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Thrilling Thursday – Strong Bounce Lines Tested

We're making some progress.

As we noted yesterday, we were looking to take back 2,880 on the S&P 500 and we finished at 2,884 and our next goal is the strong bounce line at 2,910 – after which we can put this weakness behind us and get back to our rally – because nothing that happened last week to cause the sell-off matters this week, I guess

Our bounce lines remain:

  • Dow 25,000 is the mid-point and bounce lines are 25,550 (weak) and 26,100 (strong)
  • S&P 2,850 is the mid-point and bounce lines are 2,880 (weak) and 2,910 (strong)
  • Nasdaq 7,200 is the mid-point and bounce lines are 7,360 (weak) and 7,520 (strong)
  • Russell 1,440 is the mid-point and bounce lines are 1,472 (weak) and 1,504 (strong) 

We made good progress yesterday, flipping the Weak Bounce Line on the S&P green along with the Strong Bounce Line on the Nasdaq and the Russell is right on the Strong Bounce Line at 1,503 this morning, so we turn that black.  That's all we need to do to see if we are moving in a healthy or unhealthy direction.  

Yesterday's move up came courtesy of Chicago Fed Governor Charlie Evans who said: "As long as inflation continues to behave the way it has, I think we have capacity to pursue these accommodative stances in support of the economy and sustaining the expansion and maximum employment.  There is a role for risk management, and you could take the view, as I have, that inflation alone would call for more accommodation than we’ve put in place with just our last meeting."

Evans is a voting member of the Fed so his doveish comments were taken as a very positive sign by the bulls but that makes us take this rally with a grain of salt as it's driven by words – not Fundamentals.  There's no more Fed speak this week and just PPI tomorrow as far as major data goes but we do need to watch today's 30-year note auction as yesterday's 10-year note auction did not attract many bidders.  If people lose interest in buying our debt at the rates the Fed sets – then we will have lost control of our interest rate policy – this is why the Fed needs to set REALISTIC rates, not rates that make the President happy.

Germany's yield curve is at the flattest level since the financial crisisThe entire Global Bond Market is showing signs of stress that usually indicate a looming Recession with Germany's Yield Curve falling to its lowest since the 2008 crisis.  Germany’s entire curve is already fully below 0%, while even the 10-year bonds of some of the riskiest nations in the euro area — such as Spain and Portugal — are getting precariously close to negative (inverted) territory.   

“Rates markets globally are expecting what looks like Armageddon,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings LLC. “In our view, a recession is an 80% probability,” referring to the possibility of a U.S. contraction.

Trump, meanwhile, has been taking time out of his attacks on Black and Brown People to attack the White People at the Federal Reserve, indicating that he absolutely wants a weaker Dollar and lower interest rates because it's not about what's good for the economy in the long-term but what is good for the economy into next year's election, which Trump must win to stay out of jail on those obstruction charges and now we have Fed Governors like Evans, who want to be the Chairman, saying what they can to please the President.

Benchmark Yields Around the GlobeThe bond kings at PIMCO are now warning us that US Treasury Yields may slip into negative territory next year, joining $14Tn worth of bonds around the World that already ask you to pay for the pleasure lending your money.  In a blog post Tuesday, Joachim Fels, global economic adviser at the fixed-income investing giant, said it’s “no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative.” At least 11 countries have negative 10-year yields, and Germany’s 30-year yield joined the rest of its curve below zero last week.  

JPMorgan Chase & Co. strategist Jan Loeys last month said the global heap of negative-yielding bonds has a quicksand-like ability to engulf much of the fixed-income universe, including the U.S.  

Bank of America U.S. rates strategist Bruno Braizinha, while not yet predicting negative U.S. yields, sees a risk that the 10-year falls into uncharted territory below 1% within a year as the Fed enters a recessionary-style rate-cutting cycle.  “Yield is evaporating globally,” Braizinha said in an interview. By the end of 2020, a “Japanification scenario” — an extended period of low growth and inflation marked by extremely accommodative central bank policy — implies a 10-year yield in the 0.30%-0.60% range. And if the Fed returns the policy rate to zero, “10-year yields could go negative.

