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Testy Tuesday – S&P 3,600 Yet Again

This is a strong-looking chart:  

The S&P 500 is clearly consolidating ABOVE the 3,600 line at this point and, if we hold it into the end of the year, that will bode very well for next year.  Nonetheless, we're still shorting the S&P (/ES) Futures if they dip back below the 3,600 line (now 3,602) with tight stops above simply because it's a very positive risk/reward play as we can stop out at, for example, 3,602.50 with a $125 loss but, just yesterday, /ES was down at 3,550, which would have been a $2,500 gain.  When you can win $2,500 and risk $125, you only have to be right once in a while to do very well.

Yes there is going to be a vaccine, I would say by May, things should be getting back to normal but they aren't normal now and they won't be normal for Christmas so I really don't see how Q4 GDP will be any good and Q1 not so great either.  So it's another sub-par year for the first half, at least and, even if there is not a coup, Biden will not be likely to run up $6Tn in debt – as Trump did this year.  Biden is also very likely to raise taxes on the wealthy (over $400,000 in income) and wealthy Corporations – doesn't that impact their bottom-line earnings?   

Biden is likely to move us towards a stronger Dollar and that too, is not great for stocks and Biden wants stronger wages – not good for the bottom line.  That's why Chipotle (CMG) is one of my favorite shorts – higher wages hit them hard, as will reality if it ever rears its ugly head and notices that CMG is trading at over 150 TIMES their annual earnings.  

$1,300 per share is a $36Bn valuation for a company whose best year was a profit of $475M – and that was back in 2015!  Since then, $22M (when they poisoned their customers), $176M, $176M and $350M last year.  Even if they get back to $500M ($164M in the first 3 quarters of 2020) – they'd still be at an insane 72x earnings for a restaurant that is near its saturation point.  Labor is 1/3 of their expenses and expenses on $5.5Bn in 2019 revenue that left them with a profit of $350M must be around $5.15Bn and 1/3 of $5.15Bn is $1.71Bn or 500% of their profits. 

That is how we analyze a company.  Think about what can go right AND what can go wrong and do the math!  With CMG, a 10% increase in labor cost will hit them for $171M or 1/2 of their profits.  Since they already have 2,700 restaurants (MCD and SBUX have 35,000 each), they can expand but not rapidly so even optimistically assuming 20% growth in new stors without straining cash flow (no way) – getting to a reasonble valuation above $20Bn is simply out of reach for this decade.  

CMG Long Put 2022 21-JAN 1,300.00 PUT [CMG @ $1,281.00 $0.00] 6 10/28/2020 (423) $136,800 $228.00 $-31.90 $210.70     $196.10 $0.00 $-19,140 -14.0% $117,660
CMG Short Put 2022 21-JAN 1,100.00 PUT [CMG @ $1,281.00 $0.00] -3 10/28/2020 (423) $-39,525 $131.75 $-25.05     $106.70 $0.00 $7,515 19.0% $-32,010
CMG Short Call 2021 15-JAN 1,300.00 CALL [CMG @ $1,281.00 $0.00] -5 10/28/2020 (52) $-41,550 $83.10 $-30.30     $52.80 $0.00 $15,150 36.5% $-26,400

When will people be smart enough to agree with me and sell this turkey off?  I have no idea but we did sell the Jan $1,300 calls for $83.10 ($41,550) in our Short-Term Portfolio last month as we thought $1,300 was just too ridiculous and we sold 3 $1,100 puts for $131.75 ($39,525) – just in case it wasn't.   That means we've collected $51,075 against 5 longs and 3 shorts so we have roughly $100 of room to spare on the upside (to $1,400) and $150 to the downside (since there are only 3 short puts), so that's as low as $850.  

So the bet we made is that CMG will be above $850 ($23.4Bn valuation) next year but below $1,300 in the short-term.  If we're right, we will make $51,075 plus whatever we make on the short $1,300 puts, which then double-cover the short 1,100 puts we sold.  It seems like a risky play but I don't see it that way because I have strong conviction that CMG is simply not worth $1,300 and can't sustain it.

Our net $55,725 spread is now net $59,250 – not much of a move but that just means it's still good for a new trade.  We like it in the STP as I see no reason CMG would hold up if the market falls so it makes a nice hedge with a potential to pay back over $120,000 if CMG is below $1,100 – plus whatever we make selling calls along the way.  That's a nice hedge!  

