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Tuesday Already? Short Week Opens at 2,900 on the S&P 500

We're not off to a good start

Of course we knew last week's "rally" was nothing but BS window-dressing to end the month on a high note, though the indexes were still down overall, giving us a losing month that caused a lot of technical damage on the charts. 

The S&P was at 2,900 last September and we held on all the way until early October, and then we crashed into the end of the year, hitting 2,400 at Chrismas, down 17.25% and it took us all the way until April to get back to 2,900 – and here we still are! 

"Well we know where we're going

But we don't know where we've been

And we know what we're knowing

But we can't say what we've seen

And the future is certain


Give us time to work it out" – Talking Heads 

What is certain is that Trump did carry out his evil scheme to put more tariffs on Chinese products that US Consumers have to pay for and, as we feared (though was denied last week), China IMMEDIATELY retaliated by placing a levy on US crude imports, encouraging buyers to stop buying US OIl, which is exactly what Trump's donors didn't want though, of course, Putin wins again as Russia is China's largest supplier.  China also placed tariffs on additional US Goods and the Chinese Government has filed a complaint with the World Trade Organization, who are very likely to rule against Trump so our next crisis may be pulling out of the WTO.  

Hong Kong protests are getting worse, not better and we're now 60 days away from a "NO DEAL" Brexit that will throw the EU into chaos and UK Prime Minister, Boris Johnson has said he will call for new elections (they can do that) if Parliament tries to block or delay the date.  Meanwhile, that pesky Yield Curve is getting worse, not better and I love this graphic that shows the curve going from last year's "normal" to whatever the F we have now

Last week we got news that US GDP Growth had dropped back to 2% but, as we noted, that was only because Government Spending is completely out of control and adding 1% to the GDP while Consumers are buying on credit and adding 3% to the GDP and, as we say 10 years ago – that can reverse very, very quickly if the sentiment changes. 

Meanwhile, the main reason we bumped up our hedges and cashed in a lot of positions last week is because earnings have NOT been good.  They have, in fact, been bad and we're now trending at 2.3% growth, which is in-line with GDP but 5.3% lower than was estimated at the beginning of the year yet here we are – still trading at those very enthusiastic highs as if we're growing like a 3rd World country. 

Goldman Sachs and Citigroup strategists last month reduced 2019 and 2020 earnings estimates for the S&P 500, citing a sluggish economy, trade war threats and potential currency devaluations.  The Purchasing Manager's Index (future expectations of corporate spending) dipped into contraction in August - at 49.9, down from a barely expanding 50.4 in July.  This is the first time since September of 2009 the PMI has been below 50!  

Freight shipments are, of course, down, with the Cass Shipments Index falling 5.9% in July after falling 5.3% in June after falling 6% in May, that's down 17.2% over the summer.  “We repeat our message from last two months: the shipments index has gone from ‘warning of a potential slowdown’ to ‘signaling an economic contraction,’” the July report said. “Although the initial Q2 ’19 GDP was positive, it was not as positive upon dissection, and we see a growing risk that GDP will go negative by year’s end.”  I'm sorry, by the way – I'm generally not a doom and gloom guy but when things are doomy and gloomy, it is my job to make you aware of it! 

Then there's this thing called The Economic Policy Uncertainty Index, an index designed to measure policy-related worries around the world, hit its ALL-TIME highest level, 342, in June.  Let that sink in please – in 2008/9, we were at 200, and now we're closing on on 350!!!   

The EPU Index tracks the amount of times newspaper articles use buzzwords related to economic and political uncertainty. Additionally, it measures the number of tax laws set to expire and the spectrum of disagreement among economists: The more dissent, the higher the index goes.  The index simmered in July to a level of 280 on hopes the a trade deal between the U.S. and China will be resolved – BUT IT ISN'T – and, in fact, it's now WORSE on Sept 3rd than it was in July.

Needless to say, let's be very careful out there this month.  Hope springs eternal that the Fed will give us MORE FREE MONEY!!! – a phrase we used to us back in the Bush years, when that President was doing whatever he could to prop up the economy into the elections.  Instead the economy went off the rails right in the fall of 2008, just when Americans were voting and the ended up voting for "change".  Sadly, that was all forgotten 8 years later and now we're right back to the same kind of irresponsible policies that crashed our economy in 2008.  

Meanwhile, we are DELUGED with Fed speak tomorrow as there are SIX (6) Fed speadkers scheduled around tomorrow's Beige Book release – which makes me think the Beige Book sucks and needs a lot of spin. Rosengrend goes first this afternoon and Powell goes last on Friday and again, I get the impression he's speaking to save the market because it's a 12:30 EST speech he's making from Zurich, where it will be 6:30 pm – a bit late for a normal conference speech.  That's coming after Friday's 8:30 Jobs Report – maybe that's going to suck?

