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Toppy Tuesday – S&P 4,700 and Bust?

Despite S&P 500 rally, only 16% of members are at 52-week highs16%.

That's the percentage of S&P 500 stocks that are trading at their 52-week highs while the index itself is at a record 4,700.  That is historicially narrow participation, the kind that often precedes a correction.  If you think about it, since ETFs rule these days – the S&P 500 rally SHOULD be the rising tide that lifts all ships but what's really happening is the Banksters, who along with their Top 0.1% clients own 80% of all equities, are manipulating the heavily-weighted stocks to prop up the indexes while they are dumping the bulk of their over-priced holdings – just like they do at the end of every rally.  It's their job

In the Fed's 85-page Financial Stability Report published moments after the market close yesterday, the Fed warned that as Bloomberg put it, "prices of risky assets keep rising, making them more susceptible to perilous crashes if the economy takes a turn for the worse" adding that “asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall."  You know, what I've been saying all summer but now it's from the Fed – so people might listen.

As noted by Zero Hedge:

The Fed's full view of the current level of vulnerabilities is as follows:

  1. Asset valuations. Prices of risky assets generally increased since the previous report, and, in some marketsprices are high compared with expected cash flows. House prices have increased rapidly since May, continuing to outstrip increases in rent. Nevertheless, despite rising housing valuations, little evidence exists of deteriorating credit standards or highly leveraged investment activity in the housing market. Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall.
  2. Borrowing by businesses and households. Key measures of vulnerability from business debt, including debt-to-GDP, gross leverage, and interest coverage ratios, have largely returned to pre-pandemic levels. Business balance sheets have benefited from continued earnings growth, low interest rates, and government support. However, the rise of the Delta variant appears to have slowed improvements in the outlook for small businesses. Key measures of household vulnerability have also largely returned to pre-pandemic levels. Household balance sheets have benefited from, among other factors, extensions in borrower relief programs, federal stimulus, and high aggregate personal savings rates. Nonetheless, the expiration of government support programs and uncertainty over the course of the pandemic may still pose significant risks to households.
  3. Leverage in the financial sector. Bank profits have been strong this year, and capital ratios remained well in excess of regulatory requirements. Some challenging conditions remain due to compressed net interest margins and loans in the sectors most affected by the COVID-19 pandemic. Leverage at broker-dealers was low. Leverage continued to be high by historical standards at life insurance companies, and hedge fund leverage remained somewhat above its historical average. Issuance of collateralized loan obligations (CLOs) and asset-backed securities (ABS) has been robust.
  4. Funding riskDomestic banks relied only modestly on short-term wholesale funding and continued to maintain sizable holdings of high-quality liquid assets (HQLA). By contrast, structural vulnerabilities persist in some types of MMFs and other cash-management vehicles as well as in bond and bank loan mutual funds. There are also funding-risk vulnerabilities in the growing stablecoin sector.

The report also detailed how near-term risks have changed since the May 2021 report based in part on the most frequently cited risks to U.S. financial stability as gathered from outreach to a wide range of market contacts. As the Fed cautions "despite recent improvements, an increase in uncertainty over the course of the pandemic might pose risks to asset markets, financial institutions, and borrowers in the United States and globally. In addition, stresses in the real estate sector in China caused in part by China’s ongoing regulatory focus on leveraged institutions, as well as a sharp tightening of global financial conditions, especially in highly indebted emerging market economies (EMEs), could pose some risks to the U.S. financial system. If realized, the effects of near-term risks could be amplified through the financial vulnerabilities identified in this report."

Meanwhile, Lisa Shalett, who is the CIO of Morgan Stanley, said yesterday: "We are concerned that Fed policy is divorced from the fundamentals."  MS is, of course, one of the Federal Reserve's Member Banks.  The difference between the Fed Funds Rate and the Consumer Price Index, which measures inflation, is the largest ever, the Morgan Stanley Wealth Management note shows.   

Risks of a market bubble are growing,” Shalett said. She suggested that investors “watch labor market data, valuations on 2022 forward earnings and fear/greed positioning gauges, which are closing in on extreme overbought conditions.”  Clearly she's read yesterday's PSW Report…  “Stocks continue to be stoked by excess liquidity and the Fed’s dovish rhetoric about rate hikes,” Shalett wrote. It’s “a dynamic that rewards devotion to passive investing in the S&P 500 index” and its highly-valued largest constituents, “which depend on a low-rate regime.  Negative real rates bolster long-duration and growth-oriented assets,” she said, “but contribute to asset bubbles and the misallocation of capital.”

