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Monday Market Movement – Trade Talks Back on with China!

The Dow is up 250 points pre-market.

That's after bursting over 100 points higher in the last 30 minutes of Friday's session.  Overall, it's a very low-volume rally, mostly short covering (we will be covering some shorts ourselves) as Trump met with Xi at the G20 and he decided Huawei isn't spying on us after all (despite slandering them all over the world) and that Trump will not put tariffs on another $300Bn worth of Chinese goods but he is keeping the tariffs already in place.  Keep in mind this is all to arrive at an eventual deal that is not likely to be substantially different than the deal he broke last year – so why all the celebration?

As you can see from the chart above, earnings haven't grown at all this year and it's been Valuation Expansion or Multiple Expansion that's accouted for 90% of the move in the S&P 500 for the first 6 months.  Very simply, we are paying much more for the same earnings as last year.  Granted a lot of companies did us "China" to excuse their shortfalls and we can imagine, with the Trade War hopefully winding down, that we'll get some real growth but that doesn't mean we're not paying too much for the growth we do get.

Notice that 87 S&P 500 companies have already pre-announced negative guidance for Q2 and, when we get back from the Holiday weekend next Monday, we'll begin to see those Q2 earnings reports.  So, while we hedged heavily into the weekend – just in case the G20 went badly – we will be using those hedges into Q2 earnings season, albeit less aggressively as we sell some covers as well.

We know the Fed is certainly in no hurry to raise rates, so that's a big plus for the market but I'm not so sure the Fed is looking to lower rates as we are no in the 121st month of a market expansion – the longest in history (and 104 (86%) months of it came before Trump was President – in case you are wondering).

Nonetheless, Economists surveyed by Bloomberg see a 30% chance of recession over the next 12 months and growth has already been slowing as the stilulative effect of the tax cuts begin to fade.  Resolved or not (and it will take 3-6 months to finally resolve trade at best speed) the varios trade spats have left a massive build-up of inventory and that will also be a drag on the economy for months to come.

U.S. inventories are bulging, potentially weighing on future growth

Business Investment has slowed, Construction has disappointed so it's up to the very indebted US Consumers to carry the ball going forward and that puts pressure on Friday's jobs number as we already seem to have forgotten that last month, the May Jobs Report had just 75,000 jobs added and we get the June Report on Friday – interrupting our Holiday Weekend (markets are closed Thursday and no one will show up Friday).  

Of course, too high jobs numbers puts pressure on the Fed to raise rates so we don't want too many jobs created in June – just not so pathetic as 75,000…  

Today is going to be spikey as the skeptics get squeezed by the Trade Talks but what really matters is do we get back to our record highs and, while 2,980 is a new record for the S&P 500, we need to see 26,900 on the Dow, 7,852 on the Nasdaq 100 and 1,620 on the Russell – that's the sign we're waiting for to call this more than just another Trade Relief Rally – those we have every other week.  


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  1. I remember the good old days when talking to dictators was treasonous. But not it's a victory. Thanks to Fox News, I am always up with the latest trend.

  2. Good morning! I'm back in Altadena, and completed my teaching contract at DGIST. Sad to leave (but that's much better than glad to leave).

    And, StJean – if you're referring to Kim Jongeun, I'll take it if it allows the peace process and normalization of relations to start moving again.

  3. In the 1997 film The Peacemaker, George Clooney and Nicole Kidman had to save the world from nuclear bombs being smuggled out of Russia to Iran -

    They could remake that film today and it would be topical. Feels like the US/world prefers to have Russia and Iran as perennial bad guys, I guess I should just follow the money, that will tell me why

  4. Good Morning!

  5. Phil, read the portfolio adjustments late last week. If I were starting a NEW position in CMG, I think you would say:  Buy 10 2021 700/800 BCS, Sell 5 2021 560 puts, sell 5 2020 740 calls. Correct?

  6. Phil / FCX – was expecting this one to be up today…. Any reason why it is not?

  7. Kim / Snow – I don't disagree with talking to our enemies, I am simply pointing out that when Obama did it with Cuba, the right went bonkers. It's not the action, it's the inconsistency in the response. But we also need results and as of know, we seem to be getting played.

