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Monday Market Mayhem – Viral Outbreak Infects Global Markets

Image result for spanish flu animated gifGlobal markets are down more than 1%.

Chinese markets are closed for the holidays or they would be down too as about 3,000 people are now infected by the coronavirus and it was 1,000 when I warned about it on Thursday so we're close to 50% daily increases in infections and we still aren't clear on the incubation period of the virus and we have no treatment for it either.  That is, as we say in the medical community – NOT GOOD!  

Unfortunately, the breakout is imitating the pattern of the Spanish Flu (influenza), which devastated the planet, ultimately infecting 500M people and killing 25M (5%) of them in 1918.  Even with our much more modern medicines, the death rate on the coronavirus is at 3% but modern medicine comes at a price and hospitalizations quickly run into thousands of Dollars and even if 500M people can be treated for $2,000 (mostly not in hospital, of course), we're talking about $1Tn of emergency aid required (1% of Global GDP) - plus money that needs to be allocated to prevention, education and support.  

Members of a military medical team were deployed to Wuhan on Sunday.

Do you have an extra $1,000,000,000,000 set aside in case of emergency?  We'll find out who does and who doesn't as China has already pledged $9Bn to help contain the virus and, if you do the math, that's $3,000 per infected patient in a country where health care costs are 1/4 of what we spend in the US.  Let's hope the infections level off soon but there's not likely to be a quick fix to this thing and, even in the best case, China is shut down for 2 weeks and that's going to hit the GDP for about $400Bn (2.8%) – so the effect on Global Markets will be lingering.

Speaking of $400 (M in this case) – it turns out Trump DID specifically and directly tell John Bolton, way back in August, that he was withholding military aid to the Ukraine unless they agreed to investigate Joe Biden.  Since Trump's own lawyers have said that the only way he should be impeached is if you could directly tie him to such a statement….  No, just kidding – he'll still be found not guilty by GOP Senators in this farce of a "trial" (and farce of Democracy).

Medical staff in protective clothing at the Red Cross Hospital in Wuhan, central China, the epicenter of an outbreak of viral pneumonia.Still, the possibility of Trump's impeachment adds to the Global uncertainty and 56M people now quarantined in China with lockdowns on travel, etc. have sent oil prices spiraling down.   Quarantine laws – from the Italian “quaranta giorni,” meaning 40 days -were first developed in Venice in 1370, to keep the bubonic plague at bay by banning any ships and goods for the time it seemed to take most epidemics to burn themselves out.  European nations reinforced quarantines with “cordons sanitaires” - a ring of armed guards preventing the entry or exit of anyone deemed or feared ill with an epidemic disease.   

I'm not looking to fear-monger here but I also don't want people to be complacent.  There's not much you can do to avoid the flu (as we are all well aware from years of experience) but we can prevent our portfolios from being hospitalized by taking this outbreak seriously and making sure we are well-protected in case the situaiton worsens and drags the markets down 10% or more.  

We already have SQQQ hedges in our Short-Term Portfolio, as well as our Earnings Portfolio and on Friday, in our Live Member Chat Room, someone asked what SQQQ position I would take for a new trade to cover a $100,000 portfolio and I said:

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).  

That /NQ (Nasdaq Futures) short, by the way, was from the PSW Morning Report on Friday morning, where we took 2 short positions at 9,271.50 and I said at the time: "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./NQ is now at 8,978.50 and those two contracts are up $11,720 ($5,860 each) – you're welcome!

Remember, I can only tell you what is likely to happen in the markets and how to profit from it – the rest is up to you!

Consider 9,000 the stop line to lock in those gains or, if you went with our Dow Index (/YM) shorts (from our live Chat Room) at 29,215, the stop there should be 28,500 to lock in gains of $3,575 per contract on those.  Remember, we use the Futures to supplement or even sometimes to counter our primary index hedges overnight, when the market is closed but we feel the situation is changing or intraday – when we want to react to news but feel the situation may change too quickly to bother setting up an options spread.  Once the markets actually open, the hedges can protect us adequately and it's good to cash in our Futures plays – since they can quickly be put back on if needed.

