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Testy Tuesday – S&P 500 at 3,135 (10% line), As Usual

Wheee, what fun!

Although the Dow fell 500 points into the close yesterday we still finished the day in the green as we had quite the low-volume rally in the morning (before the market opened).  That brought in what they call the "bag holders" to buy the "rally" before they got whipsawed in the selling frenzy that over took the market in the afternoon as California announced it was going back to lockdown as the virus rages out of control (again). 

WHO Says Pandemic to Linger; Cases Pass 13 Million: Virus Update.

See, that's what I'm talking about!  What a coincidence that news item popped up there…  That's right, not all the news is GREAT and we're still very concerned about what's going on in the World and, without new stimulus officially being announced, the market is looking just a little bit tired of rallying on rumors of virus cures, etc. and now we are getting REAL earnings reports that are not, on the whole, very pretty.

I'm sure everything will be "FINE" eventually but, for now, I'd say a little caution would be recommended – just in case it isn't.  We keep our hedges in the Short-Term Portfolio (STP) but those are getting killed recently because of Tesla's (TSLA) wild ride though we did take advantage of yesterday's spike up to sell more short calls, we're still way behind on that position though it is an excellent hedge against a market crash as I very much doubt TSLA will be immune:

There's not much we're looking to do here adjustment-wise as there's about $400,000 worth of downside protection in the basic hedges (TQQQ, SDS and SQQQ) and the TSLA and CMG plays will do well in a bearish market as well so our Long-Term Portfolio (LTP) is well-protected and hovering at around $875,000 (up 75%) so we're up over 100% from our $500,000 + $100,000 start in our paired portfolios and I have said often that we should consider net $1,200,000 a stop line to close out with a double – which is good for less than a year's work, so why risk it?

The TSLA trade is making the STP extremely volatile and, this morning, they are up $200 again but I'm very long-term confident that TSLA is not worth $350Bn when GM is at $35Bn (at $25) and Ford (F) is at $24Bn at $6.  In fact, since F is at $6, how about we offer to buy it for $4 by selling 25 of the 2022 $5 puts for $1.10 ($2,750) so we net in for $3.90 and that's like free money so let's make it the basis of a new trade for the Butterfly Portfolio:

  • Sell 25 F 2022 $5 puts for $1.10 ($2,750)
  • Buy 50 F 2022 $4 calls for $2.75 ($13,750) 
  • Sell 50 F 2022 $7 calls for $1.25 ($6,250) 
  • Sell 15 F Aug $6 calls for 0.60 ($900) 

That's net $3,850 on the $15,000 spread so the upside potential if F is at $7 in 2022 is $11,150 (289%) but, while we're waiting, we'll make money selling short-term calls, which also hedges us from more downside.  Our worst case is being assigned 2,500 shares of F at $5 ($12,500) and losing the entire $3,850 but that would have to be a serious misplay on our part and, of course, we'd still own the stock, which should have some value.  

That "worst case" puts us in 2,500 shares of F at $6.54 per share net but it would have to be below $5 to trigger that (otherwise we just lose the $3,850) so let's say $4.50 and then we double down on F at $4.50 and own 5,000 shares at about $5.50 and that's still only $27,500 and we can do it all again to "risk" owning 10,000 shares at $4.50 if it all goes wrong again.   

So, if we don't REALLY want to own 10,000 shares of F at $4.50 then we're not comfortable with our "worst case" and we probably shouldn't be offering to buy 2,500 shares for net $3.90, which is the basis of this trade.  But, if we would LOVE to buy 10,000 shares of F for $4.50 ($45,000) then there's really no downside to initiating this trade, is there?  In fact, we'll be disappointed if all we end up with is $11,150 in profits we'll be paid NOT to own F if it's over $7.

Trading is a lot easier when you learn to think 3-4 moves ahead.  Like, 3-4 moves from now, I'd love to be short TSLA at $1,900 since it's worth less than $500 at best! 

Year End 31st Dec 2014 2015 2016 2017 2018 2019 TTM 2020E 2021E CAGR / Avg
Total Revenue

3,198 4,046 7,000 11,759 21,461 24,578 26,022 27,440 37,795 50.4%
Operating Profit

-187 -717 -667 -1,632 -388 -69.0 736      
Net Profit

-294 -889 -675 -1,961 -976 -862 -144 834 2,243  
EPS Reported

-2.36 -6.93 -4.68 -7.47 -5.72 -4.87 -0.871      
EPS Normalised

-2.36 -6.93 -4.68 -7.47 -5.21 -4.15 -0.316 4.43 11.5  
EPS Growth

PE Ratio

              338 130  

              2.11 2.18  

Come on, are you going to pay $350 BILLION for $2.2Bn in POTENTIAL earnings?  


