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Faltering Friday – Coming to the End of a Weak Week

We're in danger of having a down week.

We opened on Monday at 3,321 on the S&P 500 and we closed last night at 3,325 so it won't take much for us to dip under and close the week in the red.  As you can see from the chart, if not for that silly gap up into Wednesday's open (which we shorted!), it's doubtful we'd be even close to green now.  

Speaking of shorting, our current position is 2 short Nasdaq (/NQ) contracts at an average entry of 9,271.50 and I'd be more likely to add to them if they go higher than stop out ahead of the weekend with China now "locking down" 40M of their citizens (only 2.5%) with travel restrictions on 10 cities as cases have now spread to 32 of China's 34 provinces.  The markets got a boost yesterday when the WHO decided NOT to declare a Global Emergency (yet) but that's only because the virus has, so far, been fairly contained to China – for now, I'd rather be safe than sorry with our hedges (see yesterday morning's PSW Report).  

relates to China Locks Down 40 Million People as Anger Grows Over VirusAs noted by Bloomberg:  The turmoil comes as the virus stymies efforts to track infected patients. While the death toll continues to rise — and now includes someone as young as 36 — some infected patients aren’t showing a fever, a symptom governments around the world have been using to screen for the pathogen.  Even Disneyland in Shanghai is closing down so it might be time to short Booking (BKNG) again – though we already missed a 5% drop.

I'm not a doom and gloom kind of person but, to put it in perspective, in a usual year, about 30M people around the World get the flu and 60,000 people die (0.2%), mostly people who are old and sick in the first place (not that that makes it better but it's understandable).  So far, out of 830 confirmed cases, 26 people are already dead (3%) but, more alarmingly, over 100 people are in critical care units in hospitals – and some of them are young people.

It's the way the Governments are scrambling that makes me think this is serious but it's a good thing that they take it seriously and jump right into measures to contain a virus.  Unfortunately, like hurricane preparation, they often pass without much incident and that makes people jaded to future alerts and complacency is the biggest problem the Government faces in these cases as you must have the people's cooperation to make containment work.

Chinese officials led by President Xi Jinping pledged “all-out” efforts to contain the outbreak this week. The government on Friday vowed to punish officials who delay virus information, with the State Council setting up an online platform to allow the public to report disclosure problems.  “This is unprecedented in China, and maybe even in the history of modern health,” said Yanzhong Huang, director of the center for Global Health Studies at Seton Hall University in New Jersey, of the widening travel restrictions. “It’s a tremendous legal, institutional, not to mention logistical challenge.

The image above is the construction of a 1,000 bed hospital in Wuhan, the center of the infections.  China began construction yesterday with 7,000 workers and plans to have the hospital up and running next week – that's incredible!  

On the dark side, of course, if they are building a 1,000 bed hospital in such a rush – it doesn't seem like they are very confident that this thing is contained, right?  

Image

China is so cool sometimes!

Image

3M (MMM) makes masks, as does Johnson and Johnson (JNJ).  MMM is a better bargain at $177.74 and they should have a good quarter so the April $180 calls at $5.80 are a fair price and I'd take 1/2 off the table at $8 and put a stop on the rest at $7 but hopefully they hit $11 on a 5% move up in the stock.  

All this has been a fantastic distraction from Trump's Impeachment but that's nothing compared to next week, when Trump unveils his Mideast Distraction Peace Plan to drown out the closing arguments in his trial (the one with no evidence and no witnesses being allowed).  

These are, as the Chinese say, interesting times.  

Have a great weekend, 

- Phil

 


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  1. Good Morning!


  2. Winston are you on board?



  3. The head of the CDC was on last night saying no need to panic everything is under control. Then we watched BBC America and PBS and saw what the health care workers have to do to"decontaminate" after contact with the patients. They look like hazmat units and must burn the coverings after stripping down  and washing. Didn't look like we can believe anything that comes out of any governmental officials mouth anymore when the stats prove otherwise. No wonder people are getting so cynical and angry.


  4. Good morning!

    Sichuan-based Hengming Medical Devices Co. said its entire inventory of 100,000 surgical masks sold out within an hour on Alibaba Group Holding Ltd.’s T-Mall e-commerce platform Wednesday and that their staff would work through the holidays. Alibaba said it has around 46 million masks in stock sold by merchants on its platforms, which are able to supply another 1.57 million ahead of the Lunar New Year. Around 80 million masks have already been sold on Jan. 20-21 alone, the company said.

    Investors rushed to take advantage of the shortages. Shenzhen-listed shares of face-mask maker Tianjin Teda rose 40% this week, the company’s biggest weekly gain on record.

