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Which Way Wednesday – Stimulus Hopes Hold off Disaster (so far)

We're holding up so far.

We are flirting with disaster at the 3,420 line but, so far, it's holding up on endless promises of endless stimulus – currently over 10% of our GDP ($2Tn) is on the table to be pumped into our economy in the last 2 months of the year – just like we did in Q2 and that gave us a 20% pop in the S&P, from 3,000 in late June to 3,600 at the end of August.  The question now is, can $2,000,000,000,000 give the markets another 20% boost or is it only enough to fill the hole that's been blown in this economy by  the Covid Crisis?

Nancy Pelosi said she hoped that fresh stimulus spending would be retroactive, although Republican Senate Majority Leader, Mitch McConnell has warned the White House against a bigger Democrat-led deal before the election.  The administration said its offer is now up to $1.88Tn, below the $2.2Tn Pelosi has pushed for.  “The rise in yields suggests that the market thinks a stimulus deal will be forthcoming and that the Democrats are set to take both the presidency and the Senate at the Nov. 3 election,” said John Hardy, chief foreign-exchange strategist at Saxo Bank.

All this stimulus talk has sent the Dollar down over 2% since September and the S&P, which is priced in Dollars, is up 6% and Oil is up 10% and Gold is up 4% and we'll see if that 92 line holds up again as we print another $2Tn.  It should as the rest of the World is still in bailout mode as well with the ECB meeting next week to discuss policy into their Winter Holiday.  

European Central Bank President Christine Lagarde said the unexpectedly early pickup in coronavirus infections is a “clear risk” to the economic outlook, in a sign that policy makers are gearing up for more monetary stimulus.  The remarks were broadcast hours after ECB chief economist Philip Lane told Germany’s RTL that while the virus might still be contained, “we have to prepare for worse scenarios” if it can’t.

“Most scientists in the euro zone were expecting the resurgence of the epidemic in November or December, with the cold,” Lagarde said in a pre-recorded interview with France’s LCI on Tuesday evening. “It’s come earlier, and from that point of view that has surprised. It’s not a good omen.”

Weakening AgainAfter gaining traction in the latter half of September, Economic Activity has again weakened in October, particularly in European countries, according to Bloomberg Economics’ gauges that integrate high-frequency data such as mobility, energy consumption, and public transport usage. Following concerns about renewed outbreaks amid strong rises in Covid-19 cases, activity in Germany, France, Spain and Italy has leveled off.  The US is picking up but still at about 2/3 of where we were before the virus hit – down 33% overall.  

Meanwhile, that doesn't stop the market from rallying as hope does spring eternal that another $2Tn of debt will fix things right up.  That means, by this time next year, the US economy will be roughly $32Tn in debt, which will be 177% of our $18Tn GDP.  Since our Government currently collects $3Tn in taxes, then doubling the tax rate for 10 years won't even pay off our exisiting debt, or the interest on that debt, or any additional money we borrow during that time.  Passing this $2Tn stimulus bill will push us close to $6Tn (200%) in debt for 2020, which means we would also have to cut Government spending by 66% just to stop running up additional debt.

ImageSo Trump had done to America what he does with every business he's been involved in – he's put his name on it, spent all of his investors' (in this case the American people's) money, leveraged the debt and left a useless, dysfunctional shell on the verge of bankruptcy which he will then walk away from and claim he had no part in the downfall.  MAGA!

As you can see from this chart, other countries have no confidence in Trump or the US anymore and almost the entirety of Trump's support in Europe comes from Right-Wing Populist Factions, where Trump is seen as the new White Messiah.  

Speaking of feeding the hungry, there are food shortages in Asia and, by all accounts, they are coming to the US as well as supply chain disruptions ripple through the Global Economy.  

In an October 5, article for the New York Times entitled “China’s mealtime appeal amid food supply worries: Don’t take more than you can eat,” Eva Dou writes,

On the surface, China’s campaign to encourage mealtime thrift has been a cheerful affair, with soldiers, factory workers and schoolchildren shown polishing their plates clean of food.

But behind the drive is a harsh reality. China does not have enough fresh food to go around — and neither does much of the world.

