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Monday Market Mania – Kaplan Speaks!

There are 12 Fed speeches this week.

6 of them are by Robert Kaplan, who is the President of the Federal Reserve Bank of Dallas and was a Vice-Chairman at Goldman Sachs (GS) with a 23-year carrer there before being sent off to the Fed.   Kaplan is the Fed's Inflation Hawk and that means, most likely, he's here to cool off the markets so make sure you have your hedges up to date (see Friday's PSW Report) as it's not only time for retail earnings (which could be rough) but also options expire on Friday – so strap yourselves in...

"What you don't know is, depending on how long that goes on, whether that starts to get embedded in inflation expectations, and you worry that inflation expectations start to get to be more elevated, and then you are getting them elevated to a level that is not consistent with anchoring them at 2%.  That's the part I'm concerned about – this is a risk for me." – Kaplan

The Cooler Poster. ID:1613472 | Cool posters, Cooler, The cooler movieOn Friday, Kaplan said contacts in industries affected by the global semiconductor shortage, for instance, have told him it could now take as long as two years to resolve the issue.  Clogged chip supply chains led to a record jump in used car and truck prices last month. And it's not just chips, Kaplan said on Friday: it's unclear how long bottlenecks could last in many industries.  There are signs inflation expectations are beginning to rise. Consumers’ estimates of inflation for the next five years shot up to 3.1% – the highest in more than a decade, a University of Michigan survey showed on Friday.

Also signaling caution is AT&T's (T) spinning off Warner Media to merge with Discovery (DISCB) for $43Bn in cash.  T bought Warner Media for $81Bn just 3 years ago and has been criticized for holding $169Bn in total debt – the most of any non-financial company.  T will maintain 71% ownership in the combined company, so a good deal for them overall but it seems very likely they are reducing debt ahead of a cycle which will raise their borrowing costs and T pays out $15Bn in annual dividends – they can't risk missing one of those payments.  

Expect more of the same as companies who have a lot of ourstanding debt to refinance begin to worry about what the rates will be when the time comes.  We have a 20-year Bond Auction on Wednesday and we'll see how that goes as well as a 10-year TIPS Auction on Thursday.  The last 10-year auction went very poorly and lack of demand for bonds at auction is another sign the Fed is getting behind the curve on inflation and will need to raise rates in the near future.  As we've noted before – companies are running record levels of debt as they are comming off a 10-year low-interest borrowing binge.  What happens next?  

Asia is a little ahead of us in suffering for inflation and the MSCI Asia Pacific Index fell 3.2% last week and is now down 2.7% for the month and this is the 4th consecutive month of declines as Covid is resurging and Earnings have been disappointing along with concerns about Inflation and Governments backing off on the stimulus in response.  Singapore, for example, is going back on lock-down and their index fell 3.2% on Friday when that was announced.  India is, of course, a complete disaster, with 300,000 new daily cases of Covid.

Asia stocks on track to underperform global peers for a fourth straight month

The market is unwinding.  Last week, the S&P ETF (SPY) fell from 422.50 on Monday to 405.41 on Wednesday on 383.5M volume (127.8M/day) and then bounced back Thursday and Friday to 416.58 on 188.5M volume (94.3/day).  33% more down volume than up and dip buyers in tech stocks appear to be mainly day traders and other individuals, rather than hedge funds and other professional investors. Retail traders bought a daily average of $300M in tech stocks and related ETFs, according to data from Vanda Research.  Meanwhile, JPMorgan's (JPM) hedge-fund clients boosted bearish wagers against growth stocks while adding money to value sectors like banks. Semiconductor stocks in particular saw cooling interest amid production constraints, with net exposure falling to the lowest level since at least the start of 2020, according to JPMorgan’s prime broker data.

Earnings will be coming in hot and heavy this week and lots and lots of retail reports are on deck but, overall, I'm expecting a down week unless Kaplan is changing his tune:

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  1. Good Morning.


  2. Morning Phil. Looks like ATT is spinning off their media assets to Discovery. I read this may be a negative for VIAC. what's your take?  I'm holding 16 naked 2023 30 calls. Maybe time to cover 1/2??


  3. I can't get TOS to open on my desktop — it asks me for permission to open/make changes but then it just spins for a few seconds and doesn't open.

     

    Anyone else?  Or most likely a local issue.


  4. TOS no problems


  5. Jeffl- not running TOS but sounds like a win10 OS security is. Bet the app is trying to update itself and your anti virus is blocking it. pure speculation on my part


  6. jaddah / VIAC: I actually consider the T spinoff a positive for VIAC. I think its the start of consolidation in the streaming area, and VIAC is by far the best remaining asset which is a viable take-over or combination candidate. Would love to see a combo of NBC/VIAC in a similar manner to T/DISCA. 


