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Will We Hold It Wednesday – Dow 27,000, S&P 3,000 Edition

Doesn't this seem to happen a lot? 

We get right up to these critical levels on happy talk over Trade and the Fed and Earnings but then, just as the Media is telling us how great things are and what a fool you are for not chasing the market – it all falls apart – again.  To a large extent, it's because the indexes (and the individual components that make them up) are already priced for a perfect outcome. 

When you pay 30 times earnings for a stock, you are getting an effective return of 3.3% and there is, of course, the risk that something bad might happen over the time you hold the stock, causing it to go down, not up.

A 30-year note yeilds 2.2%  and has, theoretically no risk – though the real risk is you are locked into the low-rate note while inflation rises faster than your note or that newer notes start giving a better return than your note – causing the present value of your note to go lower.   That would not effect your 2.2% reuturns but it would make it almost impossible to sell your note to someone else without steeply discounting it. 

Still, the "risk-free" rate of return is 2.2% while a 30x stock is giving you 3.3% but should just 1 out of 3 of your stocks fail to go up this year, your rate of return drops to 2.2% anyway.  That means you have to be right 66% of the time with your 30x picks just to keep up with TBills.   We are able to do that using options since Being the House gives us an inherent advantage but people buying straight stocks at these prices barely stand a chance.

Image result for s&p 500 historical valuationIn the last Recession, ALL the stocks went down and the bonds went down too – there was no escaping the carnage.  THEN it was a no-brainer to buy up blue-chip stocks that were trading for less than 10 times what they earned in a year – giving you an effective 10% annual return – no matter what the PRICE of the stock was.  That happened in 1973 (Nixon Impeached), 1987 (S&L Crisis), 2000 (Dot Com Crash), and 2008 (Housing/Financial Melt-Down) and now it's just about to be 2020 and we have a Unicorn Crash, Trump Impeachment, Trade War, Brexit and a Global Recession – WHY would you buy stocks for 30x earnings in this environment???

As you can see from the chart, the S&P 500 has been valued higher than it is now – twice.  It has, however, been valued lower than it is now – ALL THE OTHER TIMES.  Overvaluations can last for a couple of quarters or a couple of years but we've already put in a solid year at these levels so not likely we go another full year without reverting to the mean. 

Yes, we are doing a bit of bargain-hunting but I'm not too excited about it – there are simply too many major macro events that could go wrong and force a drastic re-pricing of the market so please – be careful out there!


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  1. Good morning, All!

    We will not be having our usual webinar this week.

    Back to normal next week!

  2. I am having trouble understand all these pundits who keep mentioning that we don't have the money for a Medicare for all system. But for some reason, we seem to have enough money for a system that relies on private insurance where costs are twice as high as other industrialized nations where people live longer on average. Do these people not realize that if we switch to a single payer system, employers would not have to pay the insurance premiums anymore. Sure taxes would be higher, but you don't pay both… You would simply replace premium with taxes and in most countries that means paying 1/2 of what you pay today and makes companies more competitive and people healthier on average. 

    It actually doesn't matter to me what choices are made at this moment but premium inflation is not sustainable and even if you have private insurance, your cost will keep on rising to a point where employers will need to cover less and less. 

  3. And Barry has a good article about that:

    We compare the US to other countries on a tax basis, but we ignore the “vast amounts of money we channel into employer-based health insurance.” Including that into the tax picture changes the calculus:

    And many of these countries have better social safety nets than the US does and end up paying less. Imagine "socialist" countries like Sweden, Finland and Denmark who spend 2-3% less than we do here. That's at least $300B per year in our case.

  4. Good Morning!

  5.  Three drug distributors are in talks with state and local governments to settle opioid litigation for $18 billion, the Wall Street Journal reported.

    Teva up 8%.  Still in a losing position on this one.

    Phil, I should have closed it out when you did. 

