Monday Market Momentum – Still Heading Higher?

Up and up we go.

Of course Europe is closed on Easter Monday so it's a very low-volume affair and we'll have to see what sticks this week. We have a few early earnings reports but nothing Earth-shaking. Earnings reports start in earnest next Wednesday, with JPM, GS (and that's all we need to know) along with Wells Fargo, Progressive, First Republic and Bed Bath and Beyond – a very good mix to start earnings season off with.

Until then, we continue to tread water in thin air (there's a mixed metaphor!) and we're thin on Fed speech this week though Powell speaks on Thursday. This morning we have PMI, ISM and Factory Orders, JOLTS tomorrow, Housing, Trade and Fed Minutes Wednesday, along with Consumer Credit, nothing Thursday and PPI and Inventories on Friday. Kind of boring, actually.

Signs, so far, point to a very uneven recovery – despite the strong Jobs Numbers on Friday. Texas will blow up this week as people get their electric bills for last month's storm – people simply can't afford $3,000 electric bills to heat their homes. As you can see from the chart on the left, sub-prime borrowers are getting worse, not better and $1,400 isn't going to fix that mess. Don't forget that mortgage and rent forgiveness will expire one day – and that's a crisis we're just kicking down the road so far.

Auto loans are a key indicator of how riskier borrowers are faring. The loans represent the biggest monthly debt payment for many subprime borrowers, who often don’t have mortgages or college debt. Many work in restaurants, hotels and bars that have been hurt badly by Covid-19.

On the other end of the financial spectrum, stock buybacks are a thing again as companies are buying back 30% more stick this year than last year, bringing us back to 2018 levels of buying (which were insane) at 50% higher prices than they were buying the shares before – what could possibly go wrong??? For our beloved Bansters, the Fed announced at the end of last month "the temporary and additional restrictions on bank holding company dividends and share repurchases currently in place will end for most firms after June 30, after completion of the current round of stress tests." Game on!

JP Morgan (JPM) is in the middle of buying back $30Bn of their own stock, which is 6% of it and that will make their earnings APPEAR to be 6% per share higher than they were – NOT because they made more money, but because they have less shares to divide them by – it's BRILLIANT! Does it make sense for JPM to buy their own stock at $155 when it was $100 in November? Depends how much you value appearances, I supose. JPM trades $2.4Bn worth of shares on the average day so $30Bn is about 12.5 days worth of buying by the company itself. Imagine the effect of that on low-volume days….

That's the kind of crazy market we're in and there's no sense in fighing it – we just have to play it until it fails and hope we're quick enough not to get crushed under the correction.

Be careful out there!

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1020
April 5th, 2021 at 9:33 am | Permalink Ignore this user

Good Morning.

swampfox
April 5th, 2021 at 10:10 am | Permalink Ignore this user

Phil, any thoughts on DISCA?

dawgydaddy
April 5th, 2021 at 10:11 am | Permalink Ignore this user

The options bounce around a lot for no apparent reason, but BGFV seems undervalued. I've got a couple spreads with different strikes and net they're up a little more than 80%. You can still buy the 10/15 2022 spread for $2.75 that's 100% ITM.

1020
April 5th, 2021 at 10:15 am | Permalink Ignore this user

Hi Phil – Can I have your opinion of XL? Thanks.

dawgydaddy
April 5th, 2021 at 10:17 am | Permalink Ignore this user

The same spread for 2023 is $2 and the 10 puts are $2.20. 3.69% dividend yield and a P/E of 6.5 or something like that.

rick2006
April 5th, 2021 at 10:26 am | Permalink Ignore this user

dawgydaddy: loved BGFV last year, and held a large position for a while from $5 to $12. Couldn't understand why they were so cheap…. just looked like it was under the radar. Still a good value w/ a nice niche store footprint. Options are very thinnly traded, and for a while I was holding many/all of the open strikes in some long dated calls. So, they fluctuate wildly as you say. And, since the stock was so cheap in the summer/fall 2020 I bought most of the position in stock. Still a good value, and the 10-15 call spread seems like a no brainer. The comps will be harder this year given how robust their sales were in some of the pandemic summer months…

phil
April 5th, 2021 at 10:38 am | Permalink Ignore this user

Good morning!