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  1. Good Morning,

  2. Phil/KO butterfly

    The KO butterfly has puts/calls sold expiring this week.  Just a reminder.

  3. Good morning!

    I was just telling my daughter that she is lucky to live in such interesting times (a Chinese curse).  

    • Stocks start the session weaker as Well Fargo saps early enthusiasm in financials.
    • The S&P is down 0.5%, the Dow is off 0.1% and the Nasdaq down 0.7%.
    • Things looked promising when J.P. Morgan, up 1.5%, reported bullish results. But Wells Fargo, off 6%, is souring sentiment after its miss and dividend cut.
    • The SPDR Financial Sector ETF (NYSEARCA:XLF)down 0.2%, retreated into the red after being up 1.5% early premarket.
    • In commodities, crude futures are down 1.7%. Worries are building that OPEC+ will reduce its production cuts.
    • The Financial sector is slightly higher ahead of trading, but conviction looks shaky after Well Fargo’s results.

    Things looked very bullish after J.P. Morgan’s (JPM+1.9%earnings beat and standout bond trading revenue. Shares popped 4% after the numbers and took the SPDR Select Sector Financial ETF (XLF+0.1%) up more than 1.5%, topping the premarket sector movers.

    But Wells Fargo (WFC-6%) rained on the parade soon afterwards with a much-wider-than-expected loss and a dividend cut to 10 cents a share. That soured sentiment and cut the gains in XLF in half. 

    Citi (C-0.9%) released a safe report, beating on top and bottom lines and building up reserves and the stock rose modestly before retreating.

    Shares of Wells Fargo have been on a pretty steady decline since mid-June and are around the same level they were in late March. And the sector as a whole has yet to make a serious move to catch up with the broader market.

    Over the last six months, XLF is down more than 23% vs. the SPDR S&P’s (NYSEARCA:SPY) decline of just 2%. In the last month the financial ETF has been tracking the broader market more closely, but still losing ground, off 1.5% compared with Spy’s gain of 5%. That’s surprising given the strong economic data that’s been coming out (although buying has been building at the long end of the Treasury curve sine the start of June). 

    “We continue to look at the financials that will not rally in this environment and that’s concerning to us,” Joule Financial President Quint Tatro told CNBC last week. “The financials should be rallying in the face of what we’re told will be a pretty significant economic rebound. Because they’re not, I am a little concerned that the bigs are getting ahead of themselves, and we’re proceeding with caution here despite how foolish that feels and seems at this time.”

    Sector Watch

    The ever-active cruise lines sector is down this morning, but just slightly by their recent standards, off around 2%.

    SuntTrust downgraded Royal Caribbean (RCL-1.4%), Norwegian (NCLH-2.4%) to Hold from Buy and Carnival (CCL-2.2%) to Sell from Hold.

    Investors that have bid these stocks up so much will face continued disappointment as more delays for cruises are announced, analyst C. Patrick Scholes wrote. Carnival and Royal will also likely need to raise debt or equity, he said.

    • Johnson Redbook reports U.S. chain same-store sales fell 5.5% Y/Y for the week that ended on July 11 to improve on the pace from a week ago.
    • Chain same-store sales are forecast to be down 4.2% in July as e-commerce spending continues to help offset lower brick-and-mortar traffic.