    A woman answering the phone in the communications office of Wuhan’s Wuchang Hospital said staff there were hungry for basic supplies, including disposable protective clothing, protective glasses, latex gloves, rubber boots, shoe covers and disposable round caps.

    Local authorities urged citizens not to panic or hoard supplies, saying the city had sufficient reserves of food and protective clothing.

    Zero Hedge says people are dying in the streets.  Not sure if that's true but you can see why people are panicking.  

    Embedded video

    Embedded video

    It does say right on our money that it's good for "all debts, public and private" so NYC does have a point.  

    Mortgage rates fall to the lowest level in three months — but this is a double-edged sword for home buyers.

    The Real Umbrella Corp: Wuhan Ultra Biohazard Lab Was Studying "The World's Most Dangerous Pathogens".

    it was brought to our attention that in February 2017, Nature penned an extensive profile of what it called the "Chinese lab poised to study world's most dangerous pathogens." The location of this BSL-4 rated lab? Why, Wuhan.

    A quick read of what this lab was meant to do, prompts the immediate question whether the coronavirus epidemic isn't a weaponized virus that just happened to escape the lab:

    The Wuhan lab cost 300 million yuan (US$44 million), and to allay safety concerns it was built far above the flood plain and with the capacity to withstand a magnitude-7 earthquake, although the area has no history of strong earthquakes. It will focus on the control of emerging diseases, store purified viruses and act as a World Health Organization ‘reference laboratory’ linked to similar labs around the world. “It will be a key node in the global biosafety-lab network,” says lab director Yuan Zhiming.

    The Chinese Academy of Sciences approved the construction of a BSL-4 laboratory in 2003, and the epidemic of SARS (severe acute respiratory syndrome) around the same time lent the project momentum. The lab was designed and constructed with French assistance as part of a 2004 cooperative agreement on the prevention and control of emerging infectious diseases. But the complexity of the project, China’s lack of experience, difficulty in maintaining funding and long government approval procedures meant that construction wasn’t finished until the end of 2014.

    The lab’s first project will be to study the BSL-3 pathogen that causes Crimean–Congo haemorrhagic fever: a deadly tick-borne virus that affects livestock across the world, including in northwest China, and that can jump to people.

    Future plans include studying the pathogen that causes SARS, which also doesn’t require a BSL-4 lab, before moving on to Ebola and the West African Lassa virus,

    What does BSL-4 mean?

    BSL-4 is the highest level of biocontainment: its criteria include filtering air and treating water and waste before they leave the laboratory, and stipulating that researchers change clothes and shower before and after using lab facilities. Such labs are often controversial. The first BSL-4 lab in Japan was built in 1981, but operated with lower-risk pathogens until 2015, when safety concerns were finally overcome.

    And here's why all this is an issue:

    Worries surround the Chinese lab. The SARS virus has escaped from high-level containment facilities in Beijing multiple times, notes Richard Ebright, a molecular biologist at Rutgers University in Piscataway, New Jersey.

    Below we repost the full Nature article because it strongly hints, without evidence for now, that the coronavirus epidemic may well have been a weaponized virus which "accidentally" escaped the Wuhan biohazard facility.

    Fun!

    AVGO at $331 ($131Bn) drops $10Bn to the bottom line so reasonable and I'm torn as they only do $25Bn in sales so even if AAPL deal is over 3 years, it's significant but no way AAPL is letting AVGO make 40% profits on the stuff they sell.

    In this case I'd say I'd love to own them for $250 and leave it at that so we can sell 5 of the AVGO 2022 $250 puts for $27 and pocket $13,500 in the LTP.  TOS says only $5,848 in margin so very efficient but that margin can crank up if they drop more than 10%  – keep that in mind.


  5. Russell already took a sharp turn down.  /NQ 9,275 supported by INTC but I'm going to add /YM at 29,215 (2) shorts. 


  6. AXP also popping the Dow (50 points), BA adding 35 points, INTC chipping in 40 points, that's 125 of 90 points being added by those 3 components. 


