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The Market Week Ahead – Earnings Start to Matter

ImageNow we're getting some action! 

About 1/3 of the S&P 500 reports this week so there should be lots of opportunities for baragain hunting – unless, of course the earnings are not good and we finally begin to deflate this bubble market.  This will be the first week in 4 years that there is likely to be more focus on the markets than the Government as the Government goes back to "normal" functions with a President who doesn't try to dominate the news cycle.  

That shifts the focus back to earnings but one might wonder how earnings can possibly justify the sky-high valuations we have been giving most stocks in the past few years.  According to Jill Mislinsky at DShort: "The peak in 2000 marked an unprecedented 129% overshooting of the trend – substantially above the overshoot in 1929. At the beginning of December 2020, it is 154% above trend. The major troughs of the past saw declines in excess of 50% below the trend. If the current S&P 500 were sitting squarely on the regression, it would be at the 1457 level."

154% above treand.  That's a lot!  While I don't see the S&P going all the way back to 1,457, I do see a 20% correction almost inevitable, back to about 3,000 and, while we may go higher, we'll still pull back at some point so 3,829 (this morning's open) is a very tough pill to swallow on the S&P 500.

We do have a Fed Meeting on Wednesday and the Chicago Fed National Activity Index was in-line this morning but again, 20% of our GDP is stimulus and we are celebrating very slight growth – this is a very dangerous thing to get used to!   

Dallas Fed comes out at 10:30 and tomorrow we get Home Prices and Consumer Confidence, Wednesday it's Durable Goods, Investor Confidence, Business Uncertainty and the Fed and then Thursday we have GDP, Retail Inventories (very important after Christmas), New Home Sales, Leading Economic Indicators and the KC Fed.  Friday we finish the week with Personal Income, PMI and Consumer Sentiment – a very busy data week with NO Fed speak – other than Powell's press conference on Wednesday, of course.

What a great week to see how the market stands on its own, without all the political turmoil or endless promises of MORE FREE MONEY.  Will we get through the week still holding these lofty levels?  Stay tuned to find out…

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  1. Good Morning!

  2. Phil/BBBY

    more than $10 up today. short squeeze?


  3. It actually looks like short-covering is holding the market up….

  4. Good morning! 

    Dow and Nasdaq going in opposite directions.  

    /NG popping:

    Dollar is pushing things down at the moment.

    Biden's Treasury Secretary, Janet Yellen, is also a prior Fed Chair. I noted her Swiss Cheese Statements on the US Dollar.

    The United States doesn’t seek a weaker currency to gain competitive advantage. We should oppose attempts by other countries to do so.

    Yellen can make whatever swiss cheese statements she wants but how would a central bank act if it wanted to sink the dollar?

    Steps to Weaken a Currency

    1. Cut interest rates

    2. Engage in massive QE balance sheet expansion

    3. Pledge to keep rates low indefinitely

    4. Pledge to ignore inflation and let it run hot to make up for alleged undershooting

    5. Encouraging more fiscal stimulus

    The Jerome Powell Fed is five for five on doing the very things that would cause the dollar to sink and Yellen supports all of them.

    Manipulation Tactics Vary

    1. The yuan doesn't float so China can use a peg. 

    2. The Bank of Japan (BoJ), EU, and Swiss National Bank (SNB) use negative rates and QE. 

    3. The SNB also defends the Franc from appreciation vs the Euro via a currency ceiling backed by unlimited buying. 

    4. The BoJ also has in the past used currency ceilings and direct currency buying to maintain targets.

    5. The Fed uses QE and low but not negative rates coupled with its support for very loose fiscal policy.  In contrast, the ECB has rules preventing extremely loose fiscal policy. 

    Direct vs Indirect Currency Manipulation

    Tactics 1, 3, and 4 are direct currency manipulation. Tactics 2 and 5 are indirect currency manipulation. 

    The competing direct and indirect forces are what makes it very hard for countries to achieve consistent debasement headway!

    I use the term "debasement headway" more than a bit sarcastically. 

    What About Hyperinflation?

    The net result of the forces and counter-forces plus ongoing speculation determines currency trends. 

    To pick a country for high inflation, my bet is Japan first. 

    That's based on demographics that will at some point change coupled with lingering impacts of Abenomics and negative interest rates of the BoJ.

    Betting on US dollar hyperinflation in this setup is more than a bit foolish.

    A Reader Asks: Why is the Euro So Strong?

    For more discussion on the Euro vs the Dollar, please see A Reader Asks: Why is the Euro So Strong?

    That link discusses an important fundamental flaw in the Euro known as Target2. 

    If the Eurozone breaks apart, then countries in the EU may see hyperinflation or severe inflation first. 

    Once again, betting on US dollar hyperinflation in this setup is more than a bit foolish.

    Is the Fed Worried? 

    For comments by Danielle DiMartino Booth, a skilled Fed watcher, please see New All-Time Low Junk Bond Yield, Is the Fed Worried?

    And What About Money Supply?

    Finally, please consider Q&A With Lacy Hunt on Money Supply.

  5. We were crying about PETS the other day up 6$ back to 36.60 again!!!! Climbing as if it is on fire!

  6. Man, market going nuts and INTC stuck in the dog house along with T, WBA,IBM,CHL. 

  7. Yep, pretty nuts – what a ride!

  8. What is going on with GME?

  9. look out below….

  10. GME/Rperi – Same as all these stocks – getting squeezed and manipulated.  Such a dangerous market right now.

    There's no news on BBBY either. 

    GME is funny:

    The activist push, however, didn't appear to be the key driver of the stock last week, which including a Friday session where a record 193 million shares changed hands and prompted at least four trading halts from officials on the New York Stock Exchange. 

