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Wary Wednesday – Boeing Production Halt Spells Big Trouble for Q1 GDP

I don't think people understand math.  

Boeing (BA) Sells $25Bn worth of airplanes per quarter and spends about $20Bn to make them so that's 0.1% off the $4.7Tn quarterly GDP right there but their suppliers also spend money and we're not even considering the impact of the layoffs and the hit we're going to get to inventories – which is also a negative on GDP.  Goldman Sachs (GS) estimates that an $18Bn reduction in inventory (not all BA planes are the Max) alone will knock 0.4% off Q1 GDP PLUS a good 0.1% from BA's lack of revenues (along with the chain of suppliers) so we're talking about a 0.5% reduction to a GDP number that was already projected to be barely above 1%.

Durable Goods and Manufacturing numbers will also take a huge hit so we're looking ahead to a string of bad reports – maybe even a bump in unemployment in the months ahead.  We are constantly amazed by how shocked traders seem to be by news that we could see coming a mile away so I will tell you now – while it is still a mile away – to prepare yourself for the shock of your fellow traders – who are ignoring this coming storm just like they've ignored all other storms to hit the market in the past year. 

Image result for struck by lightning animated gifWill this one matter?  It's hard to say.  There are plenty of people who go outside in lightning storms and very few are actually struck by lightning.  That doesn't mean it's safe to go out in a lightning storm and those who don't go outside are never struck by lightning while those who do are only rarely struck by lightning.  The people who stay inside are not foolish and the people who go outside are not really foolish either – as statistics are very much on their side.

Still, this is math and MATH is telling us that the Q1 GDP will be about 33% lower than the currently projected 1.5%, which means that no one seems to be taking into account the ACTUAL decision by Boeing to halt production through Q1.  Nothing is going to change that – once they shut production, it takes 90 days to restart so we should be more worried about whether they decide to restart it soon (they are currently expecting to restart in April, pending approvals).  

Image result for boeing production haltThe effect of rising inventories is something I always complain about in GDP Reports as there's an underlying assumption that all inventory gets sold, which paints a false positive in the GDP Growth leading into recessions as everything seems fine while inventories pile up.  That has very much been happening this year as 737Maxs have been produced but not delivered/sold so the risigng inventories have added to the GDP while actual shipments have fallen off considerably.  

This can be a bit of a ticking time bomb because, what if, ultimately, the 737 Maxs are de-certified and it turns out BA wasted $50Bn making that inventory?  Not likely but possible.  That would be an economic disaster of biblical proportions, making being struck by lightning far preferable to what would happen to BA and the US economy under those circumstances.  

900 companies make parts for the 737 Max and BA is the US's largest manufacturer and largest exporter but there is simply so much crap going on at the moment that no one is focused on this issue.  400 737 Max planes owned by airlines have been grounded for a year and 400 more 737 Max planes were produced by BA and are sitting in inventory.  BA generally delivers 42 planes per month and, as you can imagine, delivering a plane is not a job that UPS, FDX or even Amazon are able to take care of for BA – it require very specialized carriers equipment and assembly teams as well as intake teams at the airline so BA can't simply deliver 400 planes once they are re-certified, I doubt they can even do 80 per month which means it will take an entire year just to deliver the inventory backlog once production re-starts.  

Many of the hundreds of companies that are part of the 737 Max supply chain are likely, at a minimum, to be more circumspect with raises, capital investments and new hires for the foreseeable future, Dartmouth College economist Matthew Slaughter said, and that could have a broader effect on manufacturing as well as rail and trucking companies responsible for shipping the giant metal components.  "This is going to be something that curtails activity in the broad US manufacturing sector," he said.

Because of the China deal, the Atlanta Fed RAISED their GDP forecast last week, ahead of the BA decision but surely they saw this coming?   It will be interesting to see what they do with this new information but most analysts had GDP hovering around 1.7% so we'll watch out for changes in that forecast but the Philly Fed (tomorrow) and KC Fed (Friday) and also Friday's GDP Report take none of this into account – so a false sense of security can remain in place through the holidays.

But I wouldn't stand in the rain!  

 


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  1. Good morning, All!

    Join Phil at 1pm (eastern) for the weekly webinar, here:

    https://attendee.gotowebinar.com/register/4761738972922137357



  2. GDP / Phil – I posted the latest numbers the other day for the world and excluding China and India, everybody is now growing at less than 2%. The EU, the UK and Japan are barely over 1%. And yet markets are trading like we are booming. Here, it's quite simple, it's driven by so many buybacks and also the fact that taxes for businesses is now at the lowest it has been. Great for profits, but we end up with sky high deficits and then we'll need to get the money somewhere. Like cutting benefits for the poor, the disabled and the old people. Oh wait, already in progress! It just cannot end well.


