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30,000 Tuesday – Is this the New Normal?

We'll be testing Dow 30,000 again today.

After yesterday's wild ride, dropping 900 points and then getting 300 of them back into the close – traders are somewhat jittery this morning and, as I mentioned yesterday, we're about to get early earnings reports on Thursday and it will not be good if they disappoint.  

I have pointed out on serveral occasions that the earnings don't justify these valuations so we'll be watching the Dow components very closely to see if they can justify their 29.73x p/e ratio, which is up 39% from an uninfected 21.35x one year ago.  That's nothing compared to the 39.45x the Nasdaq is trading at (27.55 last year) or the 40.40x the S&P is now at (25.53 last year). 

Let's assume, for a moment, that the virus is a negative or, in the very least, not a positive event.  Corporate Profits are lower than they were last year so what is the new valuation based on if not stimulus and the pace of stimulus last year was $3.3Tn direct from the Government and another $2.8Tn from the Fed – pretty much $500Bn a month to buy us that 40% increase in valuations.

Perhaps this will be the new normal and our Government will just keep pumping $500Bn/month into the economy but, even then, will earnings ever actually catch up or is it always going to be speculation that things will improve – one day?  Corporate profits were $2.3Tn in Q4 of 2019 and Q2 of 2020 came in at $1.8Tn, which were down 21.7%.  Q3, not on the chart, was worse, at $1.6Tn but estimates are we should "bounce back" in Q4.  That's already baked in – what if the market disappoints?  

And, of course, even bouncing back only gets us back to about $2Tn, still around 15% below last year yet we're left paying 40% more for the same companies.  Will it never correct?  That's a pretty rough premise to hang your investing hat on, isn't it?  

China has a message for companies expecting another year of stimulus to keep the lights on – "Toughen up or Prepare to Fail".  After letting inefficient firms survive for years, Beijing is now allowing them to fail. Bond defaults rose to a record $30 billion in 2020, including high-profile enterprises that had previously counted on the implicit guarantees of the state. Scrutiny and punishment of credit-rating agencies are increasing, while domestic exchanges delisted at least 16 stocks from their main boards last year — the most in data going back to 1999.

China really has no choice in the matter as debt in the Financial System is now at 277% of their GDP and $30Bn worth of those bonds defaulted in 2020 alone.  In December alone, China tripled the maximum prison sentence for securities fraud to 15 years, proposed shortening the delisting process for unprofitable stocks and vowed to improve oversight of the country’s credit-rating industry. China also imposed a cap on bank lending to property developers, a sector that’s laden with debt.  

See the source image

That's in the past 30 days, folks.  I know we have a lot on our plate but let's not forget to worry about China – one of the traditional ways that market collapses tend to begin.  The chart above was their PROJECTED debt pre-pandemic – there's no clear indication of the actual number yet but likely we are at about $18Tn, $16Tn higher than 2004 or right about $1Tn (10%) per year of debt – exactly the same as China's "growth" in GDP this past decade.  

See the source imageIs this the new "normal" that we're running the World on?  Just keep pumping money into the economy to pretend it's healthy and growing while never actually doing the hard work it takes to actually create a healthy economy?  A healthy economy can take a hit and recover on its own but a comatose economy that's been artificially kept alive for many years is not likely to jump out of bed and do a jig, is it?

In the UK, where they are back on lockdown, industry groups representing retail, pubs and auto makers are pressing the government to help avert business failures by extending tax relief to companies, giving grants and assuring that the current program to support furloughs will be continued beyond April.  The full emergency lockdown is a devastating blow for companies large and small that have already had to cope with months of disruption since the pandemic took hold in March. Britain’s retail and hospitality businesses are likely to be the hardest hit as all non-essential shops, restaurants, and bars will have to stay closed.

In the US, a recent survey showed 1/3 of our remaining small businesses (25% already closed) did not think they would survive 6 more months.  Even if the vaccines are effective against the new strains of the virus (or it may come back each year like the flu), we will need to borrow MASSIVE amounts of money to address this situation and already the US has $7.7Tn worth of debt coming due in 2021 and Japan has a $2.9Tn bill to pay as well – any small change in interest rates could be devastating to either economy.  

 


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  1. Hoping that we still have a democracy tomorrow!


  2. Phil – Did you guys update the WordPress settings to change the width of the editing area! If this is permanent, I can have a more detailed big chart.


  3. Good morning!'

    I'm heading home this morning, should be back by about 1pm.

    Not sure why things got wider, StJ.  We'll see if people like it before I complain.


  4. Good riddance and morning!

    CHL….manipulation at its finest.

    ARNA….we have the Jan21 70/75 BCS.  Trying to sell it for > $4.  Not worth the risk.  The other spread is still there for April 75/100 BCS.


