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Thrilling Thursday – Markets are Half-Recovered Ahead of the Fed

"Woah, we're half way there

Woah, livin' on a prayer

Take my hand, we'll make it I swear

Woah, livin' on a prayer" – Bon Jovi

It's too early to tell if we'll have to be playing "Stuck in the Middle With You" into the weekend but we're certainly right in the center of the 50 and 200-day moving averages and exactly halfway back from our recent dip from 3,025 to 2,825 at 2,925 so all we can do is sit back and see what happens tomorrow as Jerry Powell speaks to us from Jackson Hole at 10 am.  

The volume has been anemic this week so there are simply no tea leaves to read but, as you can see from the S&P 500 chart, we've fallen comfortably below the 200-day moving average and it is going to take more than lip service to jack the indexes back over the line though it is encouraging to see the 50-day moving average curving up slightly – indicating we could have a sustainable rally if we can keep things together for the rest of the month.

Hussman Margin-Adjusted P/E (MAPE)It's all about Jackson Hole on Friday though all we're really going to get there is more Fed spin and, as I noted in yesterday's Live Trading Webinar, I'm getting more and more inclined to cash out our portfolios while we can as we're finding less and less things to buy and, as value investors – that's a pretty good sign the market is putting in a top – something John Hussman agrees with us on in his August letter.  

As you can see from Hussman's P/E chart, we've now passed the madness of 1999 and miles above where we crashed in 2008 and he has a dozen other charts and graphs to illustrate the point but my point, which I emphatically made yesterday, is that it simply isn't worth the risk to stay fully invested in a market where you've already made a great deal of money and are simply trading out of GREED.  

Our Long-Term Portfolio, for example, lost and gained back over 20% in the past few weeks and of course we hope it will keep going higher but we're getting to the point where we're worried about a 40% drop in our positions (we have leveraged option positions) from which the market doesn't bounce back and then a large amount of our gains (171.5%) of the past two years will be erased and it could take us a few years just to get back to where we are now.  How is that risk worth it?  

Of course we don't usually average 100% per year in gains.  We had a spectacular two years and we timed the December dip and recovery perfectly, which led to a spectacular 2019 (so far) but it's getting harder and harder to lock in those outsized gains through hedging as the hedges are insurance and the insurance is getting more and more expensive to maintain – eating into our profits so, if the profits begin to slow down, then we begin to chew up our gains because we're simply insuring too large of a portfolio to be appropriate in a declining market.  

That's why it's sometimes best to just wipe the slate and start again – a call I'm very, very close to making.

We do have some potential positives, mostly it would be rate cuts by the Fed – although they would be a mistake and a long-term negative, in the short run it's a rally we don't want to miss.  Then there's China.  It's possible we do finally get a trade deal and that would boost the market considerably, maybe 10% but still – If all we can do is rise 300 points to S&P 3,300 but we're worried about falling to 2,700 or lower – then really we're betting our portfolio on a 50/50 outcome and that's just not worth risking our gains over, is it?


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  1. August 22nd, 2019 at 8:30 am | Permalink | Tweet thisIgnore this user

    Interesting article in Barron's.  Started a small position in pre-market at 3.85.

  2. I can't believe that markets are not more worried about the mental state of our president – pisses off allies because they refuse to sell him something that was not for sale to begin with:

    We can’t treat the United States of America the way they treated us under President Obama. 

    He means with respect and admiration like they did then rather than contempt today I am sure!

  3. Fake meat in the USA:

  4. No one can predict recessions:

    Either way, the unpredictability of human behavior will frustrate anyone trying to pin down exactly when a recession will arrive. That doesn’t mean economists should stop making forecasts or that signals like the inverted yield curve aren’t useful. But anyone looking at predictions about when the next recession will land should take those forecasts with a big grain of salt. “Given historical patterns, a recession is likely to come again, so we need to be talking about what we’re going to do when it hits,” Sinclair said. “But we have to be open about the fact that we don’t really know when that will be.”

    Of course, our current team if not preparing at all…

  5. Good Morning!

  6. China ‘will not sit idly by’ over US arms sale to Taiwan

  7. Trump’s ‘chopper talk’ puts media on the defensive

  8. Morning, All!

    The webinar replay is up!

  9. LB – New low by a big amount.

  10. Hi Phil- Fyi in the morning post it says "as you can see from the S&P 500 chart, we've fallen comfortably below the 200-day moving average" but the chart shown is a 2-hour chart.  The $SPX is still above the 200d (approx. 2802).

  11. ALBO / GME – I saw article as well…. I also took a small flyer on this…..  it has over 5 cash / share and FCF is good – I need to spend more time on this.  Do you have any other thoughts on this?

  12. Good morning! 

    Futures up just a little so we'll see what sticks.  