The pandemic and extreme weather have disrupted agricultural supply chains, leaving food prices sharply higher in countries as diverse as YemenSudanMexico and South Korea. The United Nations warned in June that the world is on the brink of its worst food crisis in 50 years.

“It’s scary and it’s overwhelming,” Arif Husain, chief economist of the United Nations World Food Program, said in an interview. “I don’t think we have seen anything like this ever.”

One way to hedge against food inflation is with the Agriculture ETF (DBA), which is currently at $14.87.  Let's say you buy $300 worth of groceries per week so $15,000/yr and you are concerned about more than 20% inflation.  20% inflation would put DBA up $3 to $18 and cost you $3,000 so we can hedge against that with the following play:

  • Sell 10 DBA 2023 $12 puts for $1.05 ($1,050) 
  • Buy 10 DBA 2023 $12 calls for $4.20 ($4,200)
  • Sell 10 DBA 2023 $15 calls for $2.25 ($2,500) 

That's net $650 on the $3,000 spread so you are hedging up to $2,350 of any move higher in food prices and the only way you lose more than $650 is if DBA is down 20%, in which case you would be saving $3,000 on your food costs.  That's what a hedge is supposed to do – protect you from uncertainty.


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  1. Good morning

  2. Here is the link to today's Webinar. Enjoy!!!

  3. Again, markets are not being moved by rational numbers like fundamentals! I repeat myself, but these moves are only around the free money printed by CB and governments. Without that money, the economy would collapse. All these guys railing against socialism are the biggest beneficiaries of the largest scale socialist bailout ever! 

    And there won't be a large stimulus before the election because McConnell already knows that Trump will lose so he and his colleagues will rediscover the virtue of a balanced budget on Nov. 4.  Which might be foolish because if he loses the Senate, they won't have any control over the money being spent moving forward. But they'll be able to restart railing about the tax and spend Dems! Which seems to be the only job that they are good at.

  4. Good Morning.

  5. Good morning!

    Still in danger of making big "M" patterns on the big chart.  Very big test of 50 dmas coming up.

    Rumors of progress in the talks taking us higher already.

    Watch 3,200 on Euro Stoxx – that should be resistance.

