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13,000 Thursday – Nasdaq Poised to Fail Critical Support

"Transitory" Inflation is still here – month 5.

While the Fed tries to convince us it won't last, inflation is soaring higher and higher and bonds are dropping as that market doesn't believe a word the Fed is saying – especially after yesterday's decade-high 0.8% jump in Consumer Prices – double the projections by the usual crew of leading Economorons.  How long inflation readings persist on the high side has implications for when the Fed decides to start withdrawing monetary stimulus by paring back bond-buying and raising interest rates from near zero.   

“Transient does not mean one month. As supply shortages run up against aftershocks from fiscal stimulus, and the base for comparison remains low, the CPI will continue to run hot into the summer. The impact of the Colonial pipeline shutdown on fuel prices will also have to be monitored closely.” — Andrew Husby and Yelena Shulyatyeva, U.S. economists

Transitory pandemic influences clearly contributed to the surprise but there’s residual firmness in core inflation that’s hard to ignore,” said Michael Gapen, chief U.S. economist at Barclays Plc. Aside from the reopening effect, “there was still some residual firmness that suggests risks around inflation in the near term are still skewed to the upside.”  Wages have shown signs of picking up, and supply chain challenges have elongated delivery times and driven materials prices higher.

Tranportation Services have not jumped 5.8% since 1975, when the Fed Funds Rate was at 7%.  More Federal Spending means more inflation, not even Powell can pretend that it doesn't and Biden still has proposals to spend $4Tn more on Infrastructure along with the Fed's ongoing $2Tn giveaway program and, of course, 0% borrowing rates.  If either the stimulus bill is dropped or the Fed allows rates to rise to contain inflation – the blowback on the market could be tremendous.

It's not just the $28Tn National Debt we need to be concerned about but the $10.5Tn of Corporate debt that is 100% higher than the last time the market crashed – as companies have been on a low-rate binge ever since.  And what is the main thing corporations spend all that borrowed money on?  Buying back their own stocks to make their static earnings look like they are making more money per share – by reducing the share count it's divided by.

CorpCorporate Debt Outstanding

Corporate debt is a bomb that is ready to explode.  Companies borrowed $1Tn in the past 12 months, boosting apparent Corporate Profits by 20% and padding their available cash.  5-year Bond Yeilds are currently 1.33% but they went from 3% in 2003 to 8% in 2008 and the market collapsed – that's like going from 1.33% to 2.5%, which would still be a mile below the historical lows.  While we long for a return to "normal" – we certainly can't afford it!  

Profitless tech stocks have declined this yearMeanwhile, the Nasdaq faces a critical test of the 13,000 line and, after falling from 14,000, a weak bounce is at 13,200 and a strong one at 13,400.  Finishing the week below 13,400 indicates we're likely to fail 13,000 next week – continuing the downtrend.  In an early sign of a bursting bubble, tech stocks that don't actually make money yet (the kinds I keep telling you to stay away from) have fallen almost 20% this year.

According to Leuthold Group, the S&P 500 Index is at risk of falling 37% should its multiples to sales and earnings return to their mean levels since 1995.  The FAAMG premium over the market could shrink by another 24% if they go back to the mean over the seven years before the 2020 pandemic.  It’s a reason Leuthold’s core portfolio this week trimmed its equity holdings by 3 percentage points to 55%.

Tech megacaps such as Microsoft (MSFT) and Apple (AAPL) are examples of how sentiment may be shifting. Both saw mediocre share reactions to strong earnings reports.  While the FAAMG group has seen its price-earnings multiple shrink from its peak, it still fetches a 24% premium relative to the rest of the S&P 500. That compared with a P/E spread of just 7.3% five years ago, according to data compiled by Bloomberg Intelligence.

