Is that going to be enough? It's been 3 months since our last $2.1Tn stimulus so isn't it time for another round? Look how great the economy is doing – it can't be because 40% of last Quarter's $5Tn GDP was stimulus, could it? Yesterday, the CORE CPI came in at 0.9%, 50% higher than the 0.6% expected by leading economoroins. Remember when the CPI used to be high and they said "Don't worry, the Core CPI is still under 0.2%" – well that's completely out the window….
The key takeaway from the report is that the price increases in June were broad based, featuring a 10.5% increase in the index for used cars and trucks, a 0.8% increase in the food at home index, a 2.5% increase in the gasoline index, and a 0.5% increase in the household index. That should put the Fed's "transitory inflation" narrative to the test, particularly with total CPI running at an annualized rate of 7.2% over the last six months.
The Democrats $3.5Tn package includes $1.2Tn of pure infrastructure spending and calls for an expansion of Medicare to provide money for dental, vision and hearing benefits. Money is also expected to be devoted to a series of climate provisions, after liberal Democrats warned that they would not support the bipartisan framework without the promise of further climate action.
The resolution is expected to include language prohibiting tax increases on small businesses and people making less than $400,000 and the Senate Finance Committee had been drafting tax provisions to help pay for the spending. They include a restructuring the international business tax code to tax overseas profits more heavily in an effort to discourage U.S. corporations from moving profits abroad. They would also collapse dozens of tax benefits aimed at energy companies – especially oil and gas firms – into three categories focused on renewable energy sources and energy efficiency.
This is how we plan our investing for next year – go where the Government is giving and pull back from where the Government is taking away. Speaking of taking it away – we still like to play oil below the $75 line with tight stops above. Yesterday's API Report showed just a 4Mb draw in Crude but it was wiped out by a 3.7Mb build in Distillates. Gasoline broke the tie with a 1.5Mb draw but that's not likely to be enough to hold $75 if the EIA Report (10:30) also indicates the holiday draw-downs are fading fast.
Clearly, if the Biden Budget is passed, Health Care stocks should do well but not Pharma, as Bernie Sanders still wants to pay for the increased Medicare by negotiating better prices on medicine. Our friends at Walgreen's (WBA) should do well(er) and their recent dip down to $47 makes them attractive again:
We already have WBA in our Member Portfolios but, as a new trade, I'd go with:
- Sell 5 WBA 2023 $40 puts for $4 ($2,000)
- Buy 10 WBA 2023 $45 calls for $6.70 ($6,700)
- Sell 10 WBA 2023 $52.50 calls for $3.80 ($3,800)
That's net $900 on the $7,500 spread that's $2,300 in the money to start. All WBA has to do is be over $55 by Jan 2023 and the net gain is $6,600 (733%) and the worst case is the stock drops below $40 and your spread expires completely worthless and you end up owning 500 shares at net $41.80, which would STILL be an 11.6% discount to the current price. Aren't options great?
Even in a no-margin IRA account, we're still gaining $6,600 against a $20,900 commitment to buy WBA and that's 31.57% in 18 months. At $47.32, WBA is at a $41Bn market cap but they make over $4Bn a year so the P/E is 10 down here and would be 8x at $40 – so that seems pretty safe. More seniors more drugs and WBA gets their fee, no matter what price is negotiated and, of course, endless vaccines still to come.
Another stock to pay attention to that PSW Members already have is Sunpower (SPWR), the solar manufacturer. I LOVE them because they are still small enough ($5Bn at $28) to grow, especially with only $1.5Bn in sales and $50M in profits while $600Bn is being steered towards renewable energy. 30x is a bit rich for me but that should be down to 15x next year and I can't see how $28 will even be possible after that so, as a new trade I like:
- Sell 10 SPWR 2023 $30 puts for $9.50 ($9,500)
- Buy 20 SPWR 2023 $25 calls for $9.65 ($19,300)
- Sell 20 SPWR 2023 $40 calls for $5 ($10,000)
That's a net CREDIT of $200 on the $30,000 spread so the upside potential is $30,200 (15,100%) if SPWR is over $40 in 18 months. It's an aggressive worst case as we'd end up owning 1,000 shares at $30 – or $29.98 with the credit – but, as I said, I can't see any reason this stock won't do well in this evironment.
With less risk, you could just sell the puts and that would net you in for $20.50 if assigned and it's a nice 50%(ish) return on your money if SPWR simply clears $30 over the next 18 months – that's not bad!
Lots of fun ways to make money using options to leverage sensible long-term bets on the macros. Our net commitment here is to own $50,000 worth of stocks we feel are right for the next two years and, if all goes well, we can make up to $36,800 (73%) over 18 months, pretty much 10% per month against our commitment – and using only $700 in actual cash! Aren't options fantastic?