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Which Way Wednesday – Recession Worries

Now, where was I?

Before we were so rudely interrupted by yesterday's "rally," I was pointing out how there are simply too many macro fears to shrug off and get bullish.  Despite the 70-point S&P stick on China "news" that we'd be having a phone call with them in September, I remained skeptical and we took advantage of the rally to begin closing out some long positions in our Options Opportunity Portfolio, turning it a lot more bearish.  I had, in fact, said to our Members right at 9:56 am, in our Live Member Chat Room:

LOL, what a rocket on China Trade news!  How silly…

So hard to take this market seriously when it goes up and down 5% based on whether or not we're going to speak to China on the phone in 2 weeks.  It's like High School!

The market has, indeed, turned into more of a popularity contest than a true measure of economic activity.  The Administration has learned how they can talk the market up or down at will but, as we just saw yesterday – it's a short-lived thing when there's no meat on the bone to back up their statements.  Tartiffs are only delayed until Dec 15th after massive blowback on Trump's announcement last week and the "phone call" to China was nothing more than a face-saving attempt by the Administration so Trump could avoid saying he screwed up and misjudged how badly the market would take new tariff announcements.

Image result for trump report card cartoonThe delayed tariff date will also boost orders into the holidays and give us a better Q4 than we probably would have had as people rush to beat the tariffs with their orders.  That's something that will blow back on us next year, but Trump won't have to run on next year's GDP as it won't be over by the election so this year is his "report card" and, like his school career – the President is willing to cheat to get a C.  

The inverted yield curve, which we discussed yesterday, was the "shocking" news that took the markets lower this morning (down 1.5% at 8:30 in the Futures) but the price inflation also played a part – albeit a day late – and we also found out that US Mortgage Debt hit $9.4Tn, above the $9.3Th peak we hit just before the last housing market collapse after a $162Bn surge in Q2.  As we've noted previously, total Household Debt is also at a recover $13.9Tn, including $4.6Tn of Student Loans, Auto Loans and Credit Card Debt.  This is why Banksters usually do very well (interest and fees) just before the economy collapses.

And, keep in mind that all this debt is made possible by artificially low rates that are plunging the US over $1Tn a year (5% of GDP) further into deficit to sustain.  So yes, you are saving interest on your loan repayments but 164M taxpayers are each going $6,097 further into debt that the Government has taken on your behalf – to be paid by you and your children and your grandchildren – just like Jefferson warned us would happen:

Image result for jefferson debt

Oh, if only there were a party that abided by the principles of our Founding Fathers…

Refinancing homes accounted for half of the new mortgages in the 2nd Quarter and that's a huge, flashing warning sign when consumers have to tap into their home equity to make ends meet.  Mortgages remain the largest form of household borrowing but have become a smaller share of total debt since the late 2000s as consumers take on more Automotive and Student Loans, which now stand at $1,500,000,000,000 so, when you see young people walking barefoot – it's not that they are hippies – they just can't afford to buy shoes anymore.

We're doing our Live Trading Webinar at 1pm (EST) this afternoon and we'll go over more of our hedges then.


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  1. Morning, All!

    Webinar day! Join Phil at 1pm (Eastern), here:

  2. So funny to hear Trump tell the truth when he said that they are delaying tariffs until December to help with Christmas. His supporters probably think that Trump is talking about Chinese workers though since they are the ones paying the tariffs after all. 

    But overall, for once Cramer might be right when he said that Trump is delaying tariffs because he doesn't like when the market goes down – that's his only indicator on the state of the economy and his presidential TV ratings! 

    I shudder to think where we would be today if this clown car of a crew had been in charge around 9/11 or in 2008/09! 

  3. Playing with numbers:

    From the WSJ - U.S. Mortgage Debt Hits Record, Eclipsing 2008 Peak

    But then, let's put these numbers in perspective:

    A different picture!

  4. M- misses by $0.17, reports revs in-line; lowers FY20 EPS below consensus (does not include latest tariff tranche), reaffirms FY20 comps; Comps +0.2% vs. +0.3% estimates; gross margin +60 bps Q/Q but -160 bps yr/yr to 38.8%, below estimates; Stock hitting its lowest level since 2010.

    Stock trading at $16.40 in pre-market.  Diividend is now 9% if it holds.