  7. Is the market even open?

    Date Open High Low Close* Adj Close** Volume
    Jan 24, 2020 330.63 332.52 332.00 332.20 332.20 2,799,167
    Jan 23, 2020 330.63 332.17 329.41 331.72 331.72 51,907,400
    Jan 22, 2020 332.24 332.95 331.17 331.34 331.34 48,914,900
    Jan 21, 2020 330.90 332.18 330.82 331.30 331.30 77,742,400
    Jan 17, 2020 331.70 332.18 330.85 331.95 331.95 95,846,000
    Jan 16, 2020 329.70 330.92 329.45 330.92 330.92 54,050,300
    Jan 15, 2020 327.35 329.02 327.26 328.19 328.19 72,056,600
    Jan 14, 2020 327.47 328.62 326.84 327.45 327.45 62,832,800
    Jan 13, 2020 326.39 327.96 325.92 327.95 327.95 47,086,800
    Jan 10, 2020 327.29 327.46 325.20 325.71 325.71 53,029,300
    Jan 09, 2020 326.16 326.73 325.52 326.65 326.65 48,473,300
    Jan 08, 2020 322.94 325.78 322.67 324.45 324.45 68,296,000
    Jan 07, 2020 323.02 323.54 322.24 322.73 322.73 40,496,400
    Jan 06, 2020 320.49 323.73 320.36 323.64 323.64 55,653,900
    Jan 03, 2020 321.16 323.64 321.10 322.41 322.41 77,709,700
    Jan 02, 2020 323.54 324.89 322.53 324.87 324.87 59,151,200
    Dec 31, 2019 320.53 322.13 320.15 321.86 321.86 57,077,300

  8. Yodi – I'm on board – apologies for my absence yesterday, I was distracted. Thanks for posting the update on the AAPL trade you are tracking – but was that my idea of a setup? It seemed to be working. 

    The TSLA short strangle with upside protection looks even more interesting – for the moment.


  9. Hmm. Well, on the "everybody calm down" side of things, early in these epidemics – and often late in them – the patients that are getting diagnosed are those who are sick enough that they need to be admitted to a hospital. The first MERS paper out of Arabia counted only patients who were sick enough that they were in the ICU – so the fatality rate was something like 68%. Who knows how many people were out there with subclinical disease.

    Later you'll get the frightened people with very light symptoms showing up. The problem with all these corona viruses is that the symptoms are not diagnostic: a blood test is needed. You can't economically test all of the sniffles cases, so the most serious cases are the only ones tested.

    All-in-all, estimates of incidence and mortality rate are strongly biased. The incidence is probably a lot higher than estimated unless public health authorities are counting symptomatic cases (in which case it will be a lot lower) and the mortality rate, as the denominator is ICU patients, will be a lot higher.


  10. On FXP, I did fill 5 short Sept $50 puts at $4.136 but no luck on the long calls or short calls or CHL puts so far.  I flipped to Sept (LTP) as the Junes were not filling and this was close to the price so I don't mind the 3 months.  

    That doesn't sound that much better, Snow…  blush


  11. Winston I did set up some similar plays like the AAPL and I find they all work on the up side but if the stock should go down they have no protection. Setting it up on a simulator.


  12. Made a quick $1,120 on /NQ so that's off the table and I'm letting /YM ride.


  13. /NL – Nice Phil.


  14. CTL / Albo – I got to say, none of these telcos inspires a lot of confidence as far as being well run business:

    https://arstechnica.com/tech-policy/2020/01/centurylink-frontier-took-fcc-cash-failed-to-deploy-all-required-broadband/

    CenturyLink and Frontier Communications have apparently failed to meet broadband-deployment requirements in numerous states where they are receiving government funding to expand their networks in rural areas.

    And that goes for the big guys too! I guess if we had more competition, we might get better services and more honest companies. And better prices as well…


  15. Virus / Phil – If that doesn't kill us, polluted water will:

    https://earther.gizmodo.com/the-trump-administration-just-gutted-clean-water-protec-1841184727

    The Trump administration’s Environmental Protection Agency (EPA) and Army Corps of Engineers just removed federal protections for hundreds of thousands of small waterways and many of the nation’s wetlands. Later today, EPA administrator Andrew Wheeler will announce the change at a conference of the National Association of Home Builders, an industry group that pushed for loosening clean water rules.

    This is great news for those polluting corporations, such as fossil fuel producers, real estate developers, and Big Ag. They can now dump pesticides into many more waterways and build over many more wetlands with impunity.


  16. Spot VIX still under 14! No one is really worried yet! 


  17. Phil:

    Seems like more hedges would be in order in case news breaks out over weekend?


  18. cbc news Canada reporting second confirmed case corona virus in usa Chicago.


  19. Ive got a nephew that lives in China and he says virus outbreak is way worse than being reported.  FYI


  20. YM stopped out with $1,000 so all good.  Should have done better but I wasn't paying attention at 29,100, which was obviously going to bounce.   .

    Hedges/DC – The market is just so strong I hate to waste the money.  We have SQQQ already and that's our biggest loser.

    Virus/Wilsons – That ZH article above has actual videos of people just falling down on the streets.  Could be really bad.  As I said, when you see that kind of mobilization – it's not a drill.  