The FAAMG bubble is deflating and should continue to do so as risk-tolerance heals and investors position for sustainable recovery,” said Martin Adams at Bloomberg Intelligence. “Valuations have dropped, but there is room for the group’s premium to fall.”  For years, one pillar of support for equity valuations has been the rock-bottom interest rates that the Fed put in place to spur growth. Now, as the economy reopens, many investors see the only path for rates is up. That’s a problem, because relative to bonds, stocks are already less attractive than any time in a decade.

S&P 500 advantage relative to bonds has narrowed

Based on a methodology sometimes called the Fed model, the S&P 500’s earnings yield — how much profits you get relative to share prices — is about 1.7 percentage points above the yield on the 10-year Treasuries. That’s close to the smallest advantage since 2010. Should 10-year yield climb to 2%, the S&P 500 would have to fall by 8% to keep the equilibrium, all else equal. The 10-year yield recently sat near 1.7%.

Be very careful out there! 

 


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  1. Good Morning.




  2. Morning all – thoughts on BABA earnings. Looked good to me w/ strong growth rates in revenue and EPS, particularly when you take into account the fine they had to pay. Gross platform transactions and users also were strong. Don't fully understand the pre-market reaction. 


  3. Phil – I have 15 Jan 2022 110-90 Bear Put spreads @ $10.02 per contract, and 5 short May 14 $80 Puts @$1.6 per contract. Assuming the $80 puts expire worthless tomorrow, what would you advise as to the next action? Selling 5 June 18 $80 Puts (for  $4.6), or closing out of the put spread? Or perhaps selling something else? I have a minimum 30 day holding requirement, so cannot sell anything expiring before June 18. 


  4. n273 only you know what stock you have!!!!!!


  5. Oh sorry – TQQQ. I thought I had typed that :)



  6. Good morning!

    BABA/Rick – People are idiots, the metrics were a solid beat but the $2.8Bn fine knocked down profits:

    Alibaba Earnings Results
    Metric Beat/Miss/Match Reported Value Analysts' Prediction
    Adjusted Earnings Per Share (RMB) Miss 10.32 (about $1.60) 11.66
    Revenue (RMB, billions) Beat 187.4 179.9
    Annual Active Consumers in China (millions) Beat 811.0 791.4

    BABA Financial Results: Analysis

    Alibaba Group Holding Limited (BABA), the Chinese e-commerce and internet services giant, reported mixed financial results for its Q4 FY 2021, ended March 31. Adjusted earnings per share were RMB10.32 (about $1.60), well short of analysts' predicted RMB11.66. Note that Alibaba shares referred to throughout this story represent Nasdaq-listed American depositary shares (ADS) with the ticker BABA.1

     Alibaba revenue, however, surpassed consensus estimates. The company reported revenue of about RMB187.4 billion, ahead of the predicted RMB179.9 billion, for year-over-year (YOY) growth of roughly 64%.2

     

    Alibaba's Annual Active Consumers in China

    Alibaba reported 811 million annual active consumers, or "active buyers," in China for the 12 months ended March 31, 2021. This figure also beat analyst predictions and constituted growth of around 32 million active buyers on a sequential basis. This represents YOY growth of around 11.7% for this key metric, the strongest quarterly performance in more than a year.32

     

    The key metric of active buyers represents the total number of user accounts that placed at least one confirmed order through Alibaba's China retail marketplaces in the past 12 months. This metric is important because retaining and attracting active consumers supports Alibaba's business model, including selling marketing services to merchants that sell products on the company's platforms. The greater the number of Alibaba active consumers, the more advertising revenue the company can generate. This also means more potential customers for the company's cloud and entertainment businesses as well.

     

    Alibaba's Outlook and Stock Performance

    In its letter to shareholders, Alibaba predicted significant growth in annual revenue for FY 2022. The company expects to generate more than RMB930 billion for the year, far ahead of FY 2021's figure of RMB717.2 billion.4

     

    Alibaba shares fell by close to 4% in the period immediately following the company's earnings release. In the past year, the company's stock has significantly underperformed the broader market, providing one-year trailing total returns of 9.8% as compared with 41.6% for the S&P 500.5

    Still a good bottom.