In other words:

"Nothing is more securely lodged than the ignorance of the experts."

"The more the state "plans" the more difficult planning becomes for the individual."

"I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments."

Friedrich August von Hayek

 


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  1. Storied General Electric to split into 3 public companies


  2. Good Morning.


  3. Good morning!

    We are still in what you would call an "uptrend":

       

    Keep an eye on the VIX – there are signs people are getting worried.

     

    If Oil (/CL) tests $85 it's a short but maybe $85 on /BZ can be shorted on /CL too.  /NG is a long if $5 gets hit again – tight stops below.   We should at least get an 0.20 bounce (weak).

        

  4. Good morning. So Phil, since so many of the insane valuation stocks are not in the index, what's the best way to capture a correction. We know they will fall really hard with panic selling. We need an ETF with these high flyers. I'm accumulating SQQQ but wonder if  it captures these high flyers. I'm reluctant to pick individual names but maybe an idea to pick a few shortable high flyers we think will get hammered.. maybe our own etf proxy. 


  5. I see so many Reddit posts with newly minted millionaires and wannabe's with a YOLO mentality throwing life savings at the high flyers. They are bidding up with no regard. My gut tells me there's going to be a lot of broke youngsters when the casino music stops. It's very unfortunate as they are sucked into this market thinking it'll never stop which I get. I feel for them. 


  6. Nov. 09, 2021 9:36 AM ET3 Comments

    • Federal Reserve Chair Jerome Powell said Tuesday that the central bank will look beyond headline numbers to determine when it has reached its goal of maximum employment.
    • Speaking at a central bank conference on diversity and inclusion, the Fed chief argued that a wide variety of statistics are needed to tell whether economic strength has provided a benefit to everyone.
    • "While monetary policy does not target any particular group of people, when we assess whether we are at maximum employment, we purposely look at a wide range of indicators, and we are attentive to disparities in the labor market," Powell said in a pre-recorded video presentation.
    • The Fed chair did not comment directly on current monetary policy but his remarks played into a common theme he has struck recently when explaining the need for further stimulus, despite strong economic growth and signs of inflation.
    • In Tuesday's speech, Powell emphasized that he will apply a broad definition to the concept of "maximum employment," as presented as part of the central bank's monetary policy mandate.
    • "It was with this in mind that my colleagues and I on the Federal Open Market Committee, as part of last year's update to the Fed's monetary policy framework, defined maximum employment as a broad and inclusive goal," he noted.
    • Several high-profile Fed officials have made comments this week, suggesting that policymakers remain split on how aggressively the central bank should respond to the lingering inflation threat.
    • Federal Reserve Bank of Chicago President Charles Evans gave a relatively dovish outlook, saying that the economy will likely see "a low rate environment for some time to come."
    • Meanwhile, St. Louis Federal Reserve Bank President James Bullard provided a more hawkish view, predicting two rate hikes in 2022.

    TSLA -7.79%Nov. 09, 2021 9:36 AM ET19 Comments

    • Tesla (TSLA -0.2%) reports China-made electric cars sales slipped 3% M/M and +348% Y/Y to 54,391units in the month of October - Reuters.
    • In September, the company sold 56,006 China-made cars, +26.5% from 44,264 units in August.
    • Tesla (NASDAQ:TSLA) exported 40,666 China-made vehicles in the month of October,  vs. 3,853 in September.
    • Local deliveries were 13,725 cars, down 74% from September.
    • China's passenger vehicle sales squeezed 14% Y/Y to 1.74M units for the month.
    • Chinese EV giant BYD (OTCPK:BYDDF) reported October EV sales of 88,898 (+90% Y/Y).
    • In October, Li Auto delivered 7,679 cars, Xpeng sold 10,138 vehicles and Nio delivered 3,667 units.
    • The company opened its 1,000th Supercharger station in Mainland China and built a new R&D center in Shanghai during the month.
    • The company is also said to be looking at using second factory site in Shanghai.
    • The EV maker, has posted record revenue and profit in Q3. Produced 237,823 vehicles in Q3 (+64% Y/Y) and delivered 241,391 vehicles (+73%).
    • The company's shares slipped yesterday after Elon Musk initiated a Twitter poll to sell 10% of his stake.

