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The Week Ahead – S&P 3,500 and Nasdaq 12,000 in Play

Baby Trump' Balloon Grounded for July 4 Protest in DC | Military.comUp and up we go.

3 weeks and one day from now we will have an election and the markets could not be happier.  That's not good news for the soon to be ex-President as Joe Biden has the biggest lead three weeks before an election than any candidate since 1936, with a 55% to 43% margin among likely voters – even the Fox News poll has Biden leading by more than 10 points.  

Even if every undecided or current third party voter went to Trump now, he'd still be down about 5 to 6 points nationally. That's never been the case since 1936 at this point, when Franklin Roosevelt took 60% of the popular vote from Republican Alf Landon with Roosevelt winning the electoral college 523 to 8 (Maine and Vermont).  

A look under the hood reveals why Biden is in such a strong position. Since the coronavirus pandemic began, Covid-19 has either been, or been within the margin of error of being the nation's most important problem in Gallup polling.   Biden has a huge advantage over Trump when it comes to the pandemic. The clear majority (59%) of likely voters in the last CNN poll said Biden would better be able to handle the outbreak. Just 38% said Trump would do a better job than Biden.

I know, it's a tough choice isn't it?  Who do we want leading our country?  What kind of World do we want our children to grow up in?  I was reminded of what kind of President I'd like to have watching this video this weekend:

That guy!  Get that guy back!!!

Regardless, Biden is better than Trump – according to the polls, according to the markets, according to rational-thinking people around what's left of the planet that isn't on fire.  But that brings us back to the markets.  Will Biden actually be good for the market?  Probably not.  Trump has put the nation $8Tn in debt in 4 years and we need to spend another $4Tn next year fighting this virus and fixing the economic wreckage caused by Trump's 4 years.  This is a little like the nightmare Obama and Biden inherited from Bush the 2nd, so Joe is probably the right man for the job, but that doesn't mean the job will be easy – this country is badly wounded and needs a lot of healing.

United States federal budget - WikipediaSo far, President Trump and the market have been mostly ignoring the issues and ignoring the issues is how we ended up with the big crash of 2008.  This is a propped-up economy and, at $27,040,979,063,829.00 in debt, adding 4.26Tn (this year's debt) next year will put our $20Tn GDP over $30Tn in debt.  Federal Tax Revenues are $3.06Tn this year and just $174Bn of that is Corporate Tax Revenue as our Corporate Citizens have been enjoying a 4-year tax holiday under Trump – Biden has already said that's got to change.

But what kind of change will we need?  To get debt under control we have to cut spending or raise revenues but, if we're spending $4Tn more than the $3Tn we take in, we either have to cut Government spending by 100% or raise taxes by 130% – neither of those are very appealing but both of those are the reality we'll have to face one day.  

While the deficit Trump is running seems obscene – it's projected to be the new normal down the road as we're never going to put up with doubling our taxes, nor are we going to put up with 100% cuts to Government spending and the EXTREMELY low interest rates we're currently paying on $27Tn in debt are being kept artificially low by a Federal Reserve that is, one day, going to lose it's power and then we will be at the mercy of market rates – like Greece was 10 years ago.  That is REALLY going to suck….

So enjoy these Golden Years – it may not get any better than we have it now!  

Speaking of it not getting any better – earnings season has snuck up on us with plenty of companies about to report on Q3 this week and I'm very concerned that expectations are too far ahead of reality and the market has a big shock ahead.  We won't see it from the early reporters, who are generally large companies that have gigantic accounting departments that are able to prepare annual reports 2 weeks after the quarter ends – they are not struggling and they are, in fact, benefitting from all the free money that's flying around.  Later we'll hear from the mid-caps and small caps – that's when things will get interesting.  For now we have these to kick things off:

Image

Today is kind of a holiday (Indigenous People's Day) and the calendar is a bit dull this week with CPI tomorrow, PPI on Wednesday, Atlanta, NY and Philly Fed Reports into Thursday and then Retail Sales, Industrial Production  and Consumer Sentiment on Friday so we're just waiting for that data and, while we do, we'll chew on the earnings like hors d'oeuvres.  

