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Wednesday Recovery – Markets Bounce Right Back


Nothing seems to stop this market for more than a moment.  We flew right back to the strong bounce line (see yesterday's Report) at 4,292 and went all the way to 4,340 before pulling back to 4,322 this morning.  That is a very strong market and, as I said to our Members, the only caveat is that the volume is much lower (99M) on the way up than it has been on the way down (223M) in the past few days.  That means the recovery has, so far, left us weaker than we were when it started – with less actual dollars supporting the prices that failed to be supported before.  

That's OK, though, stocks don't actually need INVESTORS to go up in price.  Do you think people bought $500Bn worth of AAPL stock since June 1st?   Of course not!  AAPL trades an average of 84.5M $146.15 shares per day (and it was $122 at the start) so that's $12.3Bn/day and 30 days would be $370Bn so EVEN IF EVERY SINGLE TRADE ON AAPL was just a buyer and not a single seller (not possible) – we'd still be 30% short of the money we need to account for the gain in valuation over the last 45 days.  

That is because the stock market is a very distorted pricing mechanism that values the entire company based on the last price paid for a share.  Clearly that is idiotic and my favorite example is this.

Let's say you have a town with 100 potential drivers who make an average of $50,000 a year and can afford, generally, to buy a $25,000 car and they ALL want Beetles.  That's good news for the VW dealer, who has 100 Beetles on his lot that he bought from the factory for $20,000 ($2M).  Unfortunately, they all have cars now so he has to wait for people to decide they want new ones.

A parking lot full of vw beetles in 1968 watching Herbie the love bug |  Drive in theater, Volkswagen, Drive in movie theater  

So he sells 5 cars the first week at $25,000 and makes $5,000 per car, which is a $25,000 profit.  He can anticipate that his STOCK of Beetles is worth $25,000 per car (share) and he'll make 95 x $5,000 on the rest ($475,000) on the rest of his portfolio of Beetles ($500,000 total).  Now, in week 2, the factory gives out bonuses to all the workers and 20 people come in to buy cars but there aren't 20 cars ready to go so a bidding war ensues and, by the time it's done, he's sold 5 more for $25,000, 5 for $30,000, 9 for $35,000 and the last guy who came in HAD to buy it right away and paid $40,000.   

So now the dealer has sold 20 more cars for $125,000 + $150,000 + $315,000 + $40,000 ($630,000) and that's an average of $31,500 and he made $230,000 selling 20 more cars plus the first $25,000 for a 2-week moving average of $10,200 per car but, instead of assuming he'll make $10,200 on the next 75 cars, he EXTRAPOLATES the $20,000 he made on the last car at $40,000 and says his 75 remaining cars are worth $3,000,000 with $1.5M of that being profit.  

It's all great on paper but we don't understand the motive of the guy who paid $40,000 for the last car but we do understand that the entire population of drivers only makes $5M a year and 25% of them just bought cars so that leaves $3.75M available in the pool of potential customers and probably less if they aren't as well-paid as the guy who paid $40,000 for the last car.  

The dealer may keep those $40,000 stickers on the cars and sales (volume) may slow down or stop as less and less people are left who can afford $40,000 for a car come by and, eventually, he is forced to start dropping his price until he comes back to a price people can actually afford.  THAT is when we might begin to discover the true value of his stock – NOT while it's on the way up.

That's the problem with market pricing.  You are basing Apple's $2.5Tn valuation on whatever the last person paid for a single share of stock ($146).  If the next person buys a share for $138, did AAPL suddenly become worth $102Bn (4%) less?  Of course not – but neither was it worth $102Bn more just because the last trade of the night went off at $146.  Banksters know that traders don't understand this and they use those last trades and low-volume trades to manipulate their perception of the market and the value of stocks.   Don't fall for it.

S&P 500 P/E Ratio HIstoryLike the factory bonuses in the example above, our own Government is distorting the market with cash giveaways and low-rate financing and that does make it very hard to establish a true value but one thing we can be sure of is that THESE valuations are artificially enhanced and that means buying at these prices can leave you holding a very hot potato.  

We began 2021 with the S&P at 3,800 and we're up over 500 points (13%) since then, pushing the P/E ratio from 28.5 to 32.2 and the only time we've EVER been this high was before the great crash of 2000.  This is NOT normal and not normal can last long enough to make you think it's normal and that's the danger we're in now.  

