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  1. phil

    Good morning?

    Futures went limit down again, QE Infinity and $1.2Tn of stimulus wasn't enough, it seems….

    Here's the problem – even if you give every man, woman and child in this country $2,000 a month ($600Bn) – where are they going to spend it?  

    And, even if the US is that generous (we're not), what about the rest of the World?  If every country doesn't do something similar, we're still looking at a global Recession.  Recessions end when people goo back to work and things start getting back to normal.  The problem is, there's no "normal" in sight at the moment.  As I keep saying – you have to fix the crisis first – NOT the economy!

    This is like firemen showing up at a house fire and painting the house – who cares about that?  

    Bloomberg reporters are reporting from their homes – how's that for inspiring confidence!?  

    Sadly, we'll have to add more hedges today, in case 2,400 breaks down and we head for 1,800.  Fortunately, that's down 25% so up 50% on SDS, which is already at $34 so $51 would be the target and the SDS May $35 ($7.50)/50 ($4.50) bull call spread is just $3 and pays $15 so 400% upside potential means we can get $100,000 back for each $25,000 and we just sold $81,000 worth of short puts in the LTP which pays for $300,000 worth of protection.

    Of course we don't need to take it all at once but 80 of those for $24,000 pays $120,000 back at $50 and we certainly hope we lose the $24,000 but I'd rather have the insurance.  If 2,250 fails, we add another layer (maybe June) and another at 2,000 and, by the time you are adding at 2,000, the S&P is down 17% and that's 34% up on SDS to $45.56 and the May $24s ($10 in the money) are $12 so we'd already be able to cash in the original calls for $12 and leverage that to buy more long spreads, etc.  

    And, of course we already have $200,000 worth of SQQQ and QQQ hedges that will kick in but we need to make sure we have at least $500K in the STP as another 20% down could wipe out the LTP – in the very least, we'd have to buy back all our short puts (can't risk assignment) and then wait a very long time hoping our bull call spreads go back in the money.  

    Is it survivable?  Of course it is – but that doesn't mean it will be pleasant.  

    “I think the Fed is doing the right thing. But people are having margin calls,” said Alex Au, managing director at Alphalex Capital Management, a hedge fund based in Hong Kong. “There might be many forced sellings on the market as people unwind earlier positions.”

    Investors who have used borrowed money to make bigger bets can face margin calls when holdings fall in value, forcing them either to stump up more cash or to sell their positions.

    This is probably a fantastic opportunity to deploy cash but, as noted above, cash is in short supply and we can't be sure it's the bottom so we need to "waste" (hopefully) money on hedging if we intend to stick with long positions.  

    One reason we can't wait is that there's a possibility (30%) they will close the markets – another reason people are cashing out in a panic.

    So it will be a busy day, expect to be adding hedges to all our portfolios this morning and we'll have a lot to talk about in today's Webinar. 

     Meanwhile, I do expect progress on stimulus today so I still like (again) playing the S&P Futures (/ES) long over the 2,400 line – with tight stops below. I also like /NG long here ($1.65) also with tight stops and Copper (/HG) at $2.20 is also a good long – but tight stops below.  Better to take small losses and try again at the next support than ride the futures down! 

    We are certainly trading below fair value for most stocks but that value assumes some kind of normality where people get up and go to work, school, etc…  As it stands now, people can't leave their homes, Las Vegas is closed, California is closed, New York is closed – probably the whole country next week so we have to rethink what commerce is in a country where no one goes out.

    Let's say 80% of the people still get paid.  US payrolls are $6.5Tn or $500Bn a month and Bernie says give us $600Bn a month so – THANKS!  That's why Yang (and me!) is right that $1,000 a months for people over 18 (210M) would be a more realistic $210Bn a month or $2.5Tn a year, which is by no means a crazy number in a $20Tn GDP – a simple 10% VAT would take care of it and resdistribute the wealth from the people who spend to the people who don't have any money.  

    In any case, if we do hand out $210Bn/month for the duration (seems to be the current plan in Congress) and 80% of $500Bn a month continues to be paid out – that's $610Bn – more than people are getting paid now.  

    So there's no reason for the economy to collapse based on that though I imagine that each month 10% less people will get regular paychecks as more and more businesses begin to shut down.

    Then the real problem becomes spending.  $500Bn a month only becomes a $20Tn GDP (there's other income besides wages, of course) due to the money multiplier effect, which is roughly 3.5x.  In other words, you get paid $5 and you give it to SBUX who pays the barista who goes to the supermarket to buy a whole pound of coffee for $8 (because they are not a sucker like you!) and the Supermarket pays the cashier who combines it with food stamps (because those wages suck) and they get a turkey, etc…  

    So money moves through the economy and poor people spend whatever they get so they move money the best but, when you give money to rich people they put it in the bank (0x multiplier) or, even worse, they put it into an instrument that produces NOTHING and demands interest, which sucks even more money out of the economy (-0.1x).  Since the rich have 100x more than the poor – that's a lot of sucking!

    Image result for zombie apocalypseStill, unless we are heading into a real Zombie Apocalypse, where humanity wiped out and replaced by a mindless hoard with no interest in food, fashion or fun – we will survive – even if surviving means locking ourselves in a bubble and shopping via Amazon drones with our Universal Basic Incomes.  

    Even THAT would still have our GDP around $12Tn, down 40% from where it was but certainly not $0 – that's why a sell-off past these levels is silly and can't last – and that's the worst possible case – the actual case is probably quite a bit better than that – we just have to get through the next few months. 

    Be careful out there!  





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TODAY's LIVE webinar on stocks, options and trading strategy is open to all!

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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