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Meaningless Monday Markets – 3 Day Week Begins

What's the point?  

I already can't get people to pay attention to projects this week.  We ended last wek on a high note but it was the same high note (S&P 4,708) that we hit on November 5th and Friday was the 22nd so 11 trading days with no net progress and, suddenly, we're closing out Novemer already.  The last day that SPY had 100M contracts traded was Ocober 6th and there has only been 2 days above 69M since Ocober 15th.  So volume is dying and we're making no progress.  

As I've mentioned before, low-volume rallies are caused by the default buy-ins of "Dumb Money", which is a combination of IRA, 401K, Fed and other Central Banks and individual investors who put thier money into index funds, which buy the bad stocks along with the good – at full market prices.  That's what causes the usual end-of-day surges but the Fed is withdrawing some of their Monetary Easing and now Pension Funds are seeing their cash allocations dropping to 7-year lows. 

US pension fund performance - BogleheadsAccording to the WSJ: "Bigger private-market bets, inflation fears and a surge of retirees are putting public retirement funds at risk of a cash crunch that would force them to sell assets at losses to pay pension checks.  Public pension funds have hundreds of billions of dollars less on hand than the amount they will need to cover promised benefits after two decades of underfunding, unrealistic demands from public-employee unions, and losses during the 2007-2009 financial crisis."  Keep in mind it is the WSJ so curse those Unions for forcing employers to keep the promises they made to their workers, right?  

Public pension funds have historically been able to access cash when equity markets faltered by selling bonds. But over the past two decades, fixed income portfolios shrank to 24% of assets from 33%, according to the Boston College data, as falling rates turned bonds into a drag on returns. Now inflation threatens to further erode the value of fixed-income investments.

Meanwhile, with Thanksgiving just days away, Federal medical teams have been dispatched to Minnesota to help with Covid-19 cases at overwhelmed hospitals.  Michigan is enduring its worst case surge yet, with daily caseloads doubling since the start of November.  Even New England, where vaccination rates are high, is struggling, with VermontMaine and New Hampshire trying to contain major outbreaks.  Here's what Michigan looks like:

I know, no one is talking about this stuff, right?  That's because people are "sick of it" and aren't interested in Corona Virus news anymore – nor are the interested in "safety" or "prevention" measures. It's a 2 year-old topic and the parents are now seeing if ignoring it will work.  Michigan has 10M people and 1.4M of them have already been diagnosed with the virus and 49,219 tests yesterday discovered 8,780 newly infected people and 3,525 people were hospitalized YESTERDAY and 76 people died.  

State reporting is inconsistent but recent reports collectively show that there have been more than 1.89 million cases and at least 72,000 hospitalizations and 20,000 deaths among fully vaccinated people in the U.S. this year.  State and federal data broadly show unvaccinated people are primarily driving pandemic numbers. Breakthrough infections, however, are making up a growing portion because of rising numbers of vaccinated people and waning immunity among people who got their shots early on.  

Covid in the U.S.: Latest Map and Case Count - The New York Times770,800 people in the US have now died from Covid – as many people this year as last year and this year isn't over.  The spread of the highly contagious Delta variant and low vaccination rates in some communities were important factors, infectious-disease experts said.  

Covid has proven to be an enduring threat even in some of the most vaccinated places, many of which are confronting outbreaks again now, as the world prepares to live with and manage the disease for the long term. In Europe, parts of Austria, Germany and now the Netherlands have imposed new restrictions in recent days after Covid-19 cases rose and hospitals came under strain.

The 2021 U.S. death toll caught some doctors by surprise. They had expected vaccinations and precautionary measures like social distancing and scaled-down public events to curb the spread of infections and minimize severe cases. But lower-than-expected immunization rates as well as fatigue with precautionary measures like masks allowed the highly contagious Delta variant to spread, largely among the unvaccinated.  “Heading into this year, we knew what we needed to do, but it was a failure of getting it done,” said Abraar Karan, an infectious-diseases doctor at Stanford University.

