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Tuesday Testification – Powell Speaks to Congress

Image result for trump fedTo ease or not to ease

That is the question investors will be looking for Fed Chairman Powell to address when he testifies at 10 a.m. Wednesday before the House Financial Services committee and the next day to the Senate banking panel. Friday's strong jobs report has led to a sell-off as investors now believe the Fed is less likely to cut rates at their end-of-month meeting and of course they shouldn't be cutting with record-low unemployment, rising inflation and a record-high stock market – that would be MADNESS!!!  

Of course madness is Trump's sweet spot and he's been hammering on the Fed lately to lower rates because Trump needs to stretch this rally out another year or there's no way he'll get re-elected and he's going to need the Fed's cooperation because this rally has already overstayed it's welcome and is quite overdue for a correction.  The Fed, for it's part, wants to RAISE rates so they are then able to LOWER them WHEN it is necessary. If they lower rates when it's not necessary, what are they going to do when it is?  

Image result for trump baby balloonThat's the difference between thinking like a child and thinking like an adult, of course and, as our friends in the UK like to point out – Trump is essentially a giant baby with low attention span who likes to repeat catchy phrases with little understanding of the underlying issues and has an absolute melt-down if he doesn't immediately get what he wants.

Powell, like any Fed Chairman, is supposed to be the adult in the room and tries to intervene only when necessary – generally staying out of politics.  The need for an independent Federal Reserve has been recognized by every President in US History – until this one…  Even now, Trump is packing the Fed with his own people and is pressuring Powell to step down so he can put another sycophant in charge of our monetary policy – very scary stuff.  

Fortunately, the Fed doesn't answer to the President and they don't answer to Congress either but, twice a year, they are required to appear before Congress and explain themselves – though Alan Greenspan was great at making a mockery of that proceeding.   Bernie Sanders gave Greenspan a piece of his mind back in 2003 but, sadly, no one listened and we barrelled forward into the Financial Crisis:

Aside from attempting to prolong the rally (now in month 122), Trump needs an easy Fed to keep the Dollar weak, which strengthens US Trade and makes it look like Trump's policies are working.  Also, from a practical standpoint, a country that is $22 TRILLION in debt really can't afford to pay higher interest rates as each 1% increase in rates costs us $220Bn in interest payments.  

In fact, the US will once again hit the Debt Ceiling in September and we have been running using "extraordinary measures" to meet our debt obligations since March 2nd, when we crossed the $22Tn limit.  Without actual Congressional approval between now and early Sept (so 60 days) the US will default on their loan obligations.  Large payments due in early September increase the default risk ahead of a quarterly tax revenue infusion that would come in mid-September and provide some cash relief to the Treasury, the BPC said.  

A meeting last month among Pelosi, Mnuchin and other congressional leaders ended in acrimony when Republicans said Democrats were asking for too much spending on domestic programs.  Mnuchin suggested a one-year debt ceiling increase be attached to a spending bill that would put the budget on autopilot for a year. Lawmakers rejected that proposal, and no follow-up meeting has been scheduled.  The Treasury Department could decide to prioritize bond payments over government salary, benefit and vendor payments once the debt limit is reached but we're running on fumes as it is.  

Consumer Credit is also at an all-time high, now $4.1Tn, rising twice as fast as our GDP is growing so, in other words, 200% of our GDP growth is due to US Consumers taking on more debt and NOT because more wealth is being created in the US Economy so lowering rates and encouraging more borrowing would like trying to cure heroin addiction by giving out crack.

While we're waiting to hear from Powell, Trump's Economic Adviser, Larry Kudlow made a statement that Powell's job "is safe at the present time" which may be a threat in disguise.  It's done nothing to boost the Futures and we'll open down about 100 points and then we'll just have to wait and see what happens.

 


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  1. Cue complaints from the GOP that the Dems are endangering the security of the nation by refusing to raise the debt ceiling without conditions… Because no one will remember and they will shamelessly deny that they did that under Obama.


  2. The effect of raising the minimum wage quantified:

    https://www.motherjones.com/kevin-drum/2019/07/cbo-says-15-minimum-wage-would-be-mostly-positive/

    Some people would lose out, but it would make a difference for many more!