  8. NK/StJean – No, this is real and very important. "Getting played" is, in my opinion, the US weapons industry line, as they want to keep selling military stuff to the region. Granted, there's little of substance that will come out of the meetings of the three leaders (Trump, Kim, and don't forget Moon is there), but that's always the case with high level diplomacy. The real action is at a lower level and out of sight, at least until the leaders announce it and take the credit.

  9. Good morning!  

    As noted above, unless we pop ALL the previous highs – we're just topping out at the same place we always do.

    Dictators/StJ – I don't actually have a problem with engagement.  It's good that Trump is talking to North Korea rather than just trading insults by Twitter.  Now if we could only get him to meet the Mayor of London!  

    That outflow chart is very concerning.

    Bad guys/Mike – Russia and Iran sure do have staying power.  

    CMG/JMD – Keep in mind we got really burned on short calls on them at one point – a bit dangerous.  CMG isn't cheap now so I wouldn't take any position – the key to our success is PATIENCE – we initiate these positions when a stock is low in the channel – not at the top.  We are up over $100,000 on CMG from entries that began in Jan 2018, when CMG was $300 and we're still in the position because we took wins off the table and now we're rolling our short-call losses and covering with the new $700/800 spread but it's not an entry position – it's a buffer against the 15 short Jan $740 calls burning us and then we're selling the puts to offset the calls but again, if we didn't owe the short callers $106,000 that we were trying to avoid paying (and maybe making some money), we would not be messing around with this from scratch.

    Now AAPL, on the other hand, is still very undervalued at $203 and, unlike CMG, I'm NOT worried about AAPL falling 25% to $150 so, with AAPL, I would confidently take the following:

    • Sell 10 AAPL June 2021 $165 puts for $12 ($12,000) 
    • Buy 20 AAPL June 2021 $180 calls for $41 ($41,000) 
    • Sell 20 AAPL June 2021 $225 calls for $20 ($20,000) 
    • Sell 5 AAPL Sept $205 calls for $9 ($4,500) 

    Here we're spending net $4,500 on the $90,000 spread that's $40,000 in the money so no big deal if you lose a bit to the short callers and, if AAPL behaves and rises slowly, you have 718 days to sell and the Sep short calls used 81 so 7 more sales like that can drop another $31,500 in your pockets while you wait to see if you make $85,500 (1,900%).  Margin on the short puts is only $16,500ish (ordinary) so it's great if you have PM.  

    I don't see the point in messing around with risky trades when trades like that are just sitting around!

    FCX/Batman – They lowered outlook for Q2 as they expected $2.94 avg selling prices and got $2.77 so revenues are down $75M and now they will lose 0.05 vs +0.09 expected but I think that's already baked in so it's really a question of whether or not it gets back to $3 moving forward.  

    Cuba/StJ – Good point on the consistency but that doesn't mean we should conduct poor policy to be consistent.  I'm just happy on those rare occasions when idiocy doesn't win.

    Getting a bit of a fade on the indexes – we'll see what sticks.

  10. STJ / VXX – Have you put much thought into who takes the other side of our VXX side, and why they are willing to pay such high premiums?  My only guess is that it gives big institutions a cost competitive way to hedge Vega, but I have a hard time understanding how when the premiums are so rich.

  11. I guess this caused the sell-off:
    • May Construction Spending-0.8% M/M vs. +0.1% consensus, +0.4% prior (revised).
    • Construction spending -2.3% vs. -1.2% prior Y/Y.
    • June ISM Manufacturing Index: 51.7 vs. 51.1 consensus, 52.1 prior.
    • Prices 47.9% vs 53.2.
    • New Orders 50.0% vs 52.7.
    • Employment 54.5% vs 53.7.