  21. hopefully not true

     

    cbc says a third confirmed case in usa and that these reports are coming from a senator


  22. Phill// I received an email for an urgent cash call for PSWI investment.  Not sure if others have received it as well since a friend of mine who had invested didn't receive a similar email.  Also, it looks like the PSW Investment the second round looks like it will be a down round.  

    Thanks.


  23. Trump ups mileage proposal, but it’s well below Obama plan


  24. Tesla Stock To $0?


  25. Plague – people falling over in the streets? This is very strange. Makes me wonder if perhaps someone is cooking something alarmist with an eye to shaking up China. Hong Kong opposition, maybe? Very odd. Corona viruses don't act like this.


  26. Cartoon: Join the Trump legal defense team!







  27. Winston/TSLA – Which one are you referring to in your comment below?

    The TSLA short strangle with upside protection looks even more interesting – for the moment.


  28. Virus/Tommy – As I said yesterday, if there's a confirmed case in the US, that person came through an airport with thousands of people – it's out there baby!

    PSWI/Rookie – Not really the place to discuss it but yes, we are short on cash and asking for more to get the Michigan operation off the ground (we have over $1M in POs but not enough cash to buy product and packaging to fill the order) and we're offering shares to existing shareholders at a lower price so they don't get diluted.  Your friend should have gotten the same note you did but please contact Greg or me via Email (or my phone number was right on the note).

    Corona/Snow – Well people could think they have the flu and overdo it and pass out but, if those are real videos, one is worrying, two is alarming and 3 is time to leave the country!  Did you see the Zero Hedge article above about it possibly being an escaped weaponized virus?  Oh well, our species had a good run, time for the rats to take over – it's their year anyway…

    Remember, China markets will be closed for all of next week – I say 1,000+ easy by tomorrow, 2,000 on Weds and at least 3,000 infected by Friday – I wonder where they'll open the following Monday? 

    Look at Buffett and Napolitana above – is there some sort of public speaking course that teaches people to put up their hands like that?

    TSLA with a nice dip, finally.  

    Tesla Stock To $0?

    Someone had to say it! 


  29. Oops, I filled the FXP short June $65 puts at $2.50 but not the longs and it's blasting up.  We wanted to buy 20 June $50 calls for $7 and they are over $8 now so we could do the $52s instead and it would be the same net $4,850(ish) but only a $26,000 spread – I think we can live with that adjustment in the LTP. 


  30. YUMC hanging in there considering the poor people in Asia are dropping like fainting goats in the streets.


  31. Wow, first mention of impeachment all day on CNBC.  


  32. Trump is complaining that his defense will come on the weekend, when the ratings are low.  I don't think he understands that McConnell purposely scheduled it that way because his defense is obviously and embarrassing farce and they certainly don't want to draw attention to it.  


  33. Dems have a lot of well-spoken Senators.  I guess a lot of them used to be lawyers.  


  34. Oops, Representatives, the Senators are the "jury". 


  35. Phil – what would be a play with SQQQ if I want to open a new hedge through June of this year. Or any ticker (or VIX) to hedge for that matter for the next 6 months. Thanks.


  36. VIX/Vkat – The problem with VIX is you have to really hit the date on the nose as long options don't track short-term volatility very well – that makes it very dangerous and the churn decay is ridiculous on the ETF.

    SQQQ would have been better to ask me this morning – 100 points higher on /NQ (where we shorted it, you're welcome!) but, as a new hedge, I'd go with:

    • Sell 10 SQQQ 2021 $19 puts for $4 ($4,000) 
    • Buy 40 SQQQ June $18 calls for $3 ($12,000) 
    • Sell 40 SQQQ June $24 calls for $1.60 ($6,400)

    That's net $1,600 on the $24,000 spread that's $5,600 in the money to start so you can only lose if the Nasdaq is higher and then your longs should make up for it.  Worst case is you own 1,000 SQQQ at net $20.60, 5% over the current price and, of course rollable long-term protection but you can substitute any stock you REALLY want to own for the short puts (see yesterday's list of value stocks I like).  

    Oh dear, things are getting worse, aren't they?


  37. I still like the SQQQ spread we rolled to in the STP last week:

    SQQQ Short Put 2021 15-JAN 20.00 PUT [SQQQ @ $19.51 $0.54] -15 1/17/2020 (357) $-6,900 $4.60 $0.15 $-4.60     $4.75 - $-225 -3.3% $-7,125
    SQQQ Long Call 2021 15-JAN 17.00 CALL [SQQQ @ $19.51 $0.54] 60 1/17/2020 (357) $29,100 $4.85 $0.20     $5.05 $0.45 $1,200 4.1% $30,300
    SQQQ Short Call 2020 19-JUN 20.00 CALL [SQQQ @ $19.51 $0.54] -40 1/17/2020 (147) $-9,200 $2.30 $0.18     $2.48 $0.38 $-700 -7.6% $-9,900

    Down and down we go.  Should have support here at 9,100 on /NQ, 1,650 /RTY, 3,280 /ES and 28,800 on /YM but wow – what a dump!