  3. Good story about Costco:

    https://thehustle.co/costco-membership-economics/

    In the last 30 years, the percentage of corporate profits going to stockholders has increased from 50% to 86%, resulting in fewer deals for customers and less money for employees. This investor-first mentality has, in many ways, harmed American industry.

    Since the day Costco went public in December of 1985, investors have complained that the company has been “too generous” with its customers and employees. They’ve called for higher markups on goods, steeper prices, and reduced benefits for workers.

    But Costco has always insisted that their policies aren’t just altruistic — they’re good for business: By sticking to their principles, stock has gone up 387% since 2000.

    “On Wall Street, they’re in the business of making money between now and next Thursday,” Sinegal told the New York Times in 2005. “We can’t take that view. We want to build a company that will still be here 50 years from now.”


  4. Jean-Luc/

    I dont understand why the minimum wage should be a political football.

    Like short term interest rates are set independently by  the Fed why not set up an independent Bureau of Labor to annually determine a proper minimum wage.

    Australia has an excellent system with the Fairwork Commission.

    Minimum hourly wage in Australia is AUD19.49 or USD13.52



  5. Good Morning!


  6. Optical stocks strong on Cisco's takeover of Acacia (ACIA).


  7. Minimum wage / Lionel – No disagreement from me but apparently some people here are too worried that there would not be enough money left for shareholders!


  8. Good morning!

    I'm here until 2pm and then doing the Radio Show at 2:30.

    We'll add a trade to the Hemp Boca Portfolio this afternoon.  I'm thinking M but open to suggestions:

    Indexes off the lows but I'd call it a 200-point run on /ES to 3,000 in the very least and that would be a 40-point rejection to 2,960 (check) so an 8-point bounce is weak (2,968) and 16 points is strong (2,976) so we're looking for action at 2,976 to see what's up.

    Big Chart – NYSE 2.5% line is 13,120, now 13,099 – let's watch that closely too.

    Wages/StJ – Or you can read the right-wing interpretation of the report:

    CBO Destroys Democrat Dreams Of Utopia; Almost 4 Million Jobs Lost Under $15 Minimum Wage.

    There was a recent NY Study that came to similar conclusions (the real ones) as the CBO:

    https://irle.berkeley.edu/files/2016/The-Effects-of-a-15-Minimum-Wage-in-New-York-State.pdf

    Not even close to reality but that's how they are spinning it.  I really can't understand why it's so important to them to screw poor people over.  The report shows it doesn't even cost the rich anything substantial to make this small concession yet the GOP is fighting tooth and nail against raising wages to $600 a week for a full-time worker – that's what I was making in my first job out of college in 1985!

    COST/StJ – See how the pressure is always on to screw the customers and employees.  The system is designed to excuse and enforce the selfish actions of the 1%.


  9. Actually, we should do IMAX for the HB Portfolio, maybe M too.  


  10. Phil, any thoughts on BBBY.  Do you see any change in fundamentals?  It is at a pretty low place in the price channel.  Thanks!


  11. COST / Phil – The thing that is so frustrating is this line:

    In the last 30 years, the percentage of corporate profits going to stockholders has increased from 50% to 86%!

    Were shareholders so badly off 30 years ago in the waning years of the Reagan years? Since then, they have received a higher share of profits and seen their taxes go down. I can't imagine where the economy would be today if any of that money had flowed in the pockets of people who can actually spend it. Maybe 50% higher…


  12. STP not too much damage from the rally so far and we've got a good amount of protection in there:

    For the STP, let's sell:

    • 20 IMAX Jan $20 puts for $1.85 ($3,700)
    • 20 WBA 2021 $50 puts for $5 ($10,000)
    • 10 INTC 2021 $45 puts for $5 ($5,000)
    • 20 BBBY 2021 $12.50 puts for $4 ($8,000)

    That's a nice $26,700 offset to some of our bearish bets.  