The best thing about this hedge is that, even if the market does well, investors might still wake up and realize CMG is NOT a stock they should be investing in.  They might even poison some more customers!  What I DON'T think is going to happen is that everything goes perfectly and they grow revenues and earnings 50% in a year and begin to justify this outrageous valuation.  That I do not see happening.   We've never had a short play for a Trade of the Year – this one is in the running….

 


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  1. Good Morning.


  2. Phil,

    Would like your thoughts on gold – is the shine off? Does the negative impact of a strengthening dollar and loss of safe haven status outweigh undeniable inflationary pressures?

    Thanks


  3. Good morning! 

    Too bad /NQ didn't hit 12,000 again – dropped hard and fast at the open.  

    Small pullback on /ES but good for $250 per contract already, which pays for the Egg McMuffins.

    Gold/8800 – Democrats are good for the Dollar.  They are better at trade, budgeting and diplomacy.  Also tend to lead to less panic so probably won't be a good year for gold going forward though the global currency devaluation is already out of the bag, so I wouldn't go betting against gold – tempting though it may be.

    As I often point out – I like to make trades that are obvious and I know that makes me seem like I like to trade gold but I simply thought 2020 would be a good year to play GOLD long and that's why I got into it and 3 years ago it was WPM because I thought Silver was undervalued first, then gold.  Now that it's up in then channel – I simply won't play it until the next time it's obviously too high or too low.  

    You need to move onto the trades that work – not keep beating the ones that workED to death.  

    10 Signs to Know that You Are Ready To Trade

    I have a lot of reading to do this week – have to finalize my Trade of the Year for 2021.

    Crazy that it's 2021 – we're actually living in the Future!  


  4. Egg Mcmuffins? – I'm taking some profits!  :)


  5. Phil,

    Thanks for the gold perspective, and even more, so the trader's mindset. Tough for me to reconcile the adequacy of my 'sense of reality'' with the reality that 70 million of my fellow Americans actually voted for Trump after they observed him in office for 4 years.



  6. I sure hope someone on the board was buying FCEL at $2 and sold some in the $11 range yesterday, quite a move. I sold calls against mine at just over $4 and am kicking myself. Still a great year in FCEL since it went nowhere for several rounds of call rich call selling. 


  7. What might be good for the markets though is to have some competent people in charge! 


  8. So Elon now 2nd richest man based on a stock with a PE of 1037.   Sure, that makes sense.


  9. tangledweb

    Making sense? How does a clown with an IQ of 40 become president?


  10. Hola PSW memebers.  Hope this finds you well in the pandemic world we live in.

    Biotech portfolio update, as today is a very important day for one of our holdings, LQDA.  

    Updates:

    AGXT now is SIOX

    ARNA data came out, stock was hit.  That is NOT the trial we are playing, but one that will expand their footprint into the atopic derm space.  Overall, the trial was a success. The market did not like it because 1. primary endpoint was not met (due to 9 subjects dropping off the drug then back on due to a decreased HR – which can be a side effect of the drug in some) but 2. more $$ that they need to spend on a very competitive market.  We are waiting for the pain data in December or January.  Plan accordingly.  The Dec 60-70 BCS is up.  So take some or all OFF the table.

    MYOV Nov15Ps STO expired worthless. Holding stock

    RMED did a reverse split 25:1.  Nice. still holding

    GBT – new position.  Jan21 '22 40/55 BCS, selling 35Ps for net credit of $1.25.  I am in the 35/50 selling 35Ps from a  few weeks ago. They are going to push back up as the product is on the market and should do well moving forward.  

     

    Happy Thanksgiving PSW.


  11. Attilian-I bought fcel @ 2 and sold calls. Now I'm debating how to handle the fallout. The trade was basically free and I pocketing some good trades until this fast move up. I did the same thing with plug but did not get killed on the shorts. I always buy back the shorts when I've made 50-60% but fcel never went below my strike so held off. Bad mistake. I truly think we will have a fast move down at some point so maybe will just roll the 2 call out and let the short sit. In 2 months it may come back to earth.


  12. First time ever the Dow hit 30K? No it hit that before and I was sitting on some nice profits and was foolish enough not to take all my profits. Mostly mutual funds and some internet start ups. When Clinton was in? I remember getting into Yahoo early and many that went bust.