Speaking of feasting, just because we live in uncertain times doesn't mean we can't buy stocks we are certain of.  IBM is spinning off their Managed Infrastructure Services Division to focus more on hybrid cloud growth and they've raised their guidance for Q3 and earnings have remained strong in a rough year so here's how we played it in our Live Member Chat Room:  

IBM's CEO, Krishna, says the hybrid cloud opportunity is a $1Tn market:

"Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating … Now is the right time to create two market-leading companies focused on what they do best."

The company will spin off the Managed Infrastructure Services unit of its Global Technology Services operation into a new public company. The tax-free deal is expected to be completed by the end of next year.

The company sees Q3 adjusted EPS of $2.58 vs. consensus of $2.58, and revenue of $17.6B vs. $17.56 consensus.

So they've raised guidance ahead of the spin-off and they're not doing the spin-off to head lower, right?  Last two Qs were $1.84 and $2.18 so these guys are pretty virus-proof so $2.58 and last year's Q4 was $4.71, which would put us at $11.31 though I doubt Q4 will be as strong as last year.  So $12.30 in 2021 is not out of the question but the spin-off and transition could be a bit disruptive so I wouldn't go too crazy but I'm certainly comfortable with IBM at $125 for the long-haul as the same good value it was when we picked it at $110 in Nov 2018 as our Stock of the Year for 2019.  

The Stock of the Year doesn't have to go up (we hit $150 in Jan 2020) but it does have to be one we are certain will make 300% with an options trade and just knowing we got a bargain was enough to be sure with IBM.   

At the moment, I wouldn't make IBM the stock of the year because it COULD fall back to $100 if the market tanks.  THEN I would love it but $127.79 is simply a good price at the moment.

Of course you can own IBM for $100 by selling the 2023 $100 puts for $11.50 so, if we consider that free money, then our trade for the Newsletter Portfolio can be:

  • Sell 5 IBM 2023 $100 puts for $11.50 ($5,750) 
  • Buy 10 IBM 2023 $110 calls for $26 ($26,000)
  • Sell 10 IBM 2023 $125 calls for $19 ($19,000) 

That's net $1,250 on a $15,000 spread so there's $13,750 (1,100%) upside potential if IBM stays over $125 and, if it doesn't, we should be thrilled to invest more money in rolling down the short calls to the $100s for $5 ($5,000) or less or the $90s for $10 or less ($10,000) and then we'd be in a $35,000 spread for net $11,250 with $23,750 upside potential if we make it back to $125 but our break-even would be $101.25 – that's a risk I could certainly live with!

That's what makes a great trade, the downside to this one is owning 500 shares of IBM for net $102.50.  I'd LOVE to own 500 shares of IBM at $102.50 so there's nothing about this trade that worries me.  I'll almost be disappointed if it goes straight up and all we make is 1,100%.  Meanwhile, it's a nice, margin-efficient trade as the ordinary margin is just $4,028 as it's more than 20% out of the money on the short put side.

Be aware that they are spinning off so these options will get messy down the road but, like SPWR earlier this year, I'm not afraid of a good decision affecting our position.  

 


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  1. My request on Friday’s question re. VBBE and BHP no one saw or even mentioned.
    My todays question is: After the yellow clown’s corona infection and 4 day miracle cure, does actually any one on this board believe he contracted the virus. 
    No one has heard anything about his wife, obviously we can not have two miracle cures in one family, can we?


  2. Good morning

    Hi Yodi, in your suggestion you gave to AYX how will you do if the paper exceeds the call sold on 125/160 Jan 23 bcs? thanks


  3. Sorry repeat, I have Short 10 calls 150 jan 2022 19.00 and short 10 calls 160 14.00 jan 2022


  4. Phil / IBM – thanks for feedback….. I'll review not sure how you arrived 125…  but with the growth rate / eps  say   8.8 ish in '20 and 12.3 ish  in '22 and 14.5 ish in '23 looks like good growth that diver serves a higher multiple….  ?

     


  5. Hi Marcel I would be jumping for joy as I would be collecting in your case140,000.00 less I think the 52,000.00 you spent to set up the spread. Further you put options would have run all worthless. 