    Nasdaq over the 50 dma at 7,742 is the one to watch – if that holds, the others are likely to move on up to theirs as well but first the RUT has to clear the 200 at 1,519 so those are the ones to watch though, at these volumes – it's all completely meaningless.

    No one seems to have noticed this yet:

    • Kansas City Fed President Esther George sees no reason to ease monetary policy further "without seeing an outlook that suggests the economy is getting weaker," she said in an interview on Bloomberg TV.
    • “When I look at where unemployment is and I look at where inflation is right now, I think we’re in a good place as long as the consumer can continue to pull the economy forward," she said.
    • George points out that rate cuts have a cost.
    • “Easing policy is not a free choice. It, remember, pulls forward demand. It can make leverage more attractive. And I think, depending on where you think you are in the business cycle, it can create more risk," she said.
    • 2-year Treasury yield is up 2 basis points to 1.598%; 10-year Treasury yield is up 3 basis points to 1.623%.
    • Futures wavered between slight gains and losses overnight with investors largely attuned to the Fed's symposium in Jackson Hole, Wyoming, over the next two days.
    • Philly Fed President Patrick Harker and Dallas Fed President Robert Kaplan will kick off the festivities today, commenting on the world's largest economy, before Fed Chair Jerome Powell takes the stage tomorrow.
    • The ECB is also scheduled to release minutes of its July policy meeting, at which it raised the possibility of further rate cuts, money printing and a reprieve from its penalty charge on bank deposits.

    Elon up to his old tricks:

    • Shares of Tesla (NASDAQ:TSLA) are up 2.52% in premarket action as more intrigue arrives from Germany.
    • On top of reporting some dissatisfaction of key investor Baillie Gifford with Elon Musk, Manager Magazin is reporting via inside sources that Volkswagen (OTCPK:VWAGY) CEO Herbert Diess would invest in Tesla if he could. A big sticking point for any deal would be landing approval of the Porsche and Piech families.
    • Neither automaker has commented on the speculation.
    • Previously: Baillie Gifford critical of Elon Musk (Aug. 22)

    GME/Albo – Big pop on that.

    • GameStop (NYSE:GME) is up another 8.76% in premarket trading to extend on this week's recovery rally that was launched by Michael Burry's disclosure of holding about 3M shares through his firm.
    • Barron's landed a rare interview with Burry, during which he pitched the bull case on GameStop in detail. Burry notes that next year's new consoles will still use optical disk drives in a development that will extend GameStop's life significantly. He also lauded GameStop's balance sheet and noted that 90% of GameStop stores are free cash flow-positive. The full interview is full of inside baseball stuff and is worth a read from a GME long or short.

    Fake meat/StJ – I'm curious to know how many people are actually ordering those things.  Whole Foods just said they won't carry them because they are over-processed and not actually healthy though I guess, over time, they will improve them – hopefully.  The current Impossible Burger is called "Version 2.0".

    LB/Albo – That CC did not go well.  They were fine ahead of it!  

    S&P/EMike – Yikes, I didn't realize that made it the 200 2-hour moving average!  Good catch.

  13. Batman – I don't have anymore on GME other than the article I posted.  All I know is that Michael Burry is a very smart guy.  He's done his homework.  I think that should be sufficient to scare the shorts, creating a good chance for a short squeeze and possibly more.

  14. haven't posted in a long time but just wanted to clarity that VW did comment and said they have no interest in acquiring any stake in TSLA and claimed that before market opened.

    And I had the Impossible Whopper and thought it tasted better than the real one. Pretty much everything is the same as far as fat, calories and sodium but there is no cholesterol in the Impossible Burger.  Not a habit to eat them or fast food in general but wanted to try it as BYND and eventually Impossible will be stocks to watch for the future whether it's long or short.

  15. clarify not clarity

  16. As a vegan I prefer the Impossible burger over the beyond burger hands down

    They are not really "healthy" but they taste like the real thing, the first time I had one I thought they gave me the wrong order.  Hopefully they can make them healthier.

    Until recently I haven't been able to get it at my local restaurant because Burger King bought up the supply

  17. Pence’s funny math on Green New Deal, Medicare-for-all costs

  18. Rustle – Nice to hear from you !

  19. I don't know. All you read is negative on the Impossible Burger and Bynd BUT it is almost impossible to find in the stores. So my bet is that with heart disease as the big killer in this country that it will continue to grow and be profitable at some point. Look at Amzn, tsla and loads of stocks that were negative earnings for YEARS  and still are not to mention CMG that is still like a rocket. People's eating habits are changing fast and the Bynd tastes good and it not being "healthy" versus beef is simply ridiculous. With the change in rules and not knowing where the beef comes from is also worrisome so that provides impetus too. At least with knowledgeable people. Same with Salmon and loads of other food. IMHO!