  3. Good Morning!


  4. Today will be a Great Day for Democracy - fasten your seatbelts…. :)


  5. Good morning!


  6. Phil – coffee futures / KCH20 – I have not traded commodities yet, but am interested. What is our current view on coffee specifically? ty!


  7. Trump gonna be even more unhinged I think although his letter yesterday is going to be hard to top! 50 years from now people will be asking some tough questions to their grand-parents.


  8. BA Phil at least we do not have the clown to blame.


  9. Phil/FAS,

    A bear put spread at this point makes sense? With the regulators finding shortcoming in resolution plans in 6 major banks…it includes STT as well. It had a nice run till now.

    regards


  10. BBBY – On a roll as new CEO cleans house.


  11. Phil / Yodi / All – CMG; 

    Really liking the CMG play.. and with current price action i'm hovering in hopes of catching this short at a discount.  I'm gradually getting comfortable trading with margin and selling calls (new to this) so i think considering asset price i'm going to just play this one as a put spread.  (wise?)

    Any thoughts on a less exposure version of this play?  im thinking : 

    1 x CMG Jan '21 / $860 / $760   - ($4500 on the 10k spread – not massive R/R) 

    thanks for thoughts!





  12. BA / Yodi

    In my humble opinion, BA can become in the stock of the year, it´s so important for the U.S economy that everybody will try to restore company value in an instant…once they are approved to fly again.





  13. Potter. CMG to big for me to gamble. Why do you not start with any smaller stocks as we show on the board from time to time.


  14. I – Up 8% from purchase price yesterday.  Sold 1/2.


  15. Advill, Well I trust they work the same as we try to manage our ports not putting all eggs in one nest. I take it they produce many other planes. It has damaged their name a lot. I remember during discussions Phil's comments " wait until an engine falls off", and here we have two complete planes!!!

    Obviously the 737 plane is not the same as a faulty car. My father always said the sky has no beams to walk on, and I would think twice boarding that plane again. But as said before on our board, let the dust settle first, I still hold small puts Jan 21 sold from a while back, and still showing 2.5K credit. But as always I did it in a small way.


  16. Now that makes IBM interesting:

    https://www.engadget.com/2019/12/18/ibm-research-ev-battery-cobalt-free/

    Today, most EVs run on lithium-ion batteries made with heavy metals like cobalt, of which there is a limited supply and less than ideal mining conditions. The IBM Research Battery Lab may have a solution: a new battery built without heavy metals. It's made, instead, with materials that can be extracted from seawater.

    According to IBM, the new design could outperform current lithium-ion batteries in cost, charging time (less than five minutes to reach an 80 percent charge), power density and energy efficiency. The battery is also less flammable, and it could be used in aircraft and smart energy grids, as well as electric cars and trucks.






  17. That battery from IBM sounds great.   I bet we never hear of it again the same as every other battery of the weak announcement (I did not used to be so cynical.  Thanks Trump)


  18. Jill – Up 6 % today.  Sold 1/2.


  19. Cynical or paranoid Tangle :-)


  20. Good morning!

    Markets still going up but 3,300 is still what I think the limit is going to be.  We'll see…  3,380 would be the 30% line on the Big Chart but, if we go over 3,300 for more than a couple of days, then the Must Hold line should probably be 2,850 and then 3,420 is the 20% line there so we can then do that math for a retrace and the lines from 2,850 would be 2,964 (weak bounce), 3,078 (strong bounce), 3,192 (strong retrace) and 3,306 (weak retrace) so 3,300 is going to be significant in any direction.  3,192 is what we're testing now, if that holds, it puts 3,420 firmly in play but, if not, then we stick with the current big chart lines and look for a move back to 3,120 (20% up from 2,600).   At the moment – this is just a 20% move with a 2.5% overshoot.  

    GDP/StJ – Yes but I'm sure a lot of countries are doing upward revisions on easing trade tensions – though I don't think it will really make that much difference.  I agree, we're running a $1Tn deficit and that's 5% of our GDP so, if the Government were acting responsibly, GDP would be -3.5% – these things are not complicated.  You could say cutting benefits is responsible but what would be more responsible is cutting the military and raising taxes on Corporations and Top 1%'ers (sorrry guys!).  Giving me another $1M doesn't make me put $1M back into the economy but giving $1M to poor people puts it back into the economy right away and I end up making that money eventually anyway because trickle down may be a hoax but trickle up is exactly how economies do work.

