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3,150 Friday – Finishing the Month Strong on the S&P 500


That's up 150 points (5%) from where we cashed out most of our Member Portfolios in September and, though we missed a 10% pullback right after that – we have now missed a 15% recovery. 

Of course, at the time, I said we COULD go to 3,300 – if there was a China deal and if Brexit didn't get worse and if Q3 Earnings Reports were not a disaster and, so far, the Earnings were NOT a disaster and we keep hearing that a China deal is close and Brexit continues to stumble along so – YAY!!! – I guess…

Wall Street has taken this year’s quarterly profit contractions in stride, largely because companies, for the most part, have managed to beat already low forecasts.  Analysts came into the third quarter expecting profits for the S&P 500 to fall 4%.  With 97% of companies in the index reporting, profits are expected to have declined by 2.3%, with three-quarters of the companies topping very low expectations.

Image result for corporate profitsThere’s no question earnings are challenged,” said David Kelly, chief global strategist at JPMorgan Asset Management. “The market is to some extent coasting off good stable job performance.”  Companies that beat analysts’ forecasts in the third quarter saw an average price increase of 2.2% within the four-day period surrounding their report, according to John Butters, senior earnings analyst at FactSet. That is well above the five-year average price increase of 1% during that same window.

Investors have also been taking it relatively easy on companies that fell short of the mark, according to Butters. Companies that fell short of expectations saw an average price decline of 1.7% during that four-day window. That’s smaller than the five-year average price decrease of 2.6% during that same window for companies falling short of expectations.

Image result for corporate profits"As you can see from the above chart, we began the year down 3.75% in Q1, then gained 3.75% in Q2 and now up 0.25% but those are Q/Q growth numbers coming off a weak Q4 2018 so, overall, we're left down 2.3% on the S&P for the year so far – another down 4th quarter and we're in serious decline – which is odd since the S&P 500 is up 25% for the year – the very definition of "irrational exuberance".  

Overall Corporate Profits haven't acutually gone anywhere for the past 5 years and are 7.9% lower than they were in 2013 while Corporate Equities are up 88% over the same time-frame.  While we were happy to enjoy the first 83% of that rally – I simply had to switch gears and move to protect our gains as we headed into the end of year 5 of this Price Inflation Bubble.  

Even worse, what little new profits there are are not being generated from goods or even services that are being produced but are reallly just coming from tax breaks:

This is now way to build long-term value – I'm still happier keeping most of our CASH!!! on the sidelines.

Have a good weekend, 

- Phil


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  1. Winston To follow up on the AAPL trade as I can see it Phil just mixed up the 2021 with the 2022 so just turn then arround.

  2. Today is the last day to set up a tax loss by buying shares of the losing position and then selling the original shares on December 30th.

  3. Good Morning!

  4. stjean must be at the mall….. ;)

  5. Nope…Not been in a mall for years! But late start…

  6. Trump must be happy – reversing another Obama downtrend:

  7. Good morning!

    CNBC is in my local mall in NJ (Woodbridge) and it's no more crowded than it usually is – not a good start.

    Winston caught an error on the AAPL trade in the Butterfly Portfolio – I was looking at the price of the June 2021s, not the Jan 2021 calls, which are $28.60, not $33.50 – though we're collecting less money it's the time that's important so the positions remain the same, we're just going to spend more cash to get there.  This is corrected:

    AAPL – $266 is way over our mark and we sold 20 short March $210 calls for $23.30 so a $71,350 loss there only 1/3 offset by the gains on the short puts.  On the bright side, our $240,000 spread is 100% in the money and still net $140,000 – so $100,000 more to gain there.  Many steps to this fix:

    • Buy back the 10 short June 2021 $175 puts for $5.50 ($5,500) 
    • Roll the 20 short March $210 calls at $58.85 ($117,700) to 30 short June $260 calls at $23.65 ($70,950) 
    • Sell 15 short June $240 puts for $9.20 ($13,800) with a stop on 5 at $11, 5 at $13 and 5 at $15
    • Roll 40 short 2022 $260 calls at $44 ($176,000) to 60 short 2021 $270 calls at $25.50 ($171,000)
    • Roll 40 2022 $200 calls at $80 ($320,000) to 60 long 2022 $240 calls at $54.50 ($327,000) 

    So, all told, we're spending $36,450 and what are we accomplishing?  We now have 60 2022 $240/2021 $270 spreads at $180,000 so worse than the one we had but the short 2021 $270s can be rolled to the 2022 $290s ($30) not even accounting for the 1-year decay advantage so I'm confident we'll get our $120,000 back there eventually.