  7. Phil,

    With the current macro expectations re inflation and interest rates, would you look favorably on a bearish position in TLT – short OTM calls (140ish) or bear put spreads?

    Thanks


  8. Good morning!

    T/Jeddah – See above.  I don't see how it's a negative for VIAC.  That's like saying Diet Black Cherry Coke is a negative for Pepsi – sure, maybe, but not that impactful.

    TOS/Jeff – Sounds like it didn't update properly.

    Oil up again:

    As noted by Rick, Jeddah – T still owns 71% of the new company so, if anything, they made another acquisition but in a way that gave them cash.

    TLT/8800 – Don't fight the Fed should be the default setting.  Sure, one day it should fall.  We used to used $130 as our shorting line on TLT but it's been years since we played it as that last run from $120 (late 2018) to $175 (early 2020) just shows you how badly the Fed can burn you on that one. 


  9. Rick – excellent point. Read yesterday exactly what you were saying about consolidation in the industry. Scale being the operative word


  10. My TOS is fixed

    Took about 15 minutes with tech support — known issue -  had to download "fix files" and drag them into the file directory and then reinstall


  11. hey Phil, 

    i don't have anything bank/financial in my portfolio currently.   I'm looking to add a decent size position in something stable, classic.  Also a small, more speculative position to gain a bit of exposure to something interesting. 

     

    thanks!


  12. BP’s lobbying for gas shows rifts over path to net-zero emissions


  13. Financial/Monk – Recent Top Trades are always a good place to start:

    Top Trades for Tue, 20 Apr 2021 16:05 – TD

    Took off a bit since we picked it but still cheap.  

    UBS was recently added to the LTP, still consolidating for a breakout:

    Record-High Wednesday – Dow 33,600, S&P 4,140, Nasdaq 14,000

    UBS Group (UBS) is a nice, quiet Financial that stays out of trouble (unlike CS) and we know the rich have gotten substantially richer and UBS has been quietly handing the ultra-wealthy people's money since 1862.  UBS made $6.5Bn last year but probably closer to $5Bn going forward yet you can buy the whole bank for $55Bn at $15.64 and, even better, we can net into it as an even cheaper options play for the LTP:

    • Sell 50 UBS Jan $15 puts for $1.20 ($6,000) 
    • Buy 50 UBS Jan $12.50 calls for $3.60 ($18,000)
    • Sell 50 UBS Jan $15 calls for $1.85 ($9,250) 

    That's net $2,750 on the $12,500 spread so we have $9,750 of upside potential in 9 months so, if you want to make $1,000 a month on a $2,750 cash outlay for the next 9 months – this is the trade for you!  Keep in mind we're promising to buy 5,000 shares at $15 ($75,000) so it's not light on the obligation front but then we'd turn around and sell 2023 $15 calls for $1.85 and drop our net 12% so, as long as we REALLY want to add UBS to our Financials for the long-term, there's not too much downside to this trade. 

    CS may not be terrible for a long-term hold here.  Before they screwed up, they were making about $3Bn so this year will be less than 1Bn but, after that, $25Bn for the whole thing will seem very reasonable (if they stay out of trouble).  

    NMR is another one that took a one-time hit from Archegos ($2.3Bn) – I didn't pick them because it's hard to say whether they are excessively taking risks, meaning Archegos is just a symptom, not the whole disease.

    AFL is very cheap at $38Bn ($56.34) and should be good for $3.5Bn/yr in earnings.  We've played them before, they are a good, solid company.  You can go this way:

    • Sell 10 AFL 2023 $45 puts for $3.50 ($3,500) 
    • Buy 15 AFL 2023 $45 calls for $13.20 ($19,800) 
    • Sell 15 AFL 2023 $55 calls for $7.20 ($10,800)

    That's net $5,500 on the $15,000 spread that's 100% in the money to start with $9,500 (172%) upside potential in 18 months so a nice way to make 10% per month if AFL can hold onto $55 and stay in that tight, rising channel.


  14. thanks!


  15. MonkMan, I like Phil's picks and would add a little technology to that list like PYPL or SQ but wouldn't be in a rush. 

    today someone sold 400 PYPL Jan23 $220 puts for about $28.40, nets you in at $192.  Their last earnings were great due to online e-commerce.  Is that sustainable or was everyone just indoors?  You could good arguments for both. ( growth of e-commerce, or it was just spike due to the pandemic. )  


  16. How much have childcare challenges slowed the US jobs market recovery?


  17. Spacs lose their deal ‘pop’ as fever fades



  18. The World Economy Is Suddenly Running Low on Everything




  19. Phil/BP Have 500 BP, sold -5 Sept 25calls ($1.27). With a dividend pmt in June and BP creeping up, should I roll them out .. buy some longs to cover?

