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Thrilling Thursday – Dow Loses and Recovers 300 Points Overnight

What is the point?

I'm trying to write a morning overview of the market but everything can change in an instant based on a random tweet or a statement from any random Chinese or Opec official.  The market dropped a full point overnight, with the Dow testing 26,000 as the South China Morning Post (yes, we have to read that now), said Vice-Premier Liu and his team many leave the Trade Talks earlier than expected as the deputy-level trade talks made no progress this week.

Deputy-level negotiators, led on the Chinese side by vice-minister for finance Liao Min, spent the time focusing on only two areas: agricultural purchases and intellectual property protection.  “They have made no progress,” said another source familiar with the talks, adding that the Chinese side had not made headway in persuading US negotiators to consider a freeze on tariff increases, a main priority for Beijing.

The markets quickly reversed as the White House deneyed this was happening but who are we to believe, a random Chinese newspaper article or the White House?  Sadly, that's a real question these days…  

Tariffs on $250Bn of Chinese goods are set to increase from 25% to 30% on Tuesday, while fresh duties of 15% on $160Bn of largely consumer products will go into effect on December 15th.  Of course, China may have floated last night's rumor just to gain leverage – a harsh demonstration of what could happen to our markets should Trump fail to bend over and accept the terms they are offering.  And, of course, China's retaliatory tariffs also kick in on Dec 15th.

Of course, China has other ways of retaliating – as we've seen this week with the NBA scuffle with almost all of the NBA's partners in China cutting off their relationship after Houston Rockets GM, Daryl Morey, tweeted support of the anti-government protests in Hong Kong.  That's right, multi-Billion Dollar partnership was just trashed because China didn't like a tweet!   And now South Park has been banned as well, after airing an episode that was critical of China's policies.  

Image result for south park china animated gifThough it's a cartoon, South Park makes some excellent points that are quickly becoming political talking points about how China, by denying market access to companies that piss them off, is effectively censoring free speech IN AMERICA and is actually dictating what we listen to and what we watch as any movie or show that doesn't pass the Chinese State Censors simply doesn't make enough money to be viable – and Capitalism takes care of the rest.  

THIS is the kind of thing our leaders SHOULD be concerned about – this speaks towards our core values as Americans – you know, all that "freedom" BS they keep stumping about in their campaign speeches.  Unfortunately, our Corporate Masters are only concerned about making money and 1.4Bn Chinese people represent close to 20% of the people on this planet and, since 1Bn Africans effectively have no spending power – it's over 25% of the addressable market.  

Shots!!!Frankly, if Trey Parket and Matt Stone (who have a Tony for "The Book of Mormon" and are worth $500M each) did not still have control of the production company (and were not anti-corporate stoners) - I doubt we'd have ever seen the episode in question as it threatens the show's revenues in an important market.  

Keep that in mind when you are thinking that you don't really hear many bad things about China – YOU'RE NOT ALLOWED TO!  China decides what YOU are allowed to see and hear – even though you are "safely" in America.  The size of their market allows them to dictate US Corporate Policy which is, in effect, US Government Policy – since we effectively live in an Oligarchy now (though some would contend it's a Kleptocracy, but those too are banned).  

I still like this board game from WilliamBanzai7 from back in the days of the Financial Crisis – it's a pretty good illustration of where we stand as a nation:

Image result for kleptocracy board game

Meanwhile, Hong Kong's protests continue and China is now threatening to call in the troops to put down the protestors but Hong Kong businesess have already lost their whole summer and the Province is facing a recession, with 3 of the last 5 quarters already showing negative growth.  Unfortunately, for China, the lesson learned here is that Democracy is a disaster and needs to be nipped in the bud before people start getting ideas…

Image result for south park china animated gifThe downturn has also taken its toll on Hong Kong’s equity market. The MSCI Hong Kong Index has slumped 18% from an April high, with real estate and consumer stocks leading declines in that time.  Retail Sales are down 23%, Tourism is down 40%, Exports are way down (also affected by the Trade War) and now American Cartoons are making fun of China – when will it end?  