    Didn't think we'd see the stock this cheap !

  5. Albo, I agree that Dividend yield looks great, But do we really expect the dividend to stay the same with the company in the position it is in?  Does anyone have estimates on the value of the real estate?  You would think that would put a floor on the stock.

  6. Robert – This from Seeking Alpha in June :

    Starboard Value's $21 billion estimate for Macy's real estate assets is no longer valid.

    Macy's liquidated over $1.5 billion of real estate assets from 2016-2018.

    Macy's sold another store this week in White Plains, NY.

    A realistic tangible book value for Macy's is about $35.50 per share.

  7. I have no idea if that is accurate.

  8. On M real estate values, The estimates I have seen seem to point to around $15 Billion.  Like you I don't know if that is accurate.

  9. Good Morning!

  10. 9/11 or in 2008/09/stjean They may yet have their shot – 17 months to go!

  11. Good morning! 

    Please see the OOP Review at the end of yesterday's post.  

    I'll do the STP again this morning but no changes I think.  Back to test 2,880 but it's still holding.

    API had a huge build in oil and Gasoline yesterday but that means expectations are low for EIA at 10:30 so I like /CL long at $55 with tight stops below:


    All bull bets are off if 2,880 fails, of course.  

    Christmas/StJ – I'm confused, are we helping China for Christmas.  How would it help us to have China stop giving us money?  How can one man be so obviously full of crap but still have so many people believing in him?

    Automation/StJ – I think this Brookings Study is closer to the mark (still around 25%):

    Image result for us risk of automation

    Field Risk of automation
    Food preparation and service 81%
    Production operations 79%
    Office and administrative support 60%
    Farming/fishing and forestry 56%
    Transportation and material moving 55%
    Construction and extraction 50%
    Installation/maintenance and repair 49%
    Sales 43%
    Healthcare support 40%
    Legal 38%
    Computer and math 37%
    Protective services 36%
    Personal care and service occupations 34%
    Healthcare practitioners and technical jobs 33%
    Life/physical and social science 32%
    Management 23%
    Community and social service 22%
    Building and grounds cleaning 21%
    Arts/design/entertainment/sports and media 20%
    Architecture and engineering 19%
    Education/training and library 18%
    Business and financial operations 14%

    Mortgage Debt – That's affordable at 3.5% – what happens at 5.5% or with more unemployment?  

    Wow, so much for 2,880!

  12. M/Albo – Wow, I didn't think they had 18% left to give!  

    Macy’s says it now sees diluted profit in a range of $2.85 to $3.05 per share, excluding some items, down 20 cents — even as it held its sales forecast unchanged. The company blamed too-high inventory levels in the quarter, including “a fashion miss in our key women’s sportswear private brands.”

    It also cited a faster decline in international tourism, which often props up its flagship stores. Recent data backs up the retailer’s experience: International visitors to the U.S. spent $17.5 billion in June, according to the Commerce Department. That’s the lowest total in two years, and the 2.9% drop from a year earlier was the second-steepest since 2009.

    There were some bright spots: Its digital business posted its fortieth consecutive quarter of double-digit growth, it said. Macy’s also said its strategic initiatives are “on track to continue delivering sales growth” in the second half.

    But while it said it has corrected course, Goyal said she still questioned “if their back half is too aggressive in lieu of what they saw in Q2 and just in what they saw with tariffs.”

    Still seems overdone to me at just over 5x earnings.

    M/Robert – What position?  They are making $3/share, about $950M which is a lot more than they made in 2017 ($620M) and about what they made in 2016 ($1.1Bn) when the stock was in the 30s with a p/e of 10.  They have more cash than 2016 and way less debt ($4.7Bn vs $7Bn) so there's certainly no need to cut dividends but it would be nice if they would as it's $464M and it would clear out the suckers and boost the bottom line.

    Over its past three fiscal years, Macy's has generated more than $1.5 billion of proceeds from selling real estate. Management has signaled that the pace of asset sales will moderate beginning this year, but the department store icon still has plenty of big real estate projects under way.

    First, Macy's recently confirmed that it is seeking city approvals to build a 1.2 million-square-foot office tower on top of its Herald Square flagship store. This would allow it to capitalize on the massive value of its Manhattan real estate without having to downsize or close its highly profitable store there.