    For example, in Thailand, we (PSWI with Hemp Boca and New Age) are going to be supplying the NHS with CBD and they were asking for bids of no more than 25-30 Baht per day (0.83-$1) for pain medication.  I decided that, if we made the program successful, we'd get more patients on it and make more money so rather than gouge them, we came in at 0.66/day – about the cost of aspirin or vitamins.   That won us the contract (simply being the only bidder who wasn't greedy) and we'll still make a fortune (30% to the bottom line) but, most importantly, now it's costing the hospitals money NOT to get on our program as fast as possible so, instead of the 1M patient pilot program (365M doses/year), we now have 3M patients under contract and are in the process of signing up the rest of the hospital network.

    That's trickle up – we put a socially beneficial program in place that saves the Government money AND makes us plenty of money and we're going to create thousands of jobs as well (this is just one of 24 farms we are setting up with partners) - an actual win-win situation that's getting us significantly more money overall than just trying to make a bigger profit off the pilot program. 

    Democracy/1020 – Why, is something happening in Norway?  We rank 25th in "Democracies" around the World – Behind SoKo, Japan, Chile and Estonia – but at least we have Botswana beat!  It will however, be another fun, futile attempt to topple the Oligarchy – where we rank 11th in the World!  Notice how this looks like a list for Trump's Birthday Party:

    Several nations still use oligarchy in their governments, including:

    A study conducted by political scientists Martin Gilens of Princeton University and Benjamin Page of Northwestern University was released in April 2014,[26] which stated that their "analyses suggest that majorities of the American public actually have little influence over the policies our government adopts." The study analyzed nearly 1,800 policies enacted by the US government between 1981 and 2002 and compared them to the expressed preferences of the American public as opposed to wealthy Americans and large special interest groups.[27] It found that wealthy individuals and organizations representing business interests have substantial political influence, while average citizens and mass-based interest groups have little to none. The study did concede that "Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and a widespread (if still contestedfranchise." Gilens and Page do not characterize the US as an "oligarchy" per se; however, they do apply the concept of "civil oligarchy" as used by Jeffrey Winters with respect to the US. Winters has posited a comparative theory of "oligarchy" in which the wealthiest citizens – even in a "civil oligarchy" like the United States – dominate policy concerning crucial issues of wealth- and income-protection.[28]

    Gilens says that average citizens only get what they want if wealthy Americans and business-oriented interest groups also want it; and that when a policy favored by the majority of the American public is implemented, it is usually because the economic elites did not oppose it.[29] Other studies have questioned the Page and Gilens study.[30][31][32]

    In a 2015 interview, former President Jimmy Carter stated that the United States is now "an oligarchy with unlimited political bribery" due to the Citizens United ruling which effectively removed limits on donations to political candidates.[33]

    Coffee/Crazy – No longer interested in coffee as it's no longer cheap.  End of story.  I don't like shorting commodities generally (oil is the major exception), I prefer finding a logical floor and then going in for the long haul and we did that with coffee 30% ago so, until it's way, way lower – I'm done with it.  

    FAS/Pat – Nice defensive play, if nothing else.  FAS was $25 back in 2016 so we are through the roof here as XLF went from $17 to $30, so up 100%ish and FAS is up 300%.

    FAZ, on the other hand, is $28 – also interesting as it was $300 in 2016.

    So, to make a good play, you have to consider which will have more pop if XLF drops 20% and FAS would drop 30% ($30) while FAZ would pop 30% to $35ish.  Then we have to look at the options to see which is more interesting.  

    • FAZ April $26s are $3 and the April $32s are $1.10 for net $1.90 on a $6 spread with $4.10 upside (215%) 
    • FAS April $100s are $10.50 and the April $90s are $5.50 for net $5 on the $10 spread – only 100% upside potential though we expect a move below $70 so we could look at -
    • FAS April $90s are $5.50 and the April $80s are $2.90 so net $2.60 on the $10 spread has $7.40 (284%) upside potential.  

    Given the choices, I kind of like FAS April $90/80 bear put spread at $2.90, say 10 of those for $2,900 and selling 3 of the STT May $80 calls for $5 ($1,500) to net in for $1,400 on the $10,000 spread.


  21. BBBY/Albo – That's my general premise for picking Retail plays, if I think I know how to fix a place – I figure they'll eventually find someone who figures it out.  