Another power-up day on the way to 13,500 on the Nasdaq.

We've been higher, but not much.

Dollar down sharply is helping but people don't pay attention to that:

Oil with another entry at $61.50 and failing.

DISCA/Swamp – We were just discussing them.

Submitted on 2021/03/29 at 10:27 am

That's a lovely trade to start the week off with, Archegos may not want VIAC anymore but we sure do! Another stock that was trashed by Archegos is Discovery Financial (DISCA) – also losing about half their "value" though value is in quotes because it was never worth $80 in the first place. DISCA too is getting interesting down here but not quite as compelling as VIAC so, in this case, we can just sell the puts in our LTP as our promise to buy the stock – if it goes lower:

Sell 5 DISCA 2023 $40 puts for $12 ($6,000)

We are collecting $6,000 in exchange for our promise to buy 500 shares of DISCA for $40 so our net entry would be $14,000 or $28 per share – a 33% discount to the current price is our worst case and, if DISCA stays over $40, we simply keep the $6,000. On the whole, we'd almost rather it go lower so we can have a cheap stock for the long-haul!

They came in at $11, not $12 but still fine for a trade and should be about the same today.

BGFV/Dawg – Well, at $361M they are not on our radar but they look like a nice little company. 430 stores is not too little but sales have been flat around 1Bn for the past 5 years so it's not a growth stock by any stretch. Would have been nice to catch them at $2 – hard to find $16 exciting – even though it's still fairly priced.

XL/1020 – Another one from the small-cap bin. They convert cars to hybrids, which won't be needed soon but they also seem to be moving towards charging, which is good, if true. The problem is it's a SPAC so you are buying a business plan for $1Bn, they haven't actually done anything yet. Total revenues are $10.8M for Q4 with a loss of 0.06/share and they have $329M in the bank from all you SPAC-buyers. No one seemed thrilled with their 3/31 earnings report, overall.

There's only 100M shares so the loss is minimal so it depends how much you trust these guys to spend $329M at the top of the market to buy themselves a cash-producing asset that can justify a $1Bn valuation.

1020
April 5th, 2021 at 10:46 am | Permalink Ignore this user

XL/Phil It's not cars they convert, it's fleets of trucks and a cheaper solution (if you need one) than to replace your fleet with new electric.

https://www.xlfleet.com/

1020
April 5th, 2021 at 10:49 am | Permalink Ignore this user

With Biden's new infrastructure plan, the government may help to pay for those conversions….

phil
April 5th, 2021 at 11:16 am | Permalink Ignore this user

XL/1020 – I stand corrected, they convert trucks to hybrids. I guess that will be a good business for a while as the life-cycle of a fleet is too long to count on electric replacements coming soon.

Oil $59.50 already – ouch! That's the gift that keeps on giving for the shorts.

Obviously greedy not to take the profit here (stop at $59.50).

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phil
April 5th, 2021 at 2:14 pm | Permalink Ignore this user

/NQ 13,600 and still climbing!

F'ing oil finally bounced off $57.63 – what a joke…

Done with that, obviously.

/NG tempting as a long over the $2.50 line with tight stops below – it should at least be bouncy off an 0.15 drop (0.03).

