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4 Million Infection Thursday – Virus Rages on at Dow 27,000

This is a good shorting spot

27,000 is a good line on the Dow (/YM), which was around 18,000 from November 2014 through November 2016 so we can call that a good consolidation point.  So we're 50% above 18,000 and that means, via our fabulous 5% Rule™, that we can expect a 20% (weak) retrace of that 9,000-point run, back to 25,200 or a 40% (strong) retrace back to 23,400 and, guess what?  That happened already!  

In fact, we fell yet another 1,800 point to 21,600 just recently but it was an overshoot and we quickly took back the strong retrace and the weak retrace and now we're back at 27,000 but the real question is – where should we be?  

Let's consider that 18,000 was a realistic base.  The economy was going well under Obama, America was at full employment and a respected World leader and the deficit was getting under control – all good things that help a market stay strong.  The Dollar was strong too, it was at 102 in 2017 and Americans enjoyed great buying power and my kids loved going to the Dollar store to get knick knacks.  

Trump took office in January of 2017 and he cut taxes drastically for Corporations and people in the Top 1% and the Dollar dove all the way to 0.88 a year later, a 14% collapse that we've only recovered half of 2.5 years later.  Losing 7% of the buying power on every penny you've saved your entire life is a devastating shock to the average American, who was not able to offset the loss of buying power through their stock market gains.  

Still the weak Dollar is also good for our Corporate Citizens (thanks Citizens United!) as well as for the Top 1%, whose stock prices were jacked up by the weak dollar which, of course, makes our exports cheaper too.  This is how we make America Great, by devaluing our currency, running up the deficit and putting profits over people time and time again.  Surely that's worth a 20% boost in the Dow, isn't it?  

But now we should consider that 50% is MORE than 20% (math done as a courtesy for Fox viewers) so how exactly are we getting that extra 30%.  Let's say there's some inflation (10% in 3 years is generous) so we can give the Dow 30% (23,400) but, to REALLY get to 27,000, I think we have to see some REAL profits, right?  Especially if we want to hold it.  So who made what on the Dow in 2016  and I'm not even going to talk about this year but let's see if last year's numbers justify an increase.

  • MRK:    $3,941 – $9,777
  • VZ:       $13,608 – $19,778
  • JNJ:     $19,803 – $15,119
  • AXP:    $5,375 – $6,759
  • WMT:   $15,080 – $15,201  
  • CSCO: $10,739 – $11,621
  • AAPL:  $45,687 – $55,256
  • DIS:     $9,790 – $10,913
  • CVX:  -$431 – $2,845
  • UNH:  $7,073 – $14,239 
  • NKE:   $3,760-$2,539
  • INTC:  $10,316 – $21,048
  • MMM: $5,058 – $4,582
  • BA:     $5,034 – -$636
  • WBA:  $4,191 – $3,962
  • JPM:   $24,773 – $36,431 
  • CAT:   -$59 – $6,066
  • PG:     $10,027 – $3,966 
  • RTX:   $5,436 – $5,948
  • HD:     $7,957 – $11,242
  • V:        $5,991 – $12,080
  • MSFT: $20,539 – $39,240!
  • TRV:  $3,014 – $2,622 
  • IBM:  $11,881 – $9,435
  • XOM: $8,375 – $14,774 
  • KO:    $6,550 – $8,985
  • GS:    $7,398 – $8,466
  • MCD: $4,686 – $6,025 
  • DOW: $4,318 – -$1,717
  • PFE:  $7,229 – $16,298

So the 30 Dow Industrial Components made an after-tax total of $372,864,000,000 last year and that was up $85,725,000,000 (30%) from $287,139,000,000 in 2016.  Isn't that funny, it's the same 30% we'd expect to get given the generous donations the American people have made via tax cuts, lowered labor and envrionmental standards and, oh, the complete destruction of our way of life in just 3.5 years.   Worth it!  

