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Monday Market Movement – Will there be a Correction?

50%.

That's how much the indexes are up since 2019 yet only one sector in the S&P 500 has actually grown 50% (Semiconductors) – despite $10 TRILLION worth of stimulus being dumped into the economy during that time.  Consumer Goods, Food and Banking (things the Bottom 80% actually use) have been pretty flat while Electronics, On-Line Retail, Drugs, Investment Banking and Software are all doing pretty well for their Top 20% clientele.  

But what will happen when we remove the stimulus?  Well, we may never know judging by Powell's speech last week, in which he indicated the Fed was in no particular hurry to stop dropping $120Bn per month into the economy and the Administration, for their part, are trying to finalize a $3.5Tn budget and a $1.1Tn stimulus package.  That will be on top of the $2.2Tn stimulus we already spent in the first half, which is 22% of our $10Tn, 6-month GDP.  After that spending spree (and $720Bn from the Fed), the economy grew 6.6% in Q2 – not even 1/2 of the stimulus levels.

As you can see from the above chart, the travel and tourism sector is still in very rough shape (Q2 to Q2 comparisons) and, of course, Airlines are just as bad and oil companies are only just getting back to normal.  Consumer Services are still down 31.3% but Consumer Service Stocks (IYC) are up 50% from their 2019 levels because neither sales nor profits seem to matter to traders these days.  

Amazon (AMZN) is 10% of the IYC, then Home Depot (HD), Disney (DIS), Netflix (NFLX), Comcast (CMCSA), Walmart (WMT), Costco (COST), McDonald's (MCD), Lowe's (LOW) and Starbucks (SBUX) make up the Top 60% - so it's a mixed bag of stocks that benefitted from Covid and stocks that lost revenues but why the index is up 50% while overall revenues are down 31.3% is beyond all logic.

As long as Traders THINK we will get more stimulus, they are willing to ignore anything else that's going wrong with the recovery.  We have noted before that China has a lot of over-leveraged lenders and Huarong Asset Management just reported a loss of $15.9Bn in a long-delayed 2020 filing after leverage was hitting their capital buffers 1,333 times in 365 days. 

China Huarong's dollar bonds rebound after plans of state-led bailoutThe firm’s shares, which will remain suspended from trading, have slid 67% since their debut. Before it went public in 2015, it was backed by heavyweights including Warburg Pincus and Goldman Sachs Group Inc.  State-owned investors including Citic Group, China Insurance Investment Co. and China Life Asset Management Co. on Aug 18th agreed to put fresh capital in Huarong. The firm would receive $7.7 billion as part of an overhaul plan with control shifting to Citic from the Finance Ministry, though details were still being finalized and could change, people familiar with the matter have said.  

While defaults at state-owned Chinese companies have become more common in recent years, none of the borrowers that missed payments have been as systemically important as Huarong, who are also one of the country’s biggest issuers of offshore bonds that sit in portfolios from Hong Kong to London and New York.  If Huarong loses its investment-grade credit rating, 56% of surveyed fund managers that hold its Dollar Bonds would be forced to sell, according to a Bank of America report dated Aug. 17th. 

Is Huarong a disaster we narrowly avoided or just the tip of the iceberg in the China melt-down?  Too early to tell….

To raise capital, China is selling 150,000 Tons of metal from State Reserves – their 3rd batch of the year and the biggest, by far.  China's dumping metals on the market have stopped the metal rally this summer and Copper (/HG) may be a fun dip buy if it hits $4 again as China releases 30,000 tons on Sept 1st.  There was no August sale due to Covid and you can see how fast copper came back in the past month.  

Meanwhile, we're certainly not back to work yet as Kastle Systems has been tracking the occupancy of 2,600 buildings in 10 cities and, as of Aug 18th, only 31.3% of the office space is being utilized, DOWN from 32.1% the week before and down from 34.3% on July 28th.  How are things even close to "normal" if this is the situation downtown?   

