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Thrilling Thursday – Market Rampaging into the Holiday Weekend

Chinese banks are under increasing stress.

Profits are plunging at the fastest pace in at least a decade, bad debt has hit a record and capital buffers are eroding. Bank executives and analysts predict the damage is likely to continue in the second half of this year.  It’s also of global importance, with behemoths such as Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, and China Construction Bank Corp. on the global “too-big-to-fail” list.

And, keep in mind that China's GDP is approximately 1/2 of the US or Europe's GDP so those numbers are, relatively, twice as bad as they look in proportion to their economy.  “The government needs to strike a balance between sacrificing the banking sector for the economic recovery and maintaining financial stability,” said May Yan of UBS. “The call for national service from the largest banks can’t go on forever. A weak financial system is very dangerous to the nation.”  

Non-performing loans in China in June (last published month) were $395Bn and that has exausted the "Bad Loan Coverage Ratio" which was 3% in 2012 and is now sitting at 0.5% (as of June) and falling fast.  As part of the pandemic response, China has allowed many borrowers to delay interest and principal payments to March next year, which is hiding the true sense of the bad debt bulge.  

Profit at China’s biggest banks declined by at least 10% in the first half from a year earlier, the biggest drop on record as bad loans ballooned. In a worst-case scenario of government pressure, China’s lenders could be guided to lower profits by 20% to 25% in 2020, according to Jefferies analyst Shujin Chen. That will erode capital even further and be a risk to financial stability, she said.

It's not just China that is becoming unstable, of course.  Our own Congressional Budget Office reports that the Federal Budget Deficit will hit $3.3 TRILLION this year, more than is collected in income taxes – so they can double your taxes and we'd STILL be running a deficit!  How do you think that's going to work out?

Debt held by the public will reach $21.9 trillion in the fiscal year ending September 2021, or the equivalent to 104.4% of gross domestic product, up from 98.2% in the current year, the CBO said Wednesday in updated projections. Debt will increase to $33.5 trillion at the end of 2030, or 109% of GDP; the previous 10-year projection, in March, saw the figure at 98% in 2030.

Meanwhile, the markets could not be higher.  Well, maybe they could but, on a valuation perspective, we are now tied with our 1999 record-high P/E multiples for the S&P 500 and that's the optimistic, forward P/E.  

Since the normal p/e is 16 and we're at 27, that's more than 50% over normal and that means we could easily have a 33% correction without even being oversold.  We've been moving more and more to cash during the recent run-up but the top of the market is an excellent place to cash in your winners, isn't it?  

Liquidity is also drying up and that too can be very dangerous yet you wouldn't know it from the recent index action, though it is showing up in the VIX:

Be careful out there!  


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  1. GM PSW!

    Batman, the article you posted yesterday on the open system (stock market) vs zero sum game (poker) is nothing new (Read Collen Roche here).  QE has moved this market since 2008-9, and if one follows bonds, it tells the story, and nothing but the story, so help……  Using the phrase here on 'pounding the table'….bonds will continue to have a reduction in yield, monetizing the debt and driving the market up.  We…..are…….Japan. That's what I have been saying my 13 yrs on this forum. 

    Phil is one of the best out there seeing the big picture….and this community is second to none with experience and eyes to catch different waves.

    Cheers, Pharm

  2. Japan – and it only took reality star don j trump to make it, a reality…. :(


    Good Morning.

  3. Speaking of Japan:

    Warren Buffett's Berkshire Hathaway recently revealed 5% stakes in Japan's five largest trading houses: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.

  4. Good Morning Phil !

    RKT down on big earnings and a positive outlook.  Albeit their 1st earnings since IPO, any trade here that you would be interested in?


  5. I have been observing a very strange market behavier over the last view days.

    At present /ES is down 25 points and all my portfolios are up. Like yesterday the /ES was up and I did show a slide loss in my Ports. As I said very very strange.

  6. Phil / Rotation?  looking at the board – it looks like selling hard in tech and being in cyclical and retail….  what do you see?

