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Faltering Thursday – Our Index Hedges Finally Pay Off!

Well, it had to happen some time.

After serveral attempts to make some money shorting the Index Futures we hit the jackpot in yesterday Morning's PSW Report, when I said to our Members:

It doesn't matter what happens during the day, in the overnights, we rally to new highs.  Oddly enough, we've been making our money on the short side (see last week's Webinar) by playing the indexes short when they peak and selling on the dips so this morning we're doing it again at 9,240 on the Nasdaq (/NQ) Futures, 3,335 on the S&P Futures (/ES) and 29,280 on the Dow (/YM) Futures.

Meanwhile, we're stubbornly long on Natural Gas (/NG), which is now at $1.90 but our average entry is $1.962 and we already have 4 long.  

As you can see from the image above, we hit our goal this morning (as discussed in yesterday's Live Trading Webinar) so we're taking the money and running but we'll re-establish on a pullback.  It's a nice $2,320 gain on the day, so we don't turn that away and we'll also cash out our Index Futures, now at 9,190 on /NQ for a $1,000 per contract gain, 3,313 on /ES for a $1,100 per contract gain and 29,050 on /YM for a $1,150 per contract gain.  Now, wasn't yesterday's PSW Report worth your $3?  If so, don't forget to SUBSCRIBE HERE!  

We played yesterday bearish because there was now NEW news that justified the move up and, this morning, there's no NEW news justifying the move down so we'll cash out and wait for something interesting to happen.  The most interesting thing happening at the moment is the Chinese coronavirus that has sent the Chinese markets down 5% already this week and our 5% Rule™ says a weak bounce is 1% and a strong bounce would be 2% – so we'll see if the weak bounce fails tonight and, if so, we may be heading lower.

Two more Chinese cities were placed on lockdown as over 1,000 people are now infected, up from 300 on Tuesday and 500 yesterday.  At Wuhan’s Hankou rail station, thousands of travelers hustled to catch trains, many booked or changed at the last minute, to get out of the city before the lockdown on public transportation. Inside the station, people wearing face masks and dragging luggage jogged to catch departing trains. Almost every seat on the trains was occupied.   

In Hong Kong, health authorities on Thursday said they were investigating two patients who are suspected of having been infected with the new coronavirus, in what would be the Chinese territory’s first confirmed cases.  Keep in mind they are "investigating" the disease in Hong Kong, AFTER the patients traveled from Whuan on trains and in stations where they had contact with thousands of other people and AFTER they spent days in Hong Kong before getting sick enough to seek medical attention

There is still way too much market complacency here…

So why are we cashing out our Futures Shorts?  Well this market tends to be very bouncy so we're just playing the odds and we also have index shorts (SQQQ) in our Member Portfolios and we will be looking at adding more of those if the market opens weak.  The Futures are just a good way of giving us overnight protection ahead of something like this weekend's announcement that there are thousands of people infected right at the beginning of Chinese New Year – that could be good for a huge overnight drop.  

The 2003 SARS Outbreak also began in January and was a crisis by March and lasted until about July, when vaccines were developed.  It's good that people are freaking out about this early as we certainly don't want a repeat of SARS as it knocked over 2.5% off Hong Kong's GDP and over 1% off the GDP of all of China – something like that could topple the Chinese banking system as they are in the middle of a bad loan crisis already.

Image result for sars china stock market

We can hedge China's potential crisis with a long position on te China Ultra-Short (FXP), which should open this morning at $55 and just the straight stock should do well if Chna does poorly but I'd rather set up an options hedge as follows:

  • Buy 20 FXP June $50 calls for $7 ($14,000) 
  • Sell 20 FXP June $65 calls for $2.50 ($5,000)
  • Sell 5 FXP June $50 puts for $4.30 ($2,150) 
  • Sell 5 CHL Sept $45 puts for $4 ($2,000) 

That's net $4,850 on the $30,000 spread so there's $25,150 of upside protection if FXP gets to $65 into June expirations.  If China recovers and we get completely burned, we're promising to buy 500 shares of FXP for long-term protection at $50 (20% off) and 500 shares of China Mobile (CHL) at net $41 (10% off).  I don't see why the flu would have a long-term impact on China Mobile and Chinese stocks are very stretched and people are pretending the Government will bail out the banks but it's doubtful that will go smoothly, so I like the idea of having some FXP in our Short-Term Portfolio for the long term.

Let's be careful out there!  

 


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  1. Good morning, All!