More importantly, HOW will it end because we didn't even have massive riots in Hong Kong on our list of things to worry about into the holidays but let's not forget how the Arab Spring affected the markets in 2011/12 – sending the US Markets down 15%.  China is a lot more tied to Global Equites than the Arab Markets – this thing has a very good chance of boiling over at this point. 

Both China and India have significantly slowed this year and, just like in 2007/2008, US investors are acting like things that don't happen in America don't matter – perhaps they should be watching more cartoons!  

Growth in the two giant Asian economies has slowed sharply this year

 


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  1. Might as well take the entire week off Phil! Every day is meaningless now – we simply go from one tweet to the other, up and down! How more people don't see this as frightening is frightening on its own.


  2. I heard that the Kurds also didn't help at Yorktown!

    And I were Japan and Germany, I would be worried. Apparently, our new policy is only to help people who helped us in WW2. 


  3. No peak oil so far:

    But the day is getting closer!


  4. Looks like CB are simply watching from the sidelines now:

    https://www.bloomberg.com/opinion/articles/2019-10-09/negative-bond-yields-aren-t-solely-due-to-central-banks

    Among the world’s major developed economies, only the English speaking countries – the U.S., U.K., Canada, New Zealand and Australia – still have monetary policy rates above zero. But there is more to low yields than monetary policy rates, and those factors are likely to stay in place for an extended period.[...]

    Yes, central banks might reverse from their negative interest-rate policies, but that only means developed world rates, without a crisis, will only go up to 1% or maybe 2%. Every future downturn will add back in flight-to-quality buying and negative central bank rates, and down market rates will go again to zero or even lower.

    The secular outlook has changed and those applying the thinking from previous economic cycles about inflation and real yields conclude these low yields represent a bubble. They are not considering aging populations that are buying bonds and pushing yields below inflation rates driven lower by advances in technology. Add aggressive central banks willing to take monetary policy rates into negative territory and the standard rules that say bubble have not worked for almost a decade. Don’t expect this to change anytime soon.


  5. The northern Koreans walked out of the deputy-level talks in Stockholm for much the same reason. The US refuses to negotiate at all.


  6. Good morning, All!

    The weekly webinar replay is now available!

    https://youtu.be/Uo1S9ZS4KpM


  7. Bed Bath & Beyond soars after CEO hire.


  8. Good Morning!


  9. China control – I lived in Hong Kong from 2006-2008.  Leading up to the Beijing Olympics, the SCMP quoted a Chinese government official who basically said, "Don't believe what your eyes see.  It's really not pollution.  Believe me when I say that our measurements show minimal traces/acceptable levels"  I can't recall exactly, but that was the gist.  Air pollution was getting a lot of press at the time with concerns over athlete safety during the upcoming games.  They of course did all sorts of stuff to create blue skies leading up to and during the games, but at the time this was reported you couldn't even see across Hong Kong Harbor, which is probably about as wide as the Hudson River.


  10. I was actually in Beijing right before the Olympics and my guide there was telling me that it was the best skies and cleanest air she had seen in years!


  11. Good morning!

    Trade on, I guess as we're up half a point already and that's up 1.5% from last nights lows.  

    Uh oh:

    So is Trump having them arrested to pressure them NOT to talk or are the Dems having them arrested to get them to talk or - and this is way out there – is our impartial justice system simply doing its job?  

    Big Chart – What's the point?  

    You're right, StJ – it is frightening.  The thing about money is it's very nice when you have a 1% rally for no reason and you gain in your portfolio – that's great.  But, since there's just as much chance of having a 1% drop and since the money in your portfolio was hard to come by – it's best to lean on the side of PROTECTING IT FROM VOLATILITY!!!  People need to understand that.