    • It is never too early to talk about flying car stock plays.
    • Morgan Stanley is highlighting one today, with a new note on urban air mobility startup Lilium, whose primary product is a passenger air vehicle that is said to use the company's proprietary DEVTC technology and design to significantly reduce noise, increase safety, and potentially provide for substantially improved unit-economics of service.
    • Analyst Adam Jonas notes that the company plans to enter the ride-sharing eVOTL market (electric Vertical Take-off and Landing). While future product rollouts are still not public, the company plans to use the following timeline -2020-2022: Industrialization and certification, 2023-2024: Entry into service with piloted shuttle and 2025: Regional scale-up.
    • While the e-VTOL space is still largely pre-commercial with many untested technologies, it has all the makings of a future SPAQ speculation binge.
    • There are also some heavyweight dabbling in the air taxi sector. General Motors (NYSE:GM) is looking for a partner, while Hyundai (OTCPK:HYMLF) teamed up with Uber (NYSE:UBER) in January to develop electric air taxis and Toyota (NYSE:TM) led an investment round in startup Joby. Daimler (OTCPK:DDAIF) and Geely Automobile (OTCPK:GELYF) have invested in Germany-based Volocopter, while Volkswagen's Porsche and Boeing (NYSE:BA) have also partnered up
    • Netflix (NFLX -6.6%) is sharply lower today after earnings where the focus looked to be on low subscriber additions, though analysts came out of the report pretty much how they went in – and with most of them bullish, that meant a lot of brushing off the subscriber count in favor of looking at cash flow.
    • In the company's earnings call, CFO Spence Neumann called out the "exciting" cash flow story, saying the company is rapidly closing on sustainable positivity in free cash flow and that it's at a point where it can "self-finance our growth."
    • BMO, for example, reiterated its Outperform and boosted its price target to $700 from $625 – now implying 43% upside. It's looking past a short-term focus on subscribers to the reality of consistent cash flow generation, and says the company's relative lack of regulatory overhang among the FAANGs is underappreciated.
    • Piper Sandler reiterated its Overweight and raised price target to $630 from $534, noting stable churn and a strong content portfolio, and looking to a potential U.S. price increase in coming months.
    • Cowen echoed company execs in calling the subscriber miss "negligible" against a backdrop of 195M subs. Churn is still below pre-COVID levels, it says, and points to production resumption in much of the world (including on Stranger Things and The Witcher). It has an Outperform rating and $625 target.
    • RBC says the long thesis is "well intact" despite soft subscriber numbers, with the prospect of expanding margins and the aforementioned free cash flow inflection point. It's raised its price target to $630 from $610.
    • Bears are also unmoved by the report. Benchmark reiterated its Sell rating and lowered its price target to $380 from $420, implying 24% downside. And Needham reiterated its Underperform rating, with the slowdown in subscription adds in front of mind for the firm. The stock is stuck in a trading range heading into a global "unwinding" of the benefits it saw during COVID-19 lockdowns this year, the firm says, and points to a risk of multiple compression.
    • EIA Petroleum Inventories: Crude -1.0M barrels vs. -3.8M last week.
    • EIA Gasoline +1.9barrels vs. -1.6M last week.
    • EIA Distillates -3.8M barrels vs. -7.2M last week.
    • Futures (CL1:COM -1.6%)
    • It was the first mission in which NASA attempted to return materials from an asteroid. And it went quite well.
    • "Preliminary data show that today's sample collection event went as planned. More details to come once all the data from the event are downlinked to Earth. Thanks, everybody, for following along as we journey #ToBennuAndBack!" NASA wrote in a tweet. "Next stop: Earth 2023!"
    • The mission called OSIRIS-REx – an acronym that stands for Origins, Spectral Interpretation, Resource Identification, Security, Regolith Explorer – launched in Sept. 2016, at a total cost of about $1B.
    • Lockheed Martin (LMT +0.5%) built the spacecraft and handled the latest leg from its control center near Denver. The OSIRIS-REx spacecraft is about 20 feet long, 9 feet wide, 10 feet tall, with an 11 foot arm that reached down to collect between two ounces and five pounds of Bennu's material to deliver back to Earth. It will take about a week to confirm how big of a sample OSIRIS-REx scooped up from the asteroid.
    • "What deep space missions are able to discover is directly applicable to [NASA's other efforts, such as] lunar exploration," declared Lockheed Martin director of deep space exploration Ari Vogel.
    • The company is also the manufacturing partner for NASA's Orion lander, which will transport the first American woman and the next American man to the Moon by 2024 under the Artemis program.
    • In its Q3 earnings report yesterday, Lockheed posted revenues for its Space division that climbed 6% Y/Y to $2.8B.
    • Mining names open higher after metals prices are helped by a weaker dollar due to speculation that D.C. lawmakers will make progress on talks for stimulus legislation to be financed by trillion-dollar borrowing.
    • Most metals are moving higher, with December copper (HG1:COM) +1.1% to $3.18/lb., near its highest intraday level since May 2018.
    • Gold prices (XAUUSD:CUR

       21.41 1.12%

      52 Week Range
      1,445.18 - 2,074.88

      Market Cap.

      ) edge higher for a third straight day, pushing toward a five-week high with December Comex gold +0.6% to $1,928/oz., while December silver (XAGUSD:CUR) +1.1% to $25.24/oz.

    • However, some experts warn that gold is vulnerable to sharp pullbacks following a recent period of listless trade, leading into the U.S. presidential elections and as bond yields rise.
    • Among copper and diversified miners: FCX +3.4%SCCO +1.4%HBM +3.9%.
    • Among gold and silver miners, EGO +2.3%KGC +1.8%AEM +1.5%AU +1.3%AUY +1.1%GOLD +0.7%EXK +3.1%CDE +2.4%HL +1.9%AG +1.7%.

  6. Won’t be a green Christmas for working Santas as parades, other gigs dry up – BNN Bloomberg

  7. Hello, Phil regarding your comments to my question you said yesterday…Long, slow decline/Marcel – Well for that you'd have to go back to our Sell List from 2007 – that took a long time to pay off.  Still, notice our TSLA trade is a bit bearish.  We simply have to adapt to the environment as it presents itself.  Rather than look for undervalued stocks, we look for overvalued ones that haven't seen a decline yet.  CMG is another bet we have like that.