Rates do need to stay low with Consumer Credit now topping $4.1Tn and $1.3Tn of that is "revolving credit", mostly credit cards, which rises with the rates set by the Fed.  Even now, consumers are paying an average of 16.8% on that debt which is $218.4Bn a year that goes to our beloved Banksters on top of the Fixed Interest they collect on $1.6Tn worth of Student Loans and $1.2Tn of Auto Debt.  

If rates keep going lower, pension plans and retirement plans will fail and no one will be able to get a good return on their money without gambling but, if rates go higher – a portion of the $4.1Tn is going to default and those who do struggle to pay their debts will see their disposable income rapidly shrink.  These are all warning signs that we're nearing the top of the market but Trump and the Fed want you to party like it's 1999.

 


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  1. Love the rate discussion Phil! So basically, with all that debt in negative territory, there is not good place to go except overvalued markets which look good compared to negative numbers – for now! But they warn that low rates also imply low growth so what – more multiple expansion as EPS growth slows. Is 30 the new normal multiple for the S&P?


  2. And as predicted:

    https://twitter.com/_SeanDavid/status/1157709002115076096

    Rarely does 10 year drop below S&P dividend yield. Thursday and Friday made that crossover. Last signal was Nov 2016. Historically very positive for equity demand. Here’s instances where the spread is positive. As it widens, it’s more bullish.


  3. The trouble with tariffs:

    https://www.bloomberg.com/news/articles/2019-08-06/trump-s-china-problem-is-that-a-weak-yuan-is-a-strong-weapon

    That China is suffering from the trade conflict with the U.S. appears to please Trump. “Thousands of companies are leaving,” he crowed in a July 15 tweet. But what’s bad for China isn’t necessarily good for the U.S. In a trade war, everybody loses. By ramping up trade conflict with China, Trump is leading the U.S. and the world into a place that he only dimly understands in pursuit of goals that he has trouble articulating.


  4. Yeah, more guns:

    https://www.politico.com/story/2019/08/07/trump-gun-access-restrictions-1449663

    Federal agencies have implemented more than half a dozen policy changes — primarily through little-noticed regulatory moves — that expand access to guns by lifting firearms bans in certain locations and limiting the names in the national database designed to keep firearms away from dangerous people. The administration asked the Supreme Court to overturn New York City restrictions on transporting handguns outside homes. And it pushed to allow U.S. gunmakers to more easily sell firearms overseas, including the types used in mass shootings.


  5. Bought some GDOT at $24.80.  Just looking for a scalp.


  6. CTL

     

    CTL

    CenturyLink beats by $0.03, reports revs in-line 

     

    Reierated full year 2019 outlook for adjusted EBITA

    and Free Cash Flow.


  7. CTL / Albo – Not moving the stock in the right direction at this time…


  8. Good Morning!


  9. Good morning all. Phil you wanted me to remind you about banks. I would like to have a few on watch list. Thanks


  10. STJ – Not yet.  Think they need to spin off some unnecessary assets (which they have) and pay off more debt.  Dividend coverage very strong.


  11. GDOT – Sold 1/2 up 2 points.


  12. Morning, everyone!

    The webinar replay is now available!

    https://youtu.be/KRPUxilCVvE


  13. KHC roll down?


  14. Good morning!  

    Things are looking up as we add 0.5% to yesterday's gains.  2,899 on /ES at the moment and 7,598 on /NQ so those are levels we can watch but, as noted above – I still don't see what changed other than Trump and Evans jawboning lower rates and a weak Dollar.  Meanwhile, 4 former Fed Chairs got together to tell Trump to leave the Fed alone – I doubt they would have done that if Powell didn't feel the same way.  

    RUT is way below the others on the Big Chart so it makes a good long if /ES and /NQ get over their lines.  I guess 1,515 would be the line I play on /RTY though 1,512 is the 5% line so maybe that should be the stop with a $150 loss but ONLY if /ES is over 2,900 AND /NQ is over 7,600 and, frankly, I'd rather play them short at those lines.