Meanwhile, $52.50 is the magic line for Oil Futures (/CL) as it's a bit of an over-reaction and you know OPEC isn't going to put up with sub-$60 oil for very long so /CL can be played long here with tight stops under the line and, if oil is still low at the open, we can set up a nice Oil ETF (USO) play for our Short-Term Portfolio (STP) using the July contracts, something like this:

  • Sell 10 USO July $11 puts for $1 ($1,000) 
  • Buy 30 USO July $10 calls for $1.40 ($4,200)
  • Sell 30 USO July $12 call for 0.60 ($1,800) 

That's net $1,400 on the $6,000 spread so the upside, at $12 or better in July, will be $4,600 (328%), which should help pay for those higher gas prices by then.  Speaking of gasoline, /RB hit $1.44 and that's a tempting long as well but I think Oil is the easier play at the moment and we're already long on Natural Gas (/NG), which is now back at about $1.96 despite the drop in oil.

There's a lot of data this week and a Fed Meeting on Wednesday, so no Fed speakers other than Powell at 2:30 on Wednesday.  Before that we have New Home Sales and the Dallas Fed this morning, Durable Goods, Redbook, Case-Shiller, Consumer Confidence and the Richmond Fed tomorrow followed by Inventories, Mortgage Applications, Investor and Business Confidence on Wednesday.  After the Fed it's GDP Thursday and Friday is still busy with Personal Income and Outlays, Chicago PMI and Consumer Sentiment:

It's also the peak of earnings season, with over 200 (40%) companies in the S&P 500 reporting, including:

Image

Meanwhile, there may or may not be a Boeing plane crash in Afghanistan this morning – news reports are conflicting but BA stock is down 2% at about $315 – might be a good chance to sell puts as the $300 line has held tough!

BA 2022 $270 puts can be sold for $30 and that nets you in for $240, which is 20% below BA's current price – it's a reasonable entry point and you collect $3,000 per contract against $1,800 in margin – so it's efficient as well.  

 


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  1. I suspect we will see some test of our new lines soon!


  2. Trump / Phil – There is one reason he has trouble finding good lawyers (I mean ones that don't want to be caught lying) is because he cannot be trusted to even tell them the truth. His defense team has been making a case that has now been demolished overnight probably because he lied to them (and they also don't care about the truth anyway). As you say, won't make a difference. The GOP will say that even if true, it's not impeachable. Until they impeach a Dem president for jaywalking!


  3. These epidemics can have a big impact – look at SARS:

    https://www.hindawi.com/journals/jeph/2018/2710185/

    The global macroeconomic impact of SARS was estimated at USD 30–100 billion or around USD 3–10 million per cases. The 2003 SARS outbreak caused losses of USD 12.3-28.4 billion and an estimated decrease of 1% in GDP in China and 0.5% in Southeast Asia. 



  4. Very interesting discussion:

    https://www.weforum.org/agenda/2020/01/cities-mayors-not-nation-states-challenges-climate/

    One reason cities are so important is that they are economic powerhouses and generate an increasingly significant proportion of national GDP. In the U.S., for example, 10 of the country's biggest metropolitan areas generate over a third of the country's GDP. The New York metropolitan area alone generated more economic output than Canada. Meanwhile, Los Angeles ?s almost rivals Mexico and Chicago is larger than Switzerland, economically speaking. Outside of the U.S., Seoul accounts for over half of all South Korea´s GDP, Tel Aviv just under half of Israel's, and London, Paris and Tokyo for a third each in those countries.

    Cities are busily redefining the parameters of international statecraft, pursuing ever more entrepreneurial forms of city diplomacy. For one, cities are growing more assertive as diplomatic agents. From China and India to Nigeria and Brazil, cities are setting-up trade and investment promotion offices and commercial ventures to attract investment. They are also forging municipal foreign policies, strengthening bilateral relations, and launching city networks on everything from cultural and scientific exchanges to welcoming refugees and providing humanitarian relief. On the other, cities, are forging collaborative networks, pooling their resources to make the voices heard on the global stage.


  5. Good Morning!


  6. Phil// Any suggested trades on IQ?  I also missed the previous trade suggestion on CHL.  So I'd like your thoughts on that as well.

    Thanks.


  7. Sold some VXX Jan 21 30 calls. I usually like to get $2.50 per contract but with VXX at $15, it's too close for confort to get that much. VXX at $30 means the VIX around 70. So pretty safe although as Palotay said, in 1987, we went over 100. These would roll to the Jan 22 50 calls. which would be the VIX around 200! That's zombie apocalypse trigger there.


  8. Still going small though as there might be other legs down based on news from China! Layering is the way to go I think.


  9. I sold some too STJ, but too chicken to go to a full position. I covered with March $50 vix calls. I intend to double down if we hit 25 on the vix. 




  10. Mike Bloomberg As the Great White shark


  11. Why is Bernie Sanders surging?


  12. Methodology



  13. Phil

    Is OXY a good stock to add to the dividend portfolio

     Thanks


  14. VXX / Palotay – These are no times to be too brave!


  15. Good morning!

    Easy money on oil already.  If you played the Futures and USO, it's best to keep tight stops on the Futures and let the options play ride.  