    The exterior of the Macy's flagship store in Manhattan


    Second, Macy's real estate partnership with Brookfield Asset Management is kicking into high gear. Macy's and Brookfield are starting to look for tenants for new retail space that they plan to build on excess parking lot land adjacent to dozens of Macy's stores. The partners are also planning more ambitious mixed-use developments at certain Macy's properties, starting with a store in Manhasset, New York. They envision building 355 apartments as well as a hotel, offices, and additional retail space at that location.

    The upside from these development projects is substantial. However, they will take years to pay off, which is why asset sale gains are moderating for now.


    A huge safety net for investors

    In early 2016, hedge fund Starboard Value argued that Macy's real estate was worth more than $20 billion. A late-2017 study by investment bank Cowen put the value at $16 billion (which seems like a more realistic figure).

    Even that lower valuation represents a roughly 50% premium over Macy's current enterprise value. Investors seem to be downplaying the value of the company's real estate, though, due to the expected slowdown in asset sale gains. The vast majority of Macy's real estate value will remain "trapped" unless the company decides to sell and downsize, or close, stores.

    That said, selling more real estate is an option that could be revived if necessary. Crucially, if the bears are right and Macy's plan to reinvigorate sales growth fails, it would probably make sense to downsize the chain, including selling some of the more valuable stores. The proceeds could be used to pay down even more debt or could be returned to shareholders.

    If Macy's turnaround plan succeeds, the stock is likely to soar. But even if the plan fails, asset sales — and the resulting increase in cash available for capital returns — should put a floor under the stock. This creates a very favorable risk-reward trade-off for Macy's shareholders.

  13. Against all fear I am buying M today

  14. And BBBY trading with a 7 handle.

  15. Me too in M today.

  16. Albo – sheer bravery. I will never buy brick and mortar retail again (and haven’t been in it since before 2017)

  17. BDC – Wise move !

  18. Nice CMG dip for our STP!  

    Short-Term Portfolio (STP) Review:  $797,688 (up 697.7%) is up $59,700 since our 7/18 review, when the S&P was at 2,975 so we're down about 100 points (3.3%) and gaining $60,000 but, of course, most of our hedges are long-term, and aren't going to kick in until we're down closer to 10% – around 2,700.  3.3% is just a blip in the grand scheme of things.  

    We got a bit less aggressive after last week's nice 5% dip and we'll add hedges back if we get below 5% this time.

    • TLT – Fighting the Fed has about the same results as amateur bull-fighting.  
    • Short Puts – BBBY and M suffering from Retail Purge but not worried about any of them.
    • CMG – Crazy gains coming from our long calls, of all things, due to the higher VIX.  I think we should cash that first spread as we simply got lucky (the 2021 $800/980 spread with the 6 short Sept $800 calls).  We can leave the new one on instead. 

    • DXD – Good for well over $100,000 net as we can roll the short Oct calls.  
    • MJ – Tempting to add more but not now.
    • SDS – $100,000 spread netting $13,000 so good for $87,000.
    • SOYB – No china deal so let's kill this one.  

    • SQQQ – $400,000 spread (short calls are rollable) is still our primary hedge.  Currently net $177,375 so net $220,000 protection.  

    Since the LTP can easily drop another $300,000 – we'll have to be quick to add more hedges if those -5% lines (last week's lows) fail.

  19. M is different as the plan for utilizing the prime NYC property plus the online will boost it. If it goes down it would take years, like Sears.

  20. Phil, with this Trump/China mess, CHL at 40, buy the stock, sell the 40P and the 40C  Mar 2020. Your thoughts please. 500 share, initial poke? Thanks as always….. 

  21. M/Pirate – I have to call that one an "accumulate".  

    CHL/Jasu – I do love them below $50 but I don't know where they are re. 5G build-out.  You see how telcos are getting killed here for spending money and CHL is behind, as far as I can tell – so there's a lot of deficit spending still in their future.  They also got shut out of the US market and that's not likely to change – that's why they didn't make the LTP this time around though $40 is very, very tempting.  If anything, I'd sell the March $40s for $2.75 and see how that goes before making a big commitment.