  6. With WHR doing so well should I roll my short $140 calls to $150s?


      10 Jan’20 $120c @ $20  

    -10 Jan’20 $140c @ $11.48

    -5 Jan ’20 $130p @ $17.87




  7. Good morning!

    Volume comes back a bit and selling along with it.  

    Pundits/StJ – They can't all not get it, has to be influence from the top because one thing single-pay does for sure is cost rich people and corporations (including media companies) money.  It really pisses me off that none of these candidates can pull up a chart and just explain this to people.  The CBO just released a whole report showing it would really not cost a penny more to have Universal Health Care – it's just a question of where the money comes from and, because it's likely to be a tax instead of insurance premiums – rich people will pay more than poor people – which is why they are freaking out:

    Government spending on health care would increase substantially under a single-payer system. In 2017, just under half of the $3.5 trillion in national health care spending came from private sources. Shifting a large amount of expenditures from private to public sources would significantly increase government spending and require additional government resources, but it would also reduce or eliminate the costs incurred by private sources, such as employers’ and employees’ contributions for employment-based insurance.

    Financing for a single-payer system could come from federal, state, and local governments. If the federal government administered the single-payer system, some health care costs that state governments currently pay would shift to the federal budget. The amount of that shift would be smaller if the federal government required states to maintain their current level of funding.

    TEVA/Albo – That opioid thing was bad news and I didn't think it would go away at the time.  Now that we're getting settlements, we can do the math but I don't think these things are Global so the hits could keep on coming.

    WHR/Wing – I'm not a big fan of that move as you are paying money to take more of a risk.  I'm sure you have a nice profit at $140 so why not just be happy with it?  You should expire in the money and collect the full $20,000 and THEN you can wait PATIENTLY for WHR to at least pull back to the lower part of the uptrending channel (about $145) and, if not, MOVE ON and find another bargain.  THAT is why you love WHR so much you want to chase it at $160 – because you bought it when it was on sale but the sale is over – move along! 

  8. Added a few more MDR shares at $ 2.35.  Sold the  Feb 3 calls for $.85. 

    Sets up a 36% static return for 4  months.

    Continue to believe that they have marketable assets to get them out of this dire situation.

    Still only a 1/2 position.  Very speculative ! ! !

  9. British family ‘traumatized’ after being detained by US immigration

  10. Wing I have the same situation on WHR, and I fully agree with what Phil says. In addition I still hold a short Dec 19 155 caller, at this stage ITM but we see.

    The only thing I would add is sell half 5x Nov.15 165 callers for an extra 4$ But than I am a bit of a gambler here.

  11. The first crop in our new facility is just three weeks away from harvest.  

  12. Hi guys. First comment.

    @Phil could you share your thoughts on NFLX  and its earnings announcement? I look at fundamentals, which makes this an overvalued stock in my book. However, for a short term play, I appreciate the hype by some analysts that see price targets of around 400, which I am sure some will buy into should subscriber numbers not disappoint (the benchmark is lower this time around). Given international footprint and market share and the lower price points of the upcoming competition (Disney/Apple) there may be less displacement taking place initially than anticipated. 

    Thank you.

  13. Can anyone else see the image Phil posted of the crop? The link shows up as broken here.

    Just got out of my MDR Albo, but those premiums are still really nice. 

  14. Atitlan – Probably a good move.  I've already taken out some profits, and willing to risk an additional  $1.50 on this small play.  Iffy for sure.

  15. Phil, is it hemp or the plant? How many acres?

  16. MDR/Albo – I think worth the chance down here.

    Welcome Crazy!   In our Hedge Fund, we're playing NFLX NOT to have a big move on earnings.  I never thought they were worth $400 in the first place – that's where we shorted them!   Here's my recent comment on it:

    Submitted on 2019/10/10 at 3:22 pm

    NFLX into earnings:


    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.