    Big Chart 3,233 was the /ES low from 3,330 so 100 points is 3% off the top and that's going to coincide with:

    • Dow 29,250 less 2.5% is 28,500 (rounding) and less 5% is 27,750

    • S&P 3,330 less 2.5% is 3,250 and -5% is 3,180 

    Nas 2,975 less 2.5% is 2,900 (not even rounded) and then 5% is 2,825

    • Russell 1,695 less 2.5% is 1,650 and we'll call -5% 1,600.

    So, using those we can calculate the bounce lines off the -5% lines and that will give us a really good idea of where to expect support and resistance lines to form up.

    Cities/StJ – Good point.  

    Looks like we picked the wrong month to put all our eggs in China:

    IQ/Rookie – That's nothing like CHL.  CHL is a service provider to half the population, IQ is a content distributor.  $22 is $16Bn and, if you give them $16Bn now, they promise to lose $18.2Bn in the next 18 months.  Enjoy!  

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

        5,319 11,237 17,378 24,989 28,524 28,616 33,761 67.5%
    Operating Profit
    CNYm

        -2,428 -2,789 -3,953 -8,306 -10,054      
    Net Profit
    CNYm

        -2,575 -3,074 -3,737 -9,110 -11,306 -10,828 -7,421  
    EPS Reported
    CNY

    0.000 0.000 -6.95 -11.2 0.177 -13.0 -15.5      
    EPS Normalised
    CNY

    0.000 0.000 -6.95 -11.0 0.691 -12.8 -15.5 -14.9 -9.74  
    EPS Growth
    %

                       
    PE Ratio
    x

                       
    PEG


  16. OXY/QC – I think I said it was getting interesting but then I remembered what I said to Yodi in Nov:

    OXY/Yodi – As you know, I don't care what other idiots paid for a stock – only if I see the value currently.  OXY at $38.13 is $34Bn as a fairly traditional oil company.  Since 2014 they've netted about $0 and they lost $900M last Q after making $630M each in Q1 and Q2 so net $360M so far this year.  I'ts not like they make more at Christmas so even $1Bn puts them around $1.4Bn for the year so 27x earnings is RIDICULOUS for an oil company – I wish I had had the balls to call shorts when they (all of them) were double the current price in the spring but 50% off 60x earnings still isn't a bargain to me! 

    2018 was anomalous and was extrapolated into 2019 and that failed and then they decided to buy Anadarko, causing Icahn to dump 1/3 of his shares, threaten proxy fights, etc.  That's a stay-away to me:

    They flew up since then as Icahn has been manipulating it while he sold his shares off but he's done now and we'll have to see where their real floor is.  

    These are the dividend payers/value stocks I do like:

    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.

    Certainly I'm in no mood to commit capital today.  If we're down on the virus and it's scientifically impossible to have a cure in less than 3 months (and that would be amazing) then certainly that's not going to be resolved and there's no indication so far that it's contained so why would I buy the bounce when the underlying conditions are not improving?

    Maybe Trump's Mid-East Peace Plan will turn the tide?  devil

    Image result for trump mid-east peace plan cartoon


  17. Today is a good day for my short calls to recuperate. Good to buy back the calls which show a 95% profit, so you can sell the same for a better price tomorrow!


  18. Now both Disney parks in China have closed! I don't see how this doesn't have a big economic impact!


  19. Palotay/VXX – You said:
    I sold some too STJ, but too chicken to go to a full position. I covered with March $50 vix calls. I intend to double down if we hit 25 on the vix. 

    Did you sell Jan 21's $30 calls and covered them with Mar 2019 $50 Calls?

    Thanks


  20. STJ DIS down to 136 Phil likes them at 110 115 long way to go with still a lot of closings, But for them and the world population I hope NOT!!!!


  21. Vkat/VXX – That's correct.  I'm also short some $28 and $35 2021 VXX calls as well.  All covered by Feb and March $50 Calls (which were super cheap).  


  22. Palotay/VXX – Thanks.


  23. Agree with you, Venice invented the practice being a trade and maritime republic, had arrivals of ships all over the Mediterranean, Adriatic and Baltic, they were not sure what was happening but decided that everything, persons, animals and good arriving at the city had to stay in Poveglia (an island in front of the city where 50% of the island are human and animal bones) the 40 days arrived as an empiric number (there were no more deads after that period), it´s funny all the Chinese here are using masks the rest of the people don't.  