    The webinar replay is now available!

    https://youtu.be/8-3UztJ0XlE


  2. All new lines now!


  3. Just to be safe I deleted all my WhatsApp conversations with MBS! He was mostly sending me Baby Yoda memes anyway.


  4. Good Morning!


  5. Good morning!  

    Big Chart still mostly green, even with the adjustments.

    Play in the above post is for the STP:

    We can hedge China's potential crisis with a long position on te China Ultra-Short (FXP), which should open this morning at $55 and just the straight stock should do well if Chna does poorly but I'd rather set up an options hedge as follows:

    • Buy 20 FXP June $50 calls for $7 ($14,000) 
    • Sell 20 FXP June $65 calls for $2.50 ($5,000)
    • Sell 5 FXP June $50 puts for $4.30 ($2,150) 
    • Sell 5 CHL Sept $45 puts for $4 ($2,000) 

    That's net $4,850 on the $30,000 spread so there's $25,150 of upside protection if FXP gets to $65 into June expirations.  If China recovers and we get completely burned, we're promising to buy 500 shares of FXP for long-term protection at $50 (20% off) and 500 shares of China Mobile (CHL) at net $41 (10% off).  I don't see why the flu would have a long-term impact on China Mobile and Chinese stocks are very stretched and people are pretending the Government will bail out the banks but it's doubtful that will go smoothly, so I like the idea of having some FXP in our Short-Term Portfolio for the long term.

    LOL StJ! 


  6. Sold some April FCX 11 puts for .60.


  7. 3,300 on /ES is, of course, bouncy but how bouncy is the question?

    3,307.50 is the new 5% line so no surprise we'll have action around there on the bounce.  I'd call the fall from 3,335 so let's say 35 points so – surprise! – 7-point bounces to 3,307 and 3,314 will tell the tale but I bet when that 1,000 infection number crosses the wire – we get a big drop..

    Dow failed 29,000 – they need to take that back or BIG TROUBLE and /NQ bounced off 9,160 and 1,665 for /RTY is down 45 from 1,170 so I'm going to call it 10-point bounces to 1,675 (weak) and 1,685 (strong) and usually the RUT bounces back fast but it's been in steady decline for a week now.

    FCX/Albo – Commodity demand dropped off a cliff during SARS so be careful if this virus spreads fast.

    Image result for sars infections over time

    It's not the number of people infected but the panic.

    Image result for sars infections over time hang seng

    Image result for sars infections over time hang seng


  8. Phil/FXP,

    The options pricing has deviated a lot from the time of your trade post due to the 5% movement in FXP. So I will put the same target price and wait for it to fill or onto something else.

    regards


  9. FCX   - Thanks, Phil.  I've just been trading it back and forth.  $10.40 is a price at which  I would be willing to go long.


  10. Panic/Phil – absolutely right. During the MERS epidemic in Korea, people stayed off public transit, producing a spike in traffic crashes, injuries, and deaths that outweighed deaths and morbidity from MERS itself. And the evacuation of the US gulf area during Hurricane Rita is infamous (https://scholar.google.co.kr/scholar?cites=7379203871962391629&as_sdt=2005&sciodt=0,5&hl=en).


  11. Phil / iMAX

    hey!    i know this was a play you called recently – i've been in for little while, getting crushed and wanted to know your thoughts on my current spread.

    10 x IMAX June $18 – $22 BCS

    5 x IMAX June $23 Short puts

    the whole spread was net $1350 but down 35%.  Mostly concerned about the short puts

    thanks


  12. It's been so bad for him:

    https://www.cnbc.com/2020/01/22/trump-says-gdp-dow-would-be-higher-if-it-werent-for-the-fed.html

    President Donald Trump told CNBC on Wednesday that U.S. economic growth would have been closer to 4% if it weren’t for the lingering effect of Federal Reserve rate hikes.

    “That was a big blip that should not have taken place. It should not have happened. But it’s one of those things. But we had Boeing. We had the big strike with General Motors. We had things happen that are very unusual to happen,” Trump told CNBC’s Joe Kernen in an interview from the World Economic Forum in Davos, Switzerland.

    Other presidents had it so easy before! So many unusual factors -  I mean, a GM strike! Hard to recover from that. We are growing at 2% with a freaking $1T deficit. And not coming out of the biggest recession of the last 50 years.


  13. WOW!  This really makes you think:

    Image

    Still, it tells us to look at Health care and Financials – only half of those companies are at record valuations – AWESOME!

