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Taper-Free Thursday – Evergrande Who?

Traders have short memories but – WOW!  

China Evergrande Group, until recently the world’s largest property developer, owns dozens of stalled sites like Sunny Peninsula in Guangzhou – all across China. Buckling under more than $300 Billion in liabilities, the company is close to collapse, leaving 1.5 million buyers waiting for finished homes and leaving it's lenders on the verge of insolvency as well.  Furious retail investors who helped fund Evergrande’s expansion have turned up at the company’s Shenzhen headquarters to complain about delayed repayments on wealth management products it sold.

Evergrande is China’s largest issuer of high-yield dollar-denominated bonds, and bills are coming due to an array of banks and suppliers. Given its footprint in the housing market, there’s also a risk of a disorderly collapse triggering a broader decline in property prices—bad news in an economy where 27% of loans are for real estate.

China may be willing to let Evergrande fail if it thinks it can engineer a soft landing for the real estate sector. The $56 Trillion domestic financial system is dominated by state-owned lenders, which give the government extensive power both to squeeze borrowers and to manage the impact of defaults. But the stakes are enormous. When industries such as construction and property services are included, real estate accounts for at least 15% of the nation’s gross domestic product, and more than 70% of urban China’s wealth is stored in housing. 

relates to Evergrande Debt Crisis Is Financial Stress Test No One WantedAt the end of 2016, the ruling party’s Politburo unveiled a new slogan: “Houses are for living in, not for speculation.” One policymaker complained the following year that the economy was being “kidnapped” by the housing sector.  Since then, China has changed the rules to discourage housing speculation and that, unfortunately, is what Evergrande built their business on.  They have attempted to build more low-cost housing – but there are entire luxury projects that sit half-started and abandoned – like this soccer stadium in Guangzhou.

China's landscape is littered with projects like this that have ground to a halt and it's not just affecting the financial market but also the commodities market as all that copper, iron, steel and lumber are not going to be used after all and, since Chinese builders usually secure supplies in advance – all that supply will hit the market again via bankruptcy sales – competing with the new materials the miners are trying to sell.

That's one of the reasons the Fed did not tighten anything yesterday – we may be walking headlong into another global liquidity crunch.  This is very much like 2008, when a few property and banking defaults overseas were NEVER going to affect the US markets, were they?  Brazil's Central Bank, on the other hand, has just raised rates for the 3rd consecutive meeting, now 6.25% as inflation in that country is at 10% and they are promising to raise rates yet again at the next meeting.

The Brazilian economy is further reopening as the pandemic eases in the country.  Brazil’s seven-day rolling average for virus-related deaths has fallen below 600 (about 1/2 of what the US suffers daily), compared with roughly 3,000 in April.  Meanwhile, Brazil's economy is picking up so tightening is not a death-knell for the economy – it's just an end to the Free Money Party the markets have been enjoying and not every Government runs themselves for the benefit of the Top 1%. 

EWZ is Brazil's ETF and makes a nice play down here.  The Jan $31 ($3.75)/34 ($2.15) bull call spread is only net $1.60 on the $3 spread and you could buy 10 of those for $1,600 and sell 5 of the 2023 $25 puts for $3 ($1,500) and then you'd have net $100 in the $3,000 spread with $2,900 of upside potential and your worst case is owning 500 shares of EWZ for net $25.20, which is $8.15 (24%) below the current price.  Aren't options fun?

Wednesday March 11, 2020 – mackaycartoonsOur own Fed is refusing to take their foot off the gas, despite the US coming into a very sharp curve in the road with inflation hovering around 10% into the Holiday Shopping Season.  At least we are out of the house, right?  U.S. retailers will face an extra $223Bn in costs of goods sold this holiday season, Salesforce predicts, which include year-over-year jumps in the costs of freight, manufacturing, and labor.  Raw material shortages, logistics barriers, and challenges in the labor market, in which workers fight for better pay and the digital economy uproots traditional roles, have put a strain on retail operations and, consequently, on consumer shopping experiences.  

According to Salesforce's Shopping Index Data, the Average Selling Price (ASP) for merchandise in discretionary categories, such as apparel, footwear, and furniture, spiked by 11% over Q2 2020. This is by far the largest increase ever seen in their data. Average Order Value (AOV) was up 17% year-over-year, while the number of units consumers purchased decreased by 1% – so consumers are getting less stuff for more money, overall.  From the Report:

Simply put, consumers are spending more on fewer items. As retailers fight for wallet share among experiential categories such as travel, entertainment, and dining, the value of the dollar is becoming even more strained.  Consumers face rising prices across all sectors of the economy, which may impact consumer confidence over time. 