  20. Phil, further thoughts on LB going forward?

  21. Stocks sink after Fed hawks speak up

    Stocks fall after Philly Fed President Patrick Harker told CNBC he didn't think the July rate cut was appropriate, echoing a similar sentiment by Kansas City Fed head Esther George, who voted against the July rate cut.

    The Nasdaq sinks 0.8%, the S&P 500 falls 0.4%, and the Dow is off 0.1%.

    The 10-year Treasury yield, after rising as high as 1.626% then sliding to 1.556%, now stands at about 1.588%, just below the 2-year yield of 1.59%.

    Cboe Volatility Index jumps 6.7% to 16.86.

    Dollar Index is little changed at 98.28.

  22. Woops, down we go.  

    No particular bad news unless people are somehow surprised by poor PMI (just like the rest of the World):

    • July Leading Indicators+0.5% at 112.2 vs. +0.2% consensus, -0.1% prior (revised).
    • Coincident Economic Index +0.2% to 106.2.
    • Lagging Economic Index +0.6% at 108.5.
    • August U.S. PMI Composite Flash50.9 vs. 51.9 consensus 51.6 prior.
    • Manufacturing PMI 49.9 vs. 50.2 consensus, 50.0 prior.
    • Services PMI 50.9 vs. 52.3 consensus, 52.2 prior.

    Good job with the research Rustle!  

    Burgers/Coulter – Not on the chart above but Burger Fi, who are my favorites, do burgers with a lettuce "bun" and that's a lot healthier.  I think In and Out do something similar.  

    Image result for burgerfi impossible burger lettuce

    Wow, all red now – got very ugly very fast. 1,500 on /RTY and looks like 2,900 back in play and 2,910 (strong bounce) was no support at all.

    Stores/Pirate – I think the store supply is short as they are trying to keep up with burger demand.  I hope they do well because we can't feed 8Bn people beef – it's not sustainable and, as I said, these are early versions – I think they'll improve.   I think you prefer Beyond and there's a huge difference in saturated fat vs Impossible – as well as sodium and fiber so I also think BYND is a better bet for now.

    Image result for impossible burger nutrition facts

    Image result for beyond burger nutrition facts vs beef

    It's interesting as they arrive at the same solution using drastically different combinations but, as the CEO says above, they try new things every day and I'm sure their goal is to improve nutrition as well as taste.  

    LB/JMD – They are guiding (downward) 2019 to $2.30-$2.60 vs the prior consensus of $2.46 yet we're down from $28 (35%) post Q1 earnings – that's just silly.  If people don't want to buy a stock that's making $2.30 for $20 ($18.33 now) then I can't help them.  It is very frustrating how long they are taking to find their groove again and I'm waiting to go over the CC.

    Fed/Batman – Thanks, as I noted above, it was strange no one reacted to George but I guess Harker confirming was the last straw.

  23. The LB Jan $17.50 ($2.70)/$20 ($1.60) bull call spread at $1.10 is very hard to resist.  You can pay for it by selling the $15 puts for $1.05 or the $17.50 puts for $1.95 if you are a bit braver so, if we want to make $5,000, we buy 25 of the spreads for net $2,750 and sell 12 of the $17.50 puts for net $2,340 so that's net/net $410 on the $6,250 spread so $5,840 upside if LB can get back over $20 by Jan. 

    That's going to be trade #3 in our 5 to make $25,000 and I'll do a proper write-up later.

    #4 is going to be THC – as we discussed in yesterday's webinar.  With THC, we can play them just to hold $20 like this:

    • Sell 10 THC Jan $20 puts for $2.20 ($2,200) 
    • Buy 20 THC Jan $15 calls for $7 ($14,000)
    • Sell 20 THC Jan $20 calls for $3.75 ($7,500) 

    That's net $4,300 on the $10,000 spread so $5,700 (132%) upside potential is not as exciting as our other trade ideas but THC is a lot more of a blue chip so possibly the least risky of the set.  Margin is also light, just $2,886 according to TOS in an ordinary margin account.

    Again, I'll do a proper write up in the afternoon.

  24. SIG up big.   

  25. Phil

    Would this be a good time to sell  BA  puts  ?


  26. About time on SIG but too bad as it was on my list for a potential $5,000 play.

    BA/QC – If you REALLY want to own them long-term then sure and if you scale in as they could still get more bad news but they booked $4.6Bn of additional orders in July and, most importantly, no new cancellations of the 737 but they did have 227 overall so far.  BA isn't that cheap – it was in the $350s all last year – it's only cheap compared to the silly run-up it had early in the year.  They still may have to completely kill the 737 and go back to the drawing board – that could really send them tumbling – which is why we just sold that one set of puts (10 short 2021 $280 puts for $21, still $21) in the LTP back on 5/15.  I'll be happy enough if that comes in for $21,000.  