Image

Dining out has trailed off again this summer:

Seated diners at restaurants trend down over late July and August as delta spreads

And air travel is down siginifcantly since June at just over 1/2 of pre-covid levels:

While improved from year ago, number of travelers has declined recently

Keep this ACTUAL data in mind while the pundits tell you how well we are recovering…

Meanwhile, it's a big data week.  Dallas Fed today Case-Shiller, Chicago PMI and Consumer Confidence tomorrow, PMI, ISM & Construction Spending Wednesday.  Thursday we have Productivity and Friday is PMI and ISM Services and, of course, the Non-Farm Payroll Report:

Earnings never stop these days – almost time for Q3 and Q2s are still rolling in:

Image

We're still testing those record highs and we'll see how the week plays out.

 


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  1. Mobius Says Hold 10% in Gold as Currencies Will Be Devalued



  2. The Great American Science Heist


  3. The World Is Still Short of Everything. Get Used to It.


  4. Phil,

    In light of the expected societal/economic effects of the Delta variant what are your thoughts on the on-line sports betting space (Penn, DKNG, BYD, CZR maybe SGMS). Another shut down should help these guys.

    Thanks


  5. Phil / T

    morning.  Looking to open a new T position, something in the 1,000 shares region.   Thoughts on a complete play?

    thanks


  6. TDFAmeritrade PC platform/All – trying to deposit money into my TDA account using the https://www.tdameritrade.com url on a win10 PC, Firefox browser. Clicking on deposit/ACH, nothing happens. It's like the switch is disconnected. Anyone else using that software? For trades I usually use ToS, and that doesn't seem to be a problem. TDA's help line is overloaded, and since it's a tech problem, they won't take an email on the matter. Arrghh…


  7. snow/TD – I have seen this before also. Do you have any extensions installed in your browser that block ads (I have uBlock Origin)? This can sometimes interfere with valid content. I keep a version of Firefox with no extension on it for when these issues arise.


  8. Snow- TDA  has local reps/offices you can try to contact through one of those. TDA assigns reps to accounts- my guy is Ramez Raheb- 949-347-2721 out of the Mission Viejo, CA office here in Orange County. He has helped me on a few issues so a call to him might work. 


  9. 8800   CZR been spending a fortune lately on advertising. 


  10. Good morning!

     

     

    • Mohamed El-Erian, former PIMCO CEO and chief economic adviser at Allianz, worried Monday that the continued dovish tone taken by Federal Reserve Chair Jerome Powell could endanger the economy and overall financial stability.
    • Speaking to CNBC, El-Erian said Powell's well-publicized Jackson Hole speech last Friday took September off the table as a time when the central bank will announce a tapering of its asset-purchase plan.
    • Rather, that decision will come "maybe December," with the stock market expecting that "taper won't happen for a while," El-Erian contended.
    • The former PIMCO CEO asserted that while Powell's speech acknowledged high inflation and growing sentiment within the central bank for a more hawkish stance, the Fed chief "packaged his expectation in very dovish tone."
    • "The market concluded [after the speech] that it's going to be an even slower timetable for taper and I worry that that's going to be problematic for both economic wellbeing and financial stability," he said.
    • El-Erian said that an over-accommodative Fed could "destabilize" inflation expectations and wage expectations, which could undermine the recovery and derail "the transition to long-term inclusive growth."
    • "We are witnessing a high probability of a policy mistake," he said.
    • "Is it going to be as big as the '70s? No, it's not. But it is going to be big," he added.
    • The former PIMCO CEO argued that Powell couldn't use the Delta variant as an excuse to continue flooding the market with liquidity because the dangerous COVID strain has a stagflationary impact on the economy.
    • He contended that the Delta variant suppresses demand, which could stagnate the economy, but also disrupts supply chains at the same time, driving up prices.
    • For evidence of El-Erian's view that market participants have come to expect a dovish Fed, check out comments from SkyBridge Capital's Anthony Scaramucci, who says he doesn't expect a rate hike next year.

    That's interesting.