    • The OPEC deal to extend production cuts will stretch into 2020, Bloomberg reports.
    • Ministers from the Vienna group meeting agreed to prolong the cuts by another nine months, the long side of the previously reported 6-9 months.
    • That will take them into March.
    • The new decision is sure to be ratified by non-OPEC allies on Wednesday; Russia and Saudi Arabia are already on board.
    • WTI Crude is up 2.09% to $59.69; Brent Crude is up 2.04% to $66.06.
    • Warren Buffett will convert 11,250 of his class A Berkshire Hathaway shares (NYSE:BRK.A) today into 16,875,000 class B shares (NYSE:BRK.B) and will donate most of them to five foundations.
    • 16,811,941 class B shares, with a current value of ~$3.6B, will be donated among the Bill & Melinda Gates Foundation, Susan Thompson Buffett Foundation, Sherwood Foundation, Howard G. Buffett Foundation, and NoVo Foundation.
    • Buffett has never sold any Berkshire shares. With the current gift, about 45% of his 2006 holdings have been given to five foundations.
    • He plans to give all of his Berkshire shares to philanthropy through annual gifts that will be completed 10 years after his estate is settled.
    • An adviser to the Chinese government and central bank says a trade truce with the U.S. reached over the weekend makes a final trade deal no more likely, Bloomberg reports.
    • Zhu Ning, a Chinese academic who advises the government, likened the dispute to conflicts in Korea or Vietnam. "It could drag on and there could be no declaration of war but the skirmishes keep going," he said on the sidelines of the World Economic Forum in Dalian on Monday.
    • Comparing the two countries' statements over the past six months, Zhu said both seemed to be more cooperative after the truce in Argentina in December vs. the current agreement.
    • "Monetary policy can no longer be the main engine of economic growth, and other policy drivers need to kick in to ensure the global economy achieves sustainable momentum," the Bank of International Settlements warns in its Annual Economic Report.
    • The BIS calls for better balance among monetary policy, structural reforms, fiscal policy, and macroprudential measures to shift from the "debt-fueled growth model that risks turbulence ahead."
    • The comments echo statements made by European Central Bank President Mario Draghi earlier this month, saying that structural reforms need to be stepped up to support economic growth in EU markets.
    • The BIS is owned by 60 central banks that represent countries that together account for ~95% of world GDP.
    • “We strive to realise a free, fair, nondiscriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open," G20 leaders said in a joint communique at the weekend, but stopped short of denouncing protectionism.
    • The statement also suggested "global growth remained low and risks were tilted to the downside, as trade and geopolitical tensions have grown," echoing a phrase adopted in the communique of the G20 finance chiefs' meeting earlier this month.
    • Following talks in Vienna on Friday between the remaining signatories of the 2015 nuclear deal – Britain, France, Germany, Russia and China – Iran's deputy foreign minister Abbas Araghchi said he would report back to Tehran on the discussions.
    • The talks were a "step forward, but it is still not enough and not meeting Iran's expectations," he added.
    • Brian Hook, State Department’s special representative on Iran, meanwhile issued a stark choice for European companies: Either do business with the U.S., or forfeit it by doing business with Iran.
    • Federal prosecutors have subpoenaed records from Boeing (NYSE:BA) relating to its 787 Dreamliner and employees at the company's South Carolina manufacturing plant, according to the Seattle Times.
    • The subpoena was issued by the U.S. Department of Justice, which is also conducting a criminal investigation into the certification and design of Boeing's 737 MAX after two deadly crashes.
    • It's not yet clear, however, if the subpoena was issued by the same prosecutors overseeing the 737 MAX investigation.
    • Interesting weekend read: Check out 'Boeing's 737 Max Software Outsourced to $9-an-Hour Engineers' by Bloomberg's Peter Robison and come back here to comment.

  12. FCX – thanks 

  13. Back in a small position of GBTC at $12.94.

  14. VXX / Palotay – I can only think of people using that as a hedge. It's actually not bad protection because deltas are pretty high even deep OTM. A Dec 45 calls at around $1.00 has a delta of 20. So it doesn't take a huge VIX move to make some money. Might be cheaper than buying puts – I have not done the calculations. Anyway, there is that and there are of course gamblers!

  15. Buttigieg raises $24.8m, eclipsing Sanders as candidate cull looms

  16. How crazy traders are. On this morning’s train ride. S&P opened up with 33 points plus. GOOGLE was on fire.
    I only sold 2 July 26 1200 covered calls within three hours I show 340$ profit.
    M,  I really don't know what is the matter with this stock shot up like a flair to 22.37 three hours later 21.43. My one position in M shot up to 2335$. Now only 423$
    Nearly 1 $ in three hours. I ask myself how are people thinking and trading.