The global shipping process is being slowed not just by delays, but also by steep prices. While Home Depot is renting its own cargo ships and Walmart is pre-buying containers, this is not realistic for most brands and retailers. Container prices and capacity, along with labor issues, is causing a glut at the ports that is adding costs and lead time to inbound shipments. We predict U.S. companies will spend $163 billion more on ocean freight in the second half of 2021 than they did in the second half of 2020, roughly tripling their costs from the same period last year. With prices this high, we expect that some larger companies will turn to air freight as an alternative.

In total, we predict that the retail industry will see an additional $223 billion in the cost of goods sold this holiday season. While we forecast that year-over-year consumer prices will continue to rise by an additional 8% to 10% each quarter, suppliers and retailers should plan for incremental margin hits with inflationary pressures. 

As I noted in yesterday's Webinar, we will be paying very close attention to Conference Calls and Guidance in the upcoming earnings reports – especially from the retailers.  The Retail ETF (XRT) is still hovering at it's highs and makes a very nice short below the $95 line – with tight stops above.  This is more than double where it was in Christmas of 2019 and, even last Christmas, the index was only at $64 – what on Earth can justify this move?  

The XRT March $100 ($11)/90 ($5.50) bear put spread is net $5.50 (10 for $5,500) on the $10 spread and you can whittle away at that cost by selling 3 Nov $90 puts for $2 ($600) and 3 Nov $100 calls for $1.60 ($480), which would drop the net to $4,520 with $5,480 (120%) upside protential if shopping disappoints.  If the first short sale goes well, we can sell subsequent months as well.

Meanwhile, 4,400 is the strong bounce line on the S&P off our recent dip so we'll see how we close out the week tomorrow.


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  1. Good Morning.

  2. Florida makes quarantine optional for exposed students

  3. Going Big and Fast on Renewables Would Save Trillions in Energy Costs

  4. Good morning!

    We're popping right up at the open, well over the strong bounce lines:


    Oil is flying too:


    U.S. natural gas inventory build in line with estimates

    Gold, silver dip into the red as risk-on sentiment rises



    Dollar down 0.5% is most of the story and that's due to the easy Fed.

    Kansas City Fed composite index +22 in September


    • September Kansas City Fed Composite Index+22 vs. prior +29 in August.
    • Manufacturing Index +10 vs. +22 prior.
    • “The pace of regional factory activity growth eased slightly but remained positive,” said Wilkerson. “Many firms continued to report rapid increases in input prices, difficulties hiring workers, and supply chain delays. However, production remains considerably higher than a year ago, with the most positive expectations for production in almost 20 years.”

    Global 'debt trap' will keep Treasury yields down – Hoisington Investment Management

    • BP (BP +2.1%) says it has temporarily closed some of its U.K. gasoline stations due to supply chain delays caused by an industry-wide shortage of truck drivers.
    • "We are experiencing some fuel supply issues at some of our retail sites in the U.K. and unfortunately have therefore seen a handful of sites temporarily close due to a lack of both unleaded and diesel grades," BP says.
    • BP was responding to an ITV News report that the company may ration gasoline deliveries to its 1,200 gas stations in the U.K. due to a truck driver shortage, and quotes the company's head of U.K. retail as "expecting the next few weeks to be really, really difficult."
    • The decision exacerbates the U.K.'s serious energy and supply chain crisis in the country, and natural gas prices in Europe have been hitting all-time highs.