    The Boeing 737 MAX Misconceptions: An Engineer's View

  27. Phil


    I have one KHC 2021  old 47 put way out of the money

    As a learning experience, should I


    Roll down


    Close out and move on


    Just wait it out


     Thank you for the help

  28. Phil-There are more and more people with gluten intolerances or sensitivities so it's a no on Impossible burgers. Many of the Morningstar, Boca burgers are the same. So the Bynd is the only one so far with that consideration. BtW did you hear Patrick Byrne resigned of Ostk?

  29. Our third company looking to make $5,000 in 5 months is our old favorite/nemesis L Brands (LB), who were going to be our 2018 Trade of the Year but they blasted higher into Thanksgiving (when we announce) and we switched to Hanes Brand (HBI) instead.  

    We thought LB was a good value at $35, which was down from  $70 the year before and that seemed silly as $35/share is $9.7Bn or, basically, under $10Bn for a company who was dropping a fairly consistent $1Bn to the bottom line at the time.  Yes, sales at Victoria Secret had been in decline but the company committed to a turnaround strategy that was SUPPOSED to take 2 years and we felt it was a fair time to get in but we're in year two now – and nothing good has been happening.  

    Year End 02nd Feb 2014 2015 2016 2017 2018 2019 TTM 2020E 2021E CAGR / Avg
    Revenue $m 10,773 11,454 12,154 12,574 12,632 13,237 13,240 13,249 13,534 +4.2%
    Operating Profit $m 1,743 1,953 2,192 2,003 1,728 1,237 1,235     -6.6%
    Net Profit $m 903 1,042 1,253 1,158 983 644 636 678.3 712.3 -6.5%
    EPS Reported $ 3.05 3.50 4.22 3.98 3.11 2.31 2.28     -5.4%
    EPS Normalised $ 3.05 3.50 4.22 3.98 3.11 3.23 2.79 2.45 2.58 +1.2%
    EPS Growth % +8.7 +14.7 +20.5 -5.7 -21.9 +4.0 -6.0 -24.2 +5.06  
    PE Ratio x           6.29 7.28 8.29 7.89  
    PEG x           n/a n/a 1.64 1.33

    So we have some regrets paying $10Bn for a company that is "only" making $650M a year (P/E 15.4) but we know they CAN make more money on lower sales and they probably will again when they stop spending money to retool the stores and merchandise.  

    The MeToo movement has made sexy lingerie confusing and there's a lot more competition in the space these days but Victoria's Secret is now only 34.8% of LB's business, now eclipsed by Bath and Body Works, Henri Bendel and other brands and, of course, Victoria's Secret is now more Pink (youth brand) than what most people associate with the old line – but a lot of analysts still see them as the lingerie shop and nothing else. 

    The company is also being hit by tariffs and will benefit if they are ever lifted.  

    Sometimes we like a company, not because it's likely to go up but because it's unlikely to go any lower.  LB closed 50 Victoria Secrets this year out of 957 so about 5% of the stores and, taking that into account – the decline in sales should not be a surprise.  They added 3 new Pink stores (144 total now) and netted 13 new Bath and Body Works to get that segment up to 1,632 stores (US numbers) so the fluctuations we're seeing in sales and margins will normalize, but obviously not while they are shutting 5% of their stores.

    Forgetting the potential upside down the road, how much should we pay for a company that's making $650M a year?  Well, certainly 10x earnings doesn't seem too crazy and that would be $6.5Bn or about 25% above the current price of $19, so $23.75 seems fair as long as there is no additional bad news and, having just had earnings, none is likely to come until November's report.  

    Meanwhile, we can take advantage of the opportunity and put our foot down at the $20 line (even though we're a bit below it now) and set up the following options play – the 3rd in our series of 5 Trade Ideas to Make $25,000 in 5 months:

    • Sell 10 LB Jan $20 puts for $2.90 ($2,900) 
    • Buy 25 LB Jan $17.50 calls for $3.10 ($7,750) 
    • Sell 25 LB Jan $20 calls for $1.90 ($4,750) 

    That's net $100 on the $6,250 spread so there's $5,150 (5,150%) upside potential if LB can get back over $20 by Jan 17th (option expiration day) and it's an efficient trade as the ordinary margin requirement is just $3,834 so a very good way to make $5,150 into the holidays!  

  30. KHC/QC – It depends where it fits in your portfolio.  You were willing to buy $4,700 worth of KHC back in the day and the last 2 Qs they made $420M so good for $1.6Bn at this pace but a lot of restructuring charges still in there and it's estimated they make $3.2Bn for the year, which makes sense on $25Bn in sales and $25/share is $30Bn so, like LB above, it gives you a good return on your money so why get out just because the price is cheap at the moment?  