  22. Phil, Thank you on CHL

  23. Phil, after adjustment to CMG, what is position?  Are you wanting to close the short Sept calls?

  24. If you were going to buy Macy’s, would you do the 15 or the 18 straddle? Considering buying the sell off…

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  26. dawgydaddy

    M you buy the stock and let the dust settle, I would not jump in to any options at this state.

  27. M – I sold the 16 puts that expire Friday.  I took in the option premium.  

  28. Look at M I bought at 16 and 16.25 but /ES was at -50 now at -70 but I guess we run out of sellers jumping ship as stock is holding 16.30 to 16.35 just my guess.

  29. yodi/tshroyer – thanks! Selling some puts seems a good idea to get in cheaper or get some premium, and then wait and see if I get them put to me and decide what to do on the straddle then. 

  30. dawgydaddy,

    The short put is not the problem at this stage but selling short calls, you might be sorry if and when the stock goes back to 20 again. However I admit having sold 20 puts, thinking stock would not go lower but you see what happens. So always take it easy selling puts especially in this crazy market. I think it is perfect for day traders

  31. IBM is an other candidate for selling puts now like Jan 20 125put at 5.45 but again I have no crystal ball

  32. But I noticed some are in panic now as I bought back short calls from different stocks for less than the lowest ask price, so some are out to get anything back for what ever price.

  33. You're welcome, Jasu.

    CMG/Robert – Just the first 3 CMG legs, the 10 $800/980 spreads and the 6 short Sept $800 calls are being closed – all the 3 contract positions are staying.  It's just that we lucked out and made a quick $30,000 that could go away tomorrow – so why risk it?

    M/Dawg – As a new trade, I'd buy the 2021 $15 ($3.35)/23 ($1) bull call spreads for net $2.35 on the $8 spreads and then I'd look to sell 1/3 the Jan $18 calls for $1.10 and that would drop my net to about $2 per long.  I'd also sell 1/2 the 2021 $18 puts for $5 and that would net out to an 0.50 credit on the $8 spreads.

    IBM/Yodi – Another good one but, on the whole, I want CASH!!! and to wait and see how things shake out.

    Europe closing sure didn't help us.

    EIA was better than API but not enough to save it from the panic selling everything is in at the moment:

    • EIA Petroleum Inventories: Crude +1.6M barrels vs. -2.8M consensus, +2.4M last week.
    • Gasoline -1.4M barrels vs. +0.1M consensus, +4.4M last week.
    • Distillates -1.9M barrels vs. +1.0M consensus, +1.5M last week.
    • Futures -3.52% to $55.09.

    Panic into the Dollar not helping things:

  34. Money Talk Portfolio Review:  I'll be on the show Wed, Sept 4th so that's our next chance to make changes.  We took a big hit since our 7/17 review, when we topped out at $135,583, which was up $22,675 from May's $112,908 and we knew that was silly and now we're back to $114,863 – only slightly better off than selling in May and staying away.

    This portfolio has certainly suffered a bit from our inability to make adjustments (only on the show is the rule).  

    • TZA – The reverse-split on TZA ended up hurting us as it was our main hedge and now we only have 8 longs.  
    • ALK – Not worried.
    • BNS – Short time-frame means we'll want to roll the long calls.  March is out and the March $45 ($6.50)/$50 ($3) spread is $3.50 ($7,000) so net $1,700 on that roll and the March $50 puts are $2.50 ($2,500) so net $2,250 to make that roll would put us in that lower $10,000 spread for net net $6,250 so I guess I'm leaning that way at the moment.
    • CAT – Took a beating on trade breakdown and we're even on our very conservative spread but I still like it.

    • GIS – We're deep in the money, maybe a candidate to cash in.  
    • GOLD – Another big winner.
    • IBM – Back to about even but still on track (great for a new trade).

    • LB – Yet another portfolio waiting on earnings from them.
    • MJ – Fortunately, we got in early enough for this to be a minor setback.
    • MU – On track
    • UNG – On track and good for a new trade. 
    • WPM – Nowhere near enough to cash these out but in very good shape.

    Nothing I really regret – just down with the market fluctuations so, if you want to make a quick $20,000 – just buy these positions for net $44,178 and wait for the next move up (Jackson Hole next week should do it).