     I did not understand why you said you are looking for overvalued … instead of looking for those that somehow corrected or are undervalued…. In the aggressive form that you usually buy you need to have the chances of going in the right direction because if the paper goes against your loss should be strong. Am I correct?

    I realized that when the trade starts to lose and the Put gains value you double the position and roll over to a smaller put. Why do you only roll once?

    Thanks in advance,

  8. I believe you asked me about investing in a prolonged market downturn and I was talking about shorting overvalued stocks rather than going long on undervalued stocks.  At a certain point, we do go bargain-hunting again but only when the correction is mostly over – like we did in late 2008/9.

    Overall, this is a time to exercise caution and I'm not looking to rush into anything.  

    Webinar time!

  9. Well we were talking about the value of INTC, T and CHL in the Webinar but we ran out of recording space so I don't think it will come out.  

    All are sell 2023 puts and buy the in-the-money spreads as starter positions.

    Those are the kind of plays I don't mind making in a risky market.  

    We also went long on /CL at $39.96 – $40 is the stop now but only looking for $200.

  10. Phil any thoughts on WHR earnings after the bell?

  11. BDC's play on ETHE is starting to look pretty good… 

  12. I have IBM 2022 100/135 call spreads.  To lower my cost basis, I'd like to sell 1/2 Jan 2021 135 calls.  This will not cost me additional margin.   Any comments or objections to this plan?  Thanks.

  13. JohnC1,

    I am holding various positions. But must tell you I would never sell calls after the stock has dropped some 130 to 115. Selling leap puts would be a better play if you do not mind the margin cost.

  14. Yodi:  Thanks for the advice.  I appreciate it.

  15. JohnC1 / IBM

    I did IBM 2023 110 / 125 call spreads. 

    Since I bought, 125 calls are down 27%. If I buy them back, I should be willing to lose lot more on paper. 

    Not sure if the slide is done and I have decided not to buy back. 

  16. sk:  Thanks for your thoughts.  

  17. WHR/Coulter – Well they were really good.  Not only big beats but backlogged orders.  

    Whirlpool (WHR) came out with quarterly earnings of $6.91 per share, beating the Zacks Consensus Estimate of $4.10 per share. This compares to earnings of $3.97 per share a year ago. These figures are adjusted for non-recurring items.

    This quarterly report represents an earnings surprise of 68.54%. A quarter ago, it was expected that this maker of Maytag, KitchenAid and other appliances would post earnings of $0.74 per share when it actually produced earnings of $2.15, delivering a surprise of 190.54%.

    Over the last four quarters, the company has surpassed consensus EPS estimates four times.

    IBM/John – Now that they are down to $115 I'd be disinclined to cover them.  

    And what Yodi said!

    IBM/SK – You have 73% more to make on them, what's the better alternative?  

    TSLA very indecisive after hours.  Seems like it's settling higher.  

    NFLX still bad.

    Indexes off 0.666% – that's a bad sign….