    Don't forget, we're close enough that waiting for 2022 options is your best play.  The short 2021 $47.50 puts are $22.50 and I'd be damned if I paid $2,250 NOT to own a stock for $4,700.  If you were to roll down to 3x the 2021 $30 puts, those are $7 so you'd collect $2,100 for net $150 out of pocket and then you'd be obligated to by 300 shares for $30 ($9,000) vs 100 shares for $47.50 but it's a much more realistic target.  I think that roll would be more attractive if you could hit the 2022 $25 puts at the same price.  With any luck, Buffett will buy you out early.  

  31. Qcmike KHC 47.5 2021 put is way ITM not out OTM, wish you were right. You can roll to Jan 2021 25 put it will be cheaper than closing the put. that is the best you can do or as Phil says hope for 2022 if you do not get assigned before. But I am not in favor of selling more puts I rather stick with the cash outlay for the puts you have to roll.

  32. Speaking of KHC:

    • Kraft Heinz (KHC +0.3%) and Mondelez International (MDLZ -0.1%) are taking legal action to keep the Commodity Futures Trading Commission from discussing details on the $16M fine the companies paid to settle allegations of manipulating wheat markets.
    • The CFTC is restricted on what it can say about the case, according to a new Kraft-Mondelez contempt motion filed in federal court.
    • "The CFTC and its Commissioners engaged in a deliberate, orchestrated effort to violate the Court’s Consent Order within minutes of its entry," reads the filing.
    • Shares of Kraft are down 41% YTD.

    OSTK/Pirate – That should be good for their stock – he was a little nutsy.  

    Meanwhile, watch our Democracy crumble:

    • Officials at the Federal Trade Commission and Federal Communications Commission are pushing back against a draft executive order from the Trump administration looking to regulate social media over claims of partisan censorship, CNN says.
    • The draft order proposes to put the FTC and FCC in charge of addressing those claims. Trump and allied critics have claimed that companies including Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and Google (GOOGGOOGL) have an anti-conservative bias.
    • But a closed-door meeting last month between the two agencies and a Commerce Dept. telecom adviser allowed officials to express serious concerns the Trump order may be unconstitutional, and in any case would face a sea of bureaucratic and legal difficulties to implement.
    • That includes the fact that the FCC and FTC are independent federal agencies reporting to Congress.
    • The retail rally has stretched out to include more specialty retailers today after Target got the party started yesterday. A number of other earnings reports from within the sector have had a similar theme of strong U.S. consumer spending.
    • Notable gainers on the turn in sentiment include Williams-Sonoma (WSM +3.7%), Bed Bath & Beyond (BBBY +9.3%), Pier 1 Imports (PIR +15.2%), Kirkland's (KIRK +13.3%), Fossil (FOSL+5.4%), Tuesday Morning (TUES +10.9%), The Container Store (TCS +3.1%), Revolve Group (RVLV +3.3%), Michaels Companies (MIK +4.4%), La-Z-Boy (LZB +4.7%), Francesca's (FRAN+5.6%), Tilly's (TLYS +8.8%) and Sally Beauty Holdings (SBH +6.6%).
    • Boeing (BA +4.1%) is building on early gains after Reuters reports the company has told suppliers it will resume production of its best-selling 737 jets at a rate of 52/month by February 2020 and step up to a record 57/month in June.
    • Boeing told suppliers during a July 30 Web meeting that the new schedule depends upon regulators approving the 737 MAX to fly again commercially in Q4, according to the report.
    • Rate changes by major manufacturers are usually incremental and communicated months or even years in advance, but the unprecedented challenge to the 737 program is said to have forced Boeing to scramble.
    • Buckingham analyst Richard Safran reiterates his view that Boeing (BA +2.4%remains a tactical buying opportunity, saying the stock could go to $400-$450 driven primarily by a 9% free cash flow yield based on roughly $30/share in FCF in 2020.
    • "There hasn't been a lot of news recently regarding the MAX return to service. However, one bit of recent news (hiring hundreds of staff at its Moses Lake facility) supports the idea that BA may come close to achieving its early Q$ guide for a MAX return to service."