  24. Phill/  Clarification on IQ and CHL.  I was asking for any suggested trade ideas for IQ and also for CHL.  I just sold naked puts on CHL Sept. 45 at $4.00 apiece.

    Thanks.


  25. DIS  / Yodi – Good support at 110, but that would reflect a much higher panic level I think. I certainly hope we don't see that. But like many others, DIS is not historically cheap (what is?) so maybe we do see these prices again.


  26. VIX / Palotay – I like the idea of the long VIX calls but it would be expensive to hedge the VXX position completely. I would see it more like a way to pay for the rolls and get margin breathing room.


  27. Also, I wonder about the value of adding long dated VIX calls rather than shorter dated ones – like the November ones. Might be cheaper and you can protect multiple sets of VXX sales. Something to be tested – these options don't price completely like traditional options because of the way that the VIX moves. 

    I imagine that a couple years from now, we'll have a tuned strategy together!


  28. Short calls/Yodi – Good plan.

    IQ/Rookie – My idea for IQ is to stay away.  For CHL, we already have a play on it in our Dividend Portfolio:

    CHL China Telecom Limited ADS 500 11/18/2019 70 $19,500 $39.00 $4.99 $39.00     $43.99 $-0.80 $2,495 12.8% $21,995
    CHL Short Call 2020 19-JUN 37.50 CALL [CHL @ $43.99 $-0.80] -5 11/18/2019 (144) $-1,650 $3.30 $3.70     $7.00 - $-1,850 -112.1% $-3,500
    CHL Short Put 2020 19-JUN 42.50 PUT [CHL @ $43.99 $-0.80] -5 11/18/2019 (144) $-2,150 $4.30 $-2.65     $1.65 $0.38 $1,325 61.6% $-825

    VIX/StJ, et al – You are playing with fire.  It's a coin flip that this virus gets out of control and we have a pandemic.  If that happens, it will happen quickly and the markets will be down 10% and the VIX will be in the 40s or 50s easily.  


  29. VXX / Phil – There are risks, no doubt. Clearly, it's also about position size and strikes you sell. As I mentioned, VXX is at 15 now. To get to 30, the VIX would have to be over 60. It could happen but if you have a small enough position, you roll in time and strike. And we have room both ways. I think that the risk is manageable but it's not for everybody and not for gamblers (which I am not). What helps is that as opposed to other instruments that can be shorted, the VIX returns to long term trends eventually.


  30. And BTW, gamblers are around for sure – big volume on the March 22 and 23 calls (now over 10K each) and that corresponds to the VIX at  around 35! That seems a bit risky to me.


  31. STJ – My view is that the time that we are at the greatest risk with our strategy is in the first couple months, after shorting the calls.  VXX decay hasn't helped much yet, and whatever caused the spike initially could get worse and lead to an explosion in volatility.  That is why I'm spending the money on short term protection, since the calls will significantly cut my losses (and margin requirement) in a big spike.  I backtested through the last few spikes to 50 on the VIX, and it helped the position immensely (not to mention reducing my expected stress levels!)  

    I'm also more confident short term VIX calls will work as intended, since longer term options do not reliably track the VIX in the short term, as Phil has discussed in the past. If you do not intend to keep the coverage on the entire year, the cost is not that much.  Today I sold the $30 VXX calls, for about $2, and bought an equal amount of March $50 calls for .11.  That is only 5.5% of the premium I collected, which is well worth it for the peace of mind it gives me.  I didn't do it this time, but you should be able to theoretically increase your position size since you have the protection.  Right now I'm only doing a half position (using the position sizing rules I developed before deciding to use VIX covers), so I am in a very conservative position.

    It would be expensive if you intended to keep the protection on until expiration, and keep rolling every couple months, but more often than not, I'm taking profits after 60 days, so I'm ready for the next spike.  Lastly, you probably don't need to cover completely, since VXX doesn't go up 1 to 1 with the VIX, but right now erring on the conservative side seems to make sense, considering the uncertainty.  


  32. All good points Palotay! Good to hear you did some backtesting. 


  33. VXX – Well, here's what happened twice last year – just be careful.


  34. Phil/virus – it's a virus, there won't be a cure, it's a virus, there aren't effective cures for any virus. What can happen in three months is a preventive, a vaccine. By then we won't need it – or we'll really, really need it. Latest estimates of R, the number of people infected by one patient, are between 3.5 to 4. Influenza is a little over 2, as is Ebola. Polio and smallpox (gone, thank heavens and WHO) is 5 – 8. Measles and chickenpox are close to 20. Norovirus (*shudder*) is probably in the hundreds.


