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Which Way Wednesday – Fed Edition

Bad News Threatens To Delay Fed's Taper Plans. What Will Powell Do?To taper or not to taper? 

That is the question today as the Fed makes their next rate announcement at 2pm and we'll hear from Chairman Powell at 2:30.  A rate hike seems out of question but tapering the Fed's $120Bn monthly bond and asset purchases is very much on the table and it's almost a certainty that the Fed will cut their monthly easing down to $110Bn and see how that goes.  Just yesterday, our Government sold $24Bn worth of 20-year notes and the Fed, did in fact, buy most of them.

$4Tn worth of Treasuries are being sold in 2021 and that number will rise if the Government passses another stimulus bill.  Some of that is rollover debt but $3Tn of it is our current deficit for the year and we've hit the debt ceiling, which is why it hasn't grown this quarter but Congress is working hard to extend it, so we can go 4 or maybe $5Tn into debt in 2021 – which would be bigger than the entrie GDP of any other country on Earth besides China.  

$5Tn is also 1/4 of our own entire GDP which means 25% of our economy is deficit-funded.  How long can that really last?  Much longer than we ever dreamed is already the answer and will there ever be any consequences to our now $30Tn in total debt – that's a question we don't really ever want to know the answer to.

We'll see what Powell and the Fed have to say this afternoon but, meanwhile, on Capital Hill, the Democrats are pushing to raise or at least suspend the Debt Ceiling as we have 30 days before we default on our own loans, not to mention the overall Government shutdown.  With Republicans firmly against anything that allows a Democratic Government to run – the best we can hope for at the moment is an extension through December 3rd.  

The GOP is also holding up Disaster Relief for Wildfires, Hurricanes and $6.3Bn needed to help resettle the people who fled Afghanistan along with the US Army.  The 2019 bipartisan debt ceiling deal was approved by both parties and the Trump administration in conjunction with increased budget caps on regular domestic and military spending but this time it's different because a Democrat is in charge so the Republicans suddenly care about debt again ($8Tn later).  

BitCoin crashed below $40,000 and a Treasury committee of Bond Dealers and Investors have warned Secretary Yellen that there are "dire risks to the financial system if Congress fails to lift or re-suspend the debt limit."

“If left unresolved, this situation would put the U.S. government at risk of missing debt payments — an outcome that would have severe consequences for the U.S. Treasury market and, ultimately, for the U.S. economy,” Beth Hammack, chair and Brian Sack, vice chair of the Treasury Borrowing Advisory Committee wrote in the letter posted on the Treasury’s website. “Even if default were avoided, continued negotiations over the debt limit could cause needless volatility, create additional operational expenses for market participants, and do lasting damage to the Treasury market.”

“We encourage you to continue working with Congress to raise, suspend, or eliminate the debt ceiling immediately,” Hammack and Sack wrote. “To default would be unthinkable, but even to risk that outcome would be reckless and irresponsible.”

Something else for the market to ignore?

 


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  1. The Evergrande Troubles





  2. Phil / RIO – Getting hit pretty hard o just closed out my 88 short caller …   I have 800 Sh lookin for a short caller on this one… was looking at the April timeframe….   What do you think….  The stock tends to pop up at end of year but am nervous with China situation on metals…


  3. Good Morning.


  4. Good sunny cool morning @ 36. Is there a webinar today? Thanks-on my way out the door.


  5. Good morning!

    Indexes up ahead of the Fed so all must be well, right? 

    Of course, we need to keep things in perspective:

       

    RIO/Batman – Copper prices took a hit so down they go.  I agree with the opportunistic buy back but why re-cover so soon?   If anything, I'd ditch the shares at $67 ($53,600), which can only make $16,000 at $87 and pick up 30 of the 2024 $60 ($12)/75 ($6.75) for net $5.25 ($15,750) and sell 10 of the 2024 $60 puts for $14 ($14,000) and then you've taken $51,850 off the table and you still have a $45,000 spread that pays off at just $75 and your worst case is owning them again at a 10% lower net than you're at now.

    Webinar/Pirate – There was a technical issue Andy will hopefully resolve.  


  6. Speaking of which, Andy already fixed it earlier:

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

    https://attendee.gotowebinar.com/register/7211182613011666700


  7. Phil / RIO – Thanks for the recommendation.  

    I was holding this for the dividend…..     So don't really want to get out, unless you think the Dividend may be cut, or is at risk?   


  8. Why all this buying ahead of the FED?


  9. RIO/Batman – I think any time a company is paying a 10% dividend that's not a REIT, you have to assume the board will cut it at some point.  It's not just copper for them, iron ore pricing is way down and that's a China thing too and this won't go away overnight – most of RIO's sales come from China.  Dividends were $3.80 last year and $2 in previous years and Iron Ore was $200+ since January and now back around $120/ton – how can they not cut the dividend – it was just a bonus.

    China's Evergrande Crisis Is Just The Tip Of The Iceberg

    Buying/Stock – Don't forget the Fed is having a 2-day meeting and then the announcement.  I'm sure they leak all over the place so I guess it's a very mild taper or maybe none at all at the moment.  Keep in mind we had a bit lower inflation indicators recently and labor and housing have cooled – as well as oil prices:

    Existing-home sales slipped 2% from the prior month to a seasonally adjusted annual rate of 5.9 million, the National Association of Realtors said.