  6. Phil,

    With your write up this morning on IBM splitting up the legacy business and the cloud business, please advise on a course of action on a position I have currently:

    On 10/21/2019, I initiated a Sell Jan 2022, $115 Put receiving $13.50.

    Thanks as always for your guidance.


  7. The short Jan 22 calls you will have to watch a bit they need to burn off most or better all their premium so you left only with intrinsic value and possible have to roll them at given times. Obviously this takes a bit of observation, as you should have not entered naked calls in the first place. However now at least you are covered by the 40 Jan 23 BCS, or you could have covered them with as you said 1500 extra stock, However quite a capital outly on a stock not paying div. 


  8. Good morning!  

    Ignoring Yodi/Yodi – Wife?  There are no records or Trump having a wife.  What Covid?  Trump is immune to Covid.  You have to keep up!

    One of the issues raised in 1984 is the idea that history is mutable or changeable, that truth is what the Party deems it to be, and that the truths found in history are the bases of the principles of the future. Some Fascist German leaders of the time boasted that if you tell a lie loud enough and often enough, people will accept it as truth. The Stalinists perfected this modus operandi by re-writing people and events in and out of history or distorting historical facts to suit the Party's purposes. "Who controls the past controls the future: who controls the present controls the past," runs the Party slogan in 1984.

    Winston Smith's position in the Ministry of Truth is that of creating or forging the past into something unrecognizable to any person with an accurate memory (even memory is controlled in 1984) so that each forgery "becomes" historic fact. One moment, Oceania is and always has been at war with one enemy, the next moment it is and has always been at war with another, and the people of Oceania accept the information as true. It is an exaggeration of a phenomenon that Orwell observed in his own time and reported with true clarity in 1984: People most readily believe that which they can believe most conveniently.

    The novel makes the distinction between truth (the actual issues and circumstances of an event) and fact (what are believed to be the issues and circumstances of an event) and then explores the social-political-ethical-moral nuances of the evil manipulation of facts in order to control individuals and societies for political gain. Orwell was concerned that the concept of truth was fading out of the world. After all, in the arena of human intercourse of which politics is a part, what is believed is much more powerful than what is actual. If the leaders of nations are the people dictating the what, where, when, who, and how of history, there can be little question that lies find their way into the history books, that those lies are taught to school children, and that they eventually become historical fact.

    This concern is quite obvious in 1984. During Orwell's time as a resistance fighter in Spain, he experienced this rewriting of history first-hand: He noticed that newspaper stories were often inaccurate: There were often reports of battles where no fighting had occurred or no report at all of battles where hundreds of men had died. Orwell conceded that much of history was lies, and he was frustrated by the fact that he believed that history could be accurately written.

    This "rewriting" of events is not reserved for totalitarian governments. Even in our own time, candidates for all levels of government, including those for President, "remember" things differently, and politicos nationwide attempt to put their "spin" on events that affect us all. It is as if an event can be stricken from history if the population does not remember it. And again, at all levels, non-specific or ambiguous language is used to shade or change the actual events to favor the candidates' or leaders' position or ideology. With every era, our "heroes" are disclaimed, and history books rewritten. As the culture and the ideology change, history changes. Sometimes these distortions are innocent and innocuous differences of perspective; other times, they are deadly dangerous.

    That's the World we're living in.  You are, fortunately, on the outside looking in – the way we used to look at Russia and wonder how they possibly could have believed the propaganda of Pravda and Izvestia back in the 80s.  It's really interesting to see reality being torn apart right in front of you.

    Short calls/Marcel – ???

    IBM/Batman – $125 is not my target, as I was saying – it's a number I feel VERY comfortable with, which is what makes it a good bet.  I feel it's well within the range of even a worst-case scenario so setting up a spread which pays us in full at $125 is one I can get behind.  You don't need to "project" growth targets if you stick with solid companies that are simply not likely to go lower – that allows us to construct very profitable trades with very wide margins for error.  

    Speaking of errors – 3,500 is a great shorting line on /ES with tight stops above..

    Dollar should hold 93 and that will put a little weight on /ES.