    BBBY/Robert – I think they are stupidly cheap at $11.50.  They will probably make close to $2/share next year but they took a restructuring charge last Q ($312M) and showed a $254M loss but very a-typical, most likely.  

    Year End 02nd Mar 2014 2015 2016 2017 2018 2019 2020E 2021E CAGR / Avg
    Revenue $m 11,504 11,881 12,104 12,216 12,349 12,029 11,486 11,301 +0.9%
    Operating Profit $m 1,615 1,554 1,415 1,135 761.3 -87.1      
    Net Profit $m 1,022 957.5 841.5 685.1 424.9 -137.2 246.5 248.3  
    EPS Reported $ 4.79 5.07 5.10 4.58 3.12 -1.02      
    EPS Normalised $ 4.79 5.07 5.10 4.58 3.12 1.45 1.98 2.22 -21.3%
    EPS Growth % +5.1 +5.8 +0.6 -10.3 -31.9 -53.6 +37.0 +11.9  
    PE Ratio x           7.94 5.80 5.19  
    PEG x           0.21 0.49 0.62
    Profitability

    $11.50 is $1.5Bn so, if they hit their numbers next year, p/e is about 6!  

    As I often say:  "If you are not going to buy a stock when it's cheap – when are you going to buy it?"  

    Economy/StJ – Very true.  


  13. Phil, any reason why you are only selling puts and not adding the BCS to the new trades in the STP?  I am guessing you are waiting to buy the BCS if it goes lower.  Why not do it opposite?  Buy the BCS first and then sell the puts if it goes lower.   I appreciate your thoughts.  Just trying to learn these wrinkles.


  14. Phil, one more question, where did you pull that financial snippet you posted on BBBY.  TIA.


  15. Phil

    Do you think this would be  good place to park Cash  ?

     Monthly div .10

    The Western Asset Emerging Markets Debt Fund   EMD

    Monthly div .10

    No options

    Thanks


  16. IIPR/Phil – Have you come across this one yet?   Perhaps something for HB?


  17. Minimum wage – labor is a product like anything else and demand for it changes inversely with price. The amount of change depends on the elasticity of demand which is different for different types of workers but I would say that the elasticity is relatively high for people that have no skills. McDonald’s for example is piloting kiosks to replace cashiers. Right now they’re kind of klunky, but very usable. Grocery stores have long had self-checkout lanes. We all like to lament the loss of small businesses due to the Wal-Marts. Amazons, and Targets and we’re spinning the idea that lower minimum wages help the rich but do they really? I would argue that high volume outlets can afford either the higher wages or the investment in technology to eliminate jobs altogether but low volume outlets like Pop’s Hardware cannot. So we’re introducing another systematic advantage to the rentier class in the name of social justice. How awesome is that. 


  18. Does Vladimir Putin have a point?




  19. 10 Tuesday AM Reads




  20. Looking through my list Phil ABBV good interst payer and on the lower side of the scale.

    AGNC, CM, GILD, MO at 48,PAG looks better at 42 but 46 not too bad, WBA, just a few to look at.


  21. My mistake – Powell not until tomorrow.

    Puts/Robert – In the STP, we don't tend to take full positions.  We use short puts to generate cash (offsetting the cost of our hedges) and, if the stocks go lower and we still like them, THEN we consider moving the short puts to the LTP and establishing a long position.  Snippet is from Stockopedia's subscription site.

    EMD/QC – Park cash in the debt of emerging markets?  It doesn't SOUND like a good idea and, when I think about it, it seems like a terrible idea.  "Parking cash" usually implies a degree of safety and a fund that can drop 20% on you with no ability to hedge doesn't really qualify to me.

    IIPR/Buckeye – Well we're trying to stick to things people might have heard of for the Hemp Boca Portfolio and they don't have to be Hemp Related.  In fact, they shouldn't be as we already have MJ so we need to be diversified.  IIPR is just another overpriced Cannabis-adjacent stock to me.