According to updated data from the CDC (now that they are allowed to work on Covid again), only 59% of the U.S. population is fully vaccinated and only 17% have received booster shots due to a loss of interest on the part of the population.  Talking about Covid is not good for ratings – half of you are rolling your eyes right now – so the media has stopped takling about it and it's not good for political polling – so our leaders don't want to "go there" anymore either.  

So we pursue plan B – ignore the problem – and that is going about the way you would expect.  

 An August study in the journal Health Affairs that argued that nearly 140,000 U.S. Covid-19 deaths between the beginning of 2021 and the end of May could have been prevented by vaccinating a larger portion of the population (1/2 of the year's total deaths).  Vermont has the lowest Covid-19 death rate per 100,000 people since the pandemic began, although the state is in a continuing surge. Vermont also has the most fully vaccinated population among the states, at 72%. Mississippi, closer to the bottom of the list with about 47% fully vaccinated, has the nation’s highest death rate since the pandemic began.  BORING!!!  Please, let's not talk about Covid anymore….

Moving on then….  So not much is going on this week, data-wise, and it's all happening on Wednesday, including GDP, Durable Goods, Home Sales, Personal Income and Investor Confidence.  Then we're off Thursday and good luck finding anyone who's working on Friday in the US.

It's also a great week to try to slip bad earnings reports under the radar:

Image

Can't even get those on Friday….

 


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  1. Good morning! 

    Biden sticks with Powell – 4 more years of FREE MONEY!!!


  2. Phi;/covid……we've probably figured out the seasonality of covid-19, which was masked to a degree by the sheer numbers in the early waves. What seems to drive it is people spending more time indoors. So in the hot southern US, the peaks will be in summer, and where it gets cold in winter, the bug will peak in winter.


  3. But (public health rant by me alert) – "doctors" (meaning physicians, regardless of specialty) are not trained to address these situations – yet media keeps going to them…anyway

    What the US thinks of as public health is clinical medicine applied to a whole bunch of people. A public health program that is based on individual behavior change is doomed! The US' covid outbreak is not the fault of the anti-vaxxers; it's the fault of those who destroyed our not-very-good public health system over decades (https://www.npr.org/…/detroit-public-health-privatize…). Thank you, Uncles Miltie and Friedrich!

    So what would prevent the next pandemic in the US!

    1. Repair the CDC so it can do proper surveillance again. Early on in the epidemic in 2020, the CDC couldn't get the covid-19 case definition right – mixing symptomatics with test positives, then unmixing them. We need competent people who won't do that to return to the CDC. The CDC collects its data from the state health departments, who collect it from the local governmments. If the local public health department is a mess (see Detroit, above), bad data. Or, if you look at the current county-wide maps of the outbreak and notice how good Nebraska looks – Nebraska has 93 counties, of which 5 have health departments, of which 2 function. The rest of the state simply isn't reporting, as there is no state epidemiologist and a bunch of overworked bureaucrats running the health dept.

    2. Medicare for all or something comparable. If people are worried about the ridiculous cost of medical care, they'll avoid it.

    3. Reinstate airwave regulation. If people are scared that the vaccine will eat their brains, they'll avoid it.

    4. Paid sick leave. If people are afraid the vaccine side-effects will knock them down so they can't go to work, they'll avoid it.

    5. Stipends for small businesses so they can keep afloat.

    6. Stipends for everyone, no means testing, to reduce the conflict between the "save the economy" and "save the people" .

    7. Some sort of national tracking system like Korea uses, so people can know when they've been exposed to get out of circulation. This is an anonymous, individual intervention that won't work as well in the US as it does in Korea – plus in Korea 98% of people own smart phone, whereas in the US it's in the low 80s. But this helps, along with the rest

    8. Stop thinking in terms of a single magic bullet – "if everyone would just mask like they do in Asia" --> "If everyone would just get vaccinated….."

    Neither of those worked because we don't have a public health program.