    IBM/Jasu – Just the short puts?  Nothing to worry about, they are very likely to expire worthless so no need to do anything but they will become illiquid so, if you aren't REALLY in for the long haul, you may want to wait for the split and reset but I would sleep well with those puts, netting in at my worst-case $100.


  9. Marcel Here I give you an example on a stock I bought Aug 19 CODI @ 17.93. In May 20 when the stock was down to 14.92 I sold the Dec. 17.5 call for 1.25. Stock today is trading at 19.50. So you can see the stock has improved by 4.08 but the Dec call option is only 1.95. However 17.50 plus 1.95 equals 19.45, so there is no premium left. Stock is paying .36 div 10/14, so If I do not want to lose the stock I have to roll the Dec 17.5 option!!!!


  10. Good Morning.


  11. Phil, 

    I'm in for the long haul on the IBM $115Puts. Thank you


  12. F up today by 6.9%%


  13. Phil Thanks for the write up, just a yes or no would have done it as well, but great history lession.


  14. Yodi, yes I know since 2015 I never did any naked Call. I love to sleep peacefully at night.

    I will do it to be cover. Meanwhile AYX is little down and It can lose only if stock go above 210 or below 100.

    Thanks for your attention





  15. Fifth of countries at risk of ecosystem collapse, analysis finds



  16. Phil will there be a PSW quarterly report?


  17. Phil / INTC – at which price level do you intend to sell short calls for the LTP?


  18. F/Yodi – Coming along nicely.

    Quarterly/Tangled – Yes.  Wasn't much to say last Q but this Q we have a clearer picture.

    INTC/Hwt – Well, I don't have a real target below $60 so we're just looking to see if they run into any serious resistance.  $53.50 is "just" $228Bn and INTC is dropping over $20Bn to the bottom line and, like IBM, hasn't really taken a hit on the virus.  So $53-55 still cheap and 20% more won't bee much more expensive with a p/e around 14.  Bottom line is the sell-off was silly and the short 2022 $60s are $5 and the Jan $57.50s are $1.90 so, if you feel the need to cover, I'd say selling 1/2 of those can't really hurt you as you can roll to the 2022 $60s and that's a nice, non-greedy exit.  I just don't feel worried enough to bother yet.


  19. Is SoftBank up to its call option tricks again? 


  20. malsg – i was wondering the same thing.. although at this point they don't need to do much.. one day of parabolic madness and everyone jumps on the band wagon. self fulfilling prophecy!


  21. I'm getting a sinking feeling about this. Is this the end?!


  22. monkman you wouldnt know its the end by the way the market is going.


  23. Glass half full = Only about 50 points away from new all time highs!!

    Glass half empty = Only about 50 points away from completing the dreaded "M" double top!!


  24. Wow GOOG up 5.1%


  25. WOW volume looks pretty low – Especially on S&P


  26. Tricks/Malsg – Very low-volume day, easy to take advantage of.

    Holy cow, flying higher.  12,200 on /NQ, 1,650 on /RTY, 3,540 on /ES and 28,850 on /YM – crazy high/

    LOL EMike.

    Such tempting shorts here.


  27. We're going to new highs….


  28. Phil / Markets ( S$P) – since we have now pierced the 3420 – what this look like on the top end for the market….. any different support now, or resistance…. or is further confirmation needed and if so what would you be looking for?  Thanks


  29. Btw. The U.K. has started to lockdown its cities again. Liverpool first with others under review including London. 


  30. Markets/Batman – A low-volume day does not a trend make.  We'll see what happens the rest of the week.  If we sustain the levels for a few days, THEN we have to consider a path higher from here.  

    Lockdowns/Maslg – Markets don't seem to care.  Turns out we don't need consumers to run the economy after all – the Matrix was right!

    Science Behind the Fiction: Humans as Batteries, As in The Matrix «  Adafruit Industries – Makers, hackers, artists, designers and engineers!


  31. What Oil Recovery?




  32. Good Morning,

    Phil / Yodi please can you comment my follow questions?Tks

    How do you defend a BCS that goes against you? Do you let it go because your loss you accepted before entering?
    Do you buy the stock because you sold Put and so you will buy at a discount or do you first try to roll the BCS down for later if there is no way to have to buy the stock?