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Toppy Tuesday – What More Can Powell Say or Do at this Point?

The FED Squeeze – Grrr GraphicsHere we are again.

Indexes are still hovering around their all-time highs and Fed Chairman Powell is speaking to Congress.  What is he going to say?  What can he possibly say to make you believe that the stocks you are massively over-paying for now are going to be even more massively over-paid for by the next sucker down the road?  How much money will they have to pour into the system to maintain this farce?  Will there ever be consequences or were we just being silly for the past 245 years having a budget?

Money can just be printed when you need it.  No matter what you want to spend, you just print more and buy whatever you need, right?  That's our current fiscal policy and, as we noted yesterday, the Fed is responsible for most of it and yes, we need the stimulus and we need the liquidity BUT THERE IS A COST – and we haven't even been considering it.  

Since the financial crisis, the Fed has kept the cost of borrowing money for banks at near-zero percent interest. That allowed those banks to borrow money to buy their own stock (as did many corporations) to inflate their value but not, of course, the value of their service to Main Street.  When money is cheap because interest rates are low or near zero, the beneficiaries are those with the most direct access to it. That means, of course, that the biggest banks, members of the Fed since its inception, get the largest chunks of fabricated money and pay the least amount of interest for it.

Let’s recall that on September 15, 2008, Lehman Brothers crashed. That bank had been around for more than 150 years. Its collapse was a key catalyst in a spiral of disaster that nearly decimated the World financial system. It wasn’t the bankruptcy that did it, however, but the massive amount of money the surviving banks had already lent Lehman to buy the toxic assets they had created.  In the wake of Lehman’s bankruptcy, $16 trillion in bailouts and other subsidies from the Federal Reserve and Congress were offered mostly to Wall Street’s biggest banks. That flow of money allowed them to return from the edge of financial disaster. 

This is year 13 of money-printing.  35 year-old traders have never been in a market where the rates were not near zero and the Fed bought all the bonds that came up for auction.  In 2007 we were testing Dow 15,000 and now we're over 30,000, even though our GDP is "only" $20Tn, up less than 50% from $14.5Tn in 2007.  Mathematically, that simply does not make sense, does it?  How can the global economy only be up 50% but the price of stocks is up 100%?  Doesn't that indicated stocks are due for a 25% correction?  Or maybe the GDP will pop 33% instead – yeah, let's be optimists, right?

How Animal Investors Beat the Market | by Grant Holtes | Towards Data  ScienceThat, unfortunately, is what is now baked into the cake and that means that anything that takes away from that fantasy is now going to be considered a tragedy – especially since so many people already paid prices as if the 33% jump in our economy already occurred.  Since adding $6Tn to our GDP took 13 years of non-stop borrowing, easing and spending by our Government, even at the current pace, we have another 13 years ahead of us to grow into this valuation.  That's what the bulls are paying for.

It's still a stock-pickers market and of course there are individual companies that are fairly-priced and should increase their earnings down the road but the broad market is at the edge of a very big cliff and only needs a very small push to send it tumbling down 25%, back to Dow 23,500, S&P 2,850, Nasdaq 10,000 and Russell 1,680. 

Please, PLEASE make sure you have hedges and make sure you have plenty of CASH!!! on the sidelines.  It's been a very exciting ride but it will come to an end at some point and it would be crazy to give up the gains we've made in the past year, wouldn't it?  


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  1. Good Morning.

  2. Good morning!

    Nice little correction on the Nasdaq (again) to start the day.  We'll see how the recovery goes.  

    • The STP is now up 18.2% at $236,416 so up $82,303 (53%) since Thursday means our hedges are working well.
    • The LTP is holding up fine so far at $1,606,105 – down about $3,000 from Thursday so all good so far.

    Powell says miles to go before they tighten – should be helpful.


    I read that these leveraged ETFs suffer from price decay and reset over time, and a few sites suggested they should not be traded long term and used for day trading only. Does this affect us?

    I understand the concept of these spreads. In a 30% or 50% crash the SQQQ’s will make X amount but what is a good amount of coverage?  

    Let’s say I will lose 100k in a 50% market crash. How much SQQQ “insurance” should I hold? Obviously, it’s too expensive to insure 100% of losses so what is a good general rule?

    Do I want my insurance to pay me 50% of my projected losses?

    Thank you for the guidance.

  4. Hedges/Youngy – That's why we often sell short-term calls against them, to offset the decay and pay for our rolls.  Yes they decay over time but sometimes they go ballistic as well:

    That's why we roll them down to keep ourselves in position to take advantage of a spike up, when it happens.

    With TQQQ, we are using the decay to our advantage by shorting it.

    Generally we try to mitigate 1/2 our losses.

    If the whole market drops 40% and you make 20% back on your hedges, then you have 60% in your stocks and 20% from your hedges and you are in a market that is now net 80% – so you've kept even with the drop and you have money on the side to buy at lower prices. 

    Of course, we adjust that over time depending on our short-term outlook but that's our "default setting" – currently we are kind of bearish as we are 2/3 CASH!!! in the LTP and only $500,000 in positions covered by more than $300,000 in hedges.

    That's why we're net up about $80,000 since Thursday.  

  5. Good morning Phil and thank you for that reply. 

    I have 2 questions today, the one above and this.

    How to ratio my account size to the PSW LTP/STP.