    • July Pending Home Sales: -1.8% M/M to 110.7 vs. +0.3% consensus and -2.0% in June.
    • Compared to June, only the West saw contract signings increase in July.
    • The Northeast experienced the largest monthly and year-over-year decreases.
    • All regions recorded year-over-year declines, dropping 8.5% nationally.
    • “The market may be starting to cool slightly, but at the moment there is not enough supply to match the demand from would-be buyers,” said Lawrence Yun, NAR’s chief economist. “That said, inventory is slowly increasing and home shoppers should begin to see more options in the coming months.

    Betting/8800 – Yes, it's going to be a thing, hard to say who's going to "win".  I'd say CZR has a big advantage as they can tie rewards in to casino perks so, once things normalize, they have an advantage but they are all working in an expanding space and DKNG has more do gain as a pure play.  DKNG partnered with Golden Nugget to bulk up their offerings as well.  

    T/Monk – I would just sell 10 of the 2023 $30s for $5.80 as that's net $24.20 as your worst case and $5.80 is more than the dividend you'd collect and you can always add a bull call spread or a covered call if they firm up but why spend $27.16 now and sell $25 puts for $2.75 and $27 calls for $2 when that's net $22.41/24.70 when you can barely beat the short puts anyway.

    TD/Snow – Platform is working, not sure about deposits.  Pstas has a good idea calling a local rep.

    CZR/Stock – Well after going BK 5 times I imagine they have learned how important cash-flow is.


  11. TD/fixed. Ha! I switched off the ad blockers and that fixed it. Thanks, daveo!


  12.  

     

    • Hotel giant Hilton Worldwide (HLT -1.0%) and Marriott International (MAR -0.8%) are both lower on reports that the European Union may reinstate travel restrictions for unvaccinated U.S. travelers. Online travel names Travelzoo (TZOO -2.5%), TripAdvisor (TRIP -2.7%) and Travel + Leisure (TNL -0.8%) are also starting the week off with a drop.
    • Decliners in the airline sector include American Airlines Group (AAL -2.6%), Hawaiian Holdings (HA -3.0%), United Airlines (UAL -2.5%), SkyWest (SKYW -3.2%) and JetBlue (JBLU -2.4%). Meanwhile, cruise line stocks Norwegian Cruise Line Holdings (NCLH -2.1%), Carnival (CCL -1.8%) and Royal Caribbean (RCL -1.1%) are down as well.
    • The choppy pandemic recovery has cut into what investors hoped would be a strong late-summer travel season.

    Huge miss:

    So these guys are doing great because they are making not enough chips for a lot more money – like OPEC!

     

     

    • The Direxion Daily Semiconductor 3x Bull Shares ETF (NYSEARCA:SOXL) has hit an all-time high on Monday's trading session.
    • The fund has also surged more than 23% over the past week and a half dating back to Aug 19, as the global semiconductor chip shortage continues to weigh on certain regions of the market, such as automobiles and smartphones.
    • SOXL, a 3X leveraged fund that invests in derivatives and stocks in the semiconductors and semiconductor equipment sectors, is not the only chip ETF hitting an all-time high of late.
    • Other semiconductor ETFs are also up since Aug 19, such as (NASDAQ:SOXX), which is +9.12%(NASDAQ:SMH) +9.56%, and (NYSEARCA:XSD) +10.18%.
    • From a further out point of view SOXL is +52.10% YTD, SOXX +24.22% YTD, SMH +24.55% YTD, and XSD is +19.09% YTD.
    • Additionally, the Direxion Daily Semiconductor 3x Bear Shares ETF (NYSEARCA:SOXS), the inverse fund to SOXL, is -22.18% since Aug 19 and -65.33% YTD.
    • There is a current surge of COVID cases in Asia, specifically in Malaysia, which is a critical nation in the supply chain for the manufacturing of semiconductors. 
    • In a recent 60 minutes interview, Pat Gelsinger, CEO of Intel, discussed how 75% of semiconductor manufacturing takes place in Asia. Gelsinger stated, "25 years ago, the United States produced 37% of the world's semiconductor manufacturing in the U.S. Today, that number has declined to just 12%."
    • Any disruption to the supply chain can impact the prices of semiconductors which markets are witnessing in Asia. As a result, traditional supply and demand principles influence the price of ETFs such as SOXL, SOXS, SOXX, SMH, and XSD. 
    • Daily price action: SOXL +2.01%, SOXS -2.09%, SOXX +0.62%, SMH +0.65%, and XSD +0.65%.
    • In other semiconductor-related news, Apple (NASDAQ:AAPL) could raise the prices for its upcoming iPhone 13 lineup as its chip manufacturing partner looks to raise its costs amid the ongoing global semiconductor shortage.