  4. Good Morning.


  5. Snow-thanks for the real reason things are in such a mess. I just got a notice on my phone that I can turn tracking on for exposure to covid. Sounds like a good idea. We have a new Costco in Duluth and very few people were masked including the welcoming and check-in lady! We stay masked everywhere and stay the heck away from people as much as possible. A lot of business's say wear masks if not vaccinated but I think you are right on-wear the dang things all the time indoors. I can't believe people are so blasted dumb….but as George Carlin said… and we all know what he said BUT this is life or death!


  6. BEsides….it is freaking cold up here but I'm hesitant to get on a plane to go somewhere else. So a mask is more warmth…outside and safer inside. 14 degrees anyone?



  7. Heh. I camped out once in 14 degree overnight weather, in Joshua Tree NP. The morning coffee was really good.



  8. snow – I'm sorry, but we are so better off with the vaccine and masks. It is the unvaccinated causing the mess.

    They infect the other unvaccinated in their tribes, which in turn, infects the vaccinated.

    The idea we can have these 'fixes' in our lifetimes is, well, good luck with that!

     

    Unfortunately, we all have to work together and go to the same places, whether it's the grocery store or a place of worship.

    Shots and masks, baby!

     

    Just imagine where we would be if tdump was still president. That's what I'll be thankful for this Thankgiving. :)




  9. 1020/what works – I'm not saying masks and vaccines are ineffective – I'm saying on their own, they're ineffective, insufficient. For individuals, sure, you're protected and people in your immediate vicinity are protected. But epidemics are not a matter of individuals; it's the community that must be protected. I recommend re-reading Edgar Allan Poe's "Masque of Red Death".


  10. snow – I've never read it. :(

     

    My book would be titled for current times 'The community of the unwilling'   

    Btw, I agreed with everything you said!


  11. BTW-1020, Snow I make myself say "Thankyou"  every day for another day without Dumpy. Even though having to go to six places to find my printer ink makes me a tad grumpy! Thanks to Phil and all for uplifting the spirit in these dark days.


  12. LOL Snow – so just a total revamp of America's Health Care System, Media and Government and we're home free?  

    US numbers still very scary: https://coronavirus.jhu.edu/map.html

    Of course, now they are blaming Biden because it didn't magically go away.  

    You're welcome Pirate – we can't take all this madness too seriously – if the World is going to end (and so many ways that it might now), we may as well eat, drink and be merry when we can.  Of course, people don't seem to realize that all that eating, drinking and merriment really pissed God off:

    You built a reservoir between the two walls
        for the water of the Old Pool,
    but you did not look to the One who made it,
        or have regard for the One who planned it long ago.

    12 The Lord, the Lord Almighty,
        called you on that day
    to weep and to wail,
        to tear out your hair and put on sackcloth.
    13 But see, there is joy and revelry,
        slaughtering of cattle and killing of sheep,
        eating of meat and drinking of wine!
    “Let us eat and drink,” you say,
        “for tomorrow we die!”

    14 The Lord Almighty has revealed this in my hearing: “Till your dying day this sin will not be atoned for,” says the Lord, the Lord Almighty.

    And that is the truth of our handling of this virus – we will be atoning for it for many years to come…


  13. I think the world will survive anything except a return of the man with the golden toilet.


  14. Now, back to work:

    Top Trade of the Year candidates are looking like T, VIAC, SPWR, GOLD, WBA, DIS, DOW, KHC, MO, IBM, RIO, BA, and FF.  I'm tempted to add TZA to that list!  

    So who has the best 12-month catalyst aside from starting out undervalued and they also need to have a very sturdy floor around where they are now.  Then they need to have great options premiums so we can construct a very likely 300% return spread.  


  15. Phil, what are your thoughts on CHGG?  Thanks.


  16. Well Phil lots of requests I tip on IBM, MMM, T worries me a bit as they realy hitting the floor, Friday under 24. The premium is not to hot at this point.


