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Faltering Thursday – Powell and Yellen Fought Reality and Reality Won

It was a nice try.

As we discussed in Monday Morning's PSW Report (and if you want to know what's going to happen before it does – SUBSCRIBE HERE), Fed Chairman Powell spoke 3 times this week and each time he (with help from Janet Yellen) attempted to reassure us that the Fed has things under control and inflation is transitory and all sorts of sunshine and lollipops but yesterday, at the 1pm 5-year Bond Auction – also as expected – the investors clearly were not buying the BS and rates shot up to 0.85.  0.85 doesn't seem like a lot but they were 0.2% last July, so it's a pretty steep inversion of the Yield Curve – a very worrying sign for the economy.

Our $30Tn Debt Load is starting to worry people, especially when we're running a $1Tn deficit already and we're planning to spend another $3Tn on Infrastructure and don't forget the planet is melting and it's going to cost AT LEAST $1Tn/year to fix that – we haven't even had that discussion yet!  So I'd say, conservatively, we'll be adding $5Tn in debt this year and that will bring us to about $34Tn in total debt and we are likely to hit $50Tn in 10 years – the length of the primary notes the Government sells.  Do you want to get $100,000 back in 10 years after collecting 2% ($20,000) in interest over that period?  Do you think that's a wise investment?

US national debt projections | SIMCenterYes, all this FREE MONEY does have a price – it's a price we all pay in the future.  As the great economist, Pink Floyd said about deficit GDP financing:

"And when you lose control you'll reap the harvest you have sown

And as the fear grows the bad blood slows and turns to stone

And it's too late to loose the weight you used to need to throw around

So have a good drown as you go down all alone

Dragged down by the stone

But the Fed won't go down all alone – they are going to take us with them.  The Government is borrowing money on your behalf, this is YOUR unsustainable debts we're talking about and I know rich people love to fantasize that they owe the same $224,455 (yes, that is the real, current, per taxpayer number) as the poor people they step over on the way to work but that's not the case as you can't get blood, or money from a stone yet, somehow, the money has to be gotten.  If the US defaults, that's YOUR default – ask Greece how well that goes….

Greece's debt crisis, explained in charts and maps - VoxThat's right, those who forget the past are condemned to repeat it and we've all seen this movie before – 14 years ago when the housing market collapsed and the illusion of profits for the banks began to unravel (also predicted by yours truly) certain countries (like Greece) came under a microscope for the unsustainable debt levels and people simply stopped bying their debt – forcing them to offer higher and higher rates to fund it – effectively forcing the country into a crisis.

As part of the European Union, unlike the US, Greece did not have their own Central Bank to print money and buy their own debt – which doesn't make the debt go away but it maintains the illusion that "people" are still willing to lend you money.  Greece was not so lucky and rates went up very quickly and Global Markets quickly collapsed and that was our first big Global Bailout – and we haven't really stopped since.

We've seen a big boom in the Dow recently and that's because we're slowing down and people are, once again, defensively putting money into large-cap stocks.  The constant money-pumping has the hands on this clock spinning a lot faster than normal but it's still a good indicator of where we are and where we are is the beginning of the end of the bull market – even with another $3Tn of deficit spending around the corner.

Think of what's happened in March:  We passed a $1.9Tn Stimulus Bill AND we're talking about another $3Tn in Infrastucture Spending AND both the Fed Chairman and the Secretary of Treasury just told Congress they are going to continue their easy money policy for as long as it takes (without causing inflation) and we STILL only hit the same 3,950 we hit on the S&P in February and the Nasdaq didn't come close to 13,850 (now 12,720) and the Russell's February high was 2,300 (now 2,100).  

If that's all $5,000,000,000,000 buys us, we are in BIG TROUBLE!  

Chinese stocks show rising risks for global equitiesChina took their foot off the stimulus gas pedal this month and the CSI 300 dropped 15% as concern about tighter monetary policy replaced optimism about the economic recovery. Like elsewhere, the rally had been led by investors chasing a small number of stocks, many of whom piled in at the top as a frenzy grew.  Now the gauge is trailing MSCI Inc.’s global benchmark by the most since 2016 this month and the most popular mutual funds are getting crushed.