Not much conviction to it but 33,275 is my average /YM short at the moment.

swampfox
April 5th, 2021 at 5:36 pm | Permalink Ignore this user

Phil, it's the end of the day so I may need to repost tomorrow but I've learned a lot from you. Yet, I feel as though my timing of closing positions isn't very good. Do you have any general rules? For example, I have a GILD BC spread that expires Jan 23, max profit is about $5500 and its just over $4k profitable now. Wait it out? Sell it? Any rules here?

hicket
April 5th, 2021 at 6:31 pm | Permalink Ignore this user

/swampfox Excellent question.. Looking forward to Phil's response to your question.. For me I start looking to close the BCS >80% of max profit and same for the PUT.. >80% profit. Not that I close at >80% profit all the time but I monitor each stock and make a decision to hold or close it out.

phil
April 5th, 2021 at 7:17 pm | Permalink Ignore this user

Closing/Swamp – You have to watch the Roger Rabbit movie to get it but there's a scene where the detective is handcuffed to the Rabbit and it's a huge problem but later, when he's finally got time to saw them off – the rabbit slips his hand right out of the cuffs and the Detective says "You mean you could have taken your hand out of that cuff at any time" and the Rabbit says "Not ANY time – only when it was funny!" That's pretty much the rule for closing a position – only when you're done with it.

Like humor, there's too many variables to quantify, you just have to have a feel for it. Basically, in our LTP, our GILD position is this:

GILD Short Put	2022 21-JAN 62.50 PUT [GILD @ $66.34 $-0.10]	-10	2/5/2020	(291)	$-9,000	$9.00	$-3.95	$-9.60	$5.05	$0.05	$3,950	43.9%	$-5,050
GILD Long Call	2023 20-JAN 45.00 CALL [GILD @ $66.34 $-0.10]	50	11/17/2020	(655)	$86,000	$17.20	$4.98		$22.18	-	$24,875	28.9%	$110,875
GILD Short Call	2023 20-JAN 65.00 CALL [GILD @ $66.34 $-0.10]	-50	11/18/2020	(655)	$-37,250	$7.45	$0.80		$8.25	$-0.75	$-4,000	-10.7%	$-41,25

So GILD is at $66.34 and we're in the money at $64,575 out of a possible $100,000 so there's 50% more profits to gain – that's a no-brainer as:

A) 50% is still a lot of money (not to you spoiled people but to ordinary investors)
2) We have over $1M in CASH!!! in the LTP so we don't need the $64,000 and we're not tight on margin so there's no compelling reason to change it.
C) We like GILD and still think they are undervalued so it's a "safe" way to make $36,000 over 20 months and maybe we'll sell some short calls along the way and make another $18,000+.
4) There's nothing that's "safer"/more profitable to move it to – even if we did need the money.

So steps 1-D are sort of a checklist of WHY are you getting out of the trade. If you can't find a good reason to get out – stay in. That's how we ended up with the LTP positions we have now – they survived the elimination process month after month – even though I REALLY wanted to cash things out – I just couldn't bring myself to do it because the positions were just too good to pull them just because I was worried about a correction.

It's like we're worried about global warming and we're fairly certain it's going to happen but that doesn't mean we give away all our ski gear and winter clothes just yet, does it? No, it needs to be FUNNY!

80% Hicket – My actual rule of thumb is look to close anything that up 50% of max with more than half the time left – because anything can happen in the 2nd half. In the next 1/4 (of time of trade), over 75% is a good time to consider an exit and then, in the end game, over 85% leaves you hard-pressed to risk losing 85% to make 15%. Then we cycle back to A-4 and decide if we really want to close it.

Would you make that trade from scratch? If not – why are you in it?

So, would I play GILD at $64,000 with a $36,000 upside if it holds $65 where the downside is I get assigned 1,000 shares at $62.50? Sure I would as GILD is at $84Bn here and they make $8-9Bn a year so it's still way too cheap and they pay a $4.27 ($2.84), so of course we'd love to own them.

From scratch I'd pick a different spread, like 10 short 2023 $60 puts at $7.50 ($7,500) and 20 2023 $60 ($11)/72.50 ($6) bull call spread at $5 ($10,000) for net $2,500 on the $25,000 spread – something like that and then you have to consider that we have $22,500 upside there so we could take $59,000 off the table and do 2x of those and still capture $45,000 more upside if all goes well but, what have we done? We've doubled the downside risk.

So lots of decisions to weigh but not enough benefit for me to switch to another spread (we do have a 2nd GILD spread from December, actually) and certainly no urgency to do so.