  7. Yodi: the VIX is down. That might be the reason.  Yesterday the VIX was up with the markets.

  8. Pharm / Roche – thanks, will review this – long list with deep articles… any in particular that are very useful?

  9. kinkistyle

    Thanks but I see the vix is up a bit today as well???

  10. Vix  has ben rising  for a few days now.

  11. Thats strange.  Finviz had it down around 1% today:

  12. VIX look at TOS possible having no delay

  13. VIX up more than 1$

  14. Oops, my bad. You're right. Looks like it popped.

  15. Good morning!

    Good morning!

    Looks like the indexes are out for a dip.  

    Still our shorting lines:  

    • Dow 28,750
    • S&P 3,500 
    • Nasdaq 12,000 
    • Russell 1,585 

    We're way over except the Russell so it's just a minor pullback until we cross those.

    Japan/Pharm – We should only be so lucky.  Looking more like Weimar these days.  

    Buffett/Kinki – That was an interesting move, timed with Abe's departure so I guess Buffet thinks things can't get worse but he did load up on airlines last year…

    Mitsubishi has always been one I like to invest in.  They make about $9Bn a year (normally) and $4.19 is a $53.5Bn valuation.  They don't have options but they do pay a 5.5% dividend and this is the very low end of their range – around where they were in 2008 – could easily double from here.

    RKT/Hicket – Back to their IPO high price and that was only early Aug so I'd say the brokers had it right in the first place.  They've been over $28 since Aug 24th after being at $18 on Aug 13th so I don't think you can say "down on big earnings" – the earnings are bringing them back to some semblance of reality, that's all.  $28.12 is still $55Bn and Q1 was net $97M and Q2 was $3.5Bn but there's a huge amount of adjustments in that and apparently the market thinks it's game-playing – not earnings.  

    Rotation/Batman – I see that it's way too early to jump to conclusions.  Possibly retail is rising into the holiday weekend and then it's Christmas time anyway.  Tech is ridiculously over-valued so of course it's going to underperform as other things catch up but that does not lead me to make sweeping conclusions.  Still watching and waiting for clarity.

    VIX/Kinki – That's a good point though now it's up again.

    Finviz is a bit delayed.

  16. AVGO – Big move into earnings tonight….  They are also increasing their dividend substantially at the end of the year….  so I've sold some puts for Jan – should hold well above 280 – sold some put at Jan '21 300 earlier -- 

  17. Schwab seems to be down. Heavy volumes?

  18. Phil broke the Nasdaq. 

  19. I did not break the Nasdaq – it was clearly broken already.  

    Finally making some money on the shorts!

    28,750 (10:45)

    3,500 (10:45)

    12,000 (10:45)

    1,585 (10:00)

    That's a classic failure with confirmations.  

    Done with the Dow already.  Next would be /NQ if it crosses 11,800 with 28,200, 3,450 and 1,540.

    /RB right at the $1.18 line for the longs if you feel brave into the weekend.  

  20. Looks like the biggest drop on the /NQ since March. 

  21. Phil, any thoughts on your IMAX trade of the month a couple months ago? It's performing well. Time to get out of any of the legs? Roll anything?

  22. Phil – Rotation – the vaccine will be out in a Emergency use Authorization before election – wether it's ready or not – but will be out….  the rotation is starting now into areas that will benefit the most – We need to understand where we will start to increase positions or start new ones…   The rotation is staring today – any companies we should keep our eye one or add to positions….  Retail, Entertainment, travel..?

  23. Phil / VIAC – maybe loos at a 35 price target and set up a new spread around this…  

  24. Phil, is the Mitsubishi you referred to under your comment about Buffett MHVYF?  Thank you.

  25. VIX is now 33.32 – up 25% from yesterday. 

  26. Wheee, that was fun!

    Now we'll see what kind of bounce we get at 28,200, 3,450, 11,800 and 1,540

    Nice move on RB, $1.20 is the stop line now – congrats to the players. 