    • Over 100 outdoor businesses are lobbying the House to pass the Great American Outdoors Act, which already sailed through the Senate with bipartisan support.
    • "GAOA will fully fund the Land and Water Conservation Fund at $900 million annually, providing more recreation access for communities across the country and fueling more outdoor recreation economic activity," reads the letter to House leadership.
    • Some of the companies that signed the letter include Airstream (NYSE:THO), Bass Pro Shops, Malibu Boats (NASDAQ:MBUU), Vista Outdoors (NYSE:VSTO), Brunswick, Cabela's, REI, Columbia Sportswear (NASDAQ:COLM), Kampgrounds of America, Polaris (NYSE:PII), Pure Fishing, The North Face, VF Corporation (NYSE:VFC), Winnebago (NYSE:WGO) and Yamaha.
    • The consumer shift to outdoor vacations has been on the minds of Wall Street analysts looking at the upside for investors, but has also created backlogs at some locations not prepared for the higher traffic.
    • Under the pilot healthcare program for employees and their families, Amazon (NASDAQ:AMZN) and partner Crossover Health will build 20 health centers over the next few months in five cities near Amazon fulfillment centers.
    • The first center will be located in Las Colinas, Texas.
    • Amazon has faced employee strikes and scrutiny from U.s. lawmakers regarding its measures to protect staff from the coronavirus.
    • Netflix (NASDAQ:NFLX) is off 1.7% premarket following a downgrade to Neutral at UBS, from Buy, ahead of Thursday's postmarket earnings release.
    • The firm is looking for another solid report on the figures that have gotten a lift during the COVID-19 pandemic, as data remains strong.
    • But it expects the company will face more difficult subscriber comps in the post-pandemic period, and it's discounting more of the long-term bull case in terms of sustained growth and margin expansion.
    • It has a $535 price target, implying just 1.8% upside from last price of $525.50.
    • Tesla (NASDAQ:TSLA) shares are rising in premarket trading, at least in part due to reports that the co. has met with officials from the Chinese city of Chongqing that could lead to increased cooperation involving sales and maintenance centers — but shares also have the attention of Wall Street.
    • "Wow" was CEO Elon Musk's latest response to Piper Jaffray's more than doubling of its price target on the electric vehicle maker to $2,322 from $939.
    • "Is now the time to redeploy capital" after the stock's latest run? "NO," analyst Alexander Potter says, raising his delivery estimates after the 2Q numbers. He also notes that the 500K+ 2020 delivery estimate may "still be in play."
    • Piper updates estimates for deliveries in 2025 to reach 4M units, and says while deliveries are important, it is the operating margin and software, which the analyst expects to drive the value. Full self-driving, FSD, and the subscription plans should help the automaker reach mid 20% operating margins by the end of the 20-year forecast period. Even if the co. sells the car at or below cost in 2030s, the subscription plan could lead to higher margins for the co.
    • Credit Suisse says it thinks Hanesbrands (NYSE:HBI) weathered the pandemic better than most peers.
    • The firm notes that 50% of the company's store distribution was open during quarantine and +$300M in mask business helped to offset factory deleverage.
    • "Our call is that over the next 6-mos, HBI is relatively better positioned vs apparel peers due to more stable distribution channels and with retailers already chasing HBI inventory (adding upside potential to NT Street rev & GM ests). We also don’t think current 2021 Street ests reflect the relative stability of HBI’s categories vs other apparel wholesalers with fashion inventory to clear, while also navigating large-scale dept store closures over the next year."
    • Credit Suisse upgrades HBI to an Outperform rating and assigns a price target of $15 vs. $13 prior PT and the average sell-side PT of $11.67.
    • Shares of Hanesbrands are up 7.50% premarket to $12.32.
    • First out of the gate in Q2 earnings season, JPMorgan Chase's (NYSE:JPM) "eye-popping" trading numbers and reserve build should drive shares and consensus numbers higher, writes Wolfe Research analyst Steven Chubak.
    • JPM rises 1.7% in premarket trading.
    • "The beat was primarily driven by stronger topline on robust Trading /IB revenues (+$0.35), better efficiency (+$0.23), and lower tax rate (+$0.08), partially offset by higher reserve build (-$0.55)," he said.
    • JPM used its better-than-expected Q2 revenue to fund a higher-than-expected reserve build, notes KBW analyst Brian Kleinhanzl. Going forward, he expects the bank's reserve builds to be muted.
    • "Overall, it was a solid quarter in a tough rate environment and we expect shares to be up today," Kleinhanzl writes.
    • Meanwhile, Jefferies analyst Ken Usdin sees JPM setting a high bar for banks. "The big print and reserve/capital position will stand tall vs. most peers through EPS season," he writes.

  4. KO/DC – It's expiration week, we have to review everything.

  5. Great Article that provides a good theory on the market disconnects ( or lack there of)

    Bill Miller Q2 2020 Market Letter


    Miller Value Partners is a value investor. It values businesses, and not just stocks, and invests in them for the long term.

    The market’s behavior since the March 23rd bottom of 2191 to the 43% gain by July 2nd to 3130 has confounded most observers, from the novice investor to the most experienced and savvy, such as Stan Druckenmiller and Lee Cooperman.

    The result of the panic out of stocks in March is that there is now all-time record cash in money market funds, and bond funds have seen huge inflows even as rates hover at levels not seen for thousands of years.