    • China has partially lifted restrictions on gold imports, loosening curbs that had stopped 300-500 metric tons worth $15B-$25B at current prices from entering the country since May, Reuters reports.
    • China's central bank reportedly had been severely restricting import quotas to commercial banks responsible for most of the gold that enters the country; it began to issue quotas again last week but for lower amounts of gold than considered normal, according to the report.
    • China is the world's biggest importer of gold, with ~1,500 metric tons worth $60B, equivalent to one-third of the world's total supply.
    • "While I believe that I did what was necessary for the good of the country, for the good of the firm, I am in the sad position of having to sever ties with Overstock (NASDAQ:OSTK)," says Patrick Byrne.
    • Byrne is referring to his comments last week about his involvement in the whole Russia-gate affair.
    • Shares are currently halted, with trading set to resume at 12:30 ET.
    • Pres. Trump will meet today with Secretary of Agriculture Perdue and EPA Administrator Wheeler to discuss biofuel policy, Reuters reports, after his decision to grant 31 small refinery waivers caused an uproar in the ethanol industry.
    • Trump will be presented several options at the meeting, including a proposal to reverse some of the waivers that were granted to oil refineries, according to the report.
    • The refiners have sparked anger among farmers' groups that are crucial to Trump's re-election plans; yesterday, the USDA pulled all staff from an annual Midwest crop tour after threats of violence.
    • Potentially relevant tickers include ADMGPREGPPVLOPEIXREGIANDEREX
    • Reuters reports that India's federal health ministry is advocating stopping the importation and sale of electronic cigarettes and heat-not-burn tobacco devices.
    • The country has 106M adult smokers, second only to China according to the WHO, claiming that smoking kills more than 900K citizens each year.
    • Philip Morris (PM) is planning to launch its iQOS smoking device there under a "reduced risk" designation.
    • Related tickers: (JUUL), (MO +0.3%), (BTI -0.7%), (OTCQX:IMBBY -0.3%)
    • 30-year fixed-rate mortgage averages 3.55% for the week ending Aug. 22, 2019, down 5 basis points from 3.60% in the previous week and 4.51% at this time a year ago, according to the Freddie Mac Primary Mortgage Market Survey.
    • “The benefit of lower mortgage rates is not only shoring up home sales, but also providing support to homeowner balance sheets via higher monthly cash flow and steadily rising home equity,” said Freddie Chief Economist Sam Khater.
    • Lower mortgage rates are boosting refinancing activity. On Wednesday, the Mortgage Bankers Association reported that refinancing increased to 62.7% of total applications in the week ended Aug. 16, 2019 from 61.4% in the previous week.
    • 15-year FRM averages 3.03% vs. 3.07% a week earlier and 3.98% at this time a year ago.
    • 5-year Treasury-indexed hybrid adjustable-rate mortgage averages 3.32% vs. 3.35% a week earlier and 3.82% at this time a year ago.
    • PG&E (PCG -3.4%conducted an unusual inspection of the power line that sparked last November's deadly Camp Fire just weeks before the line failed, WSJ reports, citing recent court filings.
    • The disclosure that workers climbed portions of the Caribou-Palermo line last fall suggests PG&E had concerns about the condition of its lines before the inferno that killed 86 people and destroyed the town of Paradise.
    • PG&E tells WSJ it performed inspections of ~80 towers on the Caribou-Palermo line before the Camp Fire as part of a larger effort to determine "the condition of its aging transmission lines."
    • Before the Camp Fire, which prompted PG&E to conduct more extensive reviews of its power grid, it was unusual for the company to climb its transmission towers to inspect their condition, as well as the condition of bolts, hooks and other hardware.
    • August Kansas City Fed Composite Index-6 vs., -1 in July.
    • “Regional factory activity had its largest monthly drop in over three years, and over 55 percent of firms expect negative impacts from the latest round of U.S. tariffs on Chinese goods,” said Wilkerson. “However, even though many firms expect trade tensions to persist, expectations for future shipments and exports expanded slightly
    • The European Central Bank's July 24-25 meeting minutes show the Governing Council is taking a "package" approach to monetary easing.
    • "Experience had shown that a policy package – such as the combination of rate cuts and asset purchases – was more effective than a sequence of selective actions," according to the minutes.
    • Adjusting to the longer-than-expected soft patch European economic growth, council members agreed it's important "to demonstrate its determination and capacity to act and to be prepared to ease the policy stance further by adjusting all of its instruments, as appropriate, to achieve its inflation aim."
    • They'll be looking at "ways to further strengthen the state-based component of the forward guidance on the path of policy rates, preparatory work on the design of a tiered system, or other options to mitigate the effects of negative interest rates on bank-based intermediation, and preparatory work on modalities for potential new net asset purchases."
    • There were, though, some concerns raised regarding "possible unintended consequences of a tiered system and its ability to fully mitigate the potential effects of negative policy rates on bank intermediation."
    • Previously: ECB keeps rates unchanged, takes aim at inflation (July 25)

  33. Phil Put me in the camp who would be happy if you reset the portfolios.  The market is feeling very toppy right now.

  34. Hello Phil,  I have been studying the 5 trades to make $25k in 5 months.  One question I have is typically you trade the longest dated options available and you are constantly stressing the need for people to have patience with their trading.  What makes these 5 trades different so that you feel they have a great chance for success in 5 months verses the usual 1.5 to 2 year time frame.  I do appreciate your comments.  TIA.

  35. Phil / Yodi

    Thank you for the help, i just going to wait for the 2022 to post

  36. AP-NORC poll: 62% disapprove of how Trump’s handling his job

  37. Portfolios/Palotay – I'm very concerned that it will be much harder to sell (for good prices) as soon as there is volume selling.  That's an added consideration when you are unwinding options trades.  