    IGT +0.56%Nov. 09, 2021 9:11 AM ET

    • International Game Technology (NYSE:IGT) reports Q3 consolidated revenue of $984M, up 21% compared to last year, beats consensus by $3M.
    • Bifurcating revenue: Global Lottery revenue rises 14% to $652M, as sustained momentum drives 9% global same-store sales growth.
    • Global Gaming revenue of $289M, up from $216 million in the prior year and $274M sequentially as market recovery progresses.
    • Digital & Betting revenue increases 37% to $43M, with double-digit growth across activities.
    • Operating income of $212M, up 144% prior year.
    • Net interest expense of $79M compared to $101M.
    • Adjusted EBITDA of $407M compared to $287M.
    • Adjusted EBITDA margin of 41%, highest in company history.
    • Total liquidity of $2.2B as of September 30, 2021.
    • Net debt leverage improves to 3.8x from 6.4x at December 31, 2020; net debt reduced by $1.2B year-to-date
    • Raised FY Outlook: Revenue of ~$4.1B; Updated operating income outlook to ~$900M from ~$800M; Cash from operations of ~$850M-$900M; Capital expenditures below $300M.
    • GAAP EPS of $0.31 beats consensus by $0.22.
    • Previously: International Game Technology EPS beats by $0.22, beats on revenue (Nov. 9)

    Woops, little dip to start our morning! 

    Wasn't data – Just stilling hard at the open.  Thank goodness as I still have those /ES shorts…



  7. High flyers/Jeddah – Maybe this will help.  I like to short specific stocks, not indexes but that can be painful (CMG):

    As with any other portfolio spreads we take – I don't see the need to take risks since we can make nice, conservative plays – like betting the Nasdaq falls 10%, and leverage our options to pay us 300% on that drop.  Why mess around looking for volatile positions when a simple index short can make you a fortune?  

    Here's what we have in the STP at the moment:

    W Short Put 2022 21-JAN 260.00 PUT [W @ $251.36 $7.16] -5 3/15/2021 (73) $-21,000 $42.00 $-14.15 $-76.37     $27.85 - $7,075 33.7% $-13,925
    W Short Call 2021 19-NOV 340.00 CALL [W @ $251.36 $7.16] -3 6/17/2021 (10) $-9,450 $31.50 $-30.75     $0.75 $0.35 $9,225 97.6% $-225

    CMG Long Put 2022 21-JAN 1,500.00 PUT [CMG @ $1,805.08 $5.17] 5 4/19/2021 (73) $69,020 $138.04 $-128.39 $94.86     $9.65 - $-64,195 -93.0% $4,825
    CMG Short Call 2023 20-JAN 1,800.00 CALL [CMG @ $1,805.08 $5.17] -2 7/21/2021 (437) $-51,876 $259.38 $2.42     $261.80 $1.74 $-484 -0.9% $-52,360
    CMG Short Call 2022 21-JAN 2,000.00 CALL [CMG @ $1,805.08 $5.17] -3 9/16/2021 (73) $-23,109 $77.03 $-57.83     $19.20 $-2.55 $17,349 75.1% $-5,760

    Both of these we considered way too overvalued but we'll need a hell of a fall to get our put money back on CMG though the short calls have been a lot more successful (this is just the most recent).  

    Don't confuse hedging with betting.  




  8. Rolls-Royce secures £450m for mini nuclear reactors venture


  9. Good morning 


  10. A letter to the editor worth sharing (LA Times)…

    To the editor: The use of the word "liberty" as an excuse to flout the well-being and health of other citizens is appalling. Many on the right are now using that word and perverting its meaning.

    They need to understand its true definition, as explained in the French Constitution of 1793. I quote from Article 6:

    "Liberty is the power belonging to man to do all that does not harm the rights of others: its principle is nature; its rule, justice; its safeguard, the law; its moral limits are in this maxim: do not do unto another what you would not have done to you."

    I submit that men and women who use that word to justify their bad behavior have bastardized its true meaning.

    Richard Marcus, Los Angeles


  11. Phil/STP I have cashed out a lot of winners but still need some Stp. could you suggest tza or sds shorts to hedge about 100k unrealised profit? TIA


  12. Phil,

    Any trade you recommend on IBM; thinking of selling 2024 $105P; believe KD is the spun off legacy business, IBM is the RedHat cloud business. 

    Thanks as always on your help.