    TQQQ/RN – TQQQ is at $92 and the May puts ($1.15) should expire worthless.  Since we're expecting a 10% drop and that would be a 30% drop in TQQQ from 92 to 70 or less, selling the June $80 puts for $4.60 is pretty risky.  That's why, in the STP, we just have the bear put spread – and not even fully covered. 

    TQQQ Long Put 2022 21-JAN 120.00 PUT [TQQQ @ $89.74 $-5.78] 20 4/15/2021 (254) $60,000 $30.00 $9.38 $34.22     $39.38 - $18,750 31.3% $78,750
    TQQQ Short Put 2021 18-JUN 100.00 PUT [TQQQ @ $89.74 $-5.78] -10 5/4/2021 (37) $-10,000 $10.00 $4.20     $14.20 $3.50 $-4,200 -42.0% $-14,200

    You don't want to get stuck with short $80 puts if the Nasdaq falls 20%, do you?  Especially with your restrictions.  


  7. Phil, For a new trade set-up on BABA…..

    Sell 3 contracts Jan 2023   $150 Puts for between $15 to $18.  Any other recommendations you suggest would be greatly appreciated. 

    Thanks as always…..-


  8. Hi everyone. Here is the link to yesterday's webinar.

    https://youtu.be/etw-HRJKeDQ


  9. BABA/Jasu – No change from yesterday, when I said:

     

    BABA/Batman – I was waiting to see where the bottom is.  $220 should hold but we're doing portfolio adjustments next week.  Most likely we'll buy back the short $300 calls and roll the $250s down – the puts are fine.

    BABA Long Call 2023 20-JAN 250.00 CALL [BABA @ $221.30 $-0.08] 15 2/3/2021 (618) $106,500 $71.00 $-37.78 $71.00     $33.23 $0.51 $-56,663 -53.2% $49,838
    BABA Short Call 2023 20-JAN 300.00 CALL [BABA @ $221.30 $-0.08] -15 2/3/2021 (618) $-78,000 $52.00 $-32.73     $19.28 $0.22 $49,088 62.9% $-28,913
    BABA Short Put 2023 20-JAN 200.00 PUT [BABA @ $221.30 $-0.08] -5 2/3/2021 (618) $-15,500 $31.00 $-0.05     $30.95 $-0.35 $25 0.2% $-15,475

    And now we are at:

    BABA Long Call 2023 20-JAN 250.00 CALL [BABA @ $208.38 $-11.52] 15 2/3/2021 (617) $106,500 $71.00 $-43.58 $71.00     $27.43 $-5.13 $-65,363 -61.4% $41,138
    BABA Short Call 2023 20-JAN 300.00 CALL [BABA @ $208.38 $-11.52] -15 2/3/2021 (617) $-78,000 $52.00 $-36.60     $15.40 $-3.25 $54,900 70.4% $-23,100
    BABA Short Put 2023 20-JAN 200.00 PUT [BABA @ $208.38 $-11.52] -5 2/3/2021 (617) $-15,500 $31.00 $4.53     $35.53 $4.13 $-2,263 -14.6% $-17,763

    So it cost us $4,000 to look at earnings but now, in the LTP, we can sell 5 more 2023 $200 puts for $35.50 ($17,750) and roll our 15 2023 $250 calls at $27.50 ($41,250) to 20 of the 2023 $230 calls at $34 ($68,000) so we're spending net $9,000 to add 5 new $34 calls AND roll our existing 15 calls $30,000 lower in strike.  We're still out of the money but, if we don't bounce, we can sell 5 more $250s for $25(ish) ($12,500) and use that money to roll the $230s to the $210s (probably $10,000) and we can also sell short calls – but I'd rather do that on a bounce.  

    13,200 soundly rejected.  