Speaking of funny…  

  • PFE paid $1.1Bn on $8.4Bn in earnings in 2016 and, last year, they paid $1.4Bn on $17.7Bn in earnings.
  • MCD paid $2.2Bn on $6.9Bn in earings in 2016 and, last year, they paid $2Bn on $8Bn in earnings.
  • GS paid $2.9Bn on $10.3Bn in earnings in 2016 and, last year, they paid $2.1Bn on $10.6Bn in earnings.
  • MSFT paid $5.1Bn on $25.6Bn in earnings in 2016 and, last year, they paid $4.4Bn on $43.7Bn in earnings
  • V paid $2Bn on $9Bn in earnings in 2016 and, last year, they paid $2.8Bn on $12.1Bn in earnings
  • HD paid $4Bn on $11Bn in earnings in 2016 and, last year, they paid $3.5Bn on $14.7Bn in earnings
  • JPM paid $9.8Bn on $34.5Bn in earnings in 2016 and, last year, they paid $8.1Bn on $44.5Bn in earnings
  • INTC paid $2.6Bn on $12.9Bn in earnings in 2016 and, last year, they paid $3Bn on $24Bn in earnings
  • UNH paid $4.8Bn on $11.8Bn in earnings in 2016 and, last year, they paid $3.7Bn on $18Bn in earnings
  • DIS paid $5Bn on $13.9Bn in earnings in 2016 and, last year, they paid $3Bn on $14Bn in earnings

You get the idea, the vast majority of the earnings improvement in the Dow (and the S&P et al, of course) is not that they are making more money but that corporations pay far less taxes on the money they make.  While our tax returns didn't shrink very much, theirs dropped more than the 30% increase in net earnings they are reporting.   These are very much paper profits that can disappear with a stroke of Joe Biden's pen – which is why, no matter how awful he is or what he does or what he says – these Corporate Citizens will continue to back Donald Trump for the most part – look how good he is for them!  

So, without the virus we can certainly justify a 30% bump in the Dow to 23,400 but 27,000 is a huge stretch and that's why we're shorting the Dow Futures (/YM) this morning at 27,000 – it's just not worth that much!  

 


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  1. Good Morning.



  2. Estimates are now for well over 200K death in the USA! Simply unreal at this point… I guess we will need to send stormtroopers in the streets soon to fight zombies.


  3. Good morning. Looks like rest of Phil's post is missing. Only blank on my screen.


  4. Selling some T putters – Jan '22 $28


  5. Selling some T putters – Dec '20 $28 for $ 2.74.


  6. T OOPS. the above did not look correct see below 

    Selling

    Jan '22 $30 Puts for $ 4.9

    Dec  '20 $28 Puts for $ 1.5


  7. Good morning and wheeeeeeeee!  

    What a way to start the day.

    So of course we're going to bounce at 26,800 as it's a nice, fat, pivot-point (see yesterday's webinar) and was clearly support yesterday so we calculate the bounce as 40-points (weak) back to 26,840 and 80-points (strong) back to 26,880 but if 26,840 breaks, why risk the gains?  Honestly should have taken the money and ran at 26,800 as it was certain to bounce and then just pick it up on the break below the line – you don't need to ride out bounces on futures – there's no friction cost to the trade!

    Big Chart – NYSE is the key to everything at our 12,540 line (now 12,586).

    Zombie Apocalypse/StJ – We should have know they were preparing us with all those zombie movies and TV shows…

    T/Batman – Good call.  If not for Warner hurting them, this would have been gangbusters.  

    AT&T said adjusted earnings for the three months ending in June was pegged at 83 cents per share, down 6.75% from the same period last year and 4 cents ahead of the Street consensus forecast. Group revenues, AT&T said, fell 8.9% from last year to $41.billion, just shy of analysts' estimates of $41.1 billion.

    AT&T said it had around 36.3 million customers logged for its newly-launched HBO Max service (including legacy HBO subscribers) after adding around 3 million over the second quarter. That figure, however, is down from 34.6 million at the end of last year. Postpaid mobile phone subscribers, however, fell by 151,000 against market forecasts of additions totaling around 7,000. 

    “Our solid execution and focus in a challenging environment delivered significant progress in the quarter, most notably the successful launch of HBO Max, resilient free cash flow and a strengthened balance sheet,” said new CEO John Stankey. “Our resilient cash from operations continues to support investments in growth areas, dividend payments and debt retirement."

