you expect the FTR options to be priced roughly the same in 90 days – meaning at the money puts and calls with 90 days left to expire would be worth roughly the same price as they are now letting you generate roughly the same 43% return?  Or would you expect option prices to deflate and getting the same return in 90 days would be unlikely?  You experience and opinion are greatly appreciated.  


  16. Atitlan – Nice call on CPB !

    Was short /ES earlier and caught a small move.  Out for now.


  17. Good call, Ati, seems like a weak finish is in the making.

    FTR/Robert – Thanks.  Yes, it's more work and you don't KNOW you will ever be offered such great pricing again.  As I mentioned earlier in the week, my goal is to make 20-40% a year and NOT LOSE MONEY so, when I have a chance to lock in 40% gains for the next two years on a trade with almost 100% certainty – that's worth all the forward-looking BS in the World!  

    The very idea that you think FTR will drift along for 90 days would lead to the conclusion that the volatility will leech out of the options and your return would be less or, if FTR were to pop $1, what will you do then, sell $4 puts and calls?  If you are going to re-target every time – eventually you will get burned.  

    You can play it that way and I'd encourage you to try with 1/2 or 1/3 or 1/4 and just see how it compares – nothing teaches better than experience in this case.

    Speaking of FTR, in the LTP, we bought 10,000 more shares for $26,500 so let's sell 100 2021 $4 puts for $1.55 ($15,500) and 100 2021 $3 calls for $1.45 ($14,500) and that's net $30,000 back in our pockets and now we have 20,000 shares and the 100 short puts and calls and we'll close the 2020 $8 puts (25) at $5.30 ($13,250) and we'll leave the 50 short 2021 $5 puts we sold for $2.45 (now $2.90) as I'm fine with that target.


  18. Phil, great comments.  I am not sure how you "get burned" because in selling the calls and puts I "expect" to get assigned more shares via the put but at the same time significantly lowering my basis.  In this case, if i sell the 17May19 for $1.30 and buy the stock for $3,00 if assigned, i calculate my basis at 2X at around $2.38 which is a 20% discount to current price.    As long as the company doesn't go BK and I don't see FTR going BK in the near future, I would expect that sometime you would eventually get called away.  You may have to DD once or twice but if you plan in advance to include that in your plan it should be ok.  Yes?  I look at it as either I get to accumulate a stock I want at a good price or I get a 40%ish return in 90 days.  I have done exactly what you have suggested with a 1/3 position on these shorter options for the experience.

    Thanks!


  19. L Brands. Ouch.


  20. Just noticed that on LB too Soma – down 10%



  21. The Globe and Mail



  22. Ouch. Early end to the Trump-Kim summit. It feels like Trump was already grumpy what with Cohen and Venezuela.  Trump's marching out of there, no press conference or anything. Oh, wait, here he comes. Thanking Vietnam for hosting things, complaining about Pakistan. Not mentioning the summit at all.


  23. My wife thinks Kim's choice of interpreter was odd, too, as the woman spoke quickly and sort of North Korean harsh style. I'm sure that was deliberate.

    Ah, now Pompeo's on. Basically we couldn't come to agreement, this is complex, takes a lot of time.

    Questions now.


  24. I'll fill you later on what the Korean commentators say…


  25. MBN, the Korean broadcaster we're watching, has one hell of an instant translator working the press conference. Just amazing.


  26. The local commentators aren't saying anything unusual – the south should act as a balance between US and DPRK. One observer commented that Bolton's presence was as a threat. Usually Korean commentators are best when they put the panels together the next day. Kim Jongeun is making a visit to XI on the way home.


  27. Good morning!

    I’m worried China trade talks will suffer a similar fate.  You can’t just wish yourself into deals like this – too many devils in the details.  

    bodyp 

    Sadly, Trump ha de-fanged the UN and NATO and lost our own credibility and the US is in no position to step in with India and Pakistan, which is in desperate need of attention.  Trump should have gone straight there since he has some free time.   

    I could see Trump got really thrown when Kim took a question from the presss (he never has before) – I think that threw off his whole strategy


  28. Yes, that's a good point about Kim, not just taking the question, but his response – "I would not have come here if I did not intend to de-nuke". Okay, then…


  29. Experts: US anti-Huawei campaign likely exaggerated


  30. CPAC’s new boogeyman: China


  31. Your Coffee Could Be About to Get More Expensive






  32. Barrick, Newmont Race to Plead Merger Cases to Investors



  33. Burned/Robert – Well if the stock flies up in the first Q you are selling, you get called away at the same $3 but with far less money in your pocket – that's all.  Not terrible damage.  As I said, it's like chess, too many variables in the moves ahead so the best way to learn is by playing and see what happens. 

    LB/Soma – Ouch indeed.  A bit of an over-reaction with "disappointing" forecast of $2.20-$2.60 per $26 share DESPITE writing off 50 underperforming stores – which is still part of their overall restructuring.

    Same-store sales for L Brands on the whole rose 3 percent as its second-biggest division by revenue, Bath & Body Works, saw a same-store sales growth of 12 percent.

    I'll stick with them but not expecting much this year.

    Kim/Snow – This breakup is bringing back my primary fear – that Trump does not actually want de-escalation (Russian Agent, more sales for GOP donors – take your pick) nor does he actually want a trade deal with China and this "tough stance" is just a polling stunt to get a reading on how the public will react if he acts the same way at the Xi meeting.