    Labor/Dawg – I find the initial premise flawed as labor is not a "product" but a commodity and is NECESSARY (for now) to produce goods and services so it's much stickier than you think – it's the profits that are elastic.  And yes, when WMT can run a store with a fleet of robots and kick the workers to the curb and assuming the masses don't burn their automated freak shows to the ground, then sure, they will have a competitive advantage over stores that pay humans $15/hr but, for the next decade or two, I'd rather see WMT's 2.2M employees be paid a living wage than have the extra $6/hr ($26Bn/yr) go towards buying more machines faster to completely eliminate their salaries. 

    MO is a good one Yodi and it fits the premise as, eventually, they will buy up the cannabis companies anyway.  Others are good but too exotic.  Oops, WBA also accessible and still very cheap but $55 a bit rough for put-selling in a small portfolio (as is MO at $48.50). 


  22. Instead of M, why not  BA?


  23. I can't believe DIS has to "defend" hiring a black actress to play The Little Mermaid – have we completely slipped back into the 50s?  Even her statue is black!  cheeky

    Image result for hans christian andersen little mermaid black 

    BA/Advill – Not appropriate for small portfolio (and way too dangerous still).  We don't even have BA in the LTP yet.


  24. BA I think we hold this since 5/19 Jan 21 250 put sold for 13.25 at least I have.


  25. As you say just to keep an eye on it!!!


  26. Bitcoin, and therefore GBTC, still moving up.

    I credit much of this latest move to the hyping of George Gilder's embracing Blockchain.


  27. Yodi / BA

    Agree, it´s +12% 


  28. Phil / DVA – I mentioned this one a while back – I'm lookin at a price target of 65 to 70 and the following:

    Long 10X Jan '21 $50 calls at 9.9. 

    Short 10X Jan '21 $65 calls 4.5

    Short 5X Jan '21 $50 at 7

    Thoughts on above ?


  29. BBBY – the 7.5/12.5 Jan 2020 spread is going for $2.85 and it’s almost $4 ITM. Seems a pretty safe way to make a 75% return in 6 months. 


  30. Advill where are you hiding I am in Holland at present


  31. BBBY I put my toes in at 16 now eleven not so funny how low can you go? Not so sure about retail stores, everything goes better at AMZN. They beat the hell out of retail stores. look at holy Marie can not go over 22!!!


  32. Dawg – I like the trade.  I'm already in BBBY, but added a small BCS as you recommended.  Also sold 1/2 position (only 5) of the Jan 10 puts for $1.30.  Thanks for the idea.


  33. Help with VNOM? I have 18 Jan 21 $25 calls covered with 8 July 19 $29 and 4 Sept 19 $32. Also short 10 Jan 21 $25 puts and short 2 Sept 19 $ 31 puts. Typical that I have got myself all balled up. Also long 2 Dec 19 $24 Calls. Suggestions for simplification ??


  34. yodi/BBBY – I’m hoping the minimum wage boost gets people out of their parents basement, which means they need towels and skillets – and there ya go. 

    albo – I like the half puts kicker and would have done something like that but that trade is in my [margin prohibited] IRA and cash-covering the puts isn’t a good deal.


  35. BA/Yodi – Right you are, we did sell 10 $280 puts in the LTP, got a good price ($21) and I certainly don't mind net $259 if assigned.  I was hoping for $300 to establish a long spread. 

    DVA/Batman – Not having a good day today 

    DVA/Bataman – Pretty much the same as last month when we discussed:

    DVA/Batman – Up today when nothing else is.  Dialysis is, unfortunately, a booming industry.  Still $54 is $9Bn and these guys made $200M last year and project $700M now that they've unburdened themselves but they only made $30M last Q – so it's a bit speculative.  I think $85 is aggressive but I'm comfortable with $8Bn ($42.50) as a solid bottom so you can lean aggressive with that target and sell the 2021 $52.50 puts for $7 to net in at $45.50 and that money can be put towards 2x the $50 ($12)/60 ($7.50) bull call spreads at $4.50 so net $1,000 if you sell 5 puts for $3,500 and buy 10 spreads for $4,500 on the $10,000 spreads.   That's PLENTY of upside in a fairly conservative spread.  

    You can see why I wanted to stay conservative – I still think you are being too aggressive with your upside.  