    • Stocks are holding onto solid gains, with the broader market now higher for the week. But bonds are selling off sharply, with the market perhaps not so sanguine about the Fed's tilt to tapering.
    • The Treasury yield curve is steepening again, with a surge in Gilt yields in the UK also reflecting concerns about the punch bowl going away.
    • The 10-year Treasury yield is up 7 basis points to 1.4%, having hit 1.41% earlier, the highest level since mid-July.
    • The U.S. dollar and gold are also falling.
    • The S&P (SP500) +1.3% is now in the green for the week after starting with three days of losses. It's also back above its 50-day moving average, which had been a solid level of support.
    • The Nasdaq (COMP.IND) +0.9% is rising. The Dow (DJI) +1.6% leads the major averages thanks to a big price jump in Salesforce on higher revenue outlook.
    • Ten out of 11 S&P sectors are higher, led by cyclicals. Energy and Financials are at the top.
    • Real Estate is the only decliner.
    • One shop argued earlier today that yields will stay lower for longer due to a global debt trap.
    • Volvo Cars (OTCPK:GELYF -8.8%) says that all new fully electric vehicle models will be leather-free in the latest auto manufacturer sustainability move.  The company plans to offer only electric vehicles by 2030.
    • By 2025, Volvo aims to be supplied only by companies using 100% renewable energy and have all new cars contain 25% recycled and bio-content material like the Volvo-designed Nordico, a new interior material made from PET bottles, forest bio-material, and wine corks.
    • “Being a progressive car maker means we need to address all areas of sustainability, not just CO2 emissions,” said Director of Global Sustainability Stuart Templar. Livestock is estimated to be responsible for around 14% of global greenhouse gas emissions from human activity, with the majority coming from cattle farming.
    • Other car models, such Tesla's (TSLA -0.3%) model 3, have also shifted towards using leather-free interiors.
    • Volvo cars is exploring a separation from parent company Chinese Zhejiang Geely Holding Group through an IPO.



    • Rite Aid (RAD -7.5%reports revenue surge of 2.2% to $6.11B, the increase was driven by growth at the Retail Pharmacy Segment, partially offset by a decline at the Pharmacy Services Segment.
    • Adjusted EBITDA of $106.2M vs. $151.6M.
    • Adjusted net loss from continuing operations of $22M, or $0.41 EPS, and Adjusted EBITDA from continuing operations of $106.2M, or 1.7% of revenues.
    • For FY2022, total revenues are expected to be between $25.1B-$25.5B vs. consensus of $25.13B and adjusted net loss per share is expected to be between $0.90-$0.53 vs. consensus loss of $3.06 and prior outlook of -$0.79 to -$0.24, capital expenditures $300M.
    • CEO Heyward Donigan comments, "We also amended and extended our revolving credit facility, successfully extending the maturity out to August 2026 as we continue to enhance our financial flexibility to deliver on our RxEvolution strategy."
    • A comparative study of stock performance during the quarter in company presentation.

    • Virgin Galactic (SPCE +1.4%announced that veteran human resources executive Aparna Chitale will join as chief people officer, effective Sep.30.
    • Chitale brings 20+ years of strategic experience at multi-national organizations, where she has scaled and led global teams at both public and privately held companies.
    • Most recently, she served as VP, Human Resources at Disney Parks Experiences and Products.
    • August Leading Indicators: +0.9% to 117.1 vs. +0.6% consensus and +0.8% prior (revised from +0.9%).
    • Coincident Economic Index: +0.2% to 105.9.
    • Lagging Economic Index: +0.1% to 106.3.
    • The LEI continues on a "rapidly rising trajectory," said Ataman Ozyildirim, senior director of Economic Research at The Conference Board.
    • "While the Delta variant — alongside rising inflation fears — could create headwinds for labor markets and the consumer spending outlook in the near term, the trend in the LEI is consistent with robust economic growth in the reminder of the year. Real GDP growth for 2021 is expected to reach nearly 6.0 percent year-over-year, before easing to a still-robust 4.0 percent for 2022," Ozyildirim said.
    • September U.S. PMI Composite Flash54.5 vs. 55.5 consensus and 55.4 prior.
    • Manufacturing PMI: 60.5 vs. 60.8 consensus and 61.1 prior.
    • Service PMI: 54.4 vs. 55.1 consensus and 55.1 prior.
    • Private sector output growth hampered by severe supply chain hold-ups and capacity shortages
    • Jim Grant, founder and editor of Grant's Interest Rate Observer, said Thursday that the Federal Reserve's accommodative policy is creating "great, if pleasant" financial instability by driving up asset prices and encouraging speculation.
    • Speaking to CNBC, Grant predicted that the Fed's current stance "will end in drama" and will "not end pleasantly for the holders of speculative assets."
    • On Wednesday, the Fed announced the results of its latest regularly scheduled policy meeting, keeping interest rates near zero and maintaining the pace of its asset-purchasing program.
    • However, the central bank did hint at a coming taper, saying if economic progress continues, it would start cutting back on the pace of purchases of Treasury bonds and mortgage-backed securities.
    • Grant, who has long advocated for the Fed to pull back on its accommodative policy, was unimpressed by signs that the central bank would begin to reduce its asset purchases.
    • "By tapering, the Fed means it will become, perhaps, slightly less accommodative. It does not mean it will remove accommodation, let alone tighten," he said.
    • Grant proposed that the Fed be regulated like a bank, following some of the same rules it imposes on other financial institutions.
    • To underline his argument, the famed market watcher pointed to figures suggesting that the Federal Reserve Bank of New York was leveraged at a ratio of more than 300 to 1. Meanwhile, JPMorgan Chase, as an example of a typical bank, showed a ratio of 13 to 1.
    • To get an idea of how Fed Chair Jerome Powell views the economic situation, dive into the details of the press conference he held in the wake of the central bank's policy announcement.