    FXP/Pat – I just put in favorable limit orders on each side and see what fills first and then work on fills.  It spiked a little higher than I thought, which means we'll get a good price for the short calls and then we fill the long calls and don't even sell the puts unless it comes back down a bit.  Worst case, you just have a bull call spread.  It's thinly traded and will take time to fill.  

    Good statistic, Snow.

    IMAX/Potter – I call IMAX whenever it's low in the channel.  This is unusually low for them but I'm thrilled as I want to feature them on 2/5 for Money Talk.

    I think $23 is a fair target for the long haul and the June $23 puts are now $4.85 ($2,425) and the Sept $23 puts are $4.85 so rolling doesn't really work but you sold them for something, say $1 so I'd roll down to 10 of the Sept $19 puts at $2 ($2,000) and get your losses back, hopefully.  As to the spread, you paid $1.35 and the June $18s are $1.75 ($1,750) so you can salvage that money by cashing the long calls and buying 10 of the Sept $15 ($4.10)/19 ($1.70) bull call spreads for $2.40 ($2,400).  So, on the whole, you would be spending net $1,075 and that means you are in the $4,000 spread that's $3,400 in the money for net $2,425.  Not a catastrophe and all you need is for IMAX to be over $19 in Sept.

    A lot of our trades are like that – it would be lovely if they work out right away and make 300% but, when they don't, we can usually modify them and scrap a 50%+ gain out of them – as long as they aren't a total disaster.  

    Bad thinks/StJ – OMG, he's the only President that had bad things happen?  The auto industry Obama saved is giving him trouble?  Actually GM was $35 when he took office and $35 now but TSLA has added 2 GMs in market cap.  If not for nonsense like that – where would he be is the real question.  BA was $150 when he took office and now over 300, adding 1,200 points to the Dow.  Trump is such a whiner…


  14. Well, weak bounce it was and now we're going to test the lows.


  15. Speaking of FCX:

    Dollar flying – that's not helping.

    Palladium finally stopped going up:

    Gold coming back despite the Dollar rising – that's strong.

    $55 on /CL should be good for a bounce (tight stops below).  Should get back to $56.

    Hopefully we get another swing at /NG


  16. /RB – I'm long 2 at 1.577 wish I'd DD at $1.55 but it's coming back. 



  17. Al Gore: The Davos Interview



  18. Trump tapes help incriminate the President at his own trial





  19. Phil, I am looking at DIS questioning when it is wise to enter a new trade. Obviously I am looking more at 130, what do you think?


  20. Only got an 0.60 bounce off /CL but another chance to re-load:

    /RB/Dawg – I'm not that brave.  I like to have at least a holiday weekend coming.  Inventories were flat overall but better than 2 huge builds in a row:

    Crude inventory declines slightly

    • EIA Petroleum Inventories: Crude -0.4M barrels vs. -1.0M consensus, -2.5M last week.
    • Gasoline +1.7M barrels vs. +3.1M consensus, +6.7M last week.
    • Distillates -1.2M barrels vs. +1.0M consensus, +8.2M last week.

     

    Natural gas inventory draw in-line with estimates

    DIS/Yodi – My brain doesn't work that way.  I would want to see something really good, like $110-120 and, otherwise, why do I need DIS when there are other stocks that ARE on sale?  As much as I like DIS overall, $141 is $260Bn and they are not "only" dropping $10Bn to the bottom line for 2020 and MAYBE $11Bn in 2021.  It's not the kind of stock that will get to $13Bn in less than 5 years so buying it for $260Bn now says that, for the next 5 years, I can't imagine a market event that re-values stocks to 20x earnings.  Nope, no thanks…

    Year End 28th Sep 2014 2015 2016 2017 2018 2019 2020E 2021E CAGR / Avg
    Total Revenue
    $m

    48,813 52,465 55,632 55,137 59,434 69,570 81,350 86,571 7.34%
    Operating Profit
    $m

    11,435 13,171 14,202 13,853 14,845 14,459     4.80%
    Net Profit
    $m

    7,501 8,382 9,391 8,980 12,598 11,054 9,912 11,239 8.06%
    EPS Reported
    $

    4.26 4.90 5.73 5.69 7.23 6.25     7.93%
    EPS Normalised
    $

    4.29 4.92 5.79 5.70 6.94 5.01 5.43 6.13 3.17%
    EPS Growth
    %

    +19.5 +14.8 +17.6 -1.61 +21.8 -27.8 +8.41 +12.8  
    PE Ratio
    x

              28.7 26.5 23.5  
    PEG
     

              3.41 2.07 1.75  
     

    How about VIAC?  $37.22 is $23Bn and they should make around $3.3Bn this year and more next year. In fact, that's a good one for the LTP:

    • Sell 10 VIAC 2022 $32.50 puts for $4 ($4,000) 
    • Buy 30 VIAC 2022 $35 calls for $7 ($21,000)
    • Sell 30 VIAC 2022 $42.50 calls for $4 ($12,000) 

    That's net $5,000 on the $22,500 spread so the upside potential is $17,500 at $42.50 and the risk is owning 1,000 shares of VIAC for net $37.50 (about where it is now).  This is a first round, of course, we hope it gets cheaper and we can sell more puts and add more longs or widen the spread but, if it doesn't – we'll take the $22,500 as we should end up with at least 20 positions in the LTP (plus 20 naked short puts) – even in a "normal market" (we had more like 40 long positions in the last LTP.  

    Picard starts tonight on CBS All Access – I bet that will get it off the floor as people begin to notice their streaming service.  


  21. WHO does not declare China virus a crisis, so a bit of a relief pop.  


  22. WHO/Phil – yeah, that's good for the moment – but I'm still betting on a major measles outbreak in the US this month – the odds are going down, though, the further we get from all the holiday travel.


  23. We were talking about going for /NG pipeline plays and I am liking Plains All American (PAA) who have great growth and are dropping about $1.7Bn to the bottom line yet you can buy them for $13Bn at the moment due to a crushing sell-off. 

    They actually pay a nice 8% dividend ($1.44) too!  They sold off a portion of one of their pipelines to raise cash and that limits forward growth but only until they spend the cash to increase capacity so this is another case of silly, impatient traders giving long-term investors a bargain entry.

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Total Revenue
    $m

    42,249 43,464 23,152 20,182 26,223 34,055 33,300 34,053 35,603 -4.22%
    Operating Profit
    $m

    1,738 1,799 1,262 994 1,153 2,277 2,972     5.55%
    Net Profit
    $m

    1,361 1,384 903 726 856 2,216 2,982 1,717 1,597 10.2%
    EPS Reported
    $

    2.80 2.38 0.770 0.429 2.10 2.71 3.66     -0.655%
    EPS Normalised
    $

    2.80 2.38 0.770 0.429 2.10 2.35 3.57 2.14 1.99 -3.45%
    EPS Growth
    %

    -4.43 -15.0 -67.6 -44.3 +389 +11.8 +52.0 -8.76 -7.05  
    PE Ratio
    x

              7.74 5.09 8.48 9.12  
    PEG
     

                    1.32  
     

    For the LTP lets:

    • Buy 2,000 shares of PAA at $18.10 ($36,200) 
    • Sell 20 PAA 2022 $18 calls at $1.85 ($3,700) 
    • Sell 20 PAA 2022 $20 puts at $5 ($10,000) 

    That's net $22,500 and, over $20 (so the puts are worthless) we're called away for $36,000 plus we expect (starting 1/29) to collect $5,760 in dividends over 2 years so a potential gain of $19,260 (85.6%) makes this a fantastic dividend play though a lot of people would be happy with just the dividend (25.6% against the discounted stock).  


  24. Hi Phil – Could a rollback of federal water protections help NAK?  Thanks.


  25. I guess that's a theme in undervalued companies – they sell off assets.  GOOG, APPL, FB don't sell off assets but it's perfectly normal for Home Builders, Media Companies, Energy Companies…. to make strategic decisions to sell off assets to raise cash to buy other assets that fit their direction better.  Traders just don't understand that concept as it's outside their time frame of interest.  

    Trump complaining about GM reminded me that they are stupidly cheap.  The strike hit them in 2019 so they'll "only" make $7Bn but back to $9Bn this year yet, at $34.74, you can buy the whole company for $50Bn!  I'll take two please (and certainly if I can trade you one TLSA for 2 GMs!).

