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Tuesday Trouble at 2,300 on the Russell 2000

Small Cap Stock.

The kind that should give us an indication of the health of the broad economy but, according to the Russell 2000 this past year – 2020 could not have been better as our small cap index rallied back from below 1,000 in March all the way to 2,300 early this morning – that's up 130% in 11 months!  Let's say we started the year at 1,600, a 700-point gain is still a nice 43% gain on the year.

We should have a virus every year – is the only possible conclusion we can draw from this action. The Russell topped out at 1,740 in 2018 and was down 42.5% 18 months later – so it's kind of a finicky index but this is truly amazing though the Nasdaq is up from 9,000 to 13,700 and that's 4,700 points, or 52%, but I guess with the Nasdaq we can argue that Tesla (TSLA) and GameStop (GME) deserved their 500% gains in the past year, right?  

The secret, of course, is to completely ignore the true value of stocks and just assume that, whatever price they are now, they can be higher later.  Fortunately, what can't be higher later is the price/earnings ratio of the Russell, which is pinned at 35 and they cap the p/e measures at 35 so stocks that have p/e's of 1,000 don't throw off the scale but, of course, 35 was a number they picked because it was exreme and ridiculous and it was very unlikely ANY stock would exceed 35 for very long before the public became outraged and dumped it.

Of course, that's not happening at all now and, in fact, almost ALL of the Russell 2,000 stocks now have P/E Ratios higher than 35 so the P/E for the Russell is – 35.  If 1,999 stocks had a P/E of 35 and ONE stock had a p/e of 10, the Russell 2,000's average P/E would be 34.9875 but it's not, NO Russell stock has a P/E of 10 and no 2 are under 15 and no 4 are under 20 and no 8 are under 25 and no 16 are under 30 and not even 32 stocks are even under the maximum P/E of 35 – which again was considered so ridiculous that is was to be thrown out as bad data – since there had to be some mistake for a stock to be so ridiculously priced!  

And those, by the way, are the OPTOMISTIC Forward Expectations – the ACTUAL earnings of the Russell 2000 are roghly 40% below that but hope does spring eternal and investors are an optimistic bunch and the Government will just keep printing money because there are no consequences for your actions on this planet, are there?

Pay no attention to that debt behind the curtain.  $4.6Tn was spent in 2020 by the Government to float our $21Tn Economy so a bit more than 20% of our economy is deficit spending but that doesn't count another $4Tn spent by the Fed, expanding their balance sheet because that's an "off book" transaction – nothing to see there…  

That's why the Dollar is 10% lower than it was at the beginning of the year – back where it was when Trump rolled out his Dollar-unfriendly tax cuts and spending spree in his first term.  We were "only" $19.5Tn in debt so Trump has added $8.3Tn (42.5%) in 4 years and Biden is going to break the one-year record in 2021 (although this is still Trump's budget through June) so it's very possible the value of our savings will be down another 10% at the end of this year as well.

Since we pay for stocks (and commodities) with Dollars, the PRICE of those items goes up – or at least seems to – when the Dollar gets weaker.  But what if the market were priced in something else, like BitCoin?  Well that would give us a very different picture because, unlike the Dollar (or because of the Dollar), BitCoins have soared in value and, if the S&P 500 were priced in BitCoin, you would need less than 1/10th of a BitCoin to buy a unit of the S&P 500 – and that's down from 0.45 at the start of the year so down 0.36 is an 80% decline for the year so thank goodness BitCoin isn't more popular, right?

Maybe Elon Must is right to start accepting BitCoins for his cars (you only need one or two!) – you sure can't trust the Dollar to hold it's value anymore.  And you might think that this is just an extreme example but, for hundreds of years, Gold has been the benchmark for a steady value vs changing currencies and, if you price the S&P against Gold in 2020, it's flat.  Not up 40% but flat.

So more and more Dollars are being printed and they are being exchanged for stocks, BitCoins and Gold (don't forget Bonds are totally fake now as the Fed buys them) and that inflates everything and we talked about inflation yesterday in our Morning Report and, later in the day, we added 4 Inflation Hedges to our Member Portfolios (see our recent Top Trade Alert).  Even in a crazy market like this, there are rational ways to make money and our trade idea for Barrick Gold (GOLD), which was last year's Stock of the Year at PSW, hitting $27 in 2023 (now $22.50) can return 4,100% on our cash in 24 months.

That's better than BitCoin!  


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  1. PHIL,

    Belated thanks for the thorough inflation hedge commentary.

  2. Good morning!

    Markets a bit lethargic this morning.  Oil coming down a bit but I'm still in the red – just waiting for tomorrow's report, which will hopefully be a reality check.

    My cost basis is still $57.49 – I didn't have enough conviction to go 8 short at $58.50, which would have bumped me up to $58 avg and I'd be out already but the market is too irrational to make rational bets so I just let my conviction keep me holding on with a $1,000 per contract loss.  The Dollar will hopefully hold 90.50 but really the weak Dollar gave me the courage to ride out the spike as those short-term dollar effects don't generally last too long.  

    Of course, $57.50 WILL be bouncy and it's a $1 drop so 0.20 bounces are $57.70 (weak) and $57.90 (strong).  