    BBBY/Dawg – Another reason I like them – crazy premiums.

    VNOM/Millard – They've had a lot of growth in the last few years but I think a lot of their wells have run the cycle and they'll have to start spending again for the next cycle.  I doubt they make $100M the next couple of years and, at $31, you are paying $4.2Bn so way, way too expensive for a cyclical E&P company.  You don't really have a problem, you just capped your gains right?  Seems like you have:

    • 18 2021 $25 calls 
    • 2 Dec $24 calls
    • 10 short 2021 $25 puts 
    • 2 short Sept $31 puts 
    • 8 short July $29 calls 
    • 4 short Sept $32 calls

    So your issue at hand is the 8 short July $29 calls, which are $2.10 so no big deal at all as you can roll those out to the Sept $32s at $1.25 for 0.85 and then you clean up your mess a bit but I would 1/2 cover the 2021 $25s as I think you are too aggressive.  You can cash 18 of those at $7.60 ($13,680) and buy 30 of the 2021 $28 ($6)/37 ($2.55) bull call spreads for $3.45 ($10,350) so that's $3,330 off the table and you have 30 spreads covering 12 short calls and the short puts (and you can kill or roll the short Dec calls to 2x (4) the Sept $32s as well).

    BBBY/Dawg – Great premise!  


  36. OK, so I'm off to do the Hemp Boca Radio Show and, officially, our new trades will be:

    Yesterday's Top Trade Idea for IMAX is still a winner:

    IMAX still too cheap at $20:

    • IMAX (IMAX -1.8%) CEO Richard Gelfond pushes back against the idea that sequel fatigue is holding back box office sales this year.
    • Gelfond points to the strong opening run for Spider-Man: Far From Home and success of Avengers:Endgame. He thinks studios will continue to lean on the sequel formula due to structural changes with the movie industry.
    • As for him company, he notes IMAX's box office revenue is up 5% YTD, including a 25% rise in China.
    • Shares of IMAX are still up 7% YTD, despite a two-month long stumble.

    They look at total box office but the blockbuster movies are, of course, on IMAX screens and those things are packing them in.  Several times we've wanted to see something in IMAX and that was sold out and we had to go see it on a regular screen.  

    Spider Man was worth paying the IMAX fee for.  

    Look at IMAX's nice, steady revenue growth and yes, they spent a lot of money the last few years and it's supposed to start dropping to the bottom line this year and Q1 was $12.5M in profits so on track for $50M even if Q1 wasn't a low Q in the movie Biz.  The company is valued at $1.2Bn at $20 so p/e pushing below 20x and the growth is still there and likely to continue:

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 287.9 290.5 373.8 377.3 380.8 374.4 369.6 397.5 412 +5.4%
    Operating Profit $m 65.1 57.9 87.8 58.6 31.4 45.2 42.2     -7.0%
    Net Profit $m 44.1 39.7 55.8 28.8 2.34 22.8 22.6 70.9 76.9 -12.3%
    EPS Reported $ 0.64 0.56 0.78 0.42 0.18 0.36 0.36     -10.9%
    EPS Normalised $ 0.66 0.65 0.82 0.49 0.38 0.62 0.60 1.14 1.27 -1.1%
    EPS Growth % +4.9 -0.8 +26.3 -40.7 -22.8 +65.5 +19.8 +82.2 +11.4  
    PE Ratio x           32.7 34.2 18.0 16.1  
    PEG x           0.40 0.42 1.57 0.99
    Profitability

    At $80M, the p/e is 15 and they are less than 50% rolled out in China.  Keep in mind Avengers was SHOT in IMAX and just passed Titanic (in 6 months) for the most box office ever so, if that catches on, that's a bonus no one was counting for for IMAX.  

    While projectors don't show [18K] other than our film ones… we employ a lot of technology around that. We scan the film into its digital form at the highest possible resolution, and we process it throughout the entire food chain at these higher resolutions. It's a technique called oversampling. What it means is that when you get to that 4K final content, because you've been processing it at a much higher resolution, you actually get a better quality image.