    President Biden declared “we need to go big” as he cited two challenges: vaccinating the world and solving a global oxygen crisis. At a high-stakes meeting, a CDC advisory panel is considering whether booster shots should go to most Americans or a limited few.

    “We’re not going to solve this crisis with half measures or middle of the road ambitions — we need to go big,” the president said, adding, “It’s an all hands on deck crisis.”

    But it may be hard to turn Mr. Biden’s words into reality. Less than 10 percent of the population of poor nations — and less than 4 percent of the African population — has been fully vaccinated against Covid-19. Covax, the W.H.O.-backed international vaccine initiative, is behind schedule in delivering shots to the low- and middle-income nations that need them the most.

    White House officials have said that Mr. Biden’s message to the group will be that the United States cannot fight the pandemic, or address the global vaccine shortage, on its own. Earlier Wednesday, Pfizer-BioNTech announced that it had struck a deal with the Biden administration to sell the United States an additional 500 million doses of its coronavirus vaccine, to be donated to nations that need them. Mr. Biden heralded the deal in his opening remarks.

    At a briefing held by Physicians for Human Rights earlier this week, Dr. Soumya Swaminathan, the chief scientist of the World Health Organization, sounded a note of urgency and issued a plea for nations to work together to distribute vaccines in a coordinated — and equitable — fashion. She also urged countries to share their excess supplies.

    “A country by country approach, a nationalistic approach, is not going to get us out of this pandemic,” she said. “And that’s where we are today.”

    History shows again and again

    How nature points out the folly of men – BOC



  10. Phil – LVS. Your still positive on them correct?  I know you've chosen BYD for LTP which I didn't get into but LVS looks enticing down here. Suspect Covid will keep a damper on them for a while so starting position with 2024 33/47 BCS for $5. Looking to sell Jan23 $30 put soon. 


  11. Is SQSP Squarespace priced for perfection? They have an effective moat with their core website business for their expansion plans to take on Shopify.


  12. Phil / Taper / interstate's rate increase possible next year….. market up – is this just some covering going on w hit this late rally?


  13. Phil:  You've mentioned RIO, what about FCX as an entry into copper.  Or do you think that it is still too high?

    Thanks.


  14. LVS/Jeddah – Macau is 42% of their operations so I'd be careful – go slowly.

    SQSP/Pmam – The went public as a direct listing and sold off hard and it's very hard to value them but $6Bn at $42.50 seems just a little extreme for a company with $800M in sales and $60M in profit.  Let's say they can double it every year to $120M and $240M – that's 2024 before they even begin to justify the current valuation so we're priced beyond perfection here and, keep in mind, they used their capital to buy Tock, which is really where the growth came from – NOT from building their own revenues and now they have $350M in debt to pay off.  As to a moat, there's WIX ($12Bn with $1.2Bn in sales and a $100M loss) and SHOP ($180Bn with $4.6Bn in sales and $800M in profit), who probably think they have a moat as well.  I'd want better evidence before investing.

    Covering/Batman – The market clearly intended to rally so this is all just an excuse but where's 4,400?  That's what matters for the weak – whether we get our strong bounce line back.

    Powell:

    "No one should assume that the Fed or anyone else can protect the markets and the economy, fully protect, in the event of a failure to make sure that we do pay those debts when they’re due."

    we have not decided to taper and we have not decided to raise..

    Evergrande situation appears to be unique to China

    The number of US corporate defaults is very low

    Image

    Powell says he doesn’t want FOMC to discuss reducing balance sheet because it would show in Minutes and might provide the wrong impression. I suppose that’s the other side of “transparency”?
     
    FED'S POWELL Q&A: RE QUESTION ABOUT SHRINKING BALANCE SHEET, NEED TO GET THROUGH TAPER FIRST, THEN CAN CONSIDER LATER; NOT TIME YET TO DISCUSS
     

    Someone needs to ask Powell if he's going to have to raise the FOMC member salaries now that you're not going to be able to get rich daytrading policy.
     
    Pushpin We can all agree the US should not default on its obligations Pushpin No one should assume the Fed can fully protect the markets or the economy in the event of a default Pushpin #Fed is very closely monitoring Wells Fargo's efforts to fix it problems
     
    *FED'S POWELL: TAPER ANNOUNCEMENT COULD COME AS SOON AS THE NEXT FOMC MEETING
     

    Powell: No one on the FOMC is happy "to be in this situation" regarding trading. AKA "We're sorry we got caught"
     
    FED'S POWELL Q&A: WILL TAKE APPROPRIATE ACTIONS ON WELLS FARGO TO ENSURE IT FIXES ITS PROBLEMS; WILL TAKE STRONG SUPERVISORY ACTIONS AS NEEDED

    Image


  15. FCX/John – They are up at $45Bn at $31.50 and they should make $4.3Bn this year so pretty good and they made $600M last year, which I like.  RIO, on the other hand, is at $104Bn at $66.50 and they made $24Bn so – better and RIO is 80% Iron Ore and 10% Copper while FCX is 80% Copper and 20% gold so a little apples and oranges.  Since Copper is clearly crazy toppy, I think there's more downside risk to FCX than RIO, as Iron has already normalized.  


  16. Speaking of normalizing:



  17. China, U.S. unveil separate big steps to fight climate change



  18. Here is the link to this week's webinar

    https://youtu.be/YPo6lEMlzWw