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Total Revenue
    $m

    155,427 155,929 135,725 149,184 145,588 147,049 144,810 137,986 146,179 -1.10%
    Operating Profit
    $m

    4,919 1,732 5,987 8,686 8,661 4,445 6,864     -2.01%
    Net Profit
    $m

    5,346 3,949 9,687 9,427 -3,864 8,014 8,970 6,978 8,948 8.43%
    EPS Reported
    $

    2.38 1.66 5.89 6.01 5.21 5.44 6.00     18.0%
    EPS Normalised
    $

    3.31 2.02 6.18 6.34 5.63 6.99 6.55 4.80 6.31 16.2%
    EPS Growth
    %

    -78.9 -38.9 +205 +2.56 -11.2 +24.3 -6.39 -31.3 +31.5  
    PE Ratio
    x

              4.99 5.33 7.27 5.53  
    PEG
     

                  0.231    
     

    For the LTP, let's:

    • Sell 10 GM 2022 $35 puts for $6 ($6,000) 
    • Buy 30 GM 2022 $30 calls for $6.80 ($20,400) 
    • Sell 30 GM 2022 $37 calls for $3.60 ($10,800)

    That's net $3,600 on the $21,000 spread that's $15,000 in the money at the moment (aren't options the best?!?).  Upside potential is $17,400 (483%).   Worst case is owning 1,000 shares at net $38.60 due to the aggressive put sale but then we'd sell more calls for $6.80 and our net would be $32 anyway.  I can sure live with that – especially if they keep paying that $1.52 dividend.  


  26. Speaking of undervalued companies, my precious is taking off:

    Related image

    I'm not going to let that get away (and I certainly don't need to reiterate my value proposition) so, for the LTP, lets:

    • Sell 20 LB 2022 $20 puts for $5 ($10,000) 
    • Buy 50 LB 2022 $17.50 calls for $6.30 ($31,500)
    • Sell 50 LB 2022 $22.50 calls for $4 ($20,000) 

    That's net $1,500 on the $25,000 spread so we have $23,500 (1,566%) of upside potential and, oh look – we're almost there already.  Don't you love options?  TOS says margin on 20 short puts is just $2,830 so this is an incredibly efficient use of margin.


  27. Thanks Phil for your comments


  28. You're welcome, Yodi. 

    NAK/1020 – It certainly won't hurt them.  They are already popping on that news, which is a shame as our Trade Exchange project is starting but with stocks only and I have to put together a stock portfolio and NAK was going to be on the list, of course.  

    At least LQMT is still under 0.10.


  29. Is anyone else having problems accessing servers?  Some things I look at are fine and others are giving me errors.  Maybe there's an outage somewhere?


  30. No problem in Spain


  31. I'm going to reboot then.  About half the sites I try to access are giving me errors.  


  32. Advill are you on board?


  33. Hi Phil, I'm having internet problems as well. 


  34. Phils is cranking out the possibilities!!


  35. Wow-they are not going to ever let this market correct. Amazing!


  36. Impeachment pandemic nothing is going to do it.


  37. The frozen north is still OK for access. Might be a Fla thing?


  38. OK, I'm back.  Something strange still going on but I don't think it's my computer.  

    Was watching CNN – Dems doing a great job using videos as witnesses and lots of powerpoints to make the case – good for consumption by average citizen and most of the videos are sworn testimony or Trump's own words so they are effectively trying him without the GOP being able to cross – that's a total backfire of Mitch's plan!  

    Not a Florida thing if Ilene has it too.  I have Comcast, but only until tomorrow as I'm switching to T fiber.  Not over this but something I planned weeks ago. 

    FXP coming down again, NOW it's $55 – still no fills.  

    Analysts are still swinging for the fences::

    Bank of America says its top 2020 energy sector pick could rally 80%

    • Occidental Petroleum (OXY -1.7%) is "the most compelling opportunity" in the broader energy sector for 2020, BofA Merrill Lynch says, but shares are lower nevertheless amid broad losses in the group today.
    • BAML believes OXY is poised to rally more than 80% due to the company's faster than expected integration of Anadarko.
    • While sentiment remains "fragile," BAML analyst Doug Leggate says the account provided by CFO Cedric Burger "is one where progress on capital and cost synergies is faster than planned," with upside risk in terms of both cost and revenue synergy not initially included in targets.
    • OXY's average Sell Side Rating and Quant Rating both are Neutral, while its Seeking Alpha Authors' Rating is Bullish.

    ORI is a nice, cheap dividend-payer (3.5%).

    Other value stocks we'll look at more closely for the LTP:  SFTBY, JCI, MET, UAL, ALLY, DAL, KHC (again), COP, LEN, COF, FITB, SCGLY, VMW, CM, STX, DELL, C – that's my short list at the moment.


  39. I'm going back short on /NQ at 9,265 - just one to see what happens.







  40. Seeing a Bloomberg Ad on Fox News, Trump Takes the Bait


  41. China locks down 14 cities as Wuhan coronavirus spreads