    IMAX/Swamp – Not sure WHICH IMAX trade so can you post it?  I think they are solid long-term but, if uncovered, might be a good time to do so.

    Vaccine/Batman – That is the lie you choose to believe?  Trump is planning an "October" surprise of pushing out ANYTHING that seems like a vaccine so he can claim victory before the side effects are revealed.  Again, a day does not a trend make and the looming DISASTER is sending 50M children back to school WITHOUT a vaccine in a population that's only been about 70% exposed.    As I said in the Webinar yesterday, I like M, I like WBA, I like VIAC, I like IMAX – not because there's maybe a vaccine but because they are just great values and a vaccine would be a bonus but, even without one – I'll be happy to own them in 10 years.

    VIAC/Batman – As a new spread, I'd go for:

    • Sell 5 VIAC 2022 $25 puts for $5.15 ($2,575) 
    • Buy 10 VIAC 2022 $25 calls for $7.50 ($7,500)
    • Sell 10 VIAC 2022 $32.50 calls for $4.35 ($4,350) 

    That's net $575 on the $7,500 spread that's $3,000 in the money to start with an upside potential of $6,925 (1,200%) at a very reachable $32.50 in 18 months.  I think that's a comfortable ROI and the worst-case is owning 500 shares of VIAC for $26.15, about 10% off the current price.  

    MHVYF/Tech – That's Mitsubishi Heavy Industries, not Mitsubishi Financial – two separate stocks.

  27. Mitsubishi/Tech – I believe it is MUFG (at least that's what I bought)

  28. here was the trade I entered on imax. It's made about 50% of what it maxes out at which is almost a 600% return.

    Buy 20 Dec 20 IMAX $10 Calls for $3.57

    Sell 20 Dec 20 IMAX $15 Calls for $1.25

    Sell 10 Dec 20 IMAX $15 Puts for $3.87

  29. Thanks all, MUFG is what I was looking for, they have 11 different symbols for Mitsubishi.

  30. Got busy all day – did I miss anything? 

  31. Do these number support market prices:

  32. Honest question:  How many people would be willing to go get a vaccination if it is pushed out on November 2nd?  

    I don't think I will and I am the farthest thing from an anti-vaxxer.

  33. MUFG/Dave – The FG is for Financial Group.

    Mitsubishi UFJ Financial Group, Inc., a bank holding company, provides financial services in Japan, the United States, and Asia/Oceania. The company's Retail & Commercial Banking Business Group segment offers commercial banking, trust banking, and securities products and services to retail, and small and medium-sized enterprise customers. Its Japanese Corporate & Investment Banking Business Group segment provides transaction banking, investment banking, trust banking, and securities services, as well as advanced financial solutions for large corporations. The company's Global Corporate & Investment Banking Business Group segment offers corporate, investment, and transaction banking services for large corporate and financial institutions. Its Global Commercial Banking Business Group segment provides retail and commercial banking services, including loans, deposits, fund transfers, investments, and asset management services for local retail, small and medium-sized enterprise, and corporate customers. 

    It's like if GE Capital were a spin off (it is now).

    IMAX/Swamp – Well you only have to wait for December to make the rest so what else is there to do?  It only has to hold $15 and it's too short-term to sell calls against it.  If you are nervous, cash out or, as a great philosopher once said "When in doubt, sell half."  

    Missing/StJ – Just the normal noises in here.  

    Support/StJ – Er, no.

    Vaccine/Kinki – While I seriously fear side effects, if the study looks crazy good, I think I might take my chances rather than spend 6 more months in confinement.  Let's say I don't take it – it will be 2-3 months before we see if there are widespread side-effects so that's January (ish) and a few more months before they work out the kinks.  So, EVEN if there are problems, they would have to be pretty serious problems, not 1/1,000 problems or I'm still not going to wait until March anyway.  So, since there's very little chance I'll want to wait the extra 6 months, unless I have severe doubts about the vaccine in November, I'll probably try it.