    VIX is colling down though and Europe up more than 1% – we'll see if we can hold up after they close.

    30-year auction at 1pm but we've seen the needle and the damage done yesterday.  

    "I've seen the needle
    and the damage done
    A little part of it
    in everyone
    Every junkie's like a setting sun"

    Multiple expansion/StJ – Good summation, that's exactly what's happening.  As long as an asset class is higher than it was last year, most people don't consider multiples as it's a Fundamental that's unique to stocks.  Bonds have no multiples, Commodities have no multiples – we're equity investors so we're always thinking about it but people who usually buy bonds only look at alternate asset classes and their performance.  Right now, Gold is the top performing asset class, followed by equities – that's where the money is going.

    Speaking of multiple expansion – CMG back on the march:

    Guns/StJ – Can you imagine the outrage if Russia were doing this to us instead of us doing it to the rest of the World (and ourselves)?

    GDOT/Albo – Wow, they really got clobbered.  

    Financial technology and banking-as-a-service (Baas) company Green Dot (NYSE: GDOT) reported second-quarter earnings that — to put it mildly — disappointed investors. The morning after the earnings report, Green Dot's stock was set to lose more than 35% of its value, and this comes on the heels of a massive 26% drop after its first-quarter results in May. In all, Green Dot is trading for less than one-third of its 52-week high.

    The first-quarter drop was due to the unexpected announcement that Green Dot would be dramatically increasing its technology and marketing investment activity, and this would result in lower profits in the near term. As CEO Steve Streit recently told me on The Motley Fool's Industry Focus podcast, the company is willing to endure short-term pain in order to make the right moves for the long run.

    What went wrong in the second quarter?

    At first glance, you might expect the stock to be up following Green Dot's second-quarter results. After all, the company's earnings and revenue both beat analyst estimates.

    The problem is that it appears that the company will have a bit more short-term pain than investors had previously thought. Along with second quarter earnings, Green Dot lowered its full-year 2019 guidance yet again.

    Metric

    Q4 2018 Guidance

    Q1 2019 Guidance

    Q2 2019 Guidance

    EBITDA

    $315 million to $321 million

    $255 million to $261 million

    $240 million to $244 million

    Adjusted EPS

    $3.59 to $3.67

    $2.82 to $2.91

    $2.71 to $2.77

    Revenue

    $1.114 billion to $1.134 billion

    $1.114 billion to $1.134 billion

    $1.060 billion to $1.080 billion

    Data source: Green Dot earnings reports.

    This represents a 5% year-over-year revenue increase at the midpoint of the current guidance range but declines of 12% and 17% in EBITDA and adjusted EPS, respectively. At the beginning of the year, Green Dot was guiding for 16% and 10% increases in these metrics. That's why the stock has been crushed.

    Green Dot's reasoning for lowering guidance is that sales are declining in its legacy prepaid card product line (down about 500,000 active accounts year over year), and because the launch of the company's newest BaaS product is going to happen later than expected.

    To be perfectly clear, Green Dot's future is less certain now than it previously was. This is the case anytime companies sacrifice near-term profitability in pursuit of long-term growth drivers. As a result, Green Dot has become a higher-risk but potentially higher-reward stock.

    Specifically, if the company's new products such as its 3%-yielding Unlimited Cash Back Account start to gain serious traction, or if the investments in the BaaS platform start to translate into new partnerships, it's entirely possible that Green Dot could end up being very cheap at the current share price. After all, Green Dot trades for just over 10 times forward earnings, and this is a company with double-digit annualized earnings and revenue growth in recent years.

    On the other hand, that is a big if, which is why the stock price has been punished. Only time will tell if the company's ambitious investment strategy will pay off, but for now, it's fair to say that the market isn't convinced.

    Sounds like a fun gamble.  I like the March $25 puts at $4 to net in for $21 and the $35 calls are only $2 so I'd play those but 1:1 to keep the $2 credit.  