  17. I like T, but the options will get wonky after the discover spinoff mid next year. 


  18. rather the WarnerMedia spinoff merging with Discovery




  19. OPEC+ Weighs Adjusting Production to Counter Reserve Release


  20. Their entire model has legal risks (almost like cheating on tests) so they can be regulated out of existence at some point.  That's a lot of risk for a company that doesn't actually make money yet.  Also, a 3.85Bn market cap against those no profits with $800M in sales (if things go well) means, even at 25% profits, it's already priced at full value. They have a ton of debt and maybe the revenues are due to covid – which makes at-home test-taking a thing it won't be  next year.  https://www.forbes.com/sites/susanadams/2021/01/28/this-12-billion-company-is-getting-rich-off-students-cheating-their-way-through-covid/?sh=62b5f37a363f

    T/Yodi – Not enough bang for the buck on the options.   RN makes a good point that the options will suffer on the spin-off.  Mostly I'm looking for a good catalyst to grab on to.

    • AT&T has continued its seemingly never ending march lower. Losses have accelerated of late byway of a sharp 12% drop recently and are currently residing at only $24.13 a share as of 11/21/21.
    • Operationally, it appears the company is actually in very good condition, with strong results in telephony, mobile adds and fiber additions.
    • Capitulation may be near as the company has been dropping directly in the face of encouraging results and moves by management to refocus the company.

    Since assuming the role of CEO in July of 2020, Mr. Stankey, in my opinion, has made numerous positive moves aimed at refocusing AT&T on the core business of connectivity and telephony.

    Mr. Stankey has spent much of his time as CEO so far pruning non-core businesses away from the company. He has sold or wound down a large portion of the ancillary pieces of AT&T, highlighted by the Puerto Rican asset sale to Liberty Latin America (NASDAQ:LILA), among many others.

    In addition, Mr. Stankey has rid AT&T of the Direct TV business via a deal with TPG Capital. Direct TV has long been a source of ridicule and distraction for the company and this deal gives AT&T 70% equity ownership of the new entity along with a $7.1 billion cash infusion, along with the ability to remove the steep revenue drops each quarter from the company's books.

     

    In what appears to be the most transformative news, Mr. Stankey and the legendary John Malone in May of 2021 agreed to merge and spin off Discovery, Inc. (NASDAQ:DISCA) and WarnerMedia into a combined media powerhouse.

    In conclusion, Mr. Stankey's actions since he became CEO certainly seem to indicate that he is in fact quite serious in his attempt to turn the page from the mistakes of the past and to refocus the company back to the core telephony and connectivity business.

    Looking at purely the business results, since Mr. Stankey's appointment as CEO, the business has made significant strides in gaining back some of the ground lost to competition. In fact, in the last few quarters, AT&T has led the industry for wireless additions.

     

    The AT&T of 2020 and the AT&T of mid-2022 will be two completely different organizations. Once the spin-off of WarnerMedia is completed in mid-2022, the company will be left with a clear corporate mandate from top down, to strive to be the most efficient and best telephone and internet provider in the business.

    In addition to refocusing the management team, the company will have a vastly cleaner balance sheet. Management has indicated clearly that the debt balance is a very high priority and that deleveraging is a top priority for the company.

    The structure of the future company looks like this idea does in fact have legs as post the WarnerMedia spin-off, AT&T looks to have roughly $166 billion in total short and long term debt. In Addition, AT&T expects to produce over $20 billion in free cash flow under its new structure ex Warner Media.

    AT&T has indicated that the dividend, post spin-off would be set around 40-43% of free cash flow or around $8-8.6 billion. Using a midpoint of $8.3 billion in available free cash for the dividend and the current 7.14 billion shares outstanding, I come up with a dividend of $1.16 per share, indicating a 4.8% yield at a $24.13 price.

     

    One must not forget that each share of AT&T you own will also grant you ownership in the new WarnerMedia company to be spun off. How these shares are valued has yet to be determined other than AT&T shareholders will own 71% of the newly combined company with Discovery.