    Kurds/StJ – Here's a good one:

    @JohnCleese - President Trump points out that some Kurds didn't help us in World War 2 Perhaps it was because they had bone spurs Or doctors who said they had them…

    Oil demand/StJ – How insane are we as a species that we're using MORE oil than we did 10 years ago – knowing all the problems it's causing?  

    Here's one I wish we'd kept!  We knew it was way undervalued (new CEO):

    Negative rates/StJ – What people don't realize is that, in the bigger picture, this is just a way for banks to confiscate wealth and savings from everyone on the planet.  We have a massive boomer population heading into retirement who thought they would be able to live off their savings and circumstances have been manipulated for the last decade to create a situation where the banks can now take 1% or more of their wealth away each year. 

    Remember they initially went after our retirement accounts – so they could fee us to death but that plot failed and this is the backup plan being put into affect.  There are no accidents here…

    Image result for retirement income us

    Most people have less than two year's income saved for retirement!  That means, if the banks don't charge you to hold your money – you'll end up spending it all and they won't be able to get it.  What's a bank supposed to do when it's responsible to maximize shareholder returns?

    China/Buck – It's surprising how many things they pay attention to.  They are very image-conscious.  

    Copper having the big move we expected:

    October 4th, 2019 at 11:37 am | (Unlocked) | Permalink

    If you want a bullish hedge (ie, you are too bearish) – Copper (/HG) at $2.54 might be a nice play on possible China progress next week (I'd put a stop below the $2.53 line):

    Unfortunately, we got that quick 0.02 gain ($500) and took it into the weekend.  Now I like /YG long at the $1,500 line (when it crosses back over and tight stops below) 

    Dollar down 0.3% and markets up 0.6% – that's about right.


  12. Phil/china  More like thin-skinned….just like our potus….





    • Financials lead the broader market's advance, with the S&P 500 financials sector gaining 1.3%.
    • Financial Select Sector SPDR ETF (NYSEARCA:XLFrises 1.5% and the SPDR S&P Bank ETF (NYSEARCA:KBEjumps 1.8%.
    • Treasury yields moved up after President Trump tweeted that he'll be meeting with Chinese Vice Premier Lui He tomorrow at the White House, boosting hopes that they'll be some progress made in resolving the U.S.-China trade dispute.
    • 10-year Treasury yield rises 6.5 basis points to 1.651%.
    • Financial names rising the most include: Bank of America (BAC +2.5%), Citigroup (C +2.6%), KeyCorp (KEY +2.3%), Deutsche Bank (DB +2.4%),  Capital One (COF +2.2%), Prudential Financial (PRU +2.4%), and AIG (AIG +2.4%).
    • Investors may still be sifting through September Fed meeting minutes.  Amid the discussion, a "few participants" saw that financial markets were pricing in more "accommodation" than the Fed members saw as appropriate and the FOMC might need to better align market expectations with those of the policymakers.
    • Since the minutes were released, the probability for a 25 basis point rate cut at this month's FOMC meeting receded to 75.4% from 80.2% yesterday and 88.7% a week ago, according to the CME FedWatch Tool, which is based on trading of federal funds futures.
    • Saudi Arabia tells OPEC that its crude oil production fell by 660K bbl/day in September to 9.13M bbl/day, underlining its swift recovery from the Sept. 14 attacks on key oil infrastructure.
    • Secondary sources say Saudi production was even lower, falling by 1.28M bbl/day to 8.56M, an unusually wide divergence from the country's self-reported figure, according to OPEC's latest monthly report.
    • OPEC said its September group production fell by 1.32M bbl/day from August to 28.49M.
    • Beyond the Saudi figures, the OPEC included few surprise revisions, although there is a notable 160K bbl/day cut in the forecast for non-OPEC supply growth for this year, to 1.82M bbl/day, driven by a downward revision in the U.S.
    • The cartel again cut its forecast for global oil demand growth for the remainder of this year to 980K bbl/day, down 40K from its estimate a month ago, but left unchanged its 2020 growth forecast at 1.08 million bpd.
    • Oil futures are higher as OPEC indicates all options are on the table to balance oil markets and that it would take a decision in December on supply for next year: November WTI +1.1% to $53.18/bbl, December Brent +0.8% to $58.80/bbl.
    • 30-year fixed-rate mortgage averages 3.57% in the week ending Oct. 10, down 8 basis points from 3.65% in the previous week and 4.90% at this time a year ago, according to the Freddie Mac Primary Mortgage Market Survey.
    • Though rates have bounced around a bit in the past month, they're near the lows for the year; in early September, the average 30-year mortgage rate fell to 3.49%.
    • "Despite the economic slowdown due to weakening manufacturing and corporate investment, the consumer side of the economy remains on solid ground," says Freddie Chief Economist Sam Khater.
    • 15-year FRM averages 3.05% vs. 3.14% in the prior week and 4.29% at this time a year ago.
    • 5-year Treasury-indexed hybrid adjustable rate mortgage averages 3.35% vs. 3.38% a week ago and 4.07% at this time a year ago.