    • Chinese financial regulators instruct China Evergrande (OTCPK:EGRNF) to focus on completing unfinished development projects and repaying individual investors and at the same time avoid near-term default on dollar bonds, Bloomberg reports.
    • The regulators told the property developer that it should communicate proactively with bondholders to avoid a default, but didn't give specific instructions, a person familiar with the matter told Bloomberg.
    • Evergrande (OTCPK:EGRNF) has $83.5M in interest due on Thursday, with a 30-day grace period for making the payment. On Wednesday, the company's Hengda Real Estate unit said it would make a CNY 252M ($35.9M) interest payment on time today.
    • In Hong Kong trading, China Evergrande shares closed up 0.3%.
    • Meanwhile, the Wall Street Journal, citing official familiar with discussions, says that Chinese authorities are telling local governments that they should prepare for a potential collapse of China Evergrande (OTCPK:EGRNF).
    • While the government's giving no indications it will bail out the developer, local governments are being told to put together groups of accounting and legal experts to analyze finances around Evergrande's operations in their regions and prepare to have local state-owned and private property developers take over local real-estate projects.
    • Also, they're being asked to set up law-enforcement teams to monitor public unrest over the Evergrande turmoil.
    • Earlier, Evergrande stock up in Hong Kong, but off highs as PBOC injects $18B 

  5. STP:  Value Change Today:$-12,159

    LTP: Value Change Today:$15,885

    Not so bad….

  6. Look what the Fed did for the Banksters:

    There's another index that can be shorted.  SKF is a 2x Ultra-Short Financial at $9.28 and the Jan $8 calls are $1.50 so let's buy 20 of those in the STP for $3,000.

  7. So, Phil, we are trading for a potential fall in interest rates?  The premium is just .32 and we think what is going to happen? 

  8. Phil, what do you think of FDX at these levels?


  9. Banks Race to Assure Markets Evergrande Exposure Is Limited

  10. on a different matter one could buy INTC for the dividends and sell the 2024 $55 calls and sell the $45 puts and if all goes well make 16% annually if you include the divys.   Same return for GOLD with the 20 calls and 17 puts. 

  11. The mess Merkel leaves behind

  12. Banks/Stock – No potential spillover from Evergrande along with eventual Fed tightening.

    FDX/Harip – I think it will be a busy holiday but they'll have trouble getting workers, etc.  Probably take some hit in margins but I'm sure that's baked in because they warned there were issues ahead.  $230 is $61Bn and they're making $5.2Bn this year after making $1.3Bn last year (love that) and maybe on a path to $6Bn next year but we have to consider a lot of this is pandemic-related as 2018 was "only" $4.5Bn. 

    Still very solid here and you can sell FDX 2024 $180 puts for $19.50, which nets you in at $160.50 and THAT would be a great price, another $70 (30%) below the current price so let's sell 5 of those in the LTP for $9,750.

  13. Phil// Why is GOLD dropping when the dollar is also dropping?  I thought down dollar is good for gold.  I have Jan 22 13/17 BCS.  I have rolled my long $13 calls from Jan 22 to March $22 for 3 cents.  Should I be doing more now since GOLD is down? I also have Jan 23 18/25 BCS.  Should I roll the $18 long calls to $15 or leave it as it is?  Thanks.

  14. Gold/Rookie – Hard to say exactly but money flowing back to stocks is coming out of alternate assets like gold but this is a surprising drop back to $1,750.  Still in the long-term, consolidating over $1,700 remains healthy as it's a run from $1,200 to $1,800 so $600 and that makes $120 a weak retrace ($1,680) – so we're not even there yet.  

    GOLD, of course, is just following Gold down:

    I wouldn't keep playing it month to month but if you have short $17s, when they expire, see how much more money you can add and use it for the next roll down.

    Strong finish across the board.