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Which Way Wednesday – 3,700 Fed Edition

Shorting sure does seem pointles, doesn't it?

No matter what the news, the market seems to climb higher and no one seems to notice (or care) that the Dollar continues to get weaker, down almost 5% since September.  That's a 5% Tax on you total net worth thanks to these inept economic policies so when you wonder where all this stimulus money is coming from – it's being extracted from every Dollar you've ever made in your life and every asset you own (if they are Dollar-based).  

The Dollar is down 8% since July and down more than 10% since March while the S&P 500 has climber from 3,100 to 3,700, which is 20% and that makes sense because earnings are priced in Dollars so the weak Dollar gives you a 10% inflated view of earnings and stocks are priced in Dollars, so the weak Dollar gives you a 10% inflated view of the value of the stock.  There's really nothing there – yet people get excited!

Let's say, for example, your mom takes your temperature and it's 98.6 and the temperature outside is 75 degrees.  Later she takes your temperature and it's 37 degrees and the outside temperature is now 24 degrees.  Clearly it's the freezing temperatures that have frozen your body, right?  Or perhaps the first reading was in Fahrenheit and the second was in Celsius?  

That's what we're doing when the Dollar, which is the "constant" we measure value by, drastically changes during the course of a year.  It leads us to get false readings in all of our data and causes us to make false conclusions since the underlying assumption in the markets (and all trading algorithms) is that we have a consistent base of measurement.  This is a huge flaw in the system!

Our last Long-Term Portfolio Review was on November 17th ("Tesla Tuesday – Musk Makes the S&P 500 and our Long-Term Portfolio Review") and, at the time, we were up a whopping 159%, at $1,295,033 for the year (because what hasn't worked this year in a bullish portfolio?) and we decided to cash out many positions.  Fortunately, I have an unadjusted version so we can see how much opportunity we lost by being cautious:

$1,421,320 is now up 184.3% for the year and $126,287 for the month.  THE MONTH!  That is completely insane!  So that's the most we would have made BUT, what we actually did was this:

  • KO – We'll kill this one only because it's already up 2/3 with a year to go so why risk it?  
  • MU – Same as KO, it's up too much not to kill.  
  • MYL – I don't love them enough to risk it so let's kill.
  • BRK.B – It's a $30,000 spread at net $25,200 – kill.
  • CAT – Another $30,000 spread at net $25,762 – kill.  
  • PAA – I guess we can kill the short puts to eliminate the risk and sell some more if it pulls back.
  • AVGO – $95,000 out of $120,000 potential.  May as well kill it.
  • GILD – Back in the bargain basement so we're going to roll the 30 2022 $55 calls at $9.60 ($28,800) to 50 of the 2023 $45 ($17.25)/$65 ($7.25) bull call spreads at net $10 ($50,000)

?

  • GM – The bull call spread is $30,500 out of a potential $35,000 and the puts, by themselves, would be bought back so the two independent decisions mean we should kill the trade.  
  • INTC – About to be an "I told you so" so we'll stick with this and, in fact, we can spend $7,000 to roll the 50 2022 $45 calls at $6.35 ($31,750) to 50 2023 $35 ($14)/50 ($6.25) bull call spreads at $7.75 ($38,750) 

?

  • LABU – Who isn't a fan of Biotech this month?  Net $36,150 on the $40,000 spread means we have to say goodbye though.
  • MIDD – Wow did they get away from us!  Net $35,400 on the $40,000 spread means a sad goodbye to this one.
  • MO – Nice comeback.  So glad we bought back the short calls!  There's no penalty in selling 10 (1/3) March $42.50 calls for $1.50 ($1,500) while we wait as it's easy to roll and protects us a little.  
  • TXT – At the money but net $50,000 on a $68,750 spread is hard to justify the risk, especially as they were just at $32.50 so let's kill it

You would think it was a mistake to kill all those positions into a rally but, after making the adjustments, the exact same LTP (not including new positions) is still up 180.1% ($1,400,285) as of yesterday's close AND we have $807,560 in CASH – $308,810 more than we had last month.  So, being cautious cost us all of $21,000 in potential gains for the month (not counting what we did with the cash) while putting us in a much safer position into the holidays.  

We have 33% less positions, so it's easier to adjust if we do have a correction and we have 33% less longs for our Short-Term Portfolio to protect – lowering our insurance costs as well.  Those are the "consequences" we've suffered from "missing out" on a fantastic rally.  Certainly it's been a lot more relaxing and I aim to keep it that way into the New Year – just in case.  

So next time you feel compelled to trade due to a Fear of Missing Out (FOMO) – keep in mind – missing out on what?  We already made FANTASTIC returns for the year – why risk it just to make a tiny bit more?  

Of course we're still shorting the S&P Futures (/ES) at 3,700 as the potential reward clearly outweighs the risk of keeping a tight stop over that line but be careful around the Fed meeting today as it's likely they will try to squeeze the market higher on any hint of more stimulus.

 


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  1. Good morning everyone! Here is the link to today's webinar. 

    https://attendee.gotowebinar.com/register/1965589652074307854


  2. Good Morning.


  3. Hi Guys no one answered my question on the T play yesterday. Just like to say it is still good for today.


  4. Good morning! 

    T/Yodi – Even cheaper this morning!  