    Not much really going on – things seem to be optimizing themselves ahead of the China deal and Fed decision. 

    • Porsche (OTCPK:POAHY) and Boeing (BA -0.3%) have signed an MOU to explore the premium urban air mobility market and the extension of urban traffic into airspace.
    • With this partnership, both companies will leverage their unique market strengths and insights to study the future of premium personal urban air mobility vehicles.

    WTF?  How does this move the markets?

    • The three major U.S. stock perk up after President Trump tweets that he'll be meeting with Vice Premier Liu He at the White House tomorrow.
    • "Big day of negotiations with China," Trump tweets. "They want to make a deal, but do I?"
    • Nasdaq advances 0.7%, S&P gains 0.6%, and the Dow rises 0.6%.
    • 10-year Treasury slides, pushing yield up 5 basis points to 1.636%.

    Not only is he vague but he's tweeting about a meeting that's been planned since August!  





  13. UK economy to dodge pre-Brexit recession but outlook weak



  14. Is Bitcoin Dead?


  15. It makes a lot more sense how trumps comments are able to move the markets when you notice those two levers hidden under his desk labelled dx and vix.


  16. Dollar still being shoved lower (as we expected) but it's only masking weakness:

    Levers/Tommy – The levers are actually in Icahan's office where he get's Trump's tweets ahead of time (or maybe writes them) and then makes Billions trading the chaos.


  17. Whats going on with LB (again)?


  18. LB/JMD – All ugly again after a nice run.  All of retail pulled back this month but today is a bit severe for LB.

    Ah, here's why:

    Victoria's Secret head of stores steps down

    |About: L Brands, Inc. (LB)|By:, SA News Editor 

    L Brands (LB -2.4%confirms that April Holt is stepping down after more than 16 years at Victoria's Secret's.

    Holt was in charge of stores and store operations, as well as overseeing the chain's real estate.

    Becky Kritek-Behringer, currently senior vice president of store operations, is taking over those duties until a successor is named.

    It's funny because no one was happy with Victoria Secret's performance but now they are upset that she's leaving….


  19. IIPR/Phil
    Hi Phil,

    Last year I bought 1400 shares of IIPR (Innovative Industrial Properties), a marijuana REIT. The price then was around $40. It went up as high as $135 before falling back to $80.

    They make money and grow profits, and pay a 3.9% dividend. Their PEG ratio is 0.7. But sometime in the last year they took on a lot of debt.

    Any suggestions for what I should do now?
    Thanks.


  20. p.p1 {margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica}

    My Charles Schwab “account manager”  invited me to come meet Mr. Charles Schwab at an event in Dallas, hear him talk about his book ( its free ) and participate in a Q & A.