    • Bank of America Merrill Lynch is out with an early earnings preview on Netflix (NFLX -1.1%) that tilts to the cautious side.
    • "We see a make or break quarter for Netflix in the wake of a 25%+ sell-off since 2Q paid subscriber adds trailed Netflix’s own guidance. While Netflix has never missed its own guidance two quarters in a row, we flag the company’s CFO transition as a risk, because at this point," write analyst Nat Schindler and team.
    • BAML sticks with a Buy rating on Netflix as it notes valuation on a price-to-sales multiple is below video game companies and with contribution margins increasing.
    • Netflix is due to report earnings on October 16.

    My call from July when we had been shorting them at $400 was:

    Good morning! 

    NFLX finding dip buyers at $320 and that's down from $380 (18.75%) but I'd call $300-400 the range as NFLX consolidated at $200 back in 2017, topped out at $400 ($423) in mid 2018 and then down to $230 and back to $370 still centers around $300 so it's messy but I think realistic so the run from $300 to $400 gets $20 bounce lines and $320 is the weak bounce line, $340 strong, $360 strong retrace and $380 weak retrace so, generally, they've been failing to get over the weak retrace all year and now they've dropped to the other end of the range but $320 should hold and $340 should be tough to get back over now without better news. 

    That $300 line is still very significant and will now be hard to get back over and the same $20 lines below ($280 and $260) are significant below as are $320 and $340 still significant above.  

    While I'm leaning to the low end (below $300), I don't think they drop off too significantly as they are not really losing subscriptions – just not growing quickly but the specter of future competition remains no matter how good they look this Q so I can't see a big move up at this point – even on good news.

    Those Nov $300 callls are still $10 and the $250 puts are $5.60 so almost the same trade still works.

    Image/Ati – Refresh as it's fixed – but sideways – I can't figure out how to get images from my phone to chat without that happening.

    Trump talking about NATO again, bitching that people aren't contributing though I believe that's been debunked long ago.  Now talking about EU trade imbalance, threatening tariffs.  Has Italian leader with him – as usual, just an excuse for the usual ranting and raving that has little to do with Italy.

    What this is about (Trump's claim that EU countries "owe" hundreds of Billions to Nato) is that we exceed the pact of spending 2% of our GDP on defense by a mile (3.5%) while other EU Nations are below the line.  This isn't money paid to NATO and our spending is, of course, not solely focused on NATO interests.  This is about Trump and our Military Industrial Complex pushing the rest of the World to double their defense spending to catch up to our insanity.

    And the NATO goal is 2% by 2024 so no country has actually failed to live up to their goal yet – still 4 full years away.  Should be a good 4 years for the Military/Industrial Complex!

  17. Hemp/Kustomz – That's super high-quality MJ with THC for New Age/Jade Buddha, the guy in the picture is Ken Stannis, CEO of New Age.  It's about an acre of indoor grow (in downtown LA!) but so high-tech it's amazing.  Each plant is bar-coded so the FDA know every single step each mg of THC makes from the day we planted it to the day you eat the gummy bear we made out of it!

  18. The kind of pot New Age produces is like fine wine – high end stuff people will pay up for.  We're not much into growing but we are working on better and better strains for our growers but the real expertise we bring is in the manufacturing process.  

  19. Thanks for the pic Phil – very cool to see. I bet it was stinky in there :)

  20. MAT

    Back in August, I bought some MAT at $9.61 because I thought Hasbro was likely to buy them.  Hasbro bought another company instead, but MAT's stock has done well. Now I'm fantasizing that they would make an excellent acquisition for Disney.  With DIS beginning to put shops in Target stores, why wouldn't Disney also like to sell Barbie, Hot Wheels, Matchbox, Fisher-Price, etc. ?  

    Given Disney's size, it would be a very small acquisition for them. Wishful thinking, I'm sure. 8-)

  21. @Phil – thank you. I placed a BCS and sold a put as well, similar range that you had recommended just opted for a longer horizon. I am still getting used to the format and the various portfolio strategies, so much appreciate the repost of prior ideas.

    reg Trump / NATO – that is his thing. unfounded claims, hyped to the max to keep his sheeplets happy while it serves his purpose of either distraction or leverage to gain advantage on something else. The frustrating thing is that there is no filter whatsoever and no oversight nor consequence. Someone needs to take his microphone away.