    AT&T Skips Annual Dividend Raise for the First Time Since 2005

    That's taken them down $1.  Of course there were other factors but here's what happened last time they skipped a dividend increase:

    Oh the horror of management making a decision that the company has something better to do with money than dole it out to shareholders…

    /CL failing $47.50 – that's a fun short but inventories are at 10:30 so be careful.

    Fed meeting 2pm – also be careful. 


  5. CMG up another 5%…


  6. I forgot to mention that 90 should be bouncy for the Dollar, less stimulus or Fed action than expect, trouble in Chinese Banks, problems in Japan or Bexit issues can all send the Dollar up a percent or two which would quickly knock the markets back 2.5% per 1% on the Dollar.  

    CMG/Rn – So crazy on that one.  Almost $40Bn at $1,400/share.  MCD is $160Bn with $21Bn in sales and $6Bn in profit.   CMG has $6Bn in sales and $400M in profits.   QSR (Tim Hortons, Burger King, Popeye's) is more like CMG with $6Bn in sales but $600M in profits and they have a market cap of $19Bn – half of CMG.


  7. Phil / T – Most of that recent gain ( form 32 up to the 40s)  was due to an activist investor Elliott Mgmt ( which is the same one that helped MSFT and others) taking a stake in the company and putting pressure on them to divest and simplify the business….  that is what took them from 32 is to 44 - shortly after they sold their shares – down the stock went, ….   T management is marginal at best – hopefully they will divest direct TV for a 50B loss ( originally purchased for 67B in 2015 selling for 15B most likely),  so they can focus.  26B cash flow per year is the only reason I'm holding on to wait for a catalyst… .. They should have good numbers on retention in the next few quarters with the direct to App plan….  But if this back fires and WB  and Hollywood have a fallout over it, this will be pretty significant… to see stars and more importantly directors move away from studio….. that would be problematic, in addition, they have moved out many Sr managers at HBO / WB not sure if they were any good or not but lots of churn and consolidation…. similar to the approach with Direct TV.



  8. T/Batman – I have no idea what they were thinking with Direct TV – such a waste.  

    EIA not very exciting:

    • EIA Petroleum Inventories: Crude -3.1M barrels vs. -1.9M consensus, +15.2M last week.
    • EIA Gasoline +1.0M barrels vs. +1.6M consensus, +4.2M last week.
    • EIA Distillates +0.2M barrels vs. +0.9M consensus, +5.2M last week.
    • Futures (CL1:COM -0.2%)


  9. Whats up with TOS does not show any div any more for MO ????


  10. Maybe a glitch?  I'm sure they are paying it.

    MO dividend is a very fat 8.16% now at $3.44 per $42.87 share.  As a new trade, you can:

    • Buy 1,000 shares of MO for $42.87 ($42,870)
    • Sell 10 MO 2023 $35 puts for $4.50 ($4,500) 
    • Sell 10 MO 2023 $40 calls for $6.25 ($6,250)

    That's net $32,120 and the spread pays back $40,000 if called away in two years with a $7,880 (24.5%) profit plus the $3,440 dividend x 2 is another $6,880 (21.4%) so a very nice way to tie up $32,120 to make $14,760 while we wait for MO to get into the hemp/cannabis space.  

    Altria Has Had a Tough Year. Why 2021 May Be Better.

    Webinar time.



  11. CME group announces ETH/etherium futures. ETH is up around 6x over the past year.


  12. Oil up into close 47.85


  13. Phil your calculation on the options is given wrongly call and put should be 10 and not 5 to achieve your calculation. Obviously you can buy 1000 stk and sell only 5 strangles but it does not bring it dawn to 32,120.00. just for the record.


  14. Phil / Yodi MO

    In stead of selling $40 calls, I sold $45 calls. 

    Bought 1,000 shares of MO for $43.11 ($43,110)

    Sold 10 MO 2023 $35 puts for $4.30 ($4,300) 

    Sold 10 MO 2023 $45 calls for $4.70 ($4,700)

    for a net of $34,110. If called at $45, expect a return of $10,890 and 2 X 3360 of div totaling $17,610.

    51% return in two year as opposed to 45% return with $40 calls. 

    Would this be considered more risk? Is 6% increase in potential return worth the increase in risk?

    Thanks.


  15. sk2020,

    MO I don't think it is more risky as you would only be called at 45, so if MO goes up you still have a capital gain of some 1.90$ and your chances of getting call before the expiration is obviously less. Only your downside protection is a bit reduced.


  16. MO/Yodi – Thanks, fixed.  I started out with 500 but decided it was too small.

    MO/SK – It's a little more risky but nothing terrible.  For dividend plays I just tend to be more conservative.

    Downside/Yodi – That reflects my overall cautious outlook. 

    Speaking of which, Powell didn't offer much and the Fed did nothing – not sure what the markets are excited about so still shorting /ES at 3,700.


  17. Bitcoin all time high, 21,700. Congrats to all longs.


  18. Good job sticking with that BDC.  I wonder if the Big Short of the 2020s will be all fiat currency?