    Thanks Winston!

    Big Chart/StJ – So what's the story – they are simply unable to report the Russell?  That seems crazy.  

    Tax Loss/Albo – Good note!

    Not at the mall/StJ – How can you live in NJ and not go to a mall???

    Balance sheets/StJ – Another reason I can't trust this rally – all provided through stimulus from countries that are 50% more in debt than they were when we had the last collapse. 

    Speaking of collapsing – Oil and Gasoline already in free fall – that's why it's never worth the risk to gamble post-holiday.

    So much for $2.50 holding on /NG:

    Smells like a negative trade announcement is just around the corner to me!  

    /KC don't care:

  8. X

    U.S. Steel shares down 9% in today's session following news that company's Gary Works steel mill was partly flooded.

  9. Russell / Phil – No more Russell charts on StockCharts at all! They even removed all my old annotated charts.

  10. Let's see what's up in China:

    Chinese Foreign Ministry voiced strong opposition to the signature of the Hong Kong Human Rights and Democracy Act by the US, which seriously interferes in the internal affairs of China and violates international laws and basic principles of foreign relations.

    The White House on Wednesday signed the act, a move set to complicate the ongoing trade talks between China and the US as the US president is likely to selectively implement the act’s provisions by evaluating trade negotiations. 

    Such an act is abominable in nature and reveals vicious intentions of the US to sabotage the stability and prosperity of HK and disrupt the progress in China’s national rejuvenation, the Foreign Ministry said in a statement issued on Thursday. 

    US President Donald Trump announced he had signed the act into legislation on Wednesday, according to a statement. 
    Chinese analysts who closely observe the Hong Kong situation told the Global Times that “the signature of the act is not out of our expectations,” as the US would “swim with the current” while adding more legal tools to contain China. 

    The bill was passed in both chambers of Congress, showing that the hawkish political power in Washington is strong, Tian Feilong, associate professor at Beihang University in Beijing, told the Global Times. 

    "Trump lacks the political power to veto the bill, while it’s believed that a veto is unnecessary. The signature is within expectations,” he said.  

    The Hong Kong Special Administrative Region (SAR) government said it strongly opposes the signature of the bill, which meddles in China’s internal affairs, according to a statement issued on Thursday morning. The bill is unnecessary and groundless, and will damage exchanges between the region and the US, the statement showed.

    The act was signed after the US ignored warnings from the Chinese authorities. In an unprecedented move, seven Chinese institutes – the National People's Congress, the National Committee of the Chinese People's Political Consultative Conference, the Ministry of Foreign Affairs, the Hong Kong and Macao Affairs Office of the State Council, the Liaison Office of the Chinese Central People's Government in the Hong Kong SAR, the Office of the Commissioner of the Chinese Foreign Ministry, and Hong Kong SAR government – last week condemned the bill passed by Congress.

    The US is adding weight to its attempt to fully contain China by signing the bill. It means that the US would officially interfere into Hong Kong affairs, which China does not want to see, Fan Peng, a research fellow at the Chinese Academy of Social Sciences' Institute of Political Sciences, told the Global Times on Thursday. 

    The US intends to use Hong Kong as a political card, just like Xinjiang, to force China to sign extremely unfair agreements in the trade negotiations. By doing so the US can interfere in China’s domestic affairs from all sides, including its judicial system, Fan said, noting that the US will by no means succeed.

    They seem upset.



    Reminder: China’s GDP grew at 6% in the July-Sept quarter. This is the country in a trade war against the most powerful country in the world. At 6%, China will add 800 bn to its economy. At 4.5%, India will add 135 bn- taken annually.

    A scary scenario - From the Economist

    A recession is not inevitable. In many countries, especially America, healthy labour markets and confident consumers are bulwarks against one. Yet these defences are beginning to show cracks. And there is a worst-case scenario that should worry central bankers everywhere: that the trade war turns inflationary after all, perhaps compounded by rising oil prices, even as growth slows. The world economy is teetering on the brink of an unfamiliar type of downturn, with central banks in a period of flux. It is an uncomfortable position to be in.

  11. Mall / Phil – In Jean-Paul Sartre's best quote "Hell is the others – in a mall on Black Friday"

  12. Yodi – mix up – nope, I highlighted a point for correction- see Phil's note above. I know it was a kind of counter-intuitive adjustment but Phil's explanation was spot on.

    Phil – I really appreciate that you go to great lengths to think through adjustments which although not obvious to perhaps the average eye, are always worth the reader's attention to think through the what/why you are trying to achieve.