I hate to be a party-pooper but it's my job to keep you grounded and the behavoir of this market is not natural and, more importantly, it's not sustainable because there simply isn't enough money in the World to actually pay this much of it for stocks.  These prices are based simply on the extrapolation of a buying frenzy that COULD wear off at any time and WILL wear out as soon as the Government and the Fed stop feeding it with free money.  

extrapolation hashtag on Twitter


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  1. Good morning. Here is the link to today's webinar.

  2. Good morning!  

    VTRS used to be Upjohn (medicine), which is a combination of MYL and PFE and no one pays attention to them yet but they are at $17Bn at $13.89 but they are making $4Bn/yr selling Lipitor, Norvasc, Lyrica, and Viagra, along with Mylan's portfolio of more than 7,500 marketed products around the world, including the epinephrine auto-injector, EpiPen, and antiretroviral therapies on which 40% of people living with HIV/AIDS globally depend.  

    They are paying a 3.4% dividend (0.44) so, for our Dividend Portfolio, let's:

    • Buy 2,000 shares of VTRS at $14 ($28,000) 
    • Sell 20 2023 $15 calls for $2 ($4,000) 
    • Sell 20 2023 $12.50 puts for $2.10 ($4,200) 

    Here's we're spending net $19,800 and that makes our $880 dividend a respectable 4.4% while we wait to get called away at $30,000 with a $10,800 (54%) additional profit – not boring at all for 18 months.

    In our LTP we can be more aggressive with:

    • Sell 20 VTRS 2023 $12.50 puts for $2.10 ($4,200) 
    • Buy 50 VTRS 2023 $12.50 calls for $3.30 ($16,500)
    • Sell 50 VTRS 2023 $17.50 calls for $1.50 ($7,500) 

    Here we are foregoing the dividend and spending net $4,800 in cash on the $25,000 spread, giving us $20,200 (420%) upside potential over the next 18 months so we should make a good 20% a month ($950) if all goes well, which is more than the dividend – every month – and we're only laying out $4,800 vs $19,800 (the margin would be the same as the stock play above).  If assigned at $12.50 and we lose the whole $4,800, that adds $2.40/share so net $14.90 means we risk overpaying for the stock by $1 on 2,000 shares as our worst case.  

  3. Good Morning.

  4. Just about everything is up today even our favorit WBA up .28 cents!!!!

  5. Phil / KO – looking to sell some short callers to cover shares ….  I'm looking at the  Feb '22 $57.5 caller at 2.4 or the Oct '21 $57.5 caller at 1.3. …  I just sold out of my short puts this am…. so at a later date will sell these ( possibly at KO = 55 or 54)  all the callers would be covered by shares.  

    What would you recommend ?


  6. APO ($13.3Bn at $58.65) is acquiring ATH ($12.1Bn at $64.73) in Q122 for 1.149 shares of stock.  So we have a $25.4Bn company and they are diluting 1/2 by 15% so call that $27.4Bn but ATH makes $2Bn and APO makes $1.5Bn so $3.5Bn is a nice chunk of change and the merger is smart as ATH conservatively manages retirement accounts and APO gets a lot more bang for the investment buck without being too risky so, unless they really screw it up – they should considerably increase ATH's returns.  

    The pending merger puts a kind of growth cap on ATH so the options premiums are squished but not so APO so, for our LTP, we can make the following play:

    • Sell 10 APO 2023 $50 puts for $5.50 ($5,500) 
    • Buy 20 APO 2023 $50 calls for $12.80 ($25,600)
    • Sell 20 APO 2023 $65 calls for $6 ($12,000) 

    That's net $8,100 on the $30,000 spread that's almost $20,000 in the money to start.  Very happy to turn it into a full position if we head lower but, as it stands, we can make $21,900 (270%) in 18 months if we get to $65.  Let's say they drop 30% to $42, where would we be? We'd have 1,000 shares at net $58.10 and we could then sell 10 puts and calls for let's say $12 and we'd have the net down to $46.10 so that's our "worst case" – committing to 2,000 shares at $46.10 – 22% below the current price.  

    In reality, we'd roll the short puts and recover some of the spread money so it would be even lower than that! 

    WBA/Yodi – Yet another chance to DD.