    "We are aggressively working opportunities to sharpen our focus, transform our operations and continue investing in growth areas, with the customer at the center of everything we do,” he added. 

    AT&T shares were marked 0.8% lower in early trading immediately following the earnings release to change hands at $29.92 each, a move that would still leave the stock with a year-to-date decline of around 22%.

    Revenues from WarnerMedia, its entertainment division, fell 22.7% to $6.8 billion as the coronavirus pandemic delayed film production and closed movie theaters at home and around the world. WarnerMedia earnings fell 13.3% to $2.08 billion.

    Finally a Top Trade Alert!  T pays a $2.08 dividend at 0.52/quarter so it's great to own the stock but it also means we can just be aggressive in establishing a position since we'd be happy to own it, right?

    • Sell 10 T 2022 $28 puts for $3.75 ($3,750) 
    • Buy 30 T 2022 $25 calls for $5.60 ($16,800)
    • Sell 30 T 2022 $30 calls for $2.80 ($8,400) 
    • Sell 5 T Sept $30 calls for $1 ($500) 

    That's net $4,150 on the $15,000 spread so we've got $10,850 (261%) of upside potential if T can simply hold $30 for 18 months and, if it can't, we're selling $500 in the first 57 out of 547 days of this trade so we have a chance to collect another $5,000 to further soften the blow of owning 1,000 shares of T at net $32.15 (assuming the trade is completely wiped out and you are assigned at $28).    

    If all goes well, you can make over $2,000/yr selling short calls, which is as much as the dividend would be if you owned the stock.


  8. Oops, now we stopped out of /YM as we crossed back over 26,800.  


  9. TSLA not holding gains.  Earnings were a lot of smoke and mirrors.


  10. TSLA – I'm sure Elon would be in for a huge payday if his company is listed on the S&P….


  11. As a thought experiment (didn't do it…) on TSLA earnings, I looked into a "Butterfly" to take advantage of the implied volatility. 

    Short 7/24 $1600 C/P, Long 8/21 $1600 C/P, all 1x each.   

    The combo would cost $156 per unit and has break even from $1300 to $1900 – quite crazy!

    repeated the same exercise for a $1500 strike pin and roughly the same price per set ($150).

    Today at just above $1600 stock price (storm has passed), the $1600 combo is at $216. I didn't do the trade…. but for learning,  the combined directional bets on this name is simply incredible. 


  12. I just don't see how that is positive for the economy:

    https://www.reuters.com/article/us-usa-economy/u-s-weekly-jobless-claims-unexpectedly-rise-labor-market-recovery-stalling-idUSKCN24O1QY

    The weekly jobless claims report from the Labor Department on Thursday, the most timely data on the economy’s health, also showed nearly 32 million people were collecting unemployment checks in the first week of July. Relentless labor market weakness puts pressure on the U.S. Congress to extend a $600 weekly jobless benefit supplement, which expires on July 31.

    32M people not working! That more than the average country size! That's more than the 11% unemployment rate for sure.


  13. Musk/1020 – $2.1Bn bonus I believe.  

    TSLA/Miti – That's a good range but still crazy moves.  

    32M/StJ – When they cut off those checks, it's really going to hit the fan!


  14. The rotation continues, value over momentum. Minute, but its happening.


  15. AAPL – big down draft today… I guess GS downgrade is impacting it… n They are sort of permanent bear on stock

    Investors should 'avoid' Apple stock – Goldman Sachs

    Ahead of the fiscal Q3 report on July 30, Goldman Sachs calls Apple's (NASDAQ:AAPL) stock price "unsustainable."

    The firm tells investors to "avoid the stock," predicting CY21 EPS that's 16% below consensus due to slowing unit sales, ASPs, and unit growth.

    Goldman doesn't think Apple will provide guidance for the September quarter due to the pandemic uncertainties and the potentially delayed 5G iPhone release.

    With Apple's strong supply chain, Goldman expects an upside surprise in terms of execution. But the firm estimates that a one-month iPhone delay would reduce FQ1 2021 revenue by ~7% and EPS by ~6%.

    Goldman raises Apple's price target from $263 to $299.

    Consensus estimates for FQ3 see $52.12B in revenue and $2.05 EPS.