    Goodness knows how many mix-ups I make when I get excited about sharing ideas. The more costly ones are when I buy puts when I meant to sell them and calls when I meant to buy them. And after all these years I still have fat fingers (and part of the blame lies with IB's clunky user interface!

  13. X/Albo – That seems like a major over-reaction.

    "Between Sept. 1 and Dec. 31, 2017, 4,233 containers holding solar panels were imported to the United States. Once the tariffs were officially imposed, the number of containers imported dropped drastically, to 1,734 containers between Jan. 1 and April 30, 2018. Washing machines saw a similar pattern of front-loading: 3,477 containers filled with washing machines from China were imported between Sept. 1 and Dec. 31, 2017; when the tariff was imposed, the number dropped to 1,887 containers over the first months of 2018."

    Mix-ups/Winston – Yes, it's hard to avoid when dealing with all these complexities – good to have more eyes on it, thanks.

    Speaking of the RUT – crazy day in progress – look at that down spike:

    I'd say that's an indicator of things to come – someone just got a jump on the day's selling…

  14. And this is WITH a weakening Dollar:

  15. Warren Wealth Tax Has Wide Support, Except Among One Group

  16. Papua New Guinea faces cash crunch as China repayment schedule ramps up

  17. Wow on oil! 

    Pretty much the second Aramco got their money all the fake support disappeared. 

    Markets close in 45 mins, by the way.  

  18. Phil Thanks for the warning ?Is America Working???

  19. Not politically but, fortunately, the economy is pretty good, so people think it doesn't matter.  

  20. We now return to our Thanksgiving activities.  

    Have a great weekend everyone,

    - Phil

    See, I knew that would happen…

  21. Thanks Phil for everything. We now prepare for our next bloody snowstorm!!! 3 feet on the ground already. Fun, fun. Getting my cross country ski's on!

  22. Comment content omitted because it is too long.

  23. CBS/Phil, Vidt
    Hi Phil,

    One of the parts of this whole investing enterprise about which I know I have a lot to learn, is how to value companies. Here's one I'm trying to understand at the moment, CBS.  I sold the puts you mentioned, but I want to be able to explain to myself why that's a good idea, and I am not there yet.

    When you commented to Vidt on CBS (November 14th, 2019 at 3:40 pm) you said,

    "Don't forget, I'm a pure Fundamentalist – I don't really care what the squiggly lines on a chart do. I care about whether or not I should be buying CBS at $40, which is $15Bn for a company with slow but steady growth that's dropping close to $2Bn to the bottom line."

    I get the part about $2Bn, but not about steady growth.

    To me it looks like their revenue from 2013-2018 went down, then back up to a little past where it started. The same seems true for Operating Profits.  Their net profit seems even more variable. To me, none of those seem like steady growth. Earnings per share, however, are a different story.

    Year End 31st Dec       2013    2014    2015     2016    2017    2018     TTM     
    EPS Normalised   $      2.81    2.91      3.24     3.86     4.38      5.44     7.55
    Net Debt             $m     6,067   6,684   8,125   8,777    9,877   9,830   9,224
    Average Shares   m      624     561      489       448      407       381      378

    It looks to me like they borrowed $3Bn, and bought back 246 million shares (624 – 378),
    about 40% of their shares, and that led to, or contributed to, steady EPS growth. If that's
    really what is going on, taking on debt to grow earnings, that's not good, is it?

    In short, I'm trying to understand CBS's earnings, and why CBS is a good bet.

    As always, thanks in advance!

  24. UNG / Phil --  please excuse if this is naive, but can you explain why Natural gas is collapsing?  Last year this time, it held up above $23 until the end of the winter in March.  Is it because this year they are predicting a warmer than average winter for most of the U.S.?  But didn't they predict that last winter as well?

  25. UNG / Phil --  I should mention I bought the Jan $15 / $22 bull call spread on Oct 1 2019.  I am in trouble, aren't I?

  26. Follow-up on the AAPL BFLY adjustment.  Phil can you provide the entire history on this position from the tracking software?  It seems to me that this is a hugely profitable position and I wonder whether you should consider closing and starting a new AAPL position where it isn't so large.  This a $200,000 portfolio and having 15 puts and 60 spreads in a high priced stock seems rather large to me.  Can you also check the math on the total spend?  My review suggests $50,450 (rolling the long call will cost $7,000).  Also I have a smaller portfolio with the following AAPL position and I'd appreciate your suggestion as to how to adjust:  2022 210/260 call spread 2x, 2021 180 puts 1x and short the January 2020 225 call 1x.  My over all spend is $1,400 on this position.  

  27. The Planet vs Plastic

  28. The impeachment process is starting to get very real