  34. Kinki/vaccine

    That's not something one should decide in the abscence of data. While there is concern that the data will be rushed, I agree with Phil, I will see what the information looks like and decide at that time. So far, there are several promising vaccines that need to go through additional trial in human subjects. Once that is well underway it will become more clear regarding the risk/benefit. 

    I suspect the benefit will outweigh the risk based on the limited early data that is available today. 


  35. TSLA $380!  There's like a $1M upside in the STP if we hit that target!

  36. TSLA Short Call 2021 15-JAN 380.00 CALL [TSLA @ $407.00 $-40.37] -70 8/20/2020 (134) $-581,980 $83.14 $24.44 $-94.82     $107.58 $-29.63 $-171,045 -29.4% $-753,025
    TSLA Long Put 2021 15-JAN 190.00 PUT [TSLA @ $407.00 $-40.37] 25 6/19/2020 (134) $85,350 $34.14 $-23.04     $11.10 $1.52 $-57,600 -67.5% $27,750
    TSLA Short Put 2021 15-JAN 300.00 PUT [TSLA @ $407.00 $-40.37] -30 8/21/2020 (134) $-78,900 $26.30 $14.48     $40.78 $4.78 $-43,425 -55.0% $-122,325

  37. Vaccination: Sounds like a plan.

  38. Phil / Vaccine – I have reservations about rushing out a vaccine… however I firmly believe trump will force the FDA to approve the  vaccine right before the election.   There is no doubt that this will happen.  This trade is already in the market.   I have been moving more into positions that I think will benefit… have been adding for a few weeks – now most of these stocks have already moved a ton and are pretty close to where they were prior to crash –  eagling I put more money into SBUX, M, HBI, and WBA, VIAC  and have added more to VIAC one today – thanks… I would have gone to 35 but think the 32.5 is a bit more conservative.  I also got out of my 15 puts 17 puts ( at a nice profit), and sold the 22.5 puts and will build more on this….  I'm looking at Hotels and maybe resorts.   More higher end – Wynd, Mar intl, ( Ritz is part of this)  I'm looking at this industry.  I think these will be in a good position bc people will have more trust in high end properties, and they have petter staffing to control COVID.  also, some o f these have not moved as much..  Any ides here?

  39. Kinki/vacc – I'm a member of Kaiser Permanente Southern California, and they're running a phase 3 vaccine trial right now, and accepting enrollment. I seriously considered signing up, but the problem is that a certain amount of, what's the phrase, private medical data, is perforce collected by the investigation team for analysis. As I used to work for that research department, it's almost certain they'd recognize me. So, I'll wait. I doubt I'll take the pre-election jab, either.

  40. Batman, how about Vegas brands, MGM, Wynn, etc. Airlines – along with your travel premise.

    I would be interested in the big medical device companies. Elective procedures have been slow to come back, so some relief opening up proceduralists to go full speed should benefit them – MDT.

    Disney – I think Phil has commented on this one recently, but they should fair better once we get moving around again. 

    Penn National Gaming – getting lot of publicity due to Dave Portnoy and his antics on twitter etc. But, I can see the premise, sports betting will be big once sports are back. People are hungry for their loved pastimes to come back.

    I agree with your thought that Trump will push for a vaccine to be released, he's illustrated his intent to manipulate this entire event as a means to push the market higher, and the timing of it will be deliberate. Whether or not the vaccine is entirely ready, or best available is a different question – one I think most logical people understand is not likely. Safe enough will be good enough for this President.  Not the case for many of us, but for him it is.

  41. Jeffdoc / Vaccine…. Those are good areas that you brought up… all good.. Gambling is good, gamboling travel.   – PENN though has already risen back to previus levels WYNN is good, LUV is good as well.  The issue is I don't know these companies as well so I think we need to collectively study this and figure out which companies within these areas is a high quality co, and pick some to develop a trade set ups - I've been scanning – MCD, DBUX, DIS, PLAY, LYV, MGM, WYNN, BA, EXPE, HLT, MAR, URBN, AMC ECL, PENN, LUV