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Thrill is Back Thursday – Markets Recover Ahead of the Fed Next Week

I don't know what people think is going to happen? 

The Fed meets next week and they certainly aren't going to LOWER rates, are they?  According to Powell and others, they are in no hurry to raise them but, as you can see from this chart, inflation is rising about twice as fast as wages so our workers are falling further and further behind in buying power.  This effect is, however, masked by stimulus checks that boost spending power – that's the key to our "great" economy this year.

Labor supply shortages are still evident across all sorts of industries. The latest survey of manufacturers from the Institute for Supply Management cites complaints from makers of furniture, chemical products, machinery and electrical products about the difficulties of fulfilling demand and that hurts growth and growth is what the economy is all about, right?

Rents are starting to rise sharply, according to a range of data sources. And businesses facing higher prices for Supplies and Labor may be in the early stages yet of passing on those higher costs to consumers. The Producer Price Index, which tracks the costs of the supplies and services that companies buy, rose 1% in June, an acceleration from April and May. This is a signal that inflationary forces may still be working their way through the economy.

It is supposed to be the Fed's job to prevent prices from going up more than 2% by raising rates but, with inflation up 4% in the first 6 months of the year, the Fed is too busy lying to us about how strong (but weak) the economy is, which gives them the excuse to keep printing up $120Bn per month and distributing it to their Bankster Buddies (keep in mind the Fed is not a Government body but a banking cartel that is blessed by the Government – after many contributions from Banksters).  

ImageMeanwhile, all this free money is keeping earnings afloat for most companies (so far) but next week will be telling as the bulk of the S&P 500 will be reporting.  So far, earnings have generally beaten fairly low expectations as few companies are matching their 2019 performance but that doesn't matter as they only compare themselves to last year, when we were in the first stage of the lockdown in Q2.

Stocks are not supposed to be graded on a curve but it's easy A's all around this quarter with $8Tn worth of stimulus added to the mix.  In fact, if you want to get an idea of how much stimulus drives this economy and who is benefiting – just take a look at the monthly Retail Sales numbers:

Image

You can see the months after the stimulus checks came out – they are the green ones.  The rest is pretty red or barely green but watch out for Furniture, which was down 3.5% last month (we're short Wayfair) and gasoline sales may be up 2.5% but gasoline was $2.18 last year and now it's $3.15 so figure 50% more expensive at the pump and ONLY a 2.5% increase in sales – that is NOT an indication of healthy demand growth.

Still, there IS stimulus and it WILL continue so we will continue to add bullish positions until those bounce lines we discussed on Tuesday finally do begin to fail.  For the moment, however, all is well and even the russell is well over 2,160 so, as long as we hold that into the weekend – it should be smooth sailing into the Fed next Wednesday.  

   

 

And, by the way, if I asked you if you thought the US was doing better or worse on daily covid infections than we were last July – what would you say?

Image

How about now?

The UK is actually back to it's HIGHEST level of daily infections already.  

Be careful out there.

 

 


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  1. Good morning!

    CHL – FYI : from Ally yesterday :  "We are writing to provide you with information regarding certain of your holdings that may be affected by an Executive Order pertaining to securities associated with the Chinese military. Ally Invest may be able to assist you with liquidations or conversions of these shares on a best-efforts basis until the close of business on 7/23/21. We can accept these requests via telephone at 1-855-880-2559."

    Similar email from TDAmeritrade but with an 7/30 deadline (executive order takes effect 8/2/21).


  2. CHL somewhat still confusing. I finally have these shares at the HK exchange. Does this still effect my trading with them????

    Obviously through a US broker in this case IB. Any opinion. TIA.


  3. Here is the replay of this week's webinar. 

    https://youtu.be/aJj4Nws1NcI


  4. Continuing on the previous question – is it this group's consensus that it is time to sell the CHL shares held on the HK exchange?