  17. Oh my, this rally is just melting away…

    Crazy/Yodi – And the worst thing is that almost 90% of the trading is done by Bots and you would think they would be more rational but they really just exaggerate even the slightest trends from what I can see.  That's why I just ignore most intra-day action – it's just a distraction from paying attention to things that are long-term market movers and, of course, my beloved Fundamentals – which usually play out over time.

    • In the latest job cuts news from Deutsche Bank (DB +0.2%), the German lender reached an agreement with works council on restructuring, Bloomberg reports, citing a memo by Frank Strauss, head of retail and commercial clients division.
    • The unit combines three entities — BHW Kreditservice GmbH, Postbank Service GmbH, and PCC Services GmbH by Aug. 31.
    • Operations unit will undergo cut of ~1,300 internal and external roles by 2022 through "harmonization, process optimization, and automation."
    • Previously: Deutsche Bank +3.7% as job cuts pact expected (June 26)
    • Barrick Gold (NYSE:GOLD) and Newmont Goldcorp (NYSE:NEMconcluded the transaction to establish Nevada Gold Mines, in which Barrick holds 61.5% and is also the operator, while Newmont Goldcorp owns 38.5%.
    • Assets in north-eastern Nevada comprise ten underground and 12 openpit mines, two autoclave facilities, two roasting facilities, four oxide mills, a flotation plant and five heap leach facilities.
    • Barrick pointed out proven & probable reserves of 48.3M ounces; measured & indicated resources of 27.4M ounces; and a further 7.5M  ounces of inferred resources.
    • Nevada Gold Mines is targeting annual production between 1.8M – 1.9M at a preliminary estimated cost of sales of $940/oz to $970/oz and all-in sustaining costs of $920/oz to $950/oz for 2H 2019.
    • Synergies are expected to deliver up to $500M a year over the first five years from 2020.
    • Barrick has three seats and Newmont Goldcorp two on the JV's board
    • Netflix (NFLX +2.1%) plans to start moving toward more cost-effective spending instead of some the fly-wheeling content buys of the past, according to The Information.
    • Content boss Ted Sarandos reportedly told film and TV execs at the company to be cost-effective with their content spending, focusing on spending that adds viewers not just social media buzz.
    • Netflix's content obligations total is being watched even closer by analysts and investors quarter to quarter as the company matures.

  18. BASF reduces 6000 Ford 12000 Siemens 2700 empolyes,are these the good times?

  19. Hi Phil,

    I know that you did a series of portfolio reviews recently.  I do not seem them under the Virtual Portfolios tab.  Is there another place that you post the portfolio reviews?  If not, I'd appreciate it if you would let me know the dates of the posts that have the reviews.  Thank you.

  20. Good times/Yodi – We're tired of winning!

    Reviews/John – I haven't consolidated them into a single review yet.  They appear in comments, usually the week leading into expiration day.  

    Submitted on 2019/06/18 at 12:16 pm  Money Talk Portfolio

    June 19th, 2019 at 11:58 am | (Unlocked) | Permalink  Long-Term Portfolio (LTP) – Part 2: 

    I did not review the new Hemp Boca Portfolio that I'm doing for the radio show people kept asking me to start a new, small portfolio from scratch and this is it – I think 5 portfolios (plus our hedge fund) is plenty.  As they are only a month old – there wasn't anything to change but we're up 3% in our first month, so off to a good start:


  21. Wow, tear gas is not that effective in places where people can buy gas masks.  Protesters just stormed the Government Building in Hong Kong and seem to be inside.  

    This would be a good comedy sketch about China's problem with Capitalism:  Ordinary students come to the protest to see what's going on and someone sells them signs and handing out lyric sheets for chants.  Then the police start using tear gas and people start selling gas masks.  Then the police start firing bullets and people start selling bullet-proof vests and then someone asks if they want to fight back and rolls out a cart full of guns and suddenly you have a fully armed soldier…

    • AMC Entertainment (NYSE:AMC) is down 1.66% and traded at an all-time low of $9.16 earlier in the session.
    • The theater operator's problems are tied in part to soft traffic in the U.S. Box office revenue fell an estimated 9.4% during the first half of the year, while domestic ticket sales for the summer season are down 7.3%, according to The Hollywood Reporter. Franchise fatigue is blamed in part for the disappointing first half of the year.