And, believe it or not, there are still earnings going on.  It's been a bad quarter for making earnings picks because the macros have been so uncertain that the earnings almost didn't matter in predicting movement so we've simply sat on the sidelines but, as noted above – it's the overal trend towards lower profits that have concerned us.

Image

Hopefully, the trade was has fully escalated at this point as Trump has placed tariffs on everything coming from China.  He could make a higher percentage or take other actions (like forcing US companies to leave China) but, for now, we'll see how the market handles the new status quo.

 


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  1. The man of the people:

    https://www.vox.com/policy-and-politics/2019/8/31/20840700/indexing-capital-gains-to-inflation-example-donald-trump-twitter

    On Twitter, Trump linked to an op-ed by Sen. Ted Cruz and veteran anti-tax crusader Grover Norquist calling on the administration to index capital gains to inflation. Currently, they explain, if you bought a share of stock in 1998 for $30 and sold it this year for $40, that would count as $10 in long-term capital gains for federal tax purposes. But adjusted for inflation, $30 in 1998 is about $46.79 now, so you’d be paying taxes on an investment that, adjusted for inflation, lost money.

    That’s the basics of the case in favor of the change: taxing inflation is, proponents of the shift argue, unfair, and hurts the economy by discouraging investment. The case against indexing to inflation is much simpler: This is a change that would overwhelmingly benefit the richest Americans, who own an overwhelming share of the stocks, real estate, and other capital whose sales would be affected. One estimate finds that 86.1 percent of the benefit would go to the richest 1 percent.

    The logic makes sense but not when the tax rates are already lower that rates on regular income and all the benefits go to the top 1%.



  2. Brexit / Phil – What is so interesting was that the premise from some of the Leave guys was that they would be able to get better trade deals independently especially with the US but they probably didn't predict that they would have to deal with a guy like Trump who sees everything as a zero-sum game where the other side has to lose! And also is an incompetent buffoon! So probably no great deal to be had and BoJo now also looks like a useful idiot for Putin as he creates havoc in Europe with no winner except Putin.


  3. Good Morning!


  4. Good morning!  

    ISM also in contraction now.

    • July ISM Manufacturing Index49.1 vs. 51.3 consensus, 51.2 prior.
    • Prices 46.0% vs 45.1.
    • New Orders 47.2% vs 50.8.
    • Employment 47.4% vs 51.7.

    Big Chart – Still waiting on those 50 dmas.  NDX stopped dead at theirs, RUT failed the 200 dma and the others are heading the wrong way this morning.

    Inflation/StJ – Meanwhile incomes adjusted for inflation have gone nowhere for 20 years.  Are Republicans outraged at the unfairness of it?

    Image result for inflation adjusted social security earnings

    Or what about people getting social security?  How is their investment going in that mandatory retirement account?

    Image result for inflation adjusted social security earnings

    The level of hypocrisy is simply astounding!  

    Wow, that ISM sent us off a cliff already.  Bad news is bad news? 


  5. Any suggestions to salvage a position in Macy? Long 8 Jan'21 $15 call and 8 Jan'21 $20call, Short 2 Jan'21 $25 put, short 1 Nov'19 $21 put, short 4 Jan'21 $25 calls


  6. should I just abandon ship and take my lumps?


  7. ISM respondents: "Business is starting to show signs of a broad slowdown." "Slowest month (July) this year so far in sales." "The market for large building structures is slowing." "We continue to plan for a hard Brexit and a long trade war between the U.S. and China."

    Image

    Hurricane Dorian and more severe wildfires will probably force the world’s biggest reinsurers to increase their rates by about 15% in the near future

    Hurricane Dorian has destroyed or severely damaged as many as 13,000 homes in the Bahamas

    Trump appointee Leif Olson has resigned after revelations that he wrote a 2016 Facebook post suggesting the Jewish-controlled media “protects their own.”

    Boosters of a new battery factory in Germany say it marks a new phase in China's integration into the global economy. Instead of stealing technology, China is bringing innovation to Europe.

    Image


  8. After 16 years of false starts, the behemoth American Dream retail and amusement complex is set to open just west of Manhattan. To get there, an expected 40 million visitors must join the traffic-choked roads of northern New Jersey.

    The project’s owner, Triple Five Group, expects crowds to rival those at its Mall of America, where express buses, free shuttles and Minnesota’s most-traveled light-rail route carry people to the busiest U.S. shopping destination. Unlike Minnesota, New Jersey has no plans to link the site by rail from its major airport. In fact, it has no plans for any new train service, only additional bus routes with extended hours and stops.

    “At peak hours, I can see traffic being backed all the way up to the Lincoln Tunnel,” Secaucus Mayor Mike Gonnelli, whose town hall is 6 miles from Times Square, predicted for American Dream. “I don’t know how extra buses are going to be enough for 40 million people.”