    I said I would ask how he predicted no fee trading would affect their bottom line. My manager responded “Oh, trading fees are only 7% of our revenue, so not as big of an impact as everyone thinks. Our stock price already has that baked in and Mr Schwab wanted to continue to be an innovator in the industry”  I used Phil’s comment that I hoped they didn't count on stealing business from other brokers.

         Unfortunately the event doesn’t include dinner, though it is being held at the George Bush Presidential Library, which I’ve already seen.  I would visit the library again, but basically Bush didn't do much, so there is not a lot to see.


  21. Phil / MArket Move – South China paper indicated last night that the Chinese delegation may leaver early, maybe even before Friday….  and the markets tanked ( overnight) on that news…. so him tweeting that he is meeting with them should have moved the markets…. 


  22. Trade –  Interesting – this would indicate they are looking at doing a partial deal

    https://www.wsj.com/articles/trump-signs-off-on-licenses-for-doing-business-with-huawei-11570682663?mod=article_inline

    Trump Signs Off on Licenses for Doing Business With Huawei 

    The approval is likely to be interpreted as an act of goodwill a head of the resumption of trade talks Thursday


  23. IIPR/Sag – Yikes, not a good day for them!  When you say "they make money" – that's kind of a relative term as they only make $20M and $80 is a $900M valuation so 45x earnings is a little steep and I cannot believe you didn't take $120 and run if you came in at $40 – SHAME ON YOU!!!

    Related image

    So are you now unwilling to take a double off the table?  

    On the whole, these guys got lucky and just so happened to buy some properties in CA right when the law changed and suddenly everyone wanted their space and they made good money.  That does not, however, prove they have a good business – it's like investing in a lottery winner because they know how to win the lottery…  

    I see they just picked up 156,000 feet in Michigan for $19M, we just picked up 150,000 feet in Chicago for $1/year (but we have to renovate, hire locally and give the city 3 offices in the building – still, it's  a good deal!).  In fact, it looks like they took over the cultivation and processing equipment for another $23M and, if that's what they are borrowing money to do – get out now!   Michigan is an overgrown state and now Illinois is legal so even more supply on-line in the area.  Where would you rather go to buy weed – Chicago or Detroit and, more importantly, where would you rather sell it?  

    I don't know for sure what they are doing in Michigan but it SEEMS like they bought an operation, which is NOT what they were doing – that's a red flag.  It seems they have 27 properties (19 they added this year) that are all leased and paying for a building is usually a small part of the costs to an MJ company so I like the concept of the business… if they don't forget what kind of business they are supposed to be in.  

    The CEO is from BioMed – that's a big plus, he probably knows what he's doing on the RE side and it looks like they have about $250M still to play with so they'll likely grow into the valuation long-term.  Still, I'd cash my 100% profit ($112,000 total at $80) and then sell 10 of the 2022 $50 puts for $12 ($12,000) and buy 20 of the 2022 $65 ($25)/$95 ($14) bull call spreads at $11 ($22,000) so you remain in for $10,000 on the $60,000 spread and your worst case is you end up owning 1,000 gain at net $60 but you put $102,000 back in your pocket and you can sell 5 of the Jan $90 calls for $4.50 ($2,250) and you have 8 more of those sales for another $18,000 ahead of you.  

    So that's $20,250 + $60,000 + $102,000 in pocket is $182,250 if they just make it to $95 in two years with a lot less risk than if you hold 1,400 shares hoping they make $70,000 ($50/share) from here.

    Also, keep in mind you have to do all this work and waiting because you were unwilling to take another $66,000 off the table at $120 – SHAME!!!   Just keep it in mind for next time…  cool

    Schwab/Stock – Sounds good, I'll be interested to hear your take when you get back.

    Moving/Batman – I could see where it moved them back to where we were but not up another 0.5% – though that's fading a bit now.  As you note, now our expectations are being lowered with "mini-deal" and "partial deal" being thrown around on every media outlet – talk about a deep state!  And what's this – now Huawei is not evil and isn't using their chips to spy on us?  What a load of BS this whole thing is.  