  5. CHL/RN – Too much uncertainty – I'd get out.




  6. I decided we can add BG to the Butterfly Portfolio as it's generally rangey and boring and undervalued – just the kind of combination we like for a Butterfly play.  There were a very steady $55 in 2019, fell to $27 in March of last year and now at $75 and I think $55-90 should be the range going forward.  

    For the Butterfly Portfolio, let's:

    • Sell 10 BG 2023 $60 puts for $5.50 ($5,500)
    • Buy 25 BG 2023 $70 calls for $11.30 ($28,250)
    • Sell 20 BG 2023 $85 calls for $5.25 ($10,500) 
    • Sell 10 BG Sept $77.50 calls for $2.10 ($2,100) 

    The key to this trade is we're spending net $10,150 on a $37,500 spread that's $12,500 in the money so we have a $25,000 upside potential on the spread and we have 547 days to sell short calls and we used 57 of them to sell $2,100 (already included in the net) leaving us 490 days to sell so let's say we get 8 sales of $2,000 – that's $16,000 of potential short call income while we wait.  That's also enough to make this a net credit spread so – EVEN if BG falls below $60 and triggers the puts – our net entry should be a clean $60,000 or less.  

    To the upside, we have 5 open longs in 2023 so it's very unlikely a move up will get us in any trouble – not even a buyout at $100 as we'd owe $11,250 to the 5 naked short calls while getting the full $37,500 back on the rest (and bonus money on the uncovered longs).  We don't like to say a trade is bulletproof, but this is certainly bullet-resistant!  


  7. Phil / HBI – should benefit more from reopening, and has a sort of hedge built in with Covid issues since it was able to generate good revenue and margin on masks.   what do you think about  putter as follows

    Short Jan '23 17 Put ( 3.1)?  would you couple this with any BCS ?

    thanks 


  8. Just heard from my account rep at TDA that they are keeping TOS as is and making it Schwab's main trading platform.  He made the layoff cuts so I am hoping this is accurate.


  9. HBI/Batman – Glad you pointed them out as they got cheap enough to add back to the LTP:

    • Sell 20 HBI 2023 $17 puts for $3.10 ($6,200)
    • Buy 40 HBI 2023 $15 calls for $4.50 ($18,000) 
    • Sell 40 HBI 2023 $20 calls for $2.25 ($9,000)

    That's net $2,800 on the $20,000 spread that's $12,000 in the money to start (aren't options fun?).  Upside potential at $20 in 18 months is $17,200 (614%) and worst case is we own 2,000 shares at $17 ($34,000) + $2,800 if we lose that so $36,800/2,000 = $18.40/share – around the current price – so this is considered aggressive but not really as the LTP has $100,000 allocation blocks and this would only be a 1/3 entry. 

    Let's say HBI drops to $8 in some disaster – we could spend $16,000 more and our basis would be $13.20 and then we could sell $15 LEAPS for $3 and that's $10.20 and sell some $8 puts for maybe $1.50 and the net becomes $8.70 on 4,000 shares and that's STILL $34,800 with the obligation to buy 4,000 more at $8 ($32,000) and we'd be in 8,000 shares at an average of $8.35 for $64,800 – STILL barely over half an allocation block! 

    So, if you don't REALLY want to own 8,000 shares of HBI at $8.35, don't sell 20 $17 puts for $3.10 but, if you consider that a position you WISH you could get – then this whole trade is a no-brainer.

    TOS/Rperi – Wow, that would be great!  A lot of us have been very vocal with TD about how much better TOS is – I guess they finally agreed.  


  10. CHL   converted to HK shares and put in an order to sell.  $100 commission.   last trade was $6.44.  Trading opens on HK exchange at 9:30 pm eastern 

    lets see what happens 


  11. Russell back to 2,200 – not good.

       

     

    Remember when we were worried if Coffee (/KC) would hold $100?