The Shanghai is also 15% off in the past 30 days and the Hang Seng is off 10% and all still trending down but, as usual, Western Traders tend to ignore Chinese Markets until the results spill over into our local markets – then we blame China for the problem.

China's Ultra-Short ETF (FXP) is a relatively new hedge in our Short-Term Portfolio and we sold the March $40 calls ($6,000) and they expired worthless and that has left us with the September $30 calls ($7,760) covered by the June $35 calls ($3,280) for a $20,000 spread that's on track.  We've already collected $1,520 more than we paid for the longs so anything above $30 is just bonus money now and we can't lose.  That's a good way to take a long position on an ultra-short ETF.  

FXP Long Call 2021 17-SEP 30.00 CALL [FXP @ $32.28 $0.00] 40 2/18/2021 (176) $7,760 $1.94 $2.51 $3.44     $4.45 $0.00 $10,040 129.4% $17,800
FXP Short Call 2021 18-JUN 35.00 CALL [FXP @ $32.28 $0.00] -40 2/4/2021 (85) $-3,280 $0.82 $0.86     $1.68 $0.00 $-3,420 -104.3% $-6,700

It should also be noted that the Sept $40 calls are $2 so, if FXP does go over $35, we can roll this into a $40,000 spread at no cost – that's great flexibility!  Keeping it tight for now hedges us against the possibility that China passes another stimulus measure as well – but I doubt that as China still thinks debt is something you have to pay back one day – Old-Time Monetary Theory they call that these days….

Be careful out there and stock up on toilet paper.


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  1. Good morning.

  2. Good snowy AM all. If you are in sunshine ENJOY IT!

  3. Good Morning.

  4. Good morning!

    Sunshine/Pirate – It's so monotonous….

    We vary from "Mostly Sunny" to "Partly Cloudy"

  5. My Mom will be wearing a sweater next week – 65!  

  6. Phil-I always get laugh when with my sister. The temps go to 65 and she puts the HEAT on! 65 is a heat wave here. In fact everyone is in tee shirts @ 55.

  7. looking through my ports REYN is still a good deal for sleeping in the armchair. Buy the stock and sell the Dec 25/30 strangle. Return 1.9 % combined return. That is per month!!! As I said a sleeper.

  8. Phil/MO Strangles are set up with otm C and P. sometimes you deviate from that and i'm not sure why? i'm long 1000 MO at cost 45.14 current price 49.5. Not sure how to choose strangle becos cost and current price differ can you suggest a 2023 short strangle and your logic for the strikes you use? Thank you

  9. Stuart MO Jun21 45/52.5 @ 1.96 will give you a combined return of 1.98 % per month the same for Jan23 @ 9.60 will give you only return of 1.44% per month. 

  10. Phil – WBA  taking a beating again today  how about the 45/55 selling 35P?

  11. jeddah62 don't mention it my favorite stock

  12. Lol Yodi.. was also reminder for you to buy some more :)

  13. great advice, don't let them catch you!

  14. Did any one follow my plays on NOC first week of Jan21? looks like it is moving in the right direction.

  15. Heat/Pirate – I still have my Northern blood, extra-thick from decades of skiing but it seems to happen to everyone down here – they hit some point where even walking in the refrigerated isle in the grocery store makes them shiver.  

    That was so cute the way the indexes tried to rally! 