    • Cruise says it will team with majority shareholder General Motors (NYSE:GM) to seek U.S. regulatory approval in the coming months to deploy a limited number of Cruise Origin vehicles without steering wheels or pedals.
    • The National Highway Traffic Safety Administration, which spent 15 months reviewing the GM petition before seeking public comment, says it "will review the new petition when it is received."
    • Cruise made the announcement today after it received a permit from California's Department of Motor Vehicles last week to be the first company to test cars without any riders on San Francisco streets.
    • Exxon Mobil (NYSE:XOM) is "very close" to completing its workforce appraisals in the U.S. and Canada and expects to lay off employees in the coming weeks, Reuters reports, citing an internal email from CEO Darren Woods.
    • "We still have some significant headwinds, more work to do and, unfortunately, further reductions are necessary," Woods said in the email to the company's nearly 75K-person workforce.
    • The company this year has exceeded a target of reducing operating expenses by $1B and capital spending by $10B, but the pandemic has cut oil demand by 20%, which has made a "devastating impact" on the oil business, Woods said.
    • Exxon is coming off its first back-to-back quarterly loss in at least 36 years and is expected to post another quarterly loss when results are released on Oct. 30
    • Tesla (NASDAQ:TSLA) held one of its calmer conference calls after knocking out five straight quarters of profit.
    • Tesla CEO Elon Musk gave out more details on the full self-driving [FSD] beta, noting that the system will be trained as edge cases are worked out with the beta drivers. It is noted that the car will drive in full-self driving mode even without connectivity.
    • Musk said the Shanghai factory expansion is going well and construction is progressing in Austin and Berlin. Deliveries are expected next year from Austin and Berlin, but full capacity won't be reached until 12 months to 24 months.
    • In a question about spinoffs, Elon Musk said the company has about a dozen startups within the company, although he doesn't indicate there any thoughts to setting any of them free.
    • Musk says the future robotaxi system would allow an Uber (NYSE:UBER) or Lyft (NASDAQ:LYFT) driver to manage a fleet of ten cars.
    • Affordability of Tesla cars is still a long-term goal. It is noted that margins have been moving higher in general even as Tesla has fired off some price cuts.
    • When asked about mid-term production targets, Musk passed on anything resembling guidance but sticks with the 20M vehicles by 2030 target laid out at the Battery Day event.
    • Early reaction is already in from Wall Street on Tesla's quarter.
    • CFRA's Garrett Nelson: "We maintain a 12-month price target of $500, representing a '22 P/E of 91.7x. We raise our adjusted EPS estimates by $0.05 to $1.90, by $0.23 to $3.10 for '21, and introduce '22 at $5.45… We remain hard-pressed to find a more compelling EPS growth story and view TSLA's addition to the S&P 500 as an eventuality and positive catalyst."
    • Wedbush's Dani Ives: "While delivery/production numbers were known and beat the Street’s expectations given the current economic back drop, investors continue to be laser focused on the profitability picture of TSLA. To this point GAAP gross margin was strong at 23.5% again beating the Street's expectation of 20.6% (with impressive automotive gross margin of 27.7% vs. the expectation of 24.1%); the all important Automotive GM ex-credits was 23.7% over 200 bps ahead of expectations driving Adj. EBITDA of $1.81 billion/margin of 20.6% compared to the year ago number of $1.08 billion/margin of 17.2% which speaks to a business model that continues to have significantly lower costs and more production efficiency even in the face of challenging circumstances globally given COVID-19. Importantly cash from operations was $2.40 billion and ahead of our estimate as Tesla continues to put the red ink in the rear view mirror."
    • Shares of Tesla are up 2.51% in AH trading to $433.28.
    • See details on the Q3 earnings report.
    • During an investor call, Jeffrey Katzenberg and Meg Whitman confirmed they were shutting down Quibi, the short-form video streaming service they launched less than six months ago. The company's scheduled to have started an all-hands internal call a few minutes ago.
    • The offering seemed to be circling the drain alongside an earlier report that it had tried to sell its programming catalog to companies including NBCUniversal (NASDAQ:CMCSA) and Facebook (NASDAQ:FB), but found no takers (and given Quibi's generous deals leaving ownership with program creators in many cases, there may not have been much to sell).
    • It had launched just a month into pandemic-forced lockdowns with plans to reach 7.4M subscribers this year, but fell far short of that.
    • It failed "Likely for one of two reasons: because the idea itself wasn’t strong enough to justify a standalone streaming service or because of our timing," Katzenberg and Whitman say in an open letter. "Unfortunately, we will never know but we suspect it’s been a combination of the two. The circumstances of launching during a pandemic is something we could have never imagined but other businesses have faced these unprecedented challenges and have found their way through it. We were not able to do so."
    • Quibi's looking to return some funds to investors, including major Hollywood players who put in about $1.75B; Quibi has about $350M left to pay them back.
    • RE/MAX Holdings (NYSE:RMAX) September home sales rose 21.1% Y/Y after the pandemic-related lockdowns pushed the summer's peak homebuying season into fall.
    • Although the increase marks the third record-breaking month in homes sales when compared to a year ago figures, the month-on-month figure slipped 3.3% lower than August.
    • "September's massive year-over-year increase in home sales was the latest reminder of the housing market's overall strength and resiliency," says CEO Adam Contos.
    • Median sales prices were up 12.8% from Sept. 2019, with around 40 metro areas recording double-digit growth in prices year-over year.
    • The substantial gains in prices attributes to historically low interest rate and the pent-up housing demand that too when the overall supply levels are trending downwards, standing at 13-year lows.
    • September's inventory fell 31.9% Y/Y, reflecting dramatic fall in active residential listings, such as Fredericton (-40% Y/Y) and Saint John (-38.1% Y/Y). 
    • The Bank of Canada has cut interest rates to 0.25% and has lowered the 5-year mortgage rate to below 5%, further signalling that it does not intend to raise rates until 2022 or 2023.
    • RE/MAX expects Fredericton home prices will rise 2.5% to finish 2020 while Saint John prices to see the surge of 7% throughout the remainder of the year; the broader New Brunswick real estate market is seeing ballooning competition since the Federal COVID-19 relief has increased household incomes in the province to all-time highs.
    • "Generational factors and a continuing rebound in home construction support the notion of an active housing market moving into next year," notes Contos.
    • The company sees Q3 revenue at $69M-$71M, just under the consensus estimate of $71.5M.
    • Previously: U.S. Home Prices grow 7.8% through Q3 end; notable companies performance (Oct. 20)
    • A latest S&P Global report indicated that the number of U.S. corporate downgrades fell by 74% in Q3 to 107, its lowest level since 4Q18; upgrade count rose to 43, in-line with 3Q19 level.