  35. Even at /ES -90 M is holding 16.45

  36. M – down at these crazy levels, something counter-intuitive is called for, so my trade on M is:

    Buy M at $15 (synthetic stock – long calls, short puts at Jan 21, $15) for $0.23. So 50 contracts cost $1,150 and you get to control 5,000 shares of M until Jan 2021. But that would be kind of foolhardy as a standalone trade - so now we go against all the rules and buy 50 LONG Jan 2021, $15 puts @ $3.20, making a $16,000 debit. 

    That means we can watch M meander all across the board, sell real-estate, hire Eddy Lampert, and we really don't care as the max loss is what we paid for the trade ($1,150 + $16,000) = $17,150.

    But as we make sure we sell more premium than we buy, we can sell 10 contracts of the AAPL Jan 2021 $180 puts for $15, getting us back $15,000, so we are in the combined trade for net $2,150.

    The nice thing about this trade is we get to keep all the upside. When M does rebound and gets back above $20, we can start to cautiously sell covered calls, and we get to do that until Jan 2021. In fact when M gets it mojo back we can even think about selling monthly strangles and really make this a premium selling monster.

    Obviously you need to be able to own AAPL at $180.

  37. I am not following this – You are buying Jan 21 $15 puts and Short Jan 21 $15 puts?:

    Buy M at $15 (synthetic stock – long calls, short puts at Jan 21, $15) for $0.23. So 50 contracts cost $1,150 and you get to control 5,000 shares of M until Jan 2021. But that would be kind of foolhardy as a standalone trade - so now we go against all the rules and buy 50 LONG Jan 2021, $15 puts @ $3.20, making a $16,000 debit. 

  38. So ugly.  Failed the weak bounces, looks like we're on the way to 2,700 (10% total corrections).

    25,500, 2,850, 7,500 and 1,465 are the lines to watch, shorting the laggard if 2 go below and out if any get back above after that but could be a nice payday if we follow-through lower.

    As I noted in the Webinar – I want to wait and see before adding more hedges as there are too many people talking up the markets.  Strong Dollar can also be knocked down to boost us.

    M/Yodi – How is CMG holding $800 is the real question?

  39. As you were saying the other day Phil – it's amazing how losing 500 points is so easy for this market! Clearly it's easier with the higher levels but still over a 2% loss in one day. This is what happens when there is little macro or fundamental support for prices. When you have WMT (as an example) trading at 30x earnings and the economy endangered by stupid trade wars, it doesn't take much to drop 500 points.

  40. Now 200 DMA in play for the Dow and NYSE! We should hear about China trade progress any minute now.

  41. Administration takes step to relax trucker drive-time rules

  42. I don't remember a time when we had such a headline driven market.

  43. vkat – well spotted, got confounded by the option pricing. The puts to buy are the $13 for $1.85 – so you have to cover another $2 of cost (for the potential drop from $15 to $13.) But it's the principle that counts.

  44. Not much/StJ – If not for low rates, this market would be down at least 20%.  Yellen already came in and said "NO RECESSION" in an attempt to put in a floor.

    Headlines/Albo – And it's the same crap over and over again – no even real changes in the headlines.  

    Errors/Vkat, Winston – See, my job is hard!  

    Well, this is an ugly finish and we're very likely on the way to 2,700.   -3% is the 2.5% Rule and a 20% overshoot but not even bouncing back to the -2.5% line means the only think stopping this sell-off is the clock.

    As I noted in the Webinar, /NKD back to Dec lows – if they are down and Europe is down tomorrow – that's the way we all may be heading:

    Not a far trip for the Russell:

  45. idea for M…Buy Jan 21 $15 call, sell Jan 20$18 call, Sell Jan 20 15$ put , net around $1.1

  46. What scares me is, if the world is stuck at zero rates. Where will our booms and busts come from?
    With global Gov deficits/debts where they are, I cant see rates ever going above where they are now.

  47. Hard jobs / Phil, I really don’t know how you manage to keep on top of all those positions in all those portfolios with all those adjustments. It’s a Herculean task, and I’m kind of glad when I can pick up on something awry (which is a very rare occurrence) – shows you are just human! And impressive to boot.

    But would like your take on the synthetic stock with a protective long put. It kind of flips the allocation of premium. You pay little for synthetic long stock position and plough the savings into the protective put. I think it gives lots of opportunities to adjust, and provides built in disaster protection. When things settle down you can always scale out of the long protective puts. Could be useful in the toolbox?

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