    KO/Batman – I think I just mentioned them as a stock to buy even if the World is ending…   Emerging markets are 25% of sales (US 31%) and Asia/Pac 17.1% and Latin America 15.9%, so you have to take the Delta Virus effect seriously this year but last year they made $7.7Bn, down from $8.9Bn and this year $9.5Bn and just under 10% annual growth.   All yours for $240Bn is a high P/E for them but low for the S&P.  There's not much to do but Sell 1/4 – 1/3 the Sept $57.50s and just roll the loser.  No way to tell where it's going.  From the Butterfly Portfolio on Friday: 

    KO Long Call 2022 21-JAN 45.00 CALL [KO @ $56.90 $1.07] 15 5/28/2020 (184) $9,300 $6.20 $5.88 $4.08     $12.08 $0.92 $8,813 94.8% $18,113
    KO Short Call 2022 21-JAN 55.00 CALL [KO @ $56.90 $1.07] -15 5/28/2020 (184) $-3,525 $2.35 $1.23     $3.58 $0.52 $-1,838 -52.1% $-5,363
    KO Short Put 2022 21-JAN 42.50 PUT [KO @ $56.90 $1.07] -5 5/28/2020 (184) $-2,250 $4.50 $-4.15     $0.36 $-0.05 $2,073 92.1% $-178
    KO Short Call 2021 20-AUG 55.00 CALL [KO @ $56.90 $1.07] -10 6/18/2021 (30) $-1,300 $1.30 $0.92     $2.22 $0.55 $-915 -70.4% $-2,215

    • KO – They just popped up and messed up our short calls.  I think we'll just close the July calls and see how it plays out as our $15,000 spread is now 100% in the money from our net $1,225 entry so we're not going to sweat losing $455 along the way, are we?

  7. any thought on oil phil we are up 5 percent from 66.50 with an unexpected build of two million barrels

  8. Oil/Tommy – Then why is it up?  All so silly, isn't it?


    It's just not playable down here – that's why I lost interest.  $75 was an easy short, $60 is an easy long – $66-70 is simply the middle of the range.  

    Learning when NOT to play (which is most of the time) can drastically increase your winning percentage.  If you want to day trade a lagging indicator, try VLO:

    The VLO Aug $60 calls are $6 so 0.85 premium and, if we get to $70, it's $10 back for a 66% profit.  Set a stop below $65 and you won't lose more than 0.25 against a $4 potential reward.  

  9. Don't play/Phil – heh. As a long-time martial arts student, I sometimes get asked about street fights. I can confidently and and honestly answer that I've never lost a street fight.

  10. Street Fights/Snow – Yep, me too.  No loses in 0 fights – perfect record!

    Son of  a bitch with CMG – insane pop killed all the STP profits for the week.  Earnings were about $7.50 for the Q but up 30% from last year is getting everyone excited.  They seem to be passing on price increases too.  Have to wait for them to calm down but OUCH!  

    CMG Long Put 2022 21-JAN 1,500.00 PUT [CMG @ $1,766.57 $192.22] 5 4/19/2021 (184) $69,020 $138.04 $-90.84 $-19.80     $47.20 $-45.80 $-45,420 -65.8% $23,600
    CMG Short Call 2021 17-SEP 1,500.00 CALL [CMG @ $1,766.57 $192.22] -3 6/24/2021 (58) $-21,600 $72.00 $202.50     $274.50 $150.50 $-60,750 -281.3% $-82,350

    60x earnings is so crazy.  Jan $1,700 calls are $186 so selling 5 of those would cover the roll.  I'd almost like to sell those and keep the 3 short Sept $1,500s but instead I'll do nothing and see where things end up – this is bananas.  

    2023 $2,000 calls are $180.  Tempting but I don't want to be in the trade for that long.

  11. Short-Term Portfolio:  Since we can sell 2 CMG 2023 $1,800 calls for $260 ($52,000) – let's do that before it gets away from us.  Then we can do a roll on the 3 remaining (if we have to).  

  12. Phil,

    Jan CMG 1,800 call is $126, not $260.

  13. Sorry. I checked jan 2022. 2023 is yes (i cannot belive) $260.

  14. Those calls were $150 yesterday so a quick $20,000 if they revert at some point. 

    Labor availability and steeper menu prices are ongoing concerns for both Main Street and Wall Street alike. At the end of June, the company raised wages to $15 per an hour, which then was quickly followed by a 4 percent hike in menu prices. The move comes amid a broad labor crunch that's driving up costs nationwide.

    In the company's forward-looking statements, Chipotle says it plans to keep an eye on "the impact of competition, including from sources outside the restaurant industry" — including "the increasingly competitive labor market and our ability to attract and retain qualified employees," and the impact of its recent increase in hourly wage.

    CMG/Kgab – Meant 2023, not 2022 – was fixed in edit but you may have to refresh.