    And 34,000

    Obviously half off the table on /CL at $66.  Technically we want to be all out if it crosses the strong bounce at $66.20 at this point.  Getting 1/2 out at $66 locks in an 0.40 avg gain (providing you stop at $66.20 on the other half) which is 80% of max profit (on the major lines) – it's a good way to play these volatile futures trades.

    Speaking of bounces, /NQ 14,000 to 13,000 is 200-point bounces so 13,200 is weak and 13,400 is strong and things are not looking good for /NQ but that doesn't mean you can't pick up a few Dollars going long at 13,000 with tight stops below until the bounces fail 13,100 – then get ready for 13,000 to fail.

    They haven't killed the dip buyers yet but dow down 500 is nothing to sneeze at.  

    Meanwhile, 12,500 to 14,000 is 1,500 points so weak retrace is 300 (13,700) and strong retrace is 600 (13,400) and we actually failed those and tested 13,000 so 1,000-point drop (didn't complete) would have 200-pont bounces at 13,200 and 13,400 so 13,400 is very significant as it's the strong bounce off 13,000 and also the strong retrace off 14,000 so that is going to be the line that determines market direction this week.

    It gets harder and harder as they get closer because more and more selling programs kick in as we approach the strong bounce line.  Keep in mind, we throw out the spike below but not every system is going to do that so some of the algos kick in at lower levels.  12,900 is just a number humans care about – machines do not.  The 5% Rule tells us that around here is the point where we are likely to be rejected and now knocked back 20% of the 600-point run from 12,300 so those are going to be 120-point retraces to 12,780 and 12,660 so now the trick is to see if those lines were significant on the way up:  

    That set kicks back in once we're back below 13,000.


  10. Total greed if you still have your /CL shorts at $64, after a $2,500/contract gain.  And, of course:

    Yet another good example of proper Futures trading.  We haven't been playing oil much UNLESS it tops out in the range, then we short with tight stops knowing we can absorb a few losses which will be more than made up for by one good dip – like this one.  


  11. LOL – spoke too soon, there was a sudden 0.50 drop on /CL just now.


  12. Any thoughts on PETS earnings?  Looks like they disappointed… stock in the 27's

    If it was already discussed I apologize — been in and out out the past few days.




  13. Fear of Inflation Can Make It Happen


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  15. Meet The Inflation Profiteers



  16. Phil / BABA Rolls – What are you rolling the short $300 calls to? or are you just leaving them?


  17. Phil / BABA – Current / old position BCS

    15X $250 / $300,  

     

    new position is 20X $ 230 / $280????


  18. PETS/Jeff – They missed but the sell-off is silly, we did the math recently.  They generally missed by 3.5% but out of $1.50 expected earnings let's say $1.45 so how does that not fit $29?  Of course, if it's a down-trend that matters.   In the Dividend portfolio, we bought the stock for $29.23 and sold the $22.50 puts for $5.90 so we're in for net $23.33 and it's all about the dividends so not much to do but wait.

    BABA/Batman – Since they are down over a one-time $2.8Bn fine, I don't see the need to move our 2023 target so leaving them.  If they go lower, then we can add cash by re-positioning but we only spend $9,000 on this roll – there's no need to do anything else.

    Nasdaq taking another run at 13,200 and the others are trying as well.  Very sychronized – someone is painting a picture. 

       


  19. NAK lottery tickets back at 0.50.  Let's add 5,000 shares to the Future is Now Portfolio for $2,500 and plan to spend $2,000 more at 0.40 and $4,000 more at 0.25.  

    Northern Dynasty Minerals Ltd. (NYSEAMERICAN:NAK) is sitting on a game-changing mine. Or at least it will be, should permission to develop the mine proceed. Right now it is wrapped up in regulatory red tape, with no guarantee Northern Dynasty will ever be able to break ground. In fact, with the president and environmental activists lined up in opposition, the odds aren’t great that Northern Dynasty’s Pebble Project will be approved. But if it is, anyone who invested in NAK stock now is going to be celebrating.