  13. Phil / TZA / STP

    Would you recommending adjusting the $30 – $50 spread we have in the STP with TZA at $22.60 today?


  14. Phil:  I have F Jan 23 and Jan 24 10/15 and 10/20 spreads.  The Rivian IPO starts trading tomorrow.  F stands to make at least $7 billion on its Rivian shares given the pricing of the IPO.  This has built a fair amount of froth into F shares.  F may continue to pop depending on how Rivian trades.  From a butterfly portfolio perspective, what short calls would you sell right now above the spread?   Thanks.


  15. Liberty/1020 – True.

    Barely over 100 years ago.  

    Hedges/Stuart – Good time to look at the STP, actually:

    In our 10/12 review, we decided we had $444,725 in protection so we're pretty comfortable but, if the protection kicks in at 20% and we're up 5% since – then we have less protection now than we thought.   STP was $128,727 then and $117,504 now so down $11,000 but LTP way more than made up for it so good this month.

    Given the sharp drop in SQQQ, that's going to be my choice for a hedge with the 2023 $5 calls now $2.44 with SQQQ at $6.29 so only $1 in premium and a 20% drop is a 60% pop to $10 so that's our spread.   So, as a new hedge, I would go for:

    • Buy 150 SQQQ 2023 $5 calls at $2.45 ($36,750)
    • Sell 75 SQQQ 2024 $10 calls for $1.50 ($11,250) 
    • Sell 100 SQQQ March $10 calls for 0.50 ($5,000) 
    • Sell 50 SQQQ 2024 $5 puts for $1.25 ($6,250) 

    SQQQ is probably going to be reverse-split soon so expect to have to make adjustments.  The net of the spread is $14,250 on the $75,000 spread so $60,750 worth of protection on a 20% drop in the Nasdaq but the basis can be reduced by selling more calls when the March calls expire.  Worst case is the market goes up and up and you have to buy 5,000 shares for $25,000 plus the loss on the spread so make sure you'll make more than that in a rally and all should be well.

    Our QCOMs are going great but we're getting burned on AVGO but we can roll the 2 short Jan $500 calls at $65 ($13,000) to 3 short March $550 calls at $41 ($12,300) when the premium is gone so not worried at all so far.  

    IBM/Jasu – Sure, we just picked IBM for the LTP.

    TZA/Jij – Of course in our next review we'll adjust if we need to.  

    F/John – F only makes $4-7Bn a year so this is a very significant amount of money for them but a one-time even so I'd give them a 20% boost over normal 15x value but $80Bn is 10x so they could be good for 50% from here – which would then be a good short.  Why are you in a hurry to sell?  This is all bonus money.  If it makes you feel better, sell maybe 1/4 of the March $20s but you may get burned on them if $20 holds and they begin moving higher, so I'd keep stops on – just in case.  


  16. Ouch:

    Consistent messaging.

    And boy is it good to be a Kleptocrat in the USA:

    The Four-Sentence Letter Behind the Rise of Oxycontin | Center of Alcohol &  Substance Use Studies

    New questions about old Canadian study foreshadowing opioid crisis | CBC  News


  17. jeddah - TSLA wiping out some of those YOLO fortunes in a single day, perhaps


  18. Bio – bet so. For each bazillion'are on Reddit there's the countless silent wipeouts. some brave enough to post losses of 100k+ and their stories. A lot of it is very short term directional option bets which blows me away to see that much money expire worthless in 60 days.  


  19. speaking of those (a very short term directional bet), SPY 453 puts expiring Friday seem cheap at 13 cents. I mean, a market can't go down 3%?


  20. TSLA/BDC – Wow, doesn't take much to pop these bubbles, does it?

    As to SPY, I wouldn't make those kinds of bets at this point.   Anything can happen – up or down.  


  21. I'm remembering the 2018 Xmas bear market right now. If we get one of those I want to be very directionally bearish


  22. Look at poor PTON:

    That's all it takes, for the mood to change and suddenly silly things like earnings and guidance begin to matter and, in these thinly traded markets – it's a disaster when selling volume picks up and can't find any buyers.

    AMZN is having a nice day, however, trading at 70x forward earnings again.  This is $1.75Tn at $3,573 and this year they should make $21Bn so that's 83x current earnings with great expectations of $27Bn next year just to get to 70x:


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

    https://attendee.gotowebinar.com/register/6575327343173449741