    Banks/Robert – In a persistent low-rate environment, banks might not do well.  Still, I'll look at some.  I know I like CM. 

    KHC/Coulter – Gotta let the dust settle first.  Not getting a lot of confidence out of the CC:

    (Bloomberg) — Kraft Heinz Co. shares opened at a record low after the troubled food giant backed by Warren Buffett posted steep declines in sales for the first half. Management told investors the company needs a “long-term plan” and lacked the necessary confidence to give guidance. The shares tumbled as much as 14% in New York to the lowest level since the company was formed in 2015.

    For the first six months of the year, EBITDA slipped 15% in the company’s home market. Net sales fell too as the company struggles to boost growth with its portfolio of brands. “The level of decline we experienced in the first half of this year is nothing we should find acceptable moving forward,” new Chief Executive Officer Miguel Patricio said.

    Of course we expected them to kitchen-sink the Q for the new CEO but yikes – you would think he'd have some kind of plan!  

    Its new chief admitted the company has “significant work ahead of us to set our strategic priorities and change the trajectory of our business.” The maker of Kraft Macaroni and Cheese and Jell-O has struggled to keep up with changing consumer tastes for healthier, less processed foods. On Thursday, it reported two new impairment charges totaling $1.2 billion.

     Net income attributable to the company's shareholders fell to $854 million, or 70 cents per share, in the six months ended June 29, from $1.76 billion, or $1.43 per share, a year earlier.

    So, overall, they are making $2.85 per $27 share and that's in a turnaround year so I think the long-term potential is still there for $40, which is lower than our target in the OOP ($35) and at our target in the LTP.

    KHC Short Put 2021 15-JAN 35.00 PUT [KHC @ $26.79 $-4.09] -5 2/22/2019 (526) $-3,000 $6.00 $4.30 $-0.10     $10.30 $2.80 $-2,150 -71.7% $-5,150
    KHC Long Call 2021 15-JAN 22.50 CALL [KHC @ $26.79 $-4.09] 20 5/30/2019 (526) $13,000 $6.50 $-0.75     $5.75 $-2.65 $-1,500 -11.5% $11,500
    KHC Short Call 2021 15-JAN 30.00 CALL [KHC @ $26.79 $-4.09] -10 5/30/2019 (526) $-2,850 $2.85 $-0.68     $2.18 $-2.19 $675 23.7% $-2,175

  15. GDOT – Out of balance up 3 points.   Phil will look at your trade.


  16. Banks/Robert – Given our expectation of a larger downturn (though you can't tell from today's action), I'd stick to the big boys like MS, JPM, GS, C, BAC and, as I mentioned, CM.  

    Both MS and CM are trading at 9x earnings and CM has a better dividend (5.5%) and I also like them because they mainly handle CAD, which is low in the channel and the bank should do well when and if it recovers while MS has Dollars and the Dollar is high and Trump says he wants to bring it down – so headwind for MS and tailwind for CM.  

    CM, unfortunately, only has March options but you can play it like you REALLY want to own the stock at $73 and sell the March $80 puts for $7 so let's say you sold 5 of those ($3,500) and bought 10 of the $75 ($4)/80 ($1.85) bull call spreads for $2.15 ($2,150) for a net $1,350 credit so worst case is you end up with 500 shares at $77.30 ($1 more than it is now) and, over $8, you make $6,350 in 7 months.

    Of course, you don't need to get called away, you can roll the short calls and use your profits to buy the stock if things go well and you'd effectively have a 10% discount on your first round.  


  17. Phil,  what do you think about KHC for a new trade or would you sit this one out?


  18. LTP with a quick recovery – back to $1,351,839.  STP $780,195 so we'll end up down about net $100,000 if things steady out.  Let's look over the STP and think about whether we want to make adjustments:

    • TLT – Well, these aren't working at all. We cashed in the short puts for a profit but still down a bit.  TLT did hit $143 in July 2016 but was $117 by December – it's not about rate cuts per se but sentiment so I think I'd like to roll the 20 Jan $135 puts ($2.60) to the March $140 puts ($6) for net $3.40 ($6,800) and, to offset that, we can sell some Oct $130 puts (now 0.35) for about $1.30 if TLT drops $5, which it should.  For now though, just the roll.