    • Amid consumer spending holding up better than expected post the earlier fiscal stimulus, credit conditions turned less negative for companies.
    • Negative bias or speculative-grade companies fell to 47% on Sept. 30, 2020, from 52% at the end of June.
    • S&P Global economists estimate U.S. GDP grew at an annualized rate of 29.5% in Q3, reversing from the 31.4% contraction in Q2.
    • The report states that weakness persists at the lowest rating levels, as it expects recovery for many sectors to last into 2023: companies rated "B-" and lower accounted for 53% of downgrades in the quarter, and companies rated "CCC+" and below have a negative bias of 89%.
    • Sector-wise, the oil and gas sector now has the highest negative bias at 69% (12 percentage point Q/Q decrease in Q3), negative bias for the automotive sector declined by 17 percentage points to 66%, and the media and entertainment sector stood third with negative bias at 61% (down 3 percentage points).

    • Exceptionally, only the high-technology sector displays a negative bias below its long-term average, as credit quality in this sector has held up relatively well amid the pandemic.

    • Nonfinancial corporate issuers accounted for 102 downgrades and 39 upgrades; financial services issuers had just five downgrades during Q3 and nearly as many upgrades.
    • Fallen Angels: Downgraded to speculative grade from investment grade were only three in Q3 from six in Q2: Howmet Aerospace (NYSE:HWM), Nordstrom (NYSE:JWN) and natural gas pipeline operator Southeast Supply Header.
    • Ascena Retail (NASDAQ:ASNA) downgraded to D from CCC-, Tailored Brands (NYSE:TLRD) to D from CCC+ and Clear Channel Outdoor Holdings (NYSE:CCO) to CCC+ from B-.
    • Meanwhile, the default tally dipped to 37 in Q3 from 62 in Q2 and 13 in the year-ago quarter; YTD, corporate defaults in 2020 totaled 120, more than double the number over the same period last year.
    • A few big names in Q3 upgrades were: Tesla (NASDAQ:TSLA) B- to B+, Vista Outdoor (NYSE:VSTO) B to B+, Legg Mason (NYSE:LM) BBB to A and At Home (NYSE:HOME) CCC+ to B-.
    • ETF Watch: SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP), Utilities Select Sector SPDR ETF (NYSEARCA:XLU), Financials Select Sector SPDR ETF (NYSEARCA:XLF), SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR), SPDR S&P Insurance ETF (NYSEARCA:KIE), SPDR S&P Transportation ETF (NYSEARCA:XTN), SPDR S&P Telecom ETF (NYSEARCA:XTL).