    CMG/Potter – Well it's all fun and games until one burns you so don't ever get cocky on them.  I think the put spread seems sensible but there's no fallback on a big run-up, you just take the loss.  In our STP, we have a more conservative put spread (more in the money) that cost us $11,000 on a $20,000 spread (and you can still do that one) but we sold puts AND calls against it for $8,800 – using 4 (1/3) of the 13 months we have available for sale.  Between $750 and $900 into March, we drop our net to $2,200 on the spread and we have 2 more blocks to sell for another $17,600 and, if those pay off – who even cares if we make money on the bear spread?  So, while we're making maybe $35,000, if CMG is under $820, you need $760 to get $5,500 over the same time period. 

    CMG Long Put 2021 15-JAN 920.00 PUT [CMG @ $833.22 $1.17] 2 12/6/2019 (394) $30,000 $150.00 $-9.15 $150.00     $140.85 $-3.15 $-1,830 -6.1% $28,170
    CMG Short Put 2021 15-JAN 820.00 PUT [CMG @ $833.22 $1.17] -2 12/10/2019 (394) $-19,200 $96.00 $-9.00     $87.00 - $1,800 9.4% $-17,400
    CMG Short Call 2020 20-MAR 900.00 CALL [CMG @ $833.22 $1.17] -2 12/6/2019 (93) $-4,400 $22.00 $-2.45     $19.55 $0.89 $490 11.1% $-3,910
    CMG Short Put 2020 20-MAR 750.00 PUT [CMG @ $833.22 $1.17] -2 12/10/2019 (93) $-4,400 $22.00 $-6.80     $15.20 $-0.50 $1,360 30.9% $-3,040

    We are NOT going to win every time but if my winners are $35,000 I can afford a lot more losers than if my winners are only $5,500, right?  Keep in mind the mechanics of this trade – I have the same (essentially) bear put spread you do – only way more in the money.   The short $900 calls and $750 puts are both more than 10% out of the money (well, they were) and they can be rolled to the June $980 calls ($20) and the June $700 puts ($19 and funny how they are holding value better than the calls) which can then be rolled to the 2021 $600 puts ($20) and $1,140 calls ($20).  So, unless CMG is over $1,140 in January, the most I'm likely to lose (assuming a 100% loss on the put spread) is our net $2,200 entry (less than you lose on the bear put spread alone) and below $600 at least I get $20,000 from my put spread to deal with those losses.  Of course, if I thought either of those extremes were remotely possible – I sure wouldn't be playing this spread so I'm HAPPY to spend $20K in margin (ordinary) to make up to $35,000 ($29,500 more than your max) with the slightly more active spread.  

    And what Yodi said – unless you have a ton of cash to play with – it's best to learn on much smaller stocks.

    BA/Yodi – No it's about 70% of their sales!  

    IBM/StJ – If you can get someone to take you to Armonk, you will ALWAYS be interested in IBM.  Looks like Avenger's HQ:

    Image result for ibm armonk

    Battery/Tangled – IBM does a lot of stuff that's 10-20 years out so best not to be too excited by things when the press gets a hold of them.  As noted in the article:

    To move the new battery beyond the IBM Research Battery Lab, the team has partnered with Mercedes-Benz, battery electrolyte supplier Central Glass and battery manufacturer Sidus. While the team works out how to develop the battery, IBM Research will use AI to further improve battery performance and search for even safer, higher performing materials.

    So it's AN idea, not even THE idea for better batteries.  IBM AI is just theorizing new materials and there's no limit to car companies that want to develop a winner.  

    Also, others are working on a similar track:

    In November 2015, researchers from the University of Maryland and the Army Research Laboratory claimed that they had induced the cell to form a Solid-electrolyte interphase (SEI), a first for an aqueous electrolyte. The SEI allows the aqueous lithium-ion battery to operate at higher voltages and self-discharge more slowly. The high salt concentration allows the interphase to form. It raised the maximum voltage for such a battery from 1.23 V to around 3 V. At 2.4V, the battery's specific energy was approximately 100 watt-hour/kg and it displayed consistent performance over 1,000 charge/discharge cycles.[4] The device operated with nearly 100% coulombic efficiency at both low (0.15 C) and high (4.5 C) discharge and charge rates.[4]

    In September 2017, researchers stated they were able to raise the voltage to 4.0 volts.[5][6]

    In May 2019, researchers published an article where the voltage increased to 4.2 volts.[7] High specific capacity from a densely packed stage-I graphite intercalation compound of C3.5[Br0.5Cl0.5] can form reversibly in water-in-bisalt electrolyte.[7] By coupling this cathode with a passivated graphite anode, a cell can achieve an energy density of 460 watt-hours per kilogram of total composite electrode and about 100 per cent coulombic efficiency.[8]

    Varying temperature performance is a big issue with these things as well.  