  35. VXX / Phil – I agree, prudence is key! Not betting the farm here for sure and no one should!


  36. You only bring good news Snow! Is that R number affected by the fact that asymptomatic people can transmit the virus?


  37. if you want to invest in real estate, there is an AI study for you:

    https://earther.gizmodo.com/climate-change-could-force-millions-of-americans-to-fle-1841261940

    To predict where migrants could go, the new study examined projections of rising sea levels and population projections. Then, using data on where people moved after Hurricane Katrina and Hurricane Rita, they trained machine-learning models to predict migration patterns.

    The findings show that migrants will mostly head to land-locked cities like Atlanta and Dallas and rural and suburban areas in the Midwest. Houston could also see an influx of climate migrants because it’s near other cities that will be affected by sea level rise sooner, though recent floods show that might not be the wisest place to settle. That mass migration would vastly increase job competition and drive up housing prices.


  38. Real Estate/StJean – I figure buying up beachfront property in Antarctica would set me up. Build condos, plant some palm trees…..what to call the place……Miami Beach South?


  39. Does MCO seem like a decent short to hedge against a fairly REIT-heavy retirement account? Currently legging into some put spreads there.


  40. PBF just had a knife,… Carlos Slim just bought heavily the dip, and it´s optionable, any idea or comment?


  41. Virus/Snow – Thanks, I did mean vaccine.

    MCO/Ati – They are a generally good company but overpriced at $48Bn so I agree with the premise as they will not even make $2Bn in the next few years (per year) and MCO is unlikely to suddenly grow bigger.

    Unfortunately, options only go out to December and, even more unfortunately, they top out at $320, so not a lot to work with.  I'd set it up like this:

    • Sell 3 MCO Dec $250 puts for $19.50 ($5,850) 
    • Buy 4 MCO Dec $300 puts for $50 ($20,000) 
    • Sell 2 MCO March $260 puts for $11 ($2,200) 
    • Sell 2 MCO Dec $260 calls for $22 ($4,400) 

    That's net $7,550 on the $16,000 spread that's 100% in the money to start.  If all goes well, you can sell more short puts along the way or you'll just have to roll them lower (the Dec $230 puts are $12)  and the upside potential is around $8,450 (112%), which isn't bad for 11 months.

    PBF/Advill – Not one I follow much, just a refiner that makes $200M on $27Bn in sales so not very exciting at $3.2Bn ($27/share).  They do have much higher projections for 2020 but I wouldn't jump in until I see at least a good Q.  Last Q they made $69M and the Q before that they lost $32M and the 2 before that were net -$120M….  Hard to get excited….

    Since Gasoline is now lower than it's been since Feb (when they lost $350M in Q4 of 2018) I'm not sure even a good Q4 would interest me since Q1 is likely to be another disaster for them.  

    And, again, we have no idea what the total impact of this virus will be – why are people so willing to speculate this early in the game with very limited information?


  42. It looks like Slim is helping NY Times to survive buying and selling the stock, and Slim has a heavy hand into Mexico´s gasoline market (over 70% of the total market is imported from U.S.)

    All the staff is grey hair, ready retire and could be an operation that Slim could be coupling with his petrol businesses in Mexico.

    https://www.finviz.com/insidertrading.ashx?oc=1273693&tc=7


  43. And Mexico has a more expensive and inelastic market in comparison with the U.S.

    Anyway, I was just playing ideas around 



  44. Finishing at the lows is not good…


  45. Phil, thought on selling WYNN puts here?


  46. and/or MGM puts?


  47. WYNN/Coulter – Everything is jumping the gun at the moment.  WYNN is down 8% today because of the trend that is going on with infections and quarantines in China – getting worse, not better.  WYNN makes about $600M a year and is valued at $13.3Bn – even after the downturn.   About 70% of their revenues come from Macau – that's the only reason they have this valuation in the first place.  WYNN is servicing about $11Bn in debt and burned $587M last Q in cash, which was effectively the dividends they paid out.

    So, can they survive a closed Q in Macau?  Sure they can but they'll have to spend cash or cut dividends and then they have loan covenants and they may be downgraded etc…. If they were trading at 10x earnings or 12x earnings I'd say go for it but 20x?  It's just not a good enough deal to gamble on.

    MGM, on the other hand, is only about 15% China but also expensive at $15.6Bn ($30) considering they just sold key properties and will be lucky to make $600M in 2020 (only $200M in 2019 is even worse) so, like WYNN, cheaper doesn't mean cheap.