    IMAX has 609 screens in China but that's just 1% of all screens and it's not just our blockbusters but there are huge Chinese movies we've never heard of and if those directors start shooting in IMAX, revenues can go through the roof next decade.  

    IMAX currently has 1,500 screen world-wide and this year, like the past 5 years, they are putting in about 200 more but now 200 is not such a big percentage so the profits go to the bottom line despite the build-outs.  At some point they'll ramp up to 300 per year but they can absorb that now.

    The rest of the year looks good for them, 9 big movies in 6 months.

    • The Lion King: The IMAX Experience (Walt Disney Studios, July 2019)



    • Artemis Fowl: The IMAX Experience (Walt Disney Studios, August 2019)



    • The New Mutants: The IMAX Experience (20th Century Fox, August 2019)



    • IT Chapter Two: The IMAX Experience (New Line Cinema, September 2019)



    • Frozen 2: The IMAX Experience (Walt Disney Studios, November 2019)



    • Star Wars: Episode IX: The IMAX Experience (Walt Disney Studios, December 2019)

    Fast and Furious:  Hobbs and Shaw

    Joker 

    Gemini Man (Will Smith)

    For our Hemp Boca Portfolio, I like:

    • Sell 5 IMAX Jan $20 puts for $1.85 ($925)
    • Buy 10 IMAX Jan $17 calls for $4 ($4,000) 
    • Sell 10 IMAX Jan $21 calls for $1.70 ($1,700) 

    That's net $1,375 on the $4,000 trade that's $3,000 in the money to start so the upside potential at $21 is $2,625 (190%) in just 6 months – nothing to sneeze at.  The risk, of course, is owning 500 shares of IMAX for net $22.75, which is 10% more than it is now and the margin is $1,983 on ToS (ordinary) so not the greatest but it's only for 6 months.  

    Our other trade idea is also a staple in our Member Portfolios and that's Macy's (M), which I see as an underpriced retailer with a huge real estate kicker.  Our trade idea for M is:

    • Sell 5 M 2021 $23 puts for $5.25 ($2,625) 
    • Buy 15 M 2021 $20 calls for $4 ($6,000) 
    • Sell 15 M 2021 $25 calls for $2.10 ($3,150) 

    Here we're laying out just $225 in cash and the margin looks like net $2,167 on the $7,500 spread so the upside potential is $7,275 (3,233%) if M is over $25 in Jan 2021 and the downside is owning 500 shares for $23.45, which is 10% more than they are now.  The aggressive put sales put more cash in our pockets and they are well below our target anyway.  


  37. Phil DVA.  You think 65 tp is too conservative? 


  38. WMT / Phil – And how much stuff are these robots going to buy from Wal-Mart when they replace the 2.2M employees who are all also customers? Of course, by then the WMT shareholders will be crying for a Unviversal Income to save their customer base.


  39. Yodi, in TX until next Tuesday, flying back and will bein august with the RV in Miño river ( Portuguese side) during all August…If you want to joint…


  40. Phil, with GNC up 12% today, where would say its fair value lies?


  41. DVA/Batman – Too aggressive!  I said the $50/60 spread was conservative back on 6/25.

    Robots/StJ – Good point although I bet we could teach them to consume too – then they won't need us at all…

    Image result for robot shopping

    GNC/Alter – Well, $1.75/share is only a $150M market cap and they are certainly going to make $20M this year (p/e 7.5) and likely $30M (p/e 5) next year as they exit the restructuring so I'd have to say they should be good for at least $300M and that's $3.50/share – unless they really screw things up.  In the LTP, we have the 2021 $2.50/$5 spreads and I'm good with that target – until the 2022 options come out, then we might move to a $1/3 spread – depending on what looks good.


  42. Why metalenses are about to revolutionize chip-making


  43. Simultaneous production of fresh water and electricity via multistage




  44. Good morning!

    Down a bit into the open, about 0.25% so no big deal. 

    Oil up at $59 after API showed an 8Mb draw.  250,000 draw in Gasoline and 3.6Mb build in Distillates so net -4.5M is pretty good.  /RB at $1.957

    Waiting on Powell otherwise (for real this time).