    5 months/Robert – It's just something fun I thought we'd do since it's kind of boring at the moment with all the uncertainty and not too many new trades to play.  Ordinarily, I'd be doing a short list and adding short trades but that's been a suicide mission for the last decade and I'm not going to encourage that at the moment.  I also want to make the point that we could go to CASH!!! in our portfolios and then add 5 trades like these using a small portion of the portfolio and still generate nice returns while we wait to see how the year plays out.  

    2022/QC – Very wise.  That's another reason I'm not too eager to add new trades – I want to see the new year print first.

    Dow booster:

    • Boeing's (BA +4.3%) strong advance today, which is adding more than 100 points to the Dow Indsutrial index, may have been sparked by positive comments from Cowen analyst Cai von Rumohr, who reiterated his Buy recommendation and $460 price target for the stock.
    • Von Rumohr thinks no news is good news, saying the timeline for bringing the grounded 737 MAX back into service has not changed, essentially because the company has not stated otherwise.
    • Boeing "has updated MCAS software and is developing software for the flight control microprocessor," and the company is "also working in parallel with airlines and regulators on pilot workload issues," von Rumohr writes.
    • Separately, Reuters reports the Federal Aviation Administration plans to test next month how pilots with around one year of experience flying 737 jets handle new software on the MAX model.
    • The tests could indicate the FAA is making progress in the re-approval process of the MAX for commercial flight.
    • BA's average Sell Side Rating is Outperform, but both its Seeking Alpha Authors Rating and Quant Rating are Neutral.

    See, there's an easy $21,000 we made by just promising to buy BA for $280 in May.  That's what you do when you are in CASH!!! – make offers like that to re-establish positions you cashed out at lower strikes.  Either you get in cheaper or you get more CASH!!!.  

    For example, we have our $120,000 AAPL spread that's net $31,787 and we started with a net $12,400 credit so we're $44,187 ahead with $88,213 left to make but that's over 16 months and – if we decided to sit out the rest of the year, we could cash in and just sell 10 of the Jan $190 puts for $6 ($6,000) and 10 June 2021 $170 puts for $12.50 ($12,500) and that's $18,500 which is the same as we planned to make in a quarter and if AAPL goes lower, we roll the short $190s to the $170s and probably 1/2x so we end up with 15 short June 2021 $170 puts, which is fine to re-establish our AAPL long at a lower strike.  If AAPL goes higher – then we simply buy a bull call spread as we've already sold the puts and the short Jans would expire and then we could sell more long-term puts as well.  

  38. Oh no, now Kaplan says they'd like to keep rates where they are – it's a mutiny!  

  39. Image result for lower cartoon

    • Lithium producers are broadly lower after SQM (SQM -6.1%) posted disappointing Q2 resultsand forecast continued oversupply in the market: LTHM -5.2%ALB -4.1%LAC -3.3%.
    • "We have seen lithium supply growing more than demand over the past few quarters, putting pressure on prices," and Q3 lithium sale prices likely will drop to $10K/metric ton, down fully one third from the company's average Q1 sale price of $14.6K, says SQM CEO Ricardo Ramos.
    • Prices for lithium carbonate have plunged by more than 40% over the past year to ~$9.25/kg at the end of July, and likely will continue to be governed by cost fundamentals, keeping the price in the single-digits, according to a recent report from commodity research group CRU.

  40. #4 in our series of 5 Trade Ideas to Make $25,000 in 5 Months is going to be Tenet Healthcare (THC) and we love them at $21.20, which is a $2.2Bn market cap for a company with $18Bn in sales and $250M in earnings.  You'll notice I kind of like to buy things when they get to P/E ratios of 10 or less because that means they are returning 10% on your money, which is very good vs. 0% for bonds these days.  

    You don't need or expect growth when a company is trading at 10x earnings, we just want to make sure that they are not declining and, with THC, an aging population of Baby Boomers makes that very unlikely – talk about a growth industry! 

    We are at the end of the first bar after 2000 and there's a huge jump ahead of us with 16M new old people hitting the hospitals in the next decade.  We have 40M now so that's 40% more potential payments so THC is a great long-term premise and it's just a matter of waiting for them to come back in favor as an investment.  

    We've played THC several times over the years, usually around $15 but we're not going to be so lucky this time but all we're going to do is play them not to go lower than $20 into Jan 17th expirations and we'll be home free with the following trade:

    • Sell 10 THC Jan $20 puts for $2.20 ($2,200) 
    • Buy 20 THC Jan $15 calls for $7 ($14,000)
    • Sell 20 THC Jan $20 calls for $3.75 ($7,500) 

    That's net $4,300 on the $10,000 spread so $5,700 (132%) upside potential is not as exciting as our other trade ideas but THC is a lot more of a blue chip so possibly the least risky of the set.  Margin is also light, just $2,886 according to TOS in an ordinary margin account.