    Things could be worse:

    If we are the strongest currency – imaging what a catastrophe other people's economic policies must be…

  16. REYN/Yodi – Where have they been hiding?  $30 is just $6.3Bn for these earnings:

    Year End 31st Dec 2015 2016 2017 2018 2019 2020 2021E 2022E CAGR / Avg
    Total Revenue

    2,968 2,935 2,957 3,142 3,032 3,263 3,318 3,378 1.91%
    Operating Profit

    474 534 540 513 510 586     4.33%
    Net Profit

    68.0 79.0 302 176 225 363 422 441 39.8%
    EPS Reported

    0.336 0.390 1.49 0.869 1.11 1.78     39.5%
    EPS Normalised

    0.336 0.390 1.49 0.869 1.11 1.88 2.02 2.13 41.2%
    EPS Growth

    +656 +16.2 +282 -41.7 +27.8 +69.5 +7.24 +5.55  
    PE Ratio

              15.9 14.8 14.0  

              2.19 2.67 6.09  

    So about 15x earnings in a solid, steady company that throws off a 3% dividend (0.92) – very nice.  Short option chain is why we don't usually bother with them but we can sell 10 of the Dec $25 puts for $1.50 ($1,500) and buy 20 of the Dec $25 ($5.80)/$30 ($2.80) bull call spreads for $3 ($6,000) and that's $4,500 on the $10,000 spread that's in the money now.   Just a small entry for the LTP and hopefully we'll have a chance to widen the spread and add more if they sell off.   If all goes well we'll make $5,500 which is about $500/month (11% on cash).

    MO/Stuart – I set them depending on my expectations during the time period.  There's no simple rule to it – we have to analyze each trade to decide.  So, with MO, they are mid-channel coming into earnings (4/29), so I'd be cautious about selling puts and calls but more-so calls as I think they are underpriced at $50, which is  $92Bn and they made $4.5Bn last year and expect $8.5Bn this year and hemp cigarettes are going to be a big thing and that's not on analyst's radar yet.  We did MO in the dividend portfolio back in Nov, 2019, when things were uncertain but now I'd be a lot more aggressive on a new trade.  

    If you are in at $45.14 on 1,000, I'd sell 10 2023 $45 calls for $7.25 and 2023 $45 puts for $5.50 so you put $12.75 back in your pocket and your basis is now $32.39 with a nice profit if called away but it's rollable so you might not lose it.  It's good downside protection and, if you have to buy 1,000 more at $45, you will average $38.695 on 2,000 shares (and then you would sell more calls to drop to $30ish).  Since you own 1,000 for $49 now, I don't see how owning 2,000 for $30 would be an outcome you'd want to avoid.

    You pocket $12,610 in profit if called away and you collect $6,880 in dividends while you wait (including the one you already have this year).  Seems like a nice, relating play to me.

  17. WBA/Jeddah – Why are they down?  

    Rite Aid stock sinks after 'weak cough, cold, flu season' guide update

    Ah, now we see a reason.  The reason makes sense and seems sustainable and it is from RAD so WBA can take another hit if they announce (or CVS announces) similar issues.  Of course RAD is a disaster anyway and may be just blaming this for their poor performance.  Overall, it doesn't change our long-term view of WBA who are at $44.5Bn at $50.50 and should make $4Bn+ this year so p/e 10 means I buy them no matter what they do down here.  Nothing wrong with your spread but more likely they do at least a weak retrace of the $10 run so $2 back to $48 would be a better entry and possibly $46 if the market trends down next week so no hurry. 

    Also, I'd rather sell 1/2 as many 2023 $45 puts for $7 as the $35 puts for $3.25 as you can always roll down but, if WBA takes off, you are in way better shape.  

    NOC/Yodi – Good call.

  18. Yodi – I am in the REYN trade ; Bought stock and sold Dec 30C/25P strangle; Thanks

  19. US state jobless claims fell to pandemic-era low last week

  20. Government revises 4th quarter GDP up slightly to 4.3%

  21. Wow big market reversal from the early sell off 

  22. OMF Phil is it worth a shot 29.95% yield ????? offering more free money than the Gov.

  23. Not seeing enough open interest in REYN to be able to sell those options.

  24. Still red but improving drastically.  

    Russell is up 1.4%.