    • Short puts – All good.
    • TNA – Let's shut this down as it's $49,000 we can spend on other hedges (and it has a $10K profit).

    • DXD – Let's sell 100 of the Jan $29 calls for $1.85 ($18,500) as it's still a $90,000 spread (at least) but we reduce our net cost by 40%.

    • SQQQ – Let's sell 100 Sept $35 calls for $2.75 ($27,500) as they can be rolled longer and higher and they are all premium which expires in 43 days against our net $209,000 longs.  Still only 3/4 covered and the Jans are way up at $48 and the Jan $50s are $2.75 so not at all worried about capping our gains.

    • CAT – In the LTP, we just have 5 CAT 2021 short $100 puts at $10 and it no longer looks like we'll be making quick money on this since the China deal (our premise) is not likely to happen soon so let's just kill this and take the loss and look to re-establish in the LTP.  I do love CAT at $120 as that's $70Bn and they just made $1.6Bn last Q so pacing $6Bn in profit in a rough environment ($6.2Bn last year) is not bad at all – it just doesn't fit the STP.

    • MJ – Happy with that one.
    • SDS – Let's kill the Sept $31 calls and the rest of the spread is fine. 

    • SOYB – Next time it's at $16 we should cash the calls.  Also disappointing due to lack of trade deal. 

    So, over the strong bounce line we're capitulating a bit on our aggressive hedges but we'll slap them right back on if 2,910 fails to hold.

    /RTY 1,528 – at least we got that one right.


  19. KHC/Robert – They pay a 5% dividend ($1.60) so you'd think there would be more support.  It's possible they'll cut it and then there will be more selling but they just confirmed the next 0.40 payment today.  Operating Income is down 55% from last year and revenues down 4.8% and we may be willing to excuse it under the new CEO but a lot of investors will not – so it could dip further though last year was $55 so $27.50 would reflect 1/2 profits.  

    The problem with KHC is it's hard to pin down whether or not they actually make money.  Post-merger, they had good years in 2016 and 2017 but 2018 they did their $15Bn write-down but let's say they made $5Bn and now they are projecting $3.5Bn against a $32Bn valuation so they SEEM reasonable but we may not see a floor until 5x ($17.5Bn or $15/share) because Buffet and 3G control the board and own 50% of the stock and I'm pretty sure they want to buy the rest and they'd rather pay $22 and seem like saviors than $35, which they'd have to fight lawyers for now.  

    The way this is going, I may pull the plug in the OOP but the LTP will more likely stick with it.


  20. Phil – What are your thoughts on nat gas over the next several months?  Thanks.


  21. /NG/Albo – There's a glut now as production came on-line faster than they built export terminals but it will even out at some point. Even now, we're a bit below the 5-year average but we've been trending closer to the line so people are worried we'll drift into the high end. 

    Working Gas in Underground Storage Compared with Five-Year Range

    Last summer, /NG was $2.75-$3 and now it's $2.12 so a lot of damage done but I just want to be in it for hurricane season as I doubt it would take much of a supply shut-down to spike us higher though there are now new factors no one can be an expert in, which are:  1) We now produce 2/3 of our Nat Gas from shale – not in the Gulf and B) What if a hurricane shuts down an export terminal but not the shale?  Will we then get a massive build in /NG?  

    So, overall, it's a tricky market and, since this is all new to us, people are staying away until they can see how the new patterns play out.

    To me, this is the most important chart regarding /NG – Last year, we exported 3.5Bcf/day, which is 105Bcf/month and last year we had 2,346Bcf in storage and this year we have 2,689Bf so we're up 343Bcf but, over the course of the next 24 months, we will be exporting 9.5Bcf/day or 285Bcf/day so we would work off our excess in just two months.  This month's build was just 55Bcf, and we have 2Bcf/day (60Bcf/month) coming on-line in the 2nd half.