    Powering the surge, it seems, was an army of retail investors, many of which appeared to co-ordinate their moves in various on-line chat rooms in an effort to 'squeeze' the short-selling Citron Research, which bet against GameStop shares on January 19. 

    Citron's Andrew Left, known for his blunt assessments of company management and stock performance, predicted GameStop shares would fall back to around $20 a share — their Jan 12 level --  while chiding buyers as "suckers at this poker game" in a January 19 Tweet.

    Left abandoned his GameStop short last week, citing abuse from an "angry mob" of traders that he described as "nothing short of shameful and a sad commentary on the state of the investment community".

    "I think the long have every right to press their case," said TheStreet's founder, Jim Cramer. "In my view, it is protected free speech."

    "To me, the fight is just about the value and I have to agree that the shorts can make a good case that the stock is too high unless there is a plan by the company to raise capital and deploy it intelligently," he added. 

    What remains in the wake of Citron's retreat, and the online victory celebrations, is a stock that is now trading at more than four times the average target of Wall Street analysts and a company that may not turn a profit for at least the next two years. Loop Capital analyst Anthony Chukumba said the group's fundamentals are "in a word: 'terrible'." 

    This is what the market is now, a game of chicken.

  11. Hi Phil:  I am looking for a new hedge based on current market levels can you help with a recommendation?

  12. I bought a fun little lotto ticket on GME last week and am having fun with it.  My position was only $300 of cash with maximum risk of $1000 to buy a $40 call expiring this Friday.  I actually saw some interesting commentary on GME reading WSB where a guy was making the argument that this meteoric rise in GME could actually save the company.  If GME either makes some quality strategic acquisitions or issues stock to payoff debt, they could readily bring the company back from the dead into a real power house.  We'll wait to see.  In the meantime, my several day position has blown up from $300 to over $7000 so it is a bit fun.

  13. ring the register…..

  14. Hedge/Hicket – I'd still have to go with the Nasdaq. The 2022 $11 ($5.20)/16 ($4.10) bull call spread is just $1.10 and are $1 in the money so you can only lose if the Nasdaq goes higher (so the longs should do well).  You can help pay for that by selling some puts on something you REALLY want to own if it gets cheaper, like INTC 2023 $40 puts at $4.50.

    GME/JPH – At the moment, it's hard for them to do anything stuck in the mall retail space.

  15. I have a dividend portfolio and was running a few ideas on adding a few ADR stock positions.  

    What are thoughts on VIV?  

  16.   ADR was looking at TAK today.   4.69% dividend    options out till Jan2022.  

  17. TAK has had tons of option activity lately, more than 60X daily activity. In August, they announced plans to sell their consumer business to Blackstone and use the money to pay down debt incurred for the purchase of Shire and refocus on its core business.  I think it is a R&D transformation story with 12 new products to be launched between now and March 2025 and 40 products in clinical stage.  I dont do analysis like Batman but I think there is good risk/reward if you are patient.

  18. Thanks stockbern. :)

  19. I was reading an article that we'll see another Roarin' 20's. A post-pandemic peacetime matching the 1920's in a way. A transition to a new dominant type of economy is already firmly entrenched and underway. Women voting (crazy liberals!). We could see 5-10 years of gains before a big crash. I'm not going too hard trying to time a short set up.

    We're transitioning to a new dominant type of economy now. Crypto absolves us from a currency crisis like in 1929 so that helps from history repeating itself, but it still rhymes. Intermittent huge pullbacks followed by galactic squirts upward are the chocolate donut and chaotic, fiat-inflation driven price discovery is the creme filling and this is breakfast for the next 10 years of our lives.

  20. "By August 1929, brokers were routinely lending small investors more than two-thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan, more than the entire amount of currency circulating in the U.S. at the time."

    there wasn't enough money. That sounds familiar.

  21. The mostly Calvinist revisionist and apocryphal "tulip bulb" story is interesting in the fact that the world reserve currency was then transitioning from the conquest-based Spanish real to the merchant-based Dutch guilder in 1640. In the 1920's the world reserve transitioned from the industrial discovery and colonization-exploited British pound to the industrial expansive US Dollar. The 100 year run on the dollar is petering out. The information and knowledge economy led exuberance of the 2020's is bringing about a global reserve currency re-ordering.

  22. VIV/Willsons – I like it. Due to the lower stock price ($8.39) the dividend is huge at 0.75 (9.13%) and, at 6x earnings, not very risky.

    2019 LatAm Groups Report: Broadband Has Largest Share Of Fixed Service Revs  | S&P Global Market Intelligence

    They are not badly damaged this year so a good long-term bet though competition is heating up, especially from Slim's company.  Sadly, they options only go to August so not a lot to do with them but you can Buy 1,000 shares for $8.36 ($8,360) and sell 10 of the Aug $7.50 calls for $1.45 ($1,450) and sell 1o of the Aug $7.50 puts for 0.60 ($600) and that drops your net entry to $6.31/6.905 (if assigned) and called away at $7.50 would be $1.19 comms and 0.375 dividends so $1.565 (24.8%) by August is a very nice play.  Let's do that in our Dividend Portfolio with 2,000 shares and 20 short puts and calls.  

    When we get to Aug, we'll simply buy more stock and roll the short calls to 2x whatever.  

    TAK is nice too but I always prefer the ones people haven't noticed yet.

    $8.5Bn/BDC – Derivatives no matter how you slice them.

    Not too much damage today but not too much volume either.  Doesn't seem like there's strong support if a low-volume day can spike us down like that.

  23. GM All,  I am not seeing today's post.  Anyone able to read today's post?  Thanks 

  24. Nothing here either.

  25. Spoke too soon, it is there now.