    Thx!


  20. Hi Phil, DISCA shares are being hit hard after today's news.  They are $33.50, down from as high as $78 during the Archegos run up.  Is there a play here, or do you think the ATT deal is truly negative for them?


  21. John / DISCA: Yeah, I'm not really understanding the drop in DISCA shares. Seems to me (as a consumer) that their chance of building a global streaming brand just went up. But, can't find a ton of details on the structure of the deal re cash, debt, control, closing etc. If anyone knows exactly how its structured pls post. Wonder if there is opportunity here. 


  22. Hello Phil!

    What's the general rule about rolling the long call of a spread..ie…when it falls below what?

    I used to know…but age catching up

    Thanks


  23. Maya, the recommended rule was always when the value of the long call drops under the net of the call spread.

    The other rule was roll when you can gain $1 of position for $0.50.


  24. T/Batman – I don't know, they got the cash so they could make a special distribution too.  They SHOULD roll it back as it's 6.5% and they are paying out $15Bn so they could invest $5Bn more and cut dividends to a still nice 4.2%.

    BP/Wing – Dividend is about 0.30 and the Sept $25 calls are $3 with the stock at $27 so $1 in premium on the calls – who is going to give you that to get 0.30?  Don't be scared of being called away.  If they take your stock, they pay you $25 and you don't have to pay them $3 you owe and you keep the $1.27 you collected.  It's not a big deal.

    DISCA/John – They just gave T $43Bn and 71% of their own company in exchange for 29% of TWX – I'm pretty sure they overpaid and they are only a $16Bn company themselves – the debt load is staggering.  Yes, it will be revalued but I'd wait for the smoke to clear.

    DISCA/Rick – Same thing, not enough information to make a good decision.

    Rolling/Maya – Rule of thumb is roll before the price of the long call drops below the net you paid for the spread.  

    And what JPH said!  

    See, barely red today.


  25. Gold and energy were on fire today. GOLD, NEM, KL – all the big miners went crazy. And XLE and XOM also had very strong days. Wonder if XLE is breaking out above its old high? If so, may go long for a swing trade (totally technical, for about 1-2 weeks as we start getting memorial day travel news). 


  26. Looking  at ABNB.  Yes it is expensive .. but also rapidly growing. I have a 6/22 150/220  BCS  that I paid about $20k.  Thinking about  rolling down, selling the 150s and buying the 125s for about $9 and then selling half the 100 puts for 10.  Thoughts?  


  27. Phil/JPH/spread

    Thanks.

    But so I understand it, let's say I pay $40/20 for a $40 spread on aapl. Hypothetically, let's say it's a 2023 $100/140 spread.

    so are you saying that when the value of the long call (which I paid $40 for) falls below $20, that's the time to roll?

    it seems that may be too late…maybe I am not getting it


  28. Let's change the numbers a bit to make it more clear.  Too many 20s and 40s in that example.

    Let's say you paid $25 for a 100/140 spread.  Roll the $100 call when it the present price drops below $25.

    Additionally, it is still a good time to roll (with consideration given to tax ramifications), if you can roll the long call down $1 in position for $0.50.

    I will sometimes add cash a little bit more aggressively when I'm working with LEAPs that have gone against me when I'm rolling down because I am hoping to book a short term capital loss that, when it turns around, will be a long term capital gain.  Note: I am an engineer, not an accountant so I am not certain that this is how it is supposed to work, but that's how my broker has reported my positions on my consolidated statements at the end of the year.


  29. nomig / ABNB: so, I'm an AirBnB host for a rental property, and love the company/service. I also agree it can be a great business, but is expensive. I don't own the stock yet, but its on my watch list. If I were to enter a new trade now, I'd trade with Jan 2023 options only (to give me long runway):

    1. Sell 10 $90 puts for $11 ($11,000)

    2. Buy 10 $100 calls for $48 ($48,000)

    3. Sell 10 $200 calls for $16 ($16,000)

    That gets you in the $100 spread for $21,000, with a chance to make $100,000 at expiration. The risk is owning ABNB at $89 net – but if it were to get to this level, you'd be down $32,000 already b/c of the lost call spread – assuming you didn't roll). I'm personally waiting to see if I can get the above spread for $15,000 or less before I pull the trigger. Given the risk, I like the reward of >6x.

    For your trade adjustment – you can definitely improve that trade if you still believe in the stock. You're in a $70 spread for $20 w/ 100 contracts? Getting an extra $25 for $9 is certainly worth it…. depending how big your account is, I don't like selling that many put contracts for such a risky trade. I'd personally sell 25, but depends on your risk tolerance. What month are you in? 


  30. I dont have 100 contracts,  I have 10  .. looking to sell half in puts ..  so 5.  Thank you for thoughts.