    • Arabica coffee futures are up 10.8% to hit their highest in more than six years as the impact of a damaging frost in Brazil is factored in by traders. Robusta coffee futures are also sharply higher.
    • The unexpected frost impacted the important Minas Gerais and Sao Paulo regions earlier this week and left some farmers no choice but to take out their trees and replant them due to their extremely sensitive to cold temperatures. The freeze is having the biggest impact on coffee trees under four years old. Analysts are still working out what the impact on supply will be for this year and next.
    • The iPath Series B Bloomberg Coffee Subindex Total Return ETN (NYSEARCA:JO) is up 9.70% and traded at a new high of $54.87 earlier in the session.
    • Consumer-facing companies typically hedge many of their coffee costs, but could see an impact on input costs down the road.
    • Related stocks: Coffee Holdings (NASDAQ:JVA), Dunkin' Brands (NASDAQ:DNKN), J.M Smucker (NYSE:SJM), Starbucks (NASDAQ:SBUX), Tata Global Beverages (OTC:TTAEY), McDonald's (NYSE:MCD), Costa Coffee (NYSE:KO), Tim Hortons (NYSE:QSR), Nestle (OTCPK:NSRGY), Keurig Dr Pepper (NASDAQ:KDP), Kraft Heinz (NASDAQ:KHC), Krispy Kreme (NASDAQ:DNUT).
    • Earlier today, Starbucks traded at an all-time high.

    Lumber very bouncy;

    This is a bit of a trend:

    • Unilever (UL -4.9%) has topped 1H expectation with underlying sales growth of 5.4% and expects cost inflation to be in the high-teens in 2H vs. prior outlook of mid-teens rise.
    • The company has warned that the price of its toiletries, cleaning products and salad dressings will rise in the coming months due to rise in raw material costs. 

    • The big jump in the price of commodities such as crude +60%, palm oil +70% and soya bean oil +80%, as well as shipping costs had also surged by 40 to 50%, impacting company's profitability.

    • CEO comment: "Cost volatility and the timing of landing price actions create a higher than normal range of likely year end margin outcomes. We are managing this dynamically and expect to maintain underlying operating margin for 2021 around flat.”
    • Acquisition contributed 1.4% to sales and currency impacted -6.1%.
    • E-commerce business rose 50% and represents 11% of total sales.
    • Emerging markets grew 8.3% to €15B, driven by continued recovery in China and strong performance in South Asia.
    • Earlier today, Unilever CEO sought to distance it from the ice cream maker Ben & Jerry’s decision to stop serving Israeli settlements in the occupied West Bank and contested east Jerusalem.
    • Last month, the company's Prestige Beauty signed an agreement to acquire the leading digital-led skin care brand Paula’s Choice.
    • Previously: Unilever EPS beats by €0.08, beats on revenue (July 22)
    • Pzena Investment Management argued in a fund letter that cheap stocks tend to perform better than expensive ones during times of higher inflation, meaning that rising prices provide a tailwind for value stocks.
    • The fund detailed historical research showing that value stocks performed "somewhat better" during periods of higher inflation.
    • At the same time, data showed little impact on corporate profitability as a result of inflation, according to figures published in the company's most recent fund letter.
    • As a result, Pzena contended that "value remains the only alternative in equity and fixed income markets today that offers a double-digit earnings yield."
    • The split between cheap and expensive stocks has come largely through the extreme expansion of price-to-earnings ratios for growth stocks in recent years, Pzena suggested.
    • Pzena noted that P/E ratios for expensive stocks have doubled since 2009. At the same time, the multiples for value stocks have remained largely unchanged.
    • This came amid an environment of extremely low interest rates, which "mathematically have a stronger impact on expensive stocks," the fund asserted.
    • "Value doesn't need inflation to work, but, should inflation pressure persist, historically a higher inflationary regime appears to be a tailwind," Pzena said.
    • For a different take on how inflation will impact the market market, check out an extremely bearish fund letter issued by Crescat Capital, which warns that inflationary pressures could spark a 34% correction in the S&P 500.