    Jill/Albo – Nice call!  

    Holy cow, 12:20?  I am so not ready for Webinar!  


  22. Is it time for a new Tesla short? Disclosure, I already am short, but just repositioned into the following.  $387 is absurd.  You can sell the 2021 $400 calls for $66, and buy the 2022 450/550 BCS for $27.50 as a cover.  I wouldn't sell puts because I think this has the potential for an Enron style collapse.  


  23. Hemp Boca Portfolio Review:  Up 5.5% is nice considering MJ is hitting us for a $7,770 (15.5%) loss so we'd be on track without MJ and, hopefully, it will get us on track again one day.  Other than that, we seem to be in pretty good shape, fighting back from that loss and up 5.2% since last month with no changes at all.  

     

    • TAP – They bumped up their dividend – hopefully not priced in Canadian Dollars…  We just added puts to the bull call spread but our conservative entry is net $42.40 and I have no worries about that so I fully expect to gain the remaining $3,750 (98.7%) on the puts, so still good for a new trade.  On the bull call spread, we're down $1,250 – so also good for a new trade at net $7,750 on the $20,000 spread so $12,250 expected to be gained there but $7,900 is $54 and I need more evidence before I begin to say I'm counting on that money – so no green on the rest!  

    • IMAX – As noted in the Earnings Portfolio, I feel very good about this one and we're already in the money at net $3,625 on the $4,000 spread so $375 (10%) left to gain if they hold $21 for 1 more month. 

    • M – Finally popping!  Nice $10,500 potential spread at a net $2,708 and that's up $5,926 since last month…  Still, it's a $10,500 spread so $7,792 (287%) potential gain if M can make it to $20 in two years is still pretty good – even if you IGNORED ME the other 1,000 times I said I loved this stock at $15.    

    • MJ – Well, we took a shot at fixing it a couple of weeks ago, leaving our old long calls as they weren't worth cashing but certainly we're not counting on this money.  

    • THC – Another one we love to buy whenever investors lose faith.  Miles in the money now at net $4,575 but it's a net $7,000 spread that's 50% in the money so not bad for a new trade with $2,425 (53%) left to gain,  We entered for net $1,000(ish) so up 350% already but now it's pretty much a sure thing so 53% is not boring when you don't even have to think about it.

    So that's $14,342 left to gain despite not counting a thing on MJ or most of TAP (another $12,000 potential) and that's 28% of a $50,000 portfolio but we still have 75% of our $100,000 buying power and we will find ways to deploy that over time.  Keep in mind we only trade this one on the Tuesday Radio Show.  


  24. Dividend Portfolio Review:  Well, we filled this up already and it's already up 17% at $117,022 and that's well ahead of projections as we were only looking to make 37% for the year but we did well at the outset so we got a little more aggressive, adding TD short puts to close out the set.  If all goes well, we won't touch this portfolio at all and simply let the money flow in over the course of the  next two years.  

    So far, we've collected $756 on M, $740 on NLY, $370 on SIG and $355 on SKT – that's $2,221 in our first quarter with 5 more positions to pay but already 2.2% of $100,000 in a quarter alone is far better than we'd do in a bank!  



  25. Phil / Yodi – thanks for all the info and expertise.  Seems best for me to sit CMG out.  

    thanks!


  26. BA, I was not aware that the 737 was 70% of the company's production line. If this is the case I wonder who is buying today, stock is up 7$ !!!!! Very strange.


  27. BA / Yodi

    that shows how supported is by everybody in U.S, government,  funds, and the rest,  another company could be 70% off


  28. Good call Potter.  

    BA/Yodi – All subject to the latest rumor.  

    True Advill, it's very unlikely they would let BA go down. 

    Another day with a weak finish.


  29. Phil—I don't have SIG or SKT in my div port—-would you get in now or wait—-thanks


  30. Phil – coffee futures. ty! makes sense. are there any other commodity trades that you would recommend at this time? ty


  31. SIG/Savi – That took off too much so I'd pass and hope they miss down the road.  SKT is still a bargain – I still like them.

    Commodites/Crazy – Sure, see yesterday's post.