    New Jersey’s railroad doesn’t have an estimated $1 billion to build a crucial loop so trains between Secaucus and the complex could run in both directions simultaneously. This year, WrestleMania fans threatened to riot when rail ran hours behind, and Rolling Stones concertgoers were warned about two-hour train waits.

    Tittel, using Californians’ term of doom for tie-ups during freeway construction shutdowns, said the roads can’t handle more.

    “It’s going to be Carmageddon,” he said.

    Jackie was supposed to have her 7th birthday there in 2009 when it was originally scheduled to open but the project got put on hold due to the market crash and it's taken 10 years since.


  9. American Dream / Phil – This project has only been good for political corruption it seems! A bad idea made worse with years.


  10. M/Millard – I still like them but you have to decide if you want to stick it out for the long term.  The $13 calls are $2.90 so you can roll all to them for $1.80 avg and sell the $18s for $1.30 to pay for most of it but I'd only do a 1/2 cover for now.  If you need the margin, then buy back the short $25s as they don't do you much good otherwise and the puts just have to be rolled so, since the above cost very little – the real decision is whether you want to roll your $25 puts ($12.30) to 2x or 3x the $15 puts ($4).  I'd do the 2x roll and just be happy if they work out. 

    Corruption/StJ – Hey, it's Jersey! 


  11. Phil / PLT – Plantronics and Polycom just combined and are looking to ring out costs and divest consumer video service and focus on commercial…  Polycom is going through a transition with MSFT on a new video product rollout and this will be a challenge this in Cal Q4 as they transition which caused them to lower the Rev this year…However the Microsoft product rollout should drive very good revenue for next two years as all customers will need new hardware.   They took on quite a bit of debt ( 1.6B) to fund the acquisition um merger.   They took a big hit after earnings / Rev were a bit below CE and I think they are pretty undervalued.   GM is over 40% and should improve …  They pay a dividend but it looks like they are reviewing this (although it is pretty small) .  I've got EPS of 5.2, 5.8 and 6.5 for '19 to '21…  They have already met / booked initial saving of 160M from merger and are looking for more.    If they hit the numbers above with  good growth rates I don't see why a 11 to 12 multiple is not reasonable…   So this looks like a 60 dollar stock…  Would like your thoughts on this…  thanks, 


  12. Both GLD & SLV at yearly highs.


  13. PLT/Batman – I like the premise but bumps in the road can be painful in these things.  Options, unfortunately, only go out to Feb but, at $30, the PLT Feb $30 puts are $4.40 for net $25.60 and the $35 puts are $7.60 for net $27.40 so, if I wanted to be more aggressive than the short $30s, I'd go for the $35s before doing a bull call spread as $7.60 would be PLENTY to make in less than 6 months.  That's a nice way to start and then see how they look after 2 more earnings reports.  

    If they go down, you roll and buy the bull spread and if they are flat or up, the $25 ($7.50)/$35 ($2.70) bull call spread is $4.80 and you'd already have your put money to pay for it.

    Silver and Gold/Albo – People are worried about something:

    Image result for silver and gold snowman animated gif


  14. Oil, on the other hand, is NOT having a good day.

    Honey badger don't care…


  15. It's been while since I've watched this:

     

    https://www.youtube.com/watch?v=4r7wHMg5Yjg


  16. Phil

    Should the USA have VAT tax to handle the trade differences  ?

     

    When you have time after hours could you please  share your thoughts

    Thanks

     


  17. Hurricane Dorian: Before-and-after images show extent of flooding on the Bahamas




  18. Trump Warns China Not to Stall Talks



  19. CLF getting crushed today.  Phil, is it time for another look ?

    The CFO has purchased 42,000 shares in the last month at an average price of $8.20.

    Might be a good time to start selling some OTM puts.


  20. Phil / PLT – Thanks for the feedback I'll take a look at those puts…. I'm not sure the pop will occur in the short run so there is time. (meaning Feb) - I'm still in the process of looking at this one…. will let you know if I see anything in the process.


  21. VAT/QC – The US should have a VAT to stop cheating on taxes and make sure corporations pay their fair share (or any, at this point):

    Image result for us government revenue 2019

    I mean, seriously, 6%???  

    Related image

    That's the entirety of what's wrong with this country!  In any case, the US currently collects $3.6Tn in tax revenues on a $4.6Tn budget with a $20Tn GDP so the simple thing to do is put a 25% VAT on everything and eliminate all other taxes (though preferably 20% and cut spending back to $4Tn).   Anyone who is paying more than 25% income + payroll taxes will have no effective change to their net income and anyone paying less than that can F off!

    There would be no more cheating, no exemptions, China would pay their share like everyone else for access to the US market and there would be no need for the IRS (or accountants) and growing the GDP would directly result in more tax revenues.  