    Image result for lng exports

    Shale production doesn't grow as fast as export terminals – especially not at these prices so, between now and next summer – we should see things swing the other way so all I'm trying to do is to be there when it happens with at least 2-4 contracts!  

    /NGV20 (Oct) takes you into next year's hurricane season and through the big export build-outs and it's currently at $2.37 while /NG is at $2.13 so it's an 0.24 premium not to have to bother rolling every month between now and then.  

    And of course, as an options play, you can:

    • Sell 10 UNG 2021 $16 puts for $2 ($2,000) 
    • Buy 20 UNG 2021 $17 calls for $4.10 ($8,200) 
    • Sell 20 UNG 2021 $25 calls for $1.65 ($3,300) 

    That's net $2,900 on the $16,000 spread so it has $13,100 (451%) upside potential in 18 months if UNG can get back over $25, which is where it started the year with /NG at $3.  Of course, at $3, a single /NG futures contract, which gains $100 per penny would be up 0.63 for $6,300 with the advantage that it's easier to take quick profits in the Futures – so I prefer that play and the margin requirement is only $2,475 per contract.


  22. On the whole, we're back to Monday's open at 2,925, so we'll see if we can hold it.  Others are 26,270, 7,700 and 1,530.


  23. Phil – Thanks for that expansive answer.  You are an incredible resource !  I believe prices will be higher a month from now.

    Earlier I bought some GUSH (3x S & P Bullish oil and gas exp.and prod. ETF) @ $3.60 and sold the Sept 20 $4 calls for .40.  Looking to make 22% in 43 days with 11% downside protection.  Not a pure nat gas play, but is heavily weighted there.


  24. Phil – Any thoughts on ETM?

     

    I bought the stock a while back around $6 – sold some $7 calls and $5 puts — and collected two dividends.  It's only a small position but doesn't look so good now.  

    Jeff


  25. You're welcome Albo.  GUSH is interesting but I didn't like the lack of E&P spending by the oil companies who've been reporting recently.  Same problem with OIH. 

    ETM/Jeff – People don't believe in what they are doing (see yesterday's notes) but they converted a few people with the CC last night.  As I noted in yesterday's Webinar, we have a starter position in ETM in the LTP with just 2,000 shares at net $8,500 so $4.025 on the first batch but we sold 20 $8 puts so we'll average $6 but we'll roll the 20 Jan $8 puts ($4.80) to 50 of the March $5 puts ($2) for about even and then, if assigned, it would be 7,000 for $33,500 or $4.79 but hopefully we don't get assigned too soon.  If we do though, we would sell $4 puts for $1.10 and $3 calls for 0.70 to knock the basis down to $3.09 on $7,000 ($21,630) and then 7,000 more at $4 ($28,000) would be $14,000 at $3.59.  If they are still paying an 0.36 dividend then, it will be 10% back on our money and we'd still only be half an allocation block!  

    Meanwhile, there's no rush since we're very happy with what we can do if they stay down here.  

    LTP up $28,000 for the day, STP down $17,000 – that's a bout the ratio we're bullish.


  26. Wow, up almost 400 points on the Dow now.  Nas up 2.25% Rut up 2% Dow and S&P up 1.5% – nice recoveries.  

    That's the big advantage to hedging, would have to start buying things again but now we can just hang onto the same stuff - Not as exciting though…

    Tomorrow I'm cutting out about 1pm – off to Key West with the family.  Will be there Monday so I'll be sparse then but around early on since no one else gets up early.  


  27. Phil – does TLT flat and GLD up today mean the market doesn't really believe this move up


  28. Well Gold is an international issue so it can have a lot of momentum when it's on a run, not just what's up in the US.  I didn't see info on the auction but I assume it went well as the notes popped back up, which is what flattened TLT.  Also, the VIX indicates the panic is subsiding quickly, which is why we made the STP changes earlier. 





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