    Wall Street's average price target on the stock is $369.18.

    Apple shares are down 0.5% pre-market to $387.16.

    Goldman is not the first to question Apple's valuation and the stock's upside at this


  16. Checks / Phil – The GOP is offering an extra $400 per month (not week). How is that going to help. Right now it looks more like they know they are losing so let's make sure that Biden inherits the worst possible situation and we'll blame him for everything!


  17. Aaaand its done, back into momentum. Maybe a sign we are close to an actual pullback of 5%.


  18. Holy crap – sorry I stopped out on the /YM shorts.  Should be bouncy now around the 1.25% lines.

    Nas took a hard hit, almost 2.5% in a day = BAD!  

    TSLA failing $1,500!

    Downgrading AAPL is a great way to tank the whole market.

    $400/month/StJ – That's what's tanking the market – DOOM!!!!


  19. See how we failed the weak bounce at 26,840 – that's where the 5% Rule is most useful:


  20. INTC may be on sale in the am!


  21. Deano / INTC – the push out of the 7 nm push out… was this a push out of 6 months or a year from previous plan?


  22. Batman – My reading suggests 6mos. from external projections, but a year from internal standards. I need to read more, but so far, I think this is a fairly big issue, but I don't think the world is going to AMD quickly. 


  23. INTC / Phil – Thoughts on this….  They should be able to get TSMC to produce some product,..  They say they have root caused the problem…  6 month delay – What are your thoughts on this?

    Intel drops 9% as product delay offsets strong earnings, lifting competitor AMD

    Update: Intel says to expect 7nm products in late 2022 to early 2023. On the call, CEO Bob Swan says INTC identified a "defect mode" in the process and has invested in contingency plans, including using external third-party foundries.

    The multi-year 10nm yield issues allowed AMD to step into the process node lead.

    Original: Intel (NASDAQ:INTC) plunges 8.7% after hours following Q2 results which beat earnings and revenue that were offset by a six-month 7nm product delay. Rival AMD (NASDAQ:AMD) has gained 6% after the news.

    Intel is accelerating 10nm transition with Tiger Lake launching soon and the Ice Lake server CPUs launching by the end of the year. The Alder Lake client CPUs will launch in H2.

    The 7nm-based product transition is delayed by six months relative to prior expectations, primarily due to yield that's trailing behind the company's internal target.

    Data Center Group sales were up 43% to $7.1B (consensus $6.47B) due to the 47% growth in cloud service provider revenue and the introduction of the third-generation Xeon Scalable processors.

    The PC-centric CCG gained 7% to $9.5B (consensus: $8.97B) driven by the pandemic-related notebook demand.

    Memory products unit NSG was up 76% to a record $1.7B (consensus $1.24B). PSG (programmable storage) rose 2% to $50!M (consensus: $507M).

    IoT ($670M) and Mobileye ($146M) posted the only Y/Y declines, down 32% and 27%, respectively.

    For Q3, Intel sees revenue of $18.2B (consensus $17.94B), $1.10 EPS (consensus: $1.14), 28% operating margin, and a 15.5% tax rate.

    For FY20, the company forecasts $75B in revenue (consensus $73.83B), $4.85 EPS (consensus: $4.84), 32% operating margin, $15B in capital spending, and and $17.5B in FCF.


  24. My 2 cents:  TSM's 7nm production technology and capacity is pretty mature already. The word is they are making 5nm chips for Apple (iPhone 12) this year, and rolling out 5nm more broadly next year.  So this will well extend the lead vs. Intel.    It's interesting how the industry has shifted – it used to be Intel's vertically integrated model giving them the technological lead by generation. Now all the fabless companies (e.g. AMD, NVDA, QCOM, etc.) using TSM can benefit from that advantage and do so without the capital investments.

    I think another part of the equation too is Intel's stock buyback over the years instead of investing in R&D  (aka Boeing, GE).  There has been no breakthrough innovation from their 7th to 10th generation CPUs – only incremental at best. The current gen AMD Ryzen 7nm will beat next year's Intel chip just from the 7nm-10nm advantage, not to mention the price difference.   And AMD will move to 5nm at some point…