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Which Way Wednesday – Biden Proposes $3.5Tn in New Stimulus

$3,500,000,000,000.

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.

The Biggest Agency and Program Winners in Biden's FY 2022 Budget -  Government Executive

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?  

 


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  1. Good morning! 

    Here is the link to today's webinar.

    https://attendee.gotowebinar.com/register/262160272269372944


  2. Good Morning.


  3. Good hazy, smoky cool morning.


  4. for what its worth dept, today someone sold 1900 Jan23 WBA $42.50 puts for $5.00


  5. How have Joe Biden’s first six months been? Our panelists weigh in


  6. Comment content omitted because it is too long.


  7. Stockburn, WBA You always find some suckers. Even looking at myself, my great winning stock of the century!!!!!!


  8. "Crab prices"   so sad,  there is nothing else like the experience of sitting at a table for a couple of hours cracking steamed crabs with a hammer and knife and eating them with your bare hands.  


  9. yodi,  that sucker collected $950,000 for promising to buy WBA at 20% discount to today's price 


  10. What inflation?

    • June Producer Price Index+1.0% vs. +0.6% consensus and +0.8% prior.
    • +7.3% Y/Y vs. +6.8% consensus and +6.6% prior.
    • Core PPI: +1.0% vs. +0.5% consensus and +0.7% prior.
    • +5.6% Y/Y vs. +5.1% consensus and +4.8% prior.
    • July Atlanta Fed Business Inflation Expectations: +2.8% vs. +3% in June.
    • Current economic environment: Sales levels "compared to normal" increased slightly. However, profit margins remain unchanged. Year-over-year unit cost growth is relatively unchanged at 2.9 percent, on average.

    Still no EIA report.

    Yodi, did you buy those puts?  

    You go stock!

    Lobster GIF on GIFER - by Yggge


  11. stockburn how low can you go the sucker might still get the stock at this price!

    No Phil no stock any more sold them to buy the Jan 23 35/55 in the hope at least to break even. But I thing 55 today is more like a fools dream???


  12. someone with lots of pull must have not liked the eia report and needed some time to exit positions lol


  13. EIA:

    Release delayed



    This page should automatically refresh to download the new release at 11:30:00 AM (in 1947 seconds)

    If it does not, click here to manually re-try.

     

    Interesting.

    And what Tommy said!


  14. Might better have a look at CAG 3.2% div. Making an offer for the Jan22 30 put for 1.05 just to put a foot in and even better than the div.


  15. Given 4 shorts /CL at $75, I think below $74.50 that has to become the stop for 2 and then 2 at $75 again to lock in an 0.25 gain ($1,000) for the set. 

    At $74 (if we get there) before the release, it would be silly not to take $4,000 and run.


  16. Remember, it's foolish not to take half off when we made $500 per contract and we don't know the outcome of the Report yet.


  17. PHIL/AAPL  Longs:

        80 June 22 $105s, 

        40 '23 $100s

        20 '22 $75s 

        5   '23 $110s 

        And shorts are:

        -40 June 22 $160s 

        -40        '23 $160s 

        -40 Sept '21 $135s ($5.5)

        -20 June 22 $50 puts, -5 '23 $140 puts

     

    Sold 40 'Sept $135s as sugg. About to (finally) close out the (NAKED!) long $75s and $110s but wondering about rolling the short Sept $135s first?

    Any thoughts?

    THX!


  18. Not quite as disappointing as API but not enough to save oil either: 

    • OPEC has reached a compromise with the United Arab Emirates, agreeing to lift the amount of oil the country can eventually pump as part of a wider agreement to boost global supplies, WSJ reports.
    • Crude oil prices show little response: August WTI (CL1:COM) -0.3% to $75.01/bbl; September Brent (CO1:COM) -0.1% to $76.39/bbl.
    • ETFs: XLEUSOUCOXOPVDEGUSHOIHERXBGRBNO
    • Earlier this month, most delegates agreed to a deal that would call for OPEC+ to raise production by 400K bbl/day each month through late 2022, which would unwind remaining output curbs, but the UAE refused to sign on, insisting on a higher quota as part of any deal.
    • The UAE wanted its baseline raised to 3.8M bbl/day from 3.2M bbl/day; in the compromise, the group agreed to increase the baseline to 3.65M bbl/day starting in April, according to the report.
    • The International Energy Agency had warned yesterday that oil markets likely would remain volatile without clarity on an OPEC production policy.