  5. Technicals say 3710 on SPX. If it starts to reverse…short it. I will at those lines with a SL at 3725


  6. CHL – WOW!!  Phil And Yodi, you are why this group is amazing. You helped me and I'm sure others to take a breath and not  be a sheeple jumping off the cliff. Damn Yodi, it was just yesterday you said to chill. It seriously stinks as Batman highlights with deep ties to this grifter administration, but nice to see the clouds finally part. Between CHL,INTC, WBA, it's been quite a ride.


  7. I am still seeing CHL Jan 22 & 23 $30 puts at 100+.  Is anyone seeing that?  I saw Jan 22 Strike $30 at 1:00 and all of sudden it spiked to $100 now.

    Thanks.

    Annamalai


  8. Rookie Just made an offer on CHL Jan23 25p to sell option they changed it from 100 to 5 and my holding profit of the day changed from -13K to 22K plus. You guys owe me a commission !!!!!!!!!!!!!!!!!!


  9. IB is still restricted to closing trades on options. Letting the big boys feed at the trough first before the retail weenies are allowed in


  10. Phil – do you happen to have any Canadian stocks you know of / like? I have my usual account I use for option trading US securities but then another account where I can only trade Canadian. 

    I'm thinking it can't be too bad to to just run one of your usual set ups (buy dividend stock, sell call and sell put) on some of the big banks / utility companies? 

    Thanks!


  11. crs sell Jun 21 80 put on CM for 3$ for starters 


  12. TD Bank crs.  Nice dividend, good bank. BNS is also a good one.


  13. Yoid,  Thanks.


  14. Money maker MO buy stock @ 40.75 and sell Jun 21 40 call for 3.10


  15. MU an other 3.85 up!!!!


  16. Wider / Phil – Looks better to me! The original WordPress templates were designed for when people had lower resolution screens! Most people now have at least 1080 screens and higher. Showing more data is always a plus.


  17. Analysis: Something very important happened in the House Sunday night



  18. Trump says he’ll ‘fight like hell’ to hold on to presidency



  19. X – stock, sell Feb $20Cs for net 16.98.  If called away….that is a nice 17% ROI.


  20. Pharm, X puzzle stock only trading for 18$ Feb 20 call only .87 cents pls explain 16.98 Possible buy stk and sell Feb 18 call for 1.63, but stk hardly pays any div. 


  21. Thanks Yodi and Pharm, think I will start with some of those plays on the big banks as you suggest. 


  22. US Steel (X)/ yodi.  Not sure what you are referring to.  Not after a dividend.


  23. Pharm Simple do not understand your play 

    X – stock, sell Feb $20Cs for net 16.98.  If called away….that is a nice 17% ROI.


  24. X stock is 18.08 or so. If called away at $20, you get 1.92 + 1.12 (Feb $20C) = 3.04.

    3.04/16.98 is ….. wait for it…. 17%.



  25. Venezuela’s socialists take control of once-defiant congress


  26. Pharm the Feb.21 call sells for .87 cents Not clear to me way I would called at 20 if the stock is only trading at 18, sure does not make sense to me.





  27. Opinion: The courage of Brad Raffensperger



  28. 5G airwave bids soar past $76 billion to set auction record



  29. KPTI – buying stock, selling 1/2 cover Feb 20Cs for 1.55Cs or better.

    TRIL – buying more stock, selling 1/2 cover Feb 17.5Cs for 1.20 or better.


  30. BP& XOM…wow what a move.


  31. I'm back!

    Looks like we're bouncing a bit for the day with the Russell making a big recovery.  

    WTF with oil?

    Ah, here's the market-booster:

    Canadian stocks/CRS – I'll play a company like TD or ACB but I don't go out of my way to look for Canadian stocks.  Same issue as you, most of my data is for US stocks and just not worth having a whole other thing for Canadian or European stocks.  If the stock trades on US exchanges just let me know and we can look at them.

    And what Yodi said – CM is another one we like.


  32. Drifting down into the close. 

    Waiting on the Georgia election results, I suppose.  I'm sure those will be challenged too.


  33. Canadian stocks/CRS  – BNS is another one that still might be in the Dividend Portfolio.  It's had a pretty good run up over the last 2 months.


  34. BuckeyeMag,

    BNS yes as well a nice div. paying Stock. However looking at the scale the price is just about as high as before Mar. 20th. I feel all these could be dangerous entries in these questionable times. Even buying the stock and possible selling a Jun 21 50 call @ 5$ with an extrinsic value of 1.44 protects you only to 48. A better buy price of the stock would have been 43$. Not 53.00. Further if you not a US citizen your direct tax deduction on foreign  companies is 35% off your div.