    The current valuation of AT&T is where the absurdity I referenced is reflected. The company as of today is valued at a PE ratio of 7.18 using 2021 estimates. The company is currently priced as if it will be filing for bankruptcy shortly.

    Of course, the new WarnerMedia will not be valued at $0. The combined business is estimated to have produced over $28.2 billion in revenue and an estimated $6 billion in free cash flow in 2020.

    Estimates of the equity value of the new WarnerMedia vary wildly but the consensus estimate is between $7-10 per share of value is to be spun off to shareholders. If this holds true, then at current valuations, AT&T post-merger is to be valued at between $14 and $17 per share.

    This is absurd. EPS estimates have already been put together by the analyst community reflecting the spin off and AT&T is expected in 2022 to earn $3.20 per share. Using a mid-point of $15.50 price post spin, the company is potentially valued at a 4.84 PE ratio.

    I can see no logical argument for that type of valuation for a company projected to continue growing at mid-single digits, with an improved balance sheet and no true threats to its overall business.

    T Short Call 2022 21-JAN 33.00 CALL [T @ $24.79 $0.66] -75 9/3/2020 (60) $-10,500 $1.40 $-1.38 $2.22     $0.03 $0.01 $10,313 98.2% $-188
    T Short Put 2022 21-JAN 28.00 PUT [T @ $24.79 $0.66] -25 9/3/2020 (60) $-8,125 $3.25 $0.55     $3.80 $-0.70 $-1,375 -16.9% $-9,500
    T Long Call 2024 19-JAN 23.00 CALL [T @ $24.79 $0.66] 200 10/15/2021 (788) $80,000 $4.00 $-0.48     $3.53 $0.38 $-9,500 -11.9% $70,500
    T Short Call 2024 19-JAN 30.00 CALL [T @ $24.79 $0.66] -200 10/15/2021 (788) $-28,000 $1.40 $-0.11     $1.29 $0.06 $2,200 7.9% $-25,800
    T Short Put 2024 19-JAN 25.00 PUT [T @ $24.79 $0.66] -40 10/15/2021 (788) $-17,400 $4.35 $0.50     $4.85 $-0.65 $-2,000 -11.5% $-19,400

    We didn't make a change last week, we did make changes in October that leave us very bullish as those short Jan calls are certain to go worthless so we're just letting the big spread ride for now and the Jan puts will just get rolled – I'm certainly fine with the 2024 short $25s.  No excuse not to have this stock in your portfolio and, on that basis alone, I still kind of like it for Trade of the Year. 

    I can't back off $25 being a floor (even though we're below it) so the short 2024 $25 puts at $5 looks like free money to me.  So let's say we did this:

    • Sell 15 T 2024 $25 puts for $5 ($7,500) 
    • Buy 50 T 2024 $23 calls for $3.50 ($17,500)
    • Sell 50 T 2024 $27 calls for $2 ($10,000) 

    That is net $0 on the $20,000 spread that's $7,500 in the money at $24.50 and the worst case is owning 1,500 shares at net $25 with their $1.50(ish) dividend for the rest of your life – and that's before you sell more puts and calls to add to the income.  When the worst case sounds like a trade you'd want to make anyway – it's a good spread!  


  21. Phil /  Trade of the year – Is this the Trade of the year or not?


  22. Phil / AT&T Trade of year – is this the Trade of the Year to not?


  23. Phil / Got it not the trade of year…..     When I see an email with trade of the year in tittle I assume it is…..   Very confusing


  24. Trade of the year/Batman – No, just a candidate at the moment but it wouldn't be a good candidate if we couldn't find a good way to play it, would it?

    Officially, we do our Trade of the Year on Thursday.  

    Well, the Nas took a dive but everyone else is still green.

       

  25. When T spins Warner off the options will get untradable therefore not a trade of the year candidate? 


  26. T/Doro – Well the uncertainty makes them a bad Trade of the Year candidate though I'll be happy to own both companies post-split.  Messy profits are still profits.