    So we have a 4Mb draw and we're the world's biggest consumer and they are going to raise production by 1.2Mb/d over the next 3 month (and this is summer, when we use the most) so they wipe out half the world's drawdown by October and by January we'll be swimming in oil again.  Still liking those SCO longs!


  19. AAPL/Wing – Wow, look at it go!

    Well the short Sept $135s are now $16 with no premium.    Those are covered by the 40 2023 $100s and you don't need the 20 Jan $75s at $74.50 ($149,000) or the 5 2023 $110s at $45.50 ($22,750) so then you have 80 June $105s at $47 ($493,500) so that's $665,000 you can put towards 100 June 2023 $130 calls at $34 ($340,000) and you can then roll 40 short Sept $135s ($16) to the June $160s at $12 for $4 ($16,000) and now you've cleaned up your mess of a position and taken $309,250 off the table and you still have 40 2023 $100s and 100 June 2023 $130s covered by June $160s ($300,000 spread) and 40 2023 $160s ($120,000 spread).  

    So $309,250 back in pocket now and a potential $420,000 more at $160 is not a bad way to adjust.  Its the same $720,000 you'd have now at $160 but less downside delta on the $130s and almost half the money off the table to put you in position to take advantage of the next pullback.



  20. Pirate/SPCE  I hope you took that short last week!


  21. Phil,

    What do you think about CCL at these levels? Not sure if you have covered this already

    Thanks


  22. SPWR big drop today.


  23. SPCE/1020, Pirate – Good call by Pirate.  I guess the reality of the numbers has now pushed past the hype of the launch.  Maybe people realizing you have 3 minutes in space than the land $500,000 poorer….

    CCL/Harip – My problem is at any random moment there could be some outbreak that shuts ships down for another year and they were inches away from Bankruptcy last year – might not survive again.  Also, will be paying off this debt for a decade:  All the cruise lines are like this, and airlines – couldn't find one I like – not even my beloved ALK.

    Year End 30th Nov 2015 2016 2017 2018 2019 2020 TTM 2021E 2022E CAGR / Avg
    Total Revenue
    $m

    15,714 16,389 17,510 18,881 20,825 5,595 141 3,377 18,244 -18.7%
    Operating Profit
    $m

    2,574 3,071 2,809 3,325 3,276 -8,865 -7,115      
    Net Profit
    $m

    1,757 2,779 2,606 3,153 2,989 -10,236 -9,126 -6,299 483  
    EPS Reported
    $

    2.26 3.72 3.59 4.44 4.32 -13.2 -9.74      
    EPS Normalised
    $

    2.26 3.72 3.71 4.39 4.33 -6.46 -7.95 -5.46 0.316  
    EPS Growth
    %

    +44.3 +64.8 -0.192 +18.3 -1.41          
    PE Ratio
    x

                    72.3  
    PEG
     

                    0.149  
     

    If they were cheap that would be one thing but even $22.50 is $26Bn and these guys are losing $6Bn this year and BARELY turn it around to $0 next year and THEN, in 2023, maybe they claw back to $2Bn.  So this price isn't horrible if you want to be in CCL for a decade and, in that decade, nothing else bad happens but, other than that – it's way too dangerous.

    And now they can't park in Venice anymore…

    SPWR/Pman – Bad press:

    Is SunPower Corporation (NASDAQ:SPWR) Expensive For A Reason? A Look At Its Intrinsic Value

    I am no fan of Simply Wall Street – goes back to what I was saying in the Webinar – this stuff is not simple and, just because you "simplify" it – it doesn't mean you get to the right conclusion.

    Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

    Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars

    So growth will slow, just because.  Not taking into account that a home solar installation is $30,000 and there are 100M homes in the US so that's $3Tn over 30 years would be $100Bn/year in installs and FLSR and SCTY do about $3Bn each at the moment (more than double SPWR) so all small players in a huge, growing space and it's not like Dot Com, where there will be 1,000 companies – it's going to be a space dominated by several manufacturers and installers and this is one of the top ones at the early stage of the industry.  The above assumptions are what you expect from a high school economics student regurgitating a text book!  


  24. KRUS , up 19%    its a chain of sushi restaurants   wtf.  looks like they lose money on every sale.   Phil, they have one in Aventura, go check out whats so special 


  25. KRUS     they have a real crab roll,  4 pieces $2.65 ? 


  26. Yes when stocks are flying on thin air with nothing but stock sales funding them it is and was a great short. SPCE. Lots of good hype though.


  27. PHIL/AAPL Thanks for AAPL wisdom. Have done most of it and now have

    100 '23 $130c

    40 '23 $100c

    -40  June '22 $160c

    -40 '23 $160c

    So I should be able to sell 60 Jun '22 calls rather than 40, agreed?

    Thx.


  28. KRUS/Stock – I'd imagine there's nothing special at all about a sushi chain.  Sushi comes down to a chef who knows how to pick a good fish at the market.  If they pick a good fish, they just have to cut it up and throw it on some rice – even the rice isn't needed if the fish is good.  The minute you have a chain, you can't be paying or training the people at each place well enough to be head sushi chefs.   In Japan, you spend 5 years in training before they even let you make the rice….

    After you master the rice you are then allowed to stand near the chef while he cuts the fish – more years… 

    See "Jiro Dreams of Sushi" – great movie.  

    AAPL/Wing – I'd rather have the 20 uncovered and be more flexible.  You can always sell to cover if $150 fails.   Also, if you want to be braver, you can leave 20 uncovered longs and sell 20-40 short-term calls for income whenever you feel AAPL is toppy.  

    Rather than selling +20 June $22 $160s for $12.25 ($24,700 over 338 days), you can sell 20 Sept $150 calls for $6.20 ($12,400 over 65 days) 5 times for $60,000.  If you get caught to the upside, you simply THEN roll to  20 of the June $160s but if AAPL goes lower, you can sell 20 $140s for $5 ($10,000) and put a stop on the $150s and wash, rinse, repeat – giving you finer control of the position as it moves up and down.


  29. Sushi chains are actually quite big business here in Japan.  So much so that there are several large chains that do quite well and compete with each other fiercely.  They are always packed on the weekends, and they don't just serve sushi, they also have dessert, noodles tempura, ramen etc.   Its fun for the kids to order something and wait for it to come, kind of like the baggage claim at the airport.

    They are primarily "conveyor belt" sushi restaurants that are mostly automated and standardized — so like most businesses that become automated, the need for actual well-trained chefs becomes less important.   And they are becoming more automated with each passing day:

    Pandemic speeds up automation at conveyor belt sushi chains

    Now how this will translate to the U.S., I have no idea, but its definitely something that could be a successful niche.


  30. For those that are interested, here is a video showing how the systems at a KRUS store in Japan works behind the scenes.  Its in Japanese, but you can get the gist of just how completely automated and efficient it is, and just how little need there is for actual sushi chefs.  In fact in Japan, almost all, if not all the staff are just part-timers and college kids.  Even the dishes are automatically whisked away and washed by automation.   Its actually like a little glimpse into the future of how all chain restaurants will one day operate.

    https://www.youtube.com/watch?v=dSuz7knZqmo


  31. I love that video Kinki.  

    Yes I love those automated sushi places but wasn't what I was thinking about when I was commenting as a sushi snob.

    I wanted to use that technology in a sports bar and put snacks and jello shots and regular shots and beers on a belt that goes around so you can just grab what you want as it goes by.  Was a pre-Covid idea…