    The market predicts the economy; the economy does not predict the market. Stocks went down in the first quarter of this year and the first quarter of this year was a quarter of growth.

  6. Nothing to see here… Still disconnected from reality. Unemployment benefits will run out, 4M people lost their health benefits, etc… Are these people buying Model 3 from Tesla?

  7. Just wondering what makes the ford trade a "butterfly"?

  8. Phil / TSLA / Portfolio Margin

    Opened a TD account and the first message I got after login was that for portfolio margin the base requirement is being raised to 30% from today, still better than Schwab's 80%

  9. Market/Batman – So a record amount of money came out at Nasdaq 9,500 and we fell to 7,000 and now that money is coming back in and we're at 10,500 – obviously?  If the market is "predicting" some robust recovery then the market is a fool!

    Benefits/StJ – The next looming disaster.  

    Butterfly/Jeff – We have a Butterfly Portfolio and it started out with traditional butterfly trades but then we decided it was better to extend them over time and then we decided it as better to do artificial Buy/Writes to purchase the underlying and then sell short-term put and call premium on stocks that were fundamentally sound but range-bound over long periods of time and use the price swings to our advantage so ABWSPFRB Portfolio didn't sound as good so we still call it the Butterfly Portfolio and those are still called "Butterfly" plays.

    TSLA/Jij – Yeah, I can imagine a lot of people crapped out of TSLA on them.  Hopefully it will lower the number of day traders.  TSLA is very thinly traded with a limited float – that's why it gets so crazy.

  10. You won’t believe what Donald Trump just said about coronavirus testing

  11. Wow, Dow up 400, so crazy.  Oil back at $40 but no $41 again.  Dollar very low, testing 96, if that bounces we could have a down day tomorrow.

    Copper rejected at $3 – I did not have the balls to short that.

  12. Mayor Garcetti's close to shutting down LA……

  13. Phil any thoughts on when we can get a PSW investments update and K-1?

  14. PSWI K1s are delayed because companies we own are delayed.  No way they come in time before we have to extend.  Got most but not all (got them but errors so sent back to re-do).   As to overall update, by end of the month as usual.

    Sorry but Greg leaving did not help the process.  

    LA one of many places re-shutting.  Market doesn't seem to care at all…

  15. Did not see that Greg left.  Sorry to hear that.

  16. That sucked .. my post content vaporized.  I posted text + screenshot.  did it get quarantined?

  17. Phil / SPWR,

    They have a 1.67B market cap with 1.86B in revenues, but 1.75B cost of revenue leaving 126M in gross profits.  Can you explain your reasoning for liking them so much?  Thx!

  18. Good morning!

    More stimulus on the way (were you worried?) and Biden talking $2Tn infrastructure too.

    Post/Jeddah – Sorry, it's nowhere that I see.  Happens sometimes when the system logs you out and you try to post.  I always hit CTRL-A and then CTRL-C to copy a comment before I post it, in case something goes wrong.  Well, almost always….

    SPWR/Jeddah – Think of it like the TSLA of solar.  They have the best tech and a strong-looking future – just not very profitable so far.  We're getting the whole company for $1.7Bn at $10.  In Q1 they had $450M in sales and made $9.4M so making $36M for the year (they won't as Q2 is a mess due to virus) means we are paying almost 50x current earnings BUT they are in the middle of a restructuring and that's just their retail sales, the Business Unit lost $15M so simply not losing that money would bump them to $100M in profit and a current p/e of 17 – now are you interested?  Imagine if the business unit ever (gasp!) MAKES MONEY – that would be crazy!  

    Year End 29th Dec 2014 2015 2016 2017 2018 2019 TTM 2020E 2021E CAGR / Avg
    Total Revenue

    3,027 1,576 2,553 1,794 1,726 1,864 1,965 1,899 2,186 -9.24%
    Operating Profit

    251 -206 -372 -1,025 -849 -98.1 -26.0      
    Net Profit

    246 -187 -449 -929 -811 22.2 110 -67.9 39.0 -38.2%
    EPS Reported

    1.55 -1.39 -3.25 -4.49 -5.76 0.150 0.649     -37.3%
    EPS Normalised

    1.62 -1.36 -2.57 -1.48 -3.15 -0.181 0.370 -0.522 0.064  
    EPS Growth

    PE Ratio

                26.7   154  


    So I kind of like them.

  19. Phil / SPWR – thanks for the detailed analysis. I'm pushing hard to learn from you on valuations as this is my weak spot. I've made good strides with portfolio sizing, hedging thanks to you  much appreciated!