     

    This isn’t just any (proposed) mine. The Pebble Project in Alaska is described as “the most significant undeveloped copper and gold resource in the world.”

     

    NAK stock currently has a ‘B’ rating in Portfolio Grader. The company has been avoiding debt, but its future is all about the Pebble Project. It has no revenue, only proposals. If Northern Dynasty is successful, NAK stock will take off. If not, the company will circle the drain. The good news is that with shares at 61 cents, investors can take a chance without risking a lot of their capital.

    Pebble Project

    Northern Dynasty Minerals has been working on the Pebble Project for two decades. Located near Bristol Bay in Alaska, the site is in an environmentally sensitive area. Its proximity to the Bristol Bay salmon fishery means Northern Dynasty is pitted against environmentalists, the Environmental Protection Agency and local native tribes that rely on the fishery.

    If approved, the Pebble Project would result in a mining pit roughly one mile by one mile and over 650 feet deep. When operational, it would reportedly be North America’s largest mining operation.

    It’s what Northern Dynasty is mining for that makes the Pebble Project so enticing for investors. Measured reserves at the site include 57 billion pounds of copper and 71 million ounces of gold. In addition, there are 345 million ounces of silver and 3.4 billion pounds of molybdenum. In all, it’s estimated to contain over $400 billion worth of copper, gold and other metals.

    Hope that Donald Trump would win re-election and approve the mine pushed NAK stock to near the $2 level last summer. Joe Biden will be a much tougher sell. In fact, the current president pledged to block the mine during his campaign. That negativity from high levels has pushed NAK stock back to penny stock status.

    At this point, Northern Dynasty has an appeal filed with the U.S. Army Corp of Engineers (USACE) as the company continues to seek approval to go ahead with the project.

    Demand for Copper and Gold Keeps Rising

    The reason for the excitement over the Pebble project is the site’s copper and gold deposits. The silver and molybdenum are just gravy.

    Copper has been in high demand for years and continues to be. Copper is essential in anything electric and the move toward EVs is only going to increase demand. Now selling for $4.34 per pound, copper is once again near all-time highs and is worth seven times what it was in 2000.

    Gold is currently going for around $1,715 per ounce. Besides its value for traditional uses like jewelry, gold is widely used in electronics. This is an area where demand is only going to grow. Nearly a decade ago, the United Nations University published a study showing consumer electronics including PCs and smartphones used $21 billion worth of gold and silver annually. The use has only increased since then. In 2017, the amount of gold used in technology was estimated at nearly 367 tons.

    In short, the Pebble Project — the most significant undeveloped copper and gold resource in the world — will be an incredibly lucrative mine, should it be approved.

    Bottom Line on NAK stock

    Back in March, InvestorPlace contributor Will Ashworth wrote “buy Northern Dynasty Minerals stock if you have money to lose.” I think that’s good advice.

    The odds are stacked against the company when it comes to developing its Pebble Project in Alaska. However, appeals are still underway. Until they are all exhausted, hope remains. If Northern Dynasty beats the odds, the payoff of a copper and gold mine of this scale would be huge. It would also be long-lasting. Not a bad bet for 61 cents per share.

    FIN is up 101.6% so we can afford to take a gamble.  There's a lot of Molly and rare earths that Biden might capitulate on and even if they just stop blocking a little, the stock will pop back to $1.  If we double up, then it's 1/2 out and a free ride with the rest. 



  20. RN223- thank you for the Fidelity info my CHL shares will be converted in to Hong Kong shares in 7 to 10 day. According to the rep they still need to be divested by November. The conversion fee is about 30 but selling the shares is about 100 


  21. Bertll-Fidelity told me selling the HK share would be 250.  Guess they really have their act together!


  22. Seer it's based on how many shares you own the more shares the more expensive it is