  13. Trump calls a press conference to announce that the Dow went over 30k and that no one predicted that it could ever happen and it's an incredible thing, and so on…

    Not a word for the close to 2000 people who died yesterday from Covid which is also an incredible thing that no one expected to happen! FFS do your f'ng job.


  14. GBT has one heck of a short setting up with 14 days to cover.  Saw the same thing with fcel so figured it would take awhile to cover. It did and now on the way down.


  15. Awaiting Yellen at Treasury: Yet another daunting crisis


  16. A dark money mystery in the Sunshine State


  17. Dow soars past the 30,000 mark for the first time


  18. STJ / I've been keeping an eye on the covid spread here in San Diego.  These are not good numbers:

    Week ending Oct-17 Avg 258 cases/day

    Week ending Oct-24 Avg 318 cases/day

    Week ending Oct-31 Avg 360 cases/day

    Week ending Nov-7   Avg 438 cases/day

    Week ending Nov-14 Avg 657 cases/day

    Week ending Nov-21 Avg 983 cases/day

    Going to be a nightmare to see what Thanksgiving brings!


  19. JPH1121

    Covid, you can not keep the cake and eat it. Eihter stay with the rules or party. The numbers will increase like wild fire, if there are no restrictions been introduced. However playing golf by yourself will help as well, even a clown can tell you. 


  20. Now we're back at 12,000 but not a shortable market.  Up, up and away!

    Dow 30,000! 

    FCEL/Ati – I've always liked the technology.  It just never took off.  Until now.

    How/Yodi – Like this:

    Thanks Pharm.  Have a great holiday.

    True, StJ.  Sad and true.

    GBT/Pirate – What a ride.  What does it have to do with FCEL?

    Rainbow Emoji (U+1F308)San Diego/JPH – That is pretty alarming.   On the bright side, there's only 1.5M people in SD so everyone will be infected soon and you'll have it over with.  

    Gotta look on the bright side….

     


  21. Phill// What is your take on AAPL?  They announced Apple store fees cut from 30% to 15% for developers making <= $1M per year.  Wont that cut into their earnings and there for cut the share price down?  If so and with the Biden tax looming large, etc what is your price expectations 2002 & 2203.with the Biden tax looming large, etc

    Thanks.


  22. I was looking at the way CA calculates the case rate for SD and it uses 3,370,418 for the population in the calculation so I really don't know how many people we actually have.  I thought it was much lower than 3.4M as well but maybe that excludes certain students, military, etc?
     


  23. Phil, 

    I'm in INTC at the following:

    Jan 22 Bought $40 Call $11.90

    Jan 22 sold $50 Put $8.80

    Think it's a good time to short a Jan 22 $50 call for $4.60?


  24. sold ETHE at 106


  25. If anybody knows:

    I am employed and a shareholder in a startup that is failing.  I'm about to quit and on my way out, I am requesting financials from the company.  They are, so far, refusing, saying that they are a Delware Corp and therefore aren't required to compile financials.  They are headquartered in CA.  I believe I have a right to this information.  Does anybody have any input?


  26. GBT    for what its worth dept.  There was a lot of bullish options placed after their fall.  1000 March $50 calls, 1500 March $45 calls, 500 Jan21, $40/$30 bull risk reversals, 


  27. Phil FCEL had a high short with 5 days to cover. GBT also has a high short interest with 14 days to cover so some what similar scenario. When it starts going up it will continue for awhile.


  28. Markets at ATH … US consumer confidence dropping to 96 … errr explain to me how people will be treating themselves in Q4? 


  29. BDC – sold a little more ETHE but am still holding half. What a ride from $53, thank you! :D


  30. Everyone have a safe TURKEY DAY!


  31. JPH – they are required to keep financial records for IRS tax gain and loss purposes, though not sure if they have to furnish them to shareholders by DE law. You may have to prove proper intent to inspect financial records or something of that sort, which a corporate attorney would need to advise you on.


  32. Atitlan – ETHE makes up for a miserable SLV call option play I have going. Gotta have a winner now and again! :)


  33. swampfox

    This question was some what answered already a while back. Wise of you having sold only leap long calls.

    In Phil's answer the last time the reply was wait still, and I would say still today the same. However if your patience is not long enough I would sell only few short leap calls, as we still expect INTC will go up more. I did sell some short Dec. 20 50 strike calls but only few and it looks they might just still run worthless.


  34. Good morning!

    Had meetings yesterday, came home and passed out, will catch up this morning.