    We observe and experience a deterioration in civility which is unseen and where country before party was prevalent in the past this does not seem to be the case with most Republicans anymore. Zero integrity.

  22. I see now, I missed the picture of Ken and the product. Indica strain? I need samples.

  23. Hello,

    I have 10 IBM 2021 115/145 BCS. And I have sold 5 of 18 october 150 calls.

    Today is earning. What do you think is it safer to close these calls?

    Thank you

  24. Stinky/Ati – Not as bad as the separation room.  

    Thanks to those who contacted us yesterday re. investing in New Age expansion.  I'll be getting in touch with you when I'm back from CA next week.  

    DIS/Albo – They are tied up with HAS on toy contracts so very messy for them to do probably for 3 more years.  Also, brand confusion if DIS starts trying to push Barbie and Co and then there's MAT's less than 5% margins vs DIS's 20% so it's a $5Bn(ish) acquisition that drags down a $230Bn company's performance and for what?  To pick up $250M a year?  I'm sure they'd rather just take the licensing fees and run.

    I don't think selling toys is about money for DIS so much as it's a marketing tool to keep their brand in kids' faces all year long.  

    Samples/Kustomz – Can't leave the state, unfortunately.  Very strict.

    IBM/KGab – That far out, I wouldn't be it's not "safer" – just letting it follow though.  The $115s are $29 and the $140s are $13 so net $16 out of possible $25 is a lot of room to grow while the short Oct $150s are out of the money and rollable so either IBM is flat or down and they expire worthless or IBM goes up and your spread is well in the money for the full $25 and you roll the short calls along – why change that.  Buy back 2 if you are worried as you could do a 2x roll on 3 and still only have 6 covers.  

  25. crazy chicken – the really interesting part of this is that Republicans feel the same way about Democrats. To them, all Dems want to do is buy power by promising free shit, have no morals, no scruples, and no honor. Their agenda is to turn the truth upside down, dismantle the Constitution (specifically Article II and the first, second, fourth, fifth, sixth and tenth amendments) and destroy the country.

    Weird huh? 

  26. Gotta run guys – have a good day.

  27. @dawg I guess best to discuss investments only :)

  28. Yeah, well, it’s been a good decade plus of these arguments and a grand total of zero minds have been changed so far.  

  29. Thanks Phil & Yodi for good thoughts on WHR ..  might try those 5 short Nov $165 calls around $4, Yodi!

  30. Phil / NFLX. I took a small position in this (less than a quarter )Similar to your position  See below.   I can increase it a bit and was looking at selling some 320 and maybe 260 to improve a bit or should I just hold     ?  Thanks 

    Short the on the below 

    Nov $247.5 at 5.5 

    Nov $310 at 10.5 

  31. Phil  NFLX


    Nov $247.5 put sold for 5.5 

    Nov $310 call sold for 10.5 

  32. 6 Ways to Invest in Lithium

  33. U.S. SEC freezes assets of 18 traders over alleged manipulation

  34. Phil / IBM – taking it on the chin…. time to selll some puts?

  35. @Batman/Phil / IBM - given that it is working through the Red Hat cost of acquisition, the new mainframe rollout and the 5% correction pre market already would you combine that with call premiums? If so what levels would you suggest? 

  36. Good morning!  

    Brexit roller coaster is driving things this morning.   Seems like a deal – but maybe not.

      A Brexit Deal Is So Close But It Could All Still Go Belly Up. 


    S&P back to 3,000 after all this trouble.

    NFLX close to our 10% move but I think they'll calm down once the squeeze is over.

    IBM I would wait for the downgrade police to have at them but yes, I love them for a new trade.  

  37. Good morning!

    IBM – ty

    Now that the numbers are in for the big four banks, what is good way to play JPM?