  13. Phil/Stockbern,

    CZR and Penn seem to be theoretical frontrunners. Each has it s own strengths and weaknesses: CZR has an aggressive and arguably competent CEO but very high multiples. One sleeper is BYD which is mainly in sticks and bricks casinos – which are bound to suffer in the next shut down – but which has a minority stake in the sports gaming European Fan Duel (rumored to be in the process of being spun off from PDYDY) but also seems to have the most solid balance sheet. Thinking of short puts in CZR (@80) and Penn (@60) and watching BYD. Penn has highest option volume.


  14. CZR/8800 – That ship has sailed at $22.5Bn.  How are they going to make $1Bn before the next time they go BK?  They lose $1.7Bn last year and they'll lose about 350M this year – they are going on on-line to save them.  BYD is $7Bn at $62 and they make about $500M and only lost $135M last year and back on track this year – much better and $7Bn is not crazy for those earnings.  BYD has 28 low-rent casinos but nothing wrong with that if they make money.  I think gaming makes a nice bonus for them so let's add a play on BYD to the LTP:

    • Sell 10 BYD 2023 $50 puts for $6.50 ($6,500) 
    • Buy 20 BYD 2023 $55 calls at $16 ($32,000) 
    • Sell 20 BYD 2023 $75 calls for $8.50 ($17,000) 
    • Sell 5 BYD Jan $70 calls for $4 ($2,000) 

    That's net $6,500 on the $40,000 spread that's $14,000 in the money to start so the upside potential is $33,500 (515%) at $75 or better.  We made a 1/4 sale of short calls using 144 of our 508 days.  Three more sales like that and we have a free spread so no reason to press our luck.  Worst case is owning 1,000 shares at net $56.50 – still 10% off the current price.





  15. Phil,

    Given the anticipated Delta variant lockdown and associated safety concerns due to lower incomes (possible increased crime), any thoughts on firearms (RGR, SWBI – hi rev/inc growth) and ammo sources (POWW – very hi P/E & P/S, JOUT – hi insider ownership)?

    Thanks again


  16. LOL 8800, talk about profiting from misery.  Ammo?   You think things are going to get so out of control demand for bullets will skyrocket?  

    POWW doesn't make any money, not interesting to me.  JOUT has a nice, little business but ammo isn't much of it.  They are at $1.2Bn already on $50M in profit so you missed the buss on cheap shares at 24x and their growth is not exciting but maybe there will be an outdoor camping conference and everyone will start shooting each other – fingers crossed!  

    RGR is generally a good value at $1.4Bn with $90M last year in profit and $150M projected this year but, generally, good for $100M with some growth.  SWBI lost money last year so I much prefer RGR, who seem better able to manage downturns.  

