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Monday Markets – Uncertainty Ahead of the Fed

How inflation affects the '12 days of Christmas' 2021The last 2021 Fed meeting is Wednesday

There are only 12 shopping days until Christmas.   Turtle Doves are up 50%, French Hens are up 40%, Geese are up 57%, Unit Labor Costs for Pipers piping and Drummers drumming is up 7.1% – it's going to be a very expensive Christmas and I'd suggest sticking with the 5 Golden Rings, which are only $895 and up just 8.5% since last Christmas – barely keeping up with labor costs – and they make an excellent hedge against inflation too!  

This is the inflation the Fed is only just now beginning to see and we'll see what Chairman Powell has to say about it it on Wednesday.  

Calling inflation “transitory” was a historically bad move for the Federal Reserve, according to Allianz Chief Economic Advisor Mohamed El-Erian.  “The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake.” 

“So, the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility,” he added. “Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.”

Bloomberg had some interesting advice over the weekend: Just spend your money as fast as you can before it becomes worthless. This "advice" seems to come from observing what Agentinians are doing as their currency goes into free fall with 50% annual inflation down there.  "And don't hesitate to borrow money" says Bloomberg – when you pay it back with deflated Dollars – you can come out ahead.  

US Corporations have certainly taken that advice to heart, borrowing money at record levels ($1.3Tn so far this year) and they've been using that money to buy back record amounts of their own stock – so our Corporate Masters have MASSIVE bets that inflation will pay off for them down the road.  They have no interest at all in "fighting" it.

“The Fed is in a difficult position,” said Jeremy Stein, professor of Economics at Harvard University and a Fed governor from 2012 to 2014. If inflation is more persistent “and they really have to hike rates significantly, you can imagine what happens to asset valuations: There’s just a tremendous amount of interest-rate sensitivity in markets.”

Powell said last week that officials would consider accelerating their reduction of asset purchases when they meet Dec. 14-15 to end the program a few months earlier than mid-2022, as initially planned.  Wrapping the taper up sooner gives the Fed scope to raise rates earlier and faster if inflation fails to ease next year as expected. But record levels of debt may force them to temper their actions.

For their part, our Government now has a record $2.5Tn of short-term (less than 5-year) debt that is "rate-sensitive" – essentially immediately reacting to changes in policy.  Raising rates just 1% cost the Government $25Bn per year in rollover debt on the short-term notes but, more importantly, there are many, many firms that have borrowed short-term money at 3% that can't possibly afford to service the debt at 5% – and those loans tend to be indexed to the Fed Funds Rate – not to fixed terms.  

There are negative aspects when you encourage people to borrow, but then later feel that you can’t raise rates because so many people borrowed,” said Howard Marks, co-founder of Oaktree Capital Group. “That’s something of a trap.”  The number of "Zombie Corporations" (ones that don't generate enough cash flow to service their debts) is 772 (25.7%) out of the Russell 3,000 small-caps – up 100 (14.8%) from last year – and that is with rates still extremely, and artificially low.

In addition, the average credit rating of companies has been declining, according to Moody’s — an early warning that some of them could run into problems with paying what they owe if debt service costs rise.  “The economy is more vulnerable than it has ever been before to rising interest rates,” said Torsten Slok, chief economist at Apollo Global Management. “How much can the Fed raise rates? And the answer is, they can actually not raise rates that much.”

So with over 25% of the Russell on the verge of failure, with the greatest danger posed to them being a rise in interest rates – it's no wonder the Russell Index has been shakey but, so far, still holding that 2,200 line we've been watching all year long.  When and if it does fail that (for more than a few days) – look out below:

4,700 is still our shorting line on the S&P 500 (/ES) and we're above it at the moment.   Speaking of above the line, we're going to take the money and run on our Natural Gas (/NG) longs with $6,000+ gains on two contracts thanks to this morning's surge so congratulations to all who played along at home on that one.  We had discussed those several times last week as well as Friday morning's PSW Report (which you can subscribe to here so you don't miss the next opportunity).  

It's not a big data week and it won't be a big data week again until January as, whether officially or not, the markets tend to slow to a dead crawl by December 15th.  We have PPI tomorrow, Retail Sales Wednesday along with Empire State Manufacturing, Import Prices, Housing Index and the Atlanta Fed and then Thursday, after the Fed announcement, we have Housing Starts, Philly and KC Feds, Industrial Production and PMI and, on Friday, it's the end of the year for Options and Futures – so that could be volatile.  

Earnings reports are still trickling in and we'll watch Fed Ex (FDX) to see what they have to say ahead of the holidays.  

Image

And it's certainly not like nothing is going on in the World.  This just doesn't seem like the kind of news that supports record-high markets to me:

Inflation Surge Pushes U.S. Real Interest Rates Deeper Into Negative Territory

Fear & Inflation: The Timeless Policy Tools Of Discredited Systems

Charting the Global Economy: U.S. Inflation at Near 40-Year High

Morgan Stanley: As Uncomfortable As It Can Be To Admit Defeat, Here We Are

BofA: "The Bubble In Speculative Froth Has Popped Resulting In Epic Divergences"

Fed Hikes Seen Starting With Yield Curve Flattest in Generation

On Inflation: Friday's 7% Increase In Consumer Prices Is 11% When House Prices Are Added

Manhattan Rents Jump Most On Record Despite Dismal Back-To-Office Return

Price Shock at Meat Counter Worsens U.S. Inflation Jitters

G-7 Warns Russia of ‘Massive Consequences’ Over Ukraine. 

Private Equity Firms Plan Cuts in China to Escape Property Woes

Stung By The Semi Shortage, Chinese Auto Sales Fall For The Seventh Straight Month

Slip in Japan Manufacturing Outlook Underplays Omicron Concern.

Panic? US Mega-Corporations Rush To Abandon Vax Mandate

U.K. Housing Loses Momentum With Second Drop in Asking Prices

Trucker Central Freight Lines to Close After Years of Losses

Four States Calling In National Guard To Alleviate Healthcare Staffing Crisis

"This Is The Single Biggest Thing You Need To Have On Your Rader" – Why Goldman Goes All-In On A Face-Ripping Santa Rally

Ponzi? Insiders Dump