    What is the total LTP STP Portfolio size? 600k? (I know it’s over a million at present but if it was reset what would it be?)

    I have been here several years but am going to start following the LTP STP trades more closely.

    If for example, I have allocated 300k to follow the trades here so what ratio should I trade? If LTP/STP is 600k I assume I should place half that number of orders. And… will each trade (¼ allocation block?)  allow for doubling down etc and sitting on enough cash for future trades. Am I right?

    Thanks in advance Phil. This has been a great learning process.

  6. Size/Youngy – We started with $500,000 in the LTP and $100,000 in the STP a bit more than a year ago.  I would not copy it but rather pick up new trades as they come along (and the ones I say are "good for a new trade" in the reviews and then hedge in proportion.  Obviously, if you are working with $300,000, you should do 1/2 as much as we do, right?

    If you have a $250,000 LTP you should have $500,000 in buying power so your allocation blocks should be $25,000 each (20 positions) and each initial trade should not be more than 1/4 of an allocation block so that eliminates some trades that are simply too big to play with.  

    For example, T is still at $29.26 and we love them long-term.  The dividend is $2.08 but you can't buy more than 250 shares (with short puts) so let's say you did that and sold the 2023 $27 calls for $4 and the $27 puts for $4 so net $21.26 means you can buy 500 shares for $10,630 and you'll collect $1,040/yr or $2,080 and then called away at $27 is +$5.74 ($2,870) so $4,950 in 2 years against potentially 1,000 shares at $24.13 ($24,130) but, of course, we don't see the risk of T dropping 50% so total risk is no more than $12,000 so a 40% return going that way.

    On the other hand, we could just aggressively sell 10 of the 2023 $27 puts for $4 ($4,000) and buy 15 of the 2023 $23 ($6.60)/27 ($4) bull call spreads at $2.60 ($3,900) and that's a net $100 credit on the $8,000 spread with the worst case being owning 1,000 shares at net $26.90.  

    Both are good ways to trade and the advantage of the bull call spread is, if T really pops, then you can decide to re-allocate your block to a new trade – as it's doubtful you'll be forced to put the cash in play if T is holding up well over $35 while you'd be stuck in the stock play on the same move.

  7. Investors Are Too Exuberant

  8. 1,000-point drop for /NQ means 200-point weak bounce back to 13,100 and strong would be 13,300 but bigger picture is 7,500, 10,000, 12,500 since it's only been a year for that move so 2,500-point moves have 500-point zones which means 13,000 is more likely the overshoot of 12,500 and that means we should see 12,500 and very possibly a correction from there of 500 to 1,000 points.

  9. Commodities price surge raises fears of ‘overshoot’

  10. It's time to look into lithium miner plays and get serious about that. What are the picks?

  11. Texans Will Pay for Decades as Crisis Tacks Billions Onto Bills

  12. they sure bought the dip today

  13. Another miraculous comeback for the indexes.  

  14. TSLA $619 back to $706 already – what a day…

    Oil up at $62.09, I like the short below $62 of course but very tight stops above.  

  15. Phil,

    One of those Twilight Zone questions:

     Wouldn't the impending huge stimulus bill plus personal income stats, Fed policy, etc tend to have the effect of postponing any significant correction

    of presently over-inflated equity prices? Wouldn't those positives tend to make any sell-off – like today's – short-lived and keep market emotions on the

    bullish side?


  16. Correction/8800 – I think the market has baked all that in at this point and that means that, even with all that – it really can't go any higher.  These are not new things.  We've been discussing a $2Tn stimulus package since before the election, when the S&P was down at 3,200 and now we're at 3,800 – up 20% based on a $2Tn stimulus package.  The Fed can only get looser if they PAY you to borrow money – which they might.

    WITH all that, there's no major rebound and Q1 is no better than Q4 and Q2 won't likely be much better so it will take another $2-4Tn in stimulus just to even out 2021.  That's a lot to count on, don't you think?

  17. Pihl / AT&T – looks like sale on. Direct TV getting closer

    T : AT&T near deal to sell 'large' minority stake in video operations to TPG • 2:02 PM

    AT&T (NYSE:T) is nearing a deal to sell a large minority stake in its struggling DirecTV/U-verse operations to private-equity firm TPG, CNBC says.

    That deal would value the video units around $15B … which as expected would be a substantial loss on DirecTV, which AT&T acquired six years ago for $48.5B.

    The deal could come as soon as this week, according to the repo

  18.   The American Petroleum Institute reported late Tuesday that U.S. crude
    supplies rose by about 1 million barrels for the week ended Feb. 19,
    according to sources. The data also reportedly showed gasoline stockpiles
    edged up by 66,000 barrels, while distillate inventories fell by 4.5 million
    barrels. Crude stocks at the Cushing, Okla., storage hub, meanwhile, climbed
    by 2.8 million barrels for the week, sources said. Inventory data from the
    Energy Information Administration will be released Wednesday. On average,
    the EIA is expected to show crude inventories down by 4.8 million barrels,
    according to a survey of analysts conducted by S&P Global Platts. The survey
    also shows expectations for inventory declines of 2.8 million barrels for
    gasoline and 3.5 million barrels for distillates. April West Texas
    Intermediate crude  was at $61.26 barrel in electronic trading, compared
    with Tuesday's settlement at $61.67


    Perfect call! 

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