  24. Schwab/Stock    I'm not going. No free dinner and I've already seen the Bush Library.  


  25. chart

    That doesn't give me a lot of confidence…

    RUT is no picnic either:

    chart

    Heard of a van that is loaded with weapons
    Packed up and ready to go
    Heard of some grave sites, out by the highway
    A place where nobody knows
    The sound of gunfire, off in the distance
    I'm getting used to it now
    Lived in a brownstone, lived in the ghetto
    I've lived all over this town

    Transmit the message, to the receiver
    Hope for an answer some day
    I got three passports, a couple of visas
    You don't even know my real name
    High on a hillside, the trucks are loading
    Everything's ready to roll
    I sleep in the daytime, I work in the nighttime
    I might not ever get home  – Talking heads

    chart

    chart

    FCX waking up:

    I hear China is offering nothing re. IP issues – essentially telling Trump to F off.

    chart


    NFLX into earnings:

    chart

    We have a big fund bet they stay flat (+/- 10%).  My thinking is that a lot of bad news is already priced in and, since they are subscription-revenues, there won't be any major variation all of a sudden but good news will be tempered with worries about Disney and AAPL services taking share next year.  

    You can: 

    • Sell 5 NFLX Nov $300 calls for $10 ($5,000) 
    • Sell 5 NFLX Nov $250 puts for $7 ($3,500) 

    That's $8,500 in pocket so you have $17 of wriggle room above or below the strikes before you lose any money (or roll, of course).  If we hit the middle, that's $8,500 in 36 days!  Profit range is $233-$317.


  26. Image may contain: 1 person, meme and text

    Image

    Image

    Image

    Things must be slow over at PEW this week….

    SCOOP: The substance of Graham’s conversation with Stolyarov, who was posing as Turkish Defense Minister Hulusi Akar, is newly relevant in light of the South Carolina senator’s push for sanctions on Turkey as punishment for their offensive against the Kurds in northern Syria. Graham labeled the Kurds a “threat” to Turkey in the call, seemingly contradicting what he has said publicly in recent days..

    Graham also mentions Trump’s personal interest in a “Turkish bank case” in the call that appears to refer to a U.S. case involving Reza Zarrab, an Iranian-Turkish gold trader and client of Trump’s personal lawyer Rudy Giuliani. Bloomberg reported on Wednesday that Trump had asked then-Secretary of State Rex Tillerson in 2017 to help persuade the Justice Department to drop the Zarrab case.

    Image

    Shares of Chinese developer Fullsun plunged by a record 62% in Hong Kong trading

    The plunge has left Fullsun with a HK$1.08 billion ($138 million) market cap while Thursday’s trading volume equaled 10% of the company’s public float. Overall, it has 11.4 billion shares outstanding.

    The EU says it's ready for a trade war with the U.S. if a settlement isn’t reached in a long-running dispute over aircraft aid

    Well, we managed to claw back to Monday's open so huzzah! for the indexes!

    Tomorrow is going to be very rumor-driven.


  27. IIPR/Phil
    Thanks!


  28. Trump says they had a very, VERY good negotiation.  


  29. I'll wait to get my copy of the Shanghai News to get the truth Phil!


  30. please tell me when you do stjeanluc


  31. No big deal is possible. China will not give on major concessions Rump and the gang are looking for. If Rump settles for minor deal it plays into China's hand of waiting for better terms after next election. We will find out tomorrow whether Rump wants to go full nuclear on China by walking away from table and imposing tariffs of 35%.  I don't think he has the balls for the latter.  


  32. Denlundy/We should never  question whether he has the balls to do anything. I fully expect he plans to use this to show that he is not going to back down to China. Whether it is a good idea or not.


  33. They better get something done, little rumors of failure send us down violently, a reaction to the real thing failing will be a mess. 

    I’m essentially all cash at the moment. Waiting to see what happens and playing here and there with fun money.