    AMC kind of shot themselves in the foot by quickly attacking HMNY with their own pass.  Like HMNY, they didn't think it would be so popular and cost them so much box office – maybe worse for AMC as they are cannibalizing existing customers.  

    They spent a ton of money revamping theaters and it was helping last year with $110M in sales (they are a $950M company at $9.20) but last Q down $130M and expecting to lose $67M for the year.  

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 2,749 2,695 2,947 3,236 5,079 5,461 5,278 5,562 5,661 +14.7%
    Operating Profit $m 189.1 183.5 227.7 212.9 101.8 265 121.4     +7.0%
    Net Profit $m 364.4 64.1 103.9 111.7 -487.2 110.1 -37.8 -66.7 13.0 -21.3%
    EPS Reported $ 4.74 0.65 1.06 1.13 -4.75 0.85 -0.69     -29.2%
    EPS Normalised $ 4.77 0.63 1.15 1.53 -4.21 1.15 -0.42 -0.52 0.044 -24.7%
    EPS Growth % +1,848 -86.9 +84.4 +33.0            
    PE Ratio x           8.08 n/a n/a 212  
    PEG x           n/a n/a n/a 0.83

    CNK, on the other hand is also down but are nowhere near the mess AMC is.  They only let you see one movie a month for free and give you 10% off food, etc – in other words, it's a membership that doesn't hurt them much and they are pretty much done with upgrading.  CNK is much more focused on profits but they also have a $4.2Bn market cap at $36 – so not a major bargain but I'd still rather play them but options only go to Dec, which is why we usually don't.  

    They pay a 3.7% ($1.36) dividend so not so bad to own which means we can call a bottom and sell 10 of the Dec (as far as they go) $35 puts for $2.25 ($2,250) and buy 20 of the Dec $35 ($2.85)/40 (0.90) bull call spread at $1.80 ($3,600) so net $1,350 on the $10,000 spread means you can make up to $8,650 (640% by Christmas) but we need help from Hollywood with some summer hits.  Let's add this to the OOP. 

    • After paring gains earlier today, oil rose a bit into settlement amid reports that Iran stopped a holdout and OPEC delegates came to a compromise on its new charter.
    • That new charter sets up long-term cooperation with non-OPEC nations. Delegates reportedly agreed on language that would protect Iran's interests in the new regime.
    • The group also formally ratified Secretary General Mohammed Barkindo's second term in office.
    • Earlier, delegates agreed to extend production cuts nine months, taking them into March 2020.
    • WTI crude is up 1.2% to $59.19/barrel, while Brent Crude is up 0.6% to $65.15.

    That $2.20 line on /NG has become pretty reliable:

  22. The price chart of CNK looks like a journey to hell and back five times over!!!!! At least with AMC you know in advance that there is little likelihood of making any money – which is only beaten by HMNY where you knew it was a complete adventure into financial oblivion before you started. Makes IMAX look like the buy of the century.

    I'm sticking to good ol' DIS.

  23. Well, we got back some of the gains but not a very impressive start if they want to convince us we're going much higher.


    Gasoline got 13.5% more expensive:

    IMAX/Winston – Also cheap again at $20:


  24. This is another great opportunity to short Tesla.  It is looking likely that Tesla is going to meet delivery guidance this quarter, but they scorched their margins to do it.  The split between cheap model 3's vs the higher margin performance models, and S/X has shifted dramatically this quarter, and this has a significant impact on gross margin, and resulting net income.  There is tons of evidence of this available online.  Analysts are expecting a loss of only $150M in Q2, but based on what I have read on the subject, I am expecting a loss of $400-500M or more.  Here is one model that seems to make sense.

    If you are interested in learning more, follow @teslacharts.  The stock is up because the evidence is pointing towards Tesla meeting delivery guidance, but earnings are going to be a completely different story (look at what happened after Q1 earnings were released).  Furthermore, Tesla has pulled all the levers that they have to meet delivery guidance, but they still lost a bunch of money.  The 2nd half of 2019 will be characterized by YOY revenue declines, which is going to be difficult to reconcile with the growth narrative.

    Maybe Elon has another trick up his sleeve, or maybe not…  I'm very short right now.

  25. What Happens When a Country Drowns?