  41. Would THC be a good butterfly play?

  42. Fed speakers seem to be going out of their way to assert their independence against the constant badgering of Trump. Will be interesting to see if they still lower rates in September.

  43. THC/JMD – It's a bit too undervalued – tends to go between $15 and $35, which is a wide range. 

    We could take the bullish 2021 $18 ($7.10)/27 ($4) bull call spread for $3.10 and sell 1/2 the $18 puts for $3.80, we'd be in for net $1.20 and $3 in the money (this is kind of a nice play on it's own) and then we'd have to consider a Jan sale, like the short $26 calls for $1.30 and the short $18 puts for $1.45 so we're collecting $2.75 against our $1.20 spread – that's pretty good but THC at JUST $2.2Bn could also easily get bought out for $3Bn ($30) – that's a danger we try to avoid in the Butterfly Portfolio.  

    Still, on the whole, as long as you start with a 1/2 sale to avoid the possibility of a quick burn – it is a very reasonable play to sell short puts and calls against – providing you REALLY want to own THC if your put side triggers.

    Fed/Albo – I hope not just because it will be fun to watch Trump's temper tantrum when he doesn't get his way.  

  44. That was an ugly finish. If there's no free money tomorrow, it could be a tough day.

  45. Phil – Do you have any ideas for constructing a hedge for real estate prices?  It feels like we are due for a correction, with the baby boomers looking to downsize, and the probability of a recession in the next few years. I have a decent amount of RE assets (Primary, vacation, multi family investments), and it would be nice to buy some insurance just in case the bottom falls out.

  46. New job numbers revised down 501,000 for last twelve months. That's 45,000 a month overstated.

  47. palotay – Here in San Diego County, we are awash with high end 'Boomer' homes, mainly in Rancho Santa Fe. Some of these dated seventies and eighties estates are seeing major price reductions with no bottom in sight

    This one had a price reduction to 33.5M while on tour last week….

  48. It was donated to UCSD some time back…..

  49. 1020/ That is quite the property.  Not really my style though.  :)

  50. Good morning!  

    China retaliating on trade is a perfect example of a "known unknown" but, nonetheless, the market is spooked by it and there go all the gains (again).

    • China will levy retaliatory tariffs on another $75B of U.S. goods, Bloomberg reports, citing a statement on the Ministry of Finance website.
    • It will also resume 25% tariffs on U.S. autos starting Dec. 15.
    • Futures now indicate a lower open for the S&P, Nasdaq, and Dow.
    • Automaker stocks head lower after China resumes duties on U.S. automobiles and fires off new tariffs on another $75B worth of U.S. goods.
    • General Motors (NYSE:GM) is down 1.77% in premarket trading and Ford (NYSE:F) is off 1.33%. Tesla (NASDAQ:TSLA) is showing a 1.11% drop.

    Of course the big show is at 10 and Bullard is warming up the crowd:


    • The Fed should continue to ease monetary policy because the inverted yield curve is "not a good place to be," St. Louis Fed President James Bullard said in an interview on CNBC.
    • His comments come ahead of a speech from Fed Chair Jerome Powell at the central bank's economic symposium at Jackson Hole today.
    • Bullard is a voting member of the Federal Open Market Committee this year.
    • Futures point to the three major U.S. stock averages opening in the green today — S&P +0.3%, Dow +0.2%, and Nasdaq +0.3%.

    Free money/Deano – I think if Powell does anything less than promise a half-point cut, the market will be disappointed.  

    Real estate hedging/Palotay – Well IYR was $91.40 on Jan 1, 2007 and was $25.14 on Feb 1st, 2009 so a 72% drop was more than homes dropped, which makes it a good hedge and it's very liquid with liquid options.  I guess the fact that it's back over $90 should be warning sign – but it's one people are certainly ignoring.  

    Since you want a hedge and you're a long-term investor, I assume a 10% drop isn't what you are worried about so there's no sense in over-hedging.  You can hedge against a major disaster by just buying the 2021 $75 puts for $2.20 as those would pay back $25 at $50 so 10x on a big crash and then you can put, let's say $25,000 per $1M potential loss (I'd assume a 50% drop as worst-case) to protect yourself from half the damage.  

    Meanwhile, you could sell Jan $75 puts for 0.55 and that should generate enough to pay for your rolls to 2022 and 2023 etc as you keep selling 0.50 per Q.


    • The Fed should continue to ease monetary policy because the inverted yield curve is "not a good place to be," St. Louis Fed President James Bullard said in an interview on CNBC.
    • His comments come ahead of a speech from Fed Chair Jerome Powell at the central bank's economic symposium at Jackson Hole today.
    • Bullard is a voting member of the Federal Open Market Committee this year.
    • Futures point to the three major U.S. stock averages opening in the green today — S&P +0.3%, Dow +0.2%, and Nasdaq +0.3%.