     

     

    • Michael Sonnenshein, CEO at Grayscale Investments, said Thursday that SEC approval of a Bitcoin ETF "is a matter of when, not a matter of if."
    • Sonnenshein told CNBC that regulators have remained "highly engaged" with the industry during the approval process for a Bitcoin ETF, raising his confidence that an official blessing will come eventually.
    • The Grayscale CEO predicted that approval of a Bitcoin ETF would open the door to ETFs based on other digital assets as well.
    • On the crypto market in general, Sonnenshein reported that clients have shown an increased appetite for diversification within the asset class.
    • He noted that many clients make their first crypto purchase with either Bitcoin (BTC-USD) or Ethereum (ETH-USD) but often move on to lesser-known names, such as stablecoins.
    • "A lot of investors are getting excited about all of the new and differentiated use-cases that are popping up around digital assets," he said.
    • Asked about growing competition for a Bitcoin ETF, including an application from high-profile investor Cathie Wood, Sonnenshein indicated that the additional attention on the industry will help all the major players.
    • "We believe a rising tide lifts all boats, he said.
    • Sonnenshein also repeated the company's goal that the publicly traded Grayscale Bitcoin Trust (OTC:GBTC) will eventually become an ETF.
    • GBTC recently saw the bearish technical death cross.
    • For a more bearish perspective on the future of Bitcoin and GBTC, look at a report from SA contributor Robert Honeywell, who says of the market "there's money in the muck, but watch your step."


  12. Phil / INTC – pretty solid quarter…   need to look at margins…..   stock down a bit.

    Intel (NASDAQ:INTC): Q2 Non-GAAP EPS of $1.28 beats by $0.21; GAAP EPS of $1.24 beats by $0.19.

    Non-GAAP Revenue of $18.5B (+2% Y/Y) beats by $700M.

    Revenue of client computing: $10.1B vs. $9.96B consensus.

    Revenue of data center: $6.5B vs. $5.94B consensus.

    “There’s never been a more exciting time to be in the semiconductor industry. The digitization of everything continues to accelerate, creating a vast growth opportunity for us and our customers across core and emerging business areas. With our scale and renewed focus on both innovation and execution, we are uniquely positioned to capitalize on this opportunity, which I believe is merely the beginning of what will be a decade of sustained growth across the industry,” said Pat Gelsinger, Intel CEO. “Our second-quarter results show that our momentum is building, our execution is improving, and customers continue to choose us for leadership products.”

    Raising full-year 2021 guidance: Now expecting GAAP revenue of $77.6 billion and non-GAAP revenue of $73.5 billion from prior guidance of $72.5B vs. $72.65B consensus; GAAP EPS of $4.09 and non-GAAP EPS of $4.80 from prior guidance of $4.60 vs. $4.11B consensus.

    Q3 Guidance: Revenue $18.2B vs. $18.12B consensus, Non-GAAP EPS $110 vs. $1.02 consensus.


  13. INTC/Batman – Looks good to me.  We're sitting on a $30/50 spread from Nov 2020 so they are way over target.  Of course margins compress during inflation cycle – especially when they are fulfilling a lot of old contracts.  It will be fixed over time.
    INTC Short Put 2022 21-JAN 30.00 PUT [INTC @ $55.96 $-0.27] -10 3/12/2020 (183) $-3,000 $3.00 $-2.78 $7.00     $0.22 $0.00 $2,780 92.7% $-220
    INTC Short Put 2022 21-JAN 50.00 PUT [INTC @ $55.96 $-0.27] -20 7/24/2020 (183) $-17,000 $8.50 $-6.10     $2.40 $0.02 $12,200 71.8% $-4,800
    INTC Long Call 2023 20-JAN 35.00 CALL [INTC @ $55.96 $-0.27] 50 11/17/2020 (547) $67,000 $13.40 $8.15     $21.55 $0.35 $40,750 60.8% $107,750
    INTC Short Call 2023 20-JAN 50.00 CALL [INTC @ $55.96 $-0.27] -50 11/17/2020 (547) $-31,250 $6.25 $4.28     $10.53 $-0.07 $-21,375 -68.4% $-52,625