    OMF/Yodi – I see $7.06 dividend, not $18 and I'd take that with a grain of salt as I imagine the $3.95 they just paid was a special of some sort.  They are a sub-sub-prime lender and doing a great job of managing risks, it seems, but these sort of things work until they don't and then the CEO says "Who could have seen this coming?" Until then, it's a great little stock for $10Bn as they move towards $1Bn in profits – as long as the model holds up.  Notice their plan is to make more money on less loans going forward:

    Year End 31st Dec 2015 2016 2017 2018 2019 2020 2021E 2022E CAGR / Avg
    Total Revenue

    2,192 3,900 3,785 4,241 4,784 4,933 3,373 3,559 17.6%
    Operating Profit

    -226 356 431 624 1,098 977      
    Net Profit

    -220 215 183 447 855 730 953 1,042  
    EPS Reported

    -1.72 1.59 1.95 3.29 6.27 5.41      
    EPS Normalised

    -1.40 2.22 2.39 3.62 6.47 5.82 7.34 7.77  
    EPS Growth

        +7.46 +51.5 +78.9 -10.1 +26.2 +5.82  
    PE Ratio

              8.79 6.97 6.59  

              0.336 1.20    

    REYN/Rperi – You just have to make a GTC offer and wait patiently.  These can take days to fill on thinly-traded stocks.

    Gold having a wild day:


    Still in those last two Dow shorts:

    This is the bonus round so 32,400 is the stop as that's the strong bounce from 33,000 and, if that fails, we could drop another 1,000 easy and that would be +$10,000 against risking $4,000 on the bounce – but this was sharp so I am annoyed.  Had it been slower, I would have stopped at 32,000 as that was obviously going to be bouncy.

  25. crude   Did they get their $10M moneys worth to that captain?   spike didnt last to long 

  26. Actually it's not about the spike but establishing the $57.50 line as a key technical support.  You are "training" the TA guys and Algos (95% of the market) to "buy the dip".  That has a more lasting effect.

  27. Biden giving a good press conference.  

    First time in 4 years I've listened to a President speak and was able to keep my lunch down.

  28. That's my thoughts exactly. Thanks for the laugh.

  29. Biden Presses for Change to Filibuster, Doubles Covid-Vaccine Goal

    President Biden, in his first news conference, called for changes to the legislative filibuster and said it would be difficult to meet a May 1 deadline to withdraw troops from Afghanistan.21527 minutes ago

    Funny how they joke about Biden being old, and he is, but he was really on top of things in that conference.  He got into so much detail about the border issues that he realized no one wanted that much information and stopped himself.  

    Mr. Biden also set a new goal of administering 200 million Covid-19 shots by the end of his first 100 days in office as he tries to control a pandemic that has left millions unemployed and more than 545,000 dead.

    “I know it’s ambitious, twice our original goal. But no other country in the world has even come close, not even close, to what we are doing. I believe we can do it,” Mr. Biden said.

    Entering office, Mr. Biden pledged the U.S. would administer 100 million vaccinations in his first 100 days. That target, which he set as the U.S. was already close to administering 1 million shots a day, was reached earlier this month. Mr. Biden has a little over a month left before the end of that period, and the U.S. administered an average of 2.5 million doses a day over the past week. If that rate holds, the 200-million mark should be hit before Mr. Biden’s 100th day in office.

    Biden Administration Officials Put Together $3 Trillion Economic Plan

  30. Phil/MO I filled the straddle at 13.25. Thanks

  31. Andy/webinar has it been posted yet?

  32. I still like to comment on the MO play of Stuart.
    Not taken the Jan23 put sale in to consideration, I only looking at the potential profit of the call sale. Taking Phil’s Jan23 45 call @ 8.15 and my 52.5 call @ 4.40. Assuming MO will just be at 50 Jan23, Phil’s 45 call will bring a return of 17.5% and one will be assigned and lose 5.00. 
    My play at call 52.5 without upside potential will show a return of 20.5 % and you still have the stock. With upside potential up to 52.5 I show 26% return, and still hold the stock.
    Obviously the put sale remains in both cases the same.