    CLF/Albo – No deal on China is bad for them but Q2, just a month ago, was record volume and top and bottom beats:

    CLF – Great Quarter on CLF beat on top and bottom lines - key item was Plant Pull in.

    Cleveland-Cliffs reports record-high Q2 sales volume, 4% revenue bump

     

    Cleveland-Cliffs (NYSE:CLF) +2.2% pre-market after posting solid beats on Q2 earnings and revenues, as the "New Normal" in the global iron ore market offset weak steel prices in the U.S.

    CLF reports record high Q2 sales volumes of 6.23M long tons, up 4.3% Y/Y, and a six-year high average pellet realization of $113/lt; higher iron ore prices and pellet premiums were offset by lower hot-rolled coil steel prices.

    CLF maintains its full-year sales and production volume expectation of 20M long tons, and expects to realize mining and pelletizing revenue rates of $109-$114/lt, a $1/lt increase from the outlook provided last quarter.

    "While the New Normal in iron ore is here to stay, the absurdly low prices for steel in the United States are just a temporary thing, and we should see higher steel prices going forward," Chairman/CEO Lourenco Goncalves says, adding that CLF's Toledo plant construction is ahead of schedule and expects to produce HBI in less than a year.

    So I'd say it's just an algo-driven sell-off – one of those mistakes we like to look for but we already have them in the LTP though I certainly think it's good for a new trade.  The 2021 $8 puts can be sold for $2.50 for net $5.50 – that's a very good price and the $5 calls are $2.35 – also a good price (I wouldn't cover them). 

    PLT/Batman – Yes, those kinds of things, even when they work well, can take ages before the market realizes the value.  Look at IBM absorbing RHT:

    They made $3.17/share last Q, on track for $12.80 for the year per $134.12 share and at least 5% growth next year ($13.45) yet people are willing to take less than 10x earnings for the shares?  Idiots! 


  22. Phil, IYR up to $93 – I was hesitant on the hedge you suggested so I went in 1/4, thinking of taking a 1/2 position.

    Jan $80 puts are now $0.71, with the sale of the Jan $84 puts and buying the Jan $90 puts $1.41, so net $2.11 on each additional spread selling 1/2 the Jan $80 puts on each $6 spread if my math is correct versus $3.15 last week.


  23. Calls on CLF are very cheap.

    Puts on a Jan 2021 BCS – Long the $5 calls and short the $10 calls for $1.70.  Strike is about where the stock is trading now.


  24. Put on


  25. IYR/Rperi – Well, the idea was to hedge your real estate, right?  I think we talked about 50 March $90 puts at $4, selling $84 puts at $2 and 1/2 covering with 25 short Jan $80 puts at 0.85 so the net entry was about $1.58 per March $90 put.  Those are now $3.25 so no danger yet.  I'm thinking you are saying you did 1/2 of that and now want to add 1/2 more at the current $3.25/1.70 ($1.55) – 1/2 0.70 so net $1.20 on the spread so no reason not to DD AS LONG AS you will be able to roll the March puts back to a new spread while you wait fort the short March $84 puts to expire down the road.  The key to these plays is your ability to SALVAGE (see our strategy section) the net input cost of the spread as you roll to longer hedges.  

    CLF/Albo – Certainly better than buying the stock.  

    Well, we had a bounce off 26,000 and that was to be expected and 2,900 held on /ES along with 7,600 on /NQ so could have been worse but this is down on low volume so it ain't over 'till it's over. 

    And look at that VIX!

    Date Open High Low Close* Adj Close** Volume
    Sep 03, 2019 290.57 291.58 289.27 290.91 290.91 54,098,729
    Aug 30, 2019 294.22 294.24 291.42 292.45 292.45 62,901,200
    Aug 29, 2019 291.72 293.16 290.61 292.58 292.58 57,899,400
    Aug 28, 2019 286.14 289.07 285.25 288.89 288.89 59,696,700
    Aug 27, 2019 289.54 289.95 286.03 286.87 286.87 66,668,900
    Aug 26, 2019 287.27 288.00 285.58 288.00 288.00 72,423,800
    Aug 23, 2019 290.92 292.76 283.47 284.85 284.85 149,161,500
    Aug 22, 2019 293.23 293.93 290.40 292.36 292.36 51,666,400

  26. Great, yes that is indeed the strategy and thank you for the input.


  27. CLF- no position now but an observation- if memory serves, their product primarily goes to domestic steel producers who in turn, serve the  construction and automotive markets both of which are subject to demand contraction in a slowing economy. So, is the stock price drop just an algo knee jerk or baking in a recession? If so, CLF would be the place to be on the other side of the cycle but tops and bottoms are guesswork at best. So, if my scenario plays out then scaling in would be prudent and better stock pricing may be in the offing. 



  28. Reaching the American Dream: a Traffic Nightmare?