  3. Hey goaaaaaaaaallllllllllllllllllll!!! on oil, got back to 2 short on that spike down, allowing me to get out 2 even(ish) at $57.45 so the two remaining now have a cost basis of $57.54 and NOW, if we hit $58.50, I'd certainly sell 2 more again.

  4. Phil,

    I'm not seeing any comments since 10:04.  Where is everyone?

  5. I have no idea.

    Very quiet this morning.  

    I've been doing my reading (which is my default mode if no one is chatting), thinking about shorting the Russell as we're back near 3,000 (/RTY

    Oil back over $58 though so looks risky (dollar backing off too).

  6. TLRY is back! The 2018 stock-story-of-the-year (remember them? seems so long ago) has returned from near death. Weekly calls up 1000%. Maybe time to chase some other weed plays?

  7. Total slips despite 'rock steady' Q4, full-year results

    Feb. 09, 2021 7:58 AM ETTOTAL SE (TOT)By: Carl Surran, SA News Editor4 Comments

    Total (NYSE:TOT) -1.1% pre-market after posting lower than forecast Q4 earnings but stronger than expected revenues as oil prices stabilized, and earnings fell less sharply than in Q3.

    Q4 adjusted net income came in at $1.3B, down 59% Y/Y but above the average analyst estimate of $1.14B.

    Total's Q4 ratio of net debt to equity including leases rose to 25.9% at the end of December, compared with above 30% for some of its European rivals.

    Q4 hydrocarbon production fell 8.7% Y/Y to 2.84M boe/day, citing compliance with OPEC quotas, maintenance and unplanned outages – notably in Norway – and the natural decline of fields.

    "Overall a rock steady performance in a tough quarter and year," according to Bernstein analysts, also noting that cash flow levels were strong.

    For FY 2020, Total plunged to a $7.2B net loss, hit by ~$10B of impairments as oil prices collapsed, but it recorded most of the charges earlier in the year.

    The oil market outlook remains uncertain, Total says as it plans to target another $500M in cost cuts in 2021, after saving $1.1B last year.

    Chairman and CEO Patrick Pouyanne says the company's proposed rebranding to TotalEnergies, reflects an attempt to move as fast as possible as it tries to improve on its environmental goals.

    The company says it has already spent more than $2B on acquisitions in the renewables sector this year, and plans to target 20% of its ~$12B investment budget for 2021 on renewables and electricity, up from 15% in 2020.

  8. Phil/RTY – You mean RTY at 2300 and not 3000?

  9. Phil – you should do a PSW token and start yield farming. All the rage with the kids these days.

  10. Impeachment and the market is rocketing higher and higher. Insanity still reigns.

  11. Phil/GM,

    Your take on GM earnings? Few plans have been shut down due to chip shortage but that should not affect them long run. Especially there are also planning big in EV space.


  12. TLRY/BDC – I was advocating TCNNF – they did well.  Also I liked the MJ ETF so as not to have too many eggs in one basket.  

    TOT/Batman – I still like them long-term.  They were in our Future is Now portfolio but they made too much money so we cashed them out. $42.25 is $108Bn and they made $11Bn in 2019 about $4Bn this year and then back to $8Bn projected in 2021 so a very good deal down here as they are likely to be back on track by 2022.  I like them as a diversified renewables play.  They only have short-term option, unfortunately but the dividend is 7% so let's play them that way in the LTP"

    • Buy 1,000 shares of TOT at $42.29 ($42,290)
    • Sell 10 Aug $40 calls for $4.80 ($4,800) 
    • Sell 10 Aug $40 puts for $3.70 ($3,700) 

    That's net $33,790 or $33.79/share and, if we get called away at $40, we make $6.21 (18.37%) in 6 months plus 2 dividend payments for another $1.60 (4.7%) so about 23% in six months on this conservative play and the worst case is we get assigned 1,000 more at $40 and our average on 2,000 would be $36.895, which is a 12.7% discount to the current price.  Not a bad worst case for a stock that returns 40% a year if it's up or flat.

    RTY/Ravi – Yes 2,300 is where I'm shorting /RTY though shorting does seem hopeless today. 

    Token/BDC – We discussed that years ago – should have done it.

  13. GM/Pat – I liked their superbowl ad.  Need to understand more of the reality behind what they are doing.  They are probably going to show about $1.50/share in profits ($3Bn) – these guys haven't missed a quarter in a couple of years.  For the year, they should do just under $7Bn and $56 is $81Bn in market cap so very fairly priced as well.  I kind of hope they miss so we can jump in cheaply but they probably won't:

    Due to the volatility, you can sell the 2023 $35 puts for $4.50 and that's a nice $30.50 net entry.

  14. F- while on the subject of autos- What is your take on Ford? I have been reviewing my portfolios regularly and selling positions to increase cash and I have a decent profit with F but since dividend has been suspended for nearly a year looks to me as the upside may be limited. 

  15. F/Pstas – Well we did grab them.  We have 3,000 shares in the Dividend Portfolio starting from Oct, 2019 (we added more when they got cheaper) and our target for this year was only $7 and now they're testing $12, which is $46Bn in market cap after earning $0 last year but should be back to $4Bn+ this year so, like GM, still a good buy but I'd wait for a pullback.

    Another up day in the markets, yawn…

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