     

     

    • Worldwide smartphone shipments are expected to recover from last year's pandemic-related losses to post a 7.4% growth in 2021, according to new IDC forecasts. 
    • The research firm expects worldwide handset shipments to reach 1.3 billion units this year before increasing 3.4% year-over-year in both 2022 and 2023.
    • Apple's (NASDAQ:AAPL) iOS devices are expected to increase 14% on the year, driven by last year's delayed iPhone 12 launch and the iPhone 13 lineup debuting next month. Android handsets should grow 6% compared to last year.
    • Demand for 5G handsets crosses smartphone ecosystems and the devices are expected to more than double on the year to 570 million shipments with China remaining the largest market. Average selling prices for 5G will be flat on the year at $634, while 4G ASP will slide 30% to $206.
    • Shipments for the world's largest smartphone markets – China, the United States, and Western Europe – will be down compared to 2019, but the declines were more than offset by growing markets such as India, Japan, the Middle East and Africa.
    • "The smartphone market was better prepared from a supply chain perspective heading into 2020 given almost all regions were expecting to grow and vendors were preparing accordingly," says Ryan Reith, group vice president with IDC's Mobility and Consumer Device Trackers. "2020 was a bust due to the pandemic but all of the top brands continued forward with their production plans with the main difference that the timeline was pushed out. Therefore, we are at a point where inventory levels are much healthier than PCs and some other adjacent markets and we are seeing the resilience of consumer demand in recent quarterly results."
    • Apple breaks out iPhone revenue but not units sold in earnings reports. When the tech giant reported third-quarter results in July, iPhone sales totaled $39.6 billion, up from $26.4 billion in the prior year's quarter. 

     

     

    • The Treasury market is rallying some today, with the 10-year yield (NYSEARCA:TBT) (NASDAQ:TLT) down 2 basis points to 1.29%, below 1.3% for the first time in a week.
    • Following Federal Reserve Chairman Jerome Powell's dovish Jackson Hole speech, Wall Street is still looking the Fed to start tapering its bond purchases this year, but opinion is split on exact timing.
    • In addition, there are questions about what will happen with issuance through the end of the year.
    • The Treasury said at the start of the month that it would keep coupon issuance steady, but could potentially cut issuance as soon as November.
    • That could ease worries about a taper tantrum.
    • J.P. Morgan said net issuance of notes and bonds will be about $1T lower in 2022 from 2021, with the Fed buying $316B in the secondary market, down from $960B, according to Bloomberg.
    • But DataTrek Research says its clients are worrying about a ramp-up in issuance that will cause a backup in yields.
    • Either way, the effect of yields will likely be negligible, with the correlation between issuance and yields long gone, DataTrek says.
    • "Since 2000, there is simply no tie between incremental Treasury issuance and rates," DataTrek notes. "The dollar amount of Treasuries outstanding has increased by 5-20 percent every year and rates have plumbed ever-lower depths."
    • "US money velocity (GDP/M2 money supply) peaked 2 decades ago, as we’ve recently discussed, going from a high of 2.2x in 1997 to 1.1x today. The money created by Treasury issuance post-2000 has not had the same impact on economic growth, and therefore inflation, as before that year. Lower levels of inflation mean lower Treasury yields, which explains the lack of a post-2000 relationship between issuance and yields."
    • The impact that bond yields are having on stocks has never been greater.


  17. Phil,

    Thanks for the candidly jovial thoughts on sports betting and guns. Just trying to identify a few stocks/areas that would hold up in a lockdown and/or market downturn (assuming Powell eventually grows a pair).   


  18. South Lake Tahoe is being evacuated Phil.


  19. I know.  It's amazing how little we are able to do to stop a fire.  Like I said, there's only one major road for them with a north and south exit from the basin so not worth taking chances.  

    KCRA 3's Lysee Mitri confirmed that flames have jumped east of Highway 89 by Echo Summit.

    Another resident told KCRA 3 said he was packing after hearing about Sunday night's evacuation warning when he heard his neighbors knocking on his door saying those warnings were upgraded to an order. He's among the thousands stuck in gridlocked traffic, hardly making any progress in leaving.

    "Now we're just waiting all to get out … but what can you do?" he said. "Feels like an hour and I maybe made it five inches."

    The Caldor Fire, which ignited Aug. 14 near Little Mountain between Omo Ranch and Grizzly Flats, has burned at least 186,568 acres, or 276 square miles, and containment has dropped to 15%, as of Monday evening, Cal Fire said. On Sunday, there was 19% containment reported.