  38. vkat – TSLA reference here


  39. …….. and Yodi referenced it here


  40. Wow, those bounces were easy to call. 

    Been a good week for Futures trading!


  41. Looks like the virus is doing a number on IMAX: 

    https://www.marketwatch.com/story/imax-to-postpone-chinese-new-year-film-slate-in-china-after-coronavirus-outbreak-2020-01-23?siteid=yhoof2&yptr=yahoo

    Its the biggest holiday season in China and nobody wants to be in small enclosed spaces for long periods of time.


  42. IMAX/Kinki – Yeah, very bad timing.

    Well, it makes for a nice entry.

    So we're finishing near the lows and China is closed next week, which is the busiest earnings week of the Quarter and there's probably plenty of data since there wasn't much this week.

    Have a great weekend, 

    - Phil


  43. Winston

    Intersting My play was buy TSLA stock @ 465.00 now 560.00 credit 95.00 up

    Feb strangle 390/480 credit then 37.97 cost now 96.90 debit 58.93. So the run with the stock gives now a net credit of 46.09.

    How did your's turn out.?


  44. Yodi

    sell Feb 21 $475 straddle for $70 and then protecting the upside by BUYING the Feb 21 $485 call for $28.50. 

    That caps your upside risk to $10 – so you get to keep $70 – $28.50 = $41.50 as you pray for a short squeeze and then you got $41.50 to protect yourself on the downside.

    At the moment – the position makes $41.30 – $10 (for the short $475 / $485 spread) – so net $31.10.

    As my grandfather used to say – better than a kick in the teeth. 

    And you get to sleep at night.

    But like all virtual trades it remains potentially brilliant – but only in your dreams.

    Your trade was also nicely setup. Both trades confirm the rule – don't short MOMO stocks.

    Wise man once said: short sellers on MOMO stocks eat like chickens and s**t like elephants.


  45. Winston Good comment and good night.


  46. Phil's hedge rule of thumb- can someone refresh my memory on this- if I want to mitigate a potential 20% drawdown do I set up a trade to try to recover all the loss of just a portion of it? 








  47. ‘This is huge’: Locust swarms in Africa are worst in decades



  48. Things are moving around EV´s, the first to crack the nut of heating/energy density/thermal runaway/charge time will also ruin all the other car companies. any company including Tesla could go to 0  

    https://www.ibm.com/blogs/research/2020/01/next-gen-lithium-sulfur-batteries/


  49. Just read a study on the corona virus that puts its basic reproduction rate (R0) at 3.6 – 4 which means an infected person will on average infect another 3-4 people.  Which pretty much makes it more infectious than SARS and MERS were.  Even with a complete quarantine in Wuhan the study estimates only a ~25% reduction in infections outside of Wuhan.  It also estimates that only 5% of total infections have been identified in Wuhan.  In other words, it seems this will be hard to contain and our only hope at the moment is in a vaccine.

    Study here: https://www.medrxiv.org/content/10.1101/2020.01.23.20018549v1.full.pdf

    Just something to keep in mind in regards to markets, economics and volatility for the following weeks.  



  50. AP fact check: Trump’s impeachment defense


  51. Scientists race to find out how Wuhan victims became ill


  52. In recording Trump asks how long Ukraine can resist Russians


  53. Already over 2,000 people infected now – that was my prediction for the whole weekend – NOT GOOD!

    56 dead (2.8%).

    Likely to be 3,000 by tomorrow's open – hopefully not more or it's accelerating.


  54. Futures.very ugly.  


  55. How Under Armour Lost Its Edge





  56. 6 Revelatory Moments From the Video of Trump’s Private Donor Dinner




  57. 3000 / Phil – I wish, but why would you think that?

    1. It's a Monday, the market is never down on Mondays.

    2. Trump clearly has a direct line to the Plunge Protection Team.

    3. Any 1% dip puts the bots on Buy Buy Buy trigger.

    4. Just wait until Cramer hits the TV and describes this "incredible opportunity"…


  58. Good morning (not really)!

    I was talking about 3,000 cases, Mr. M, not S&P 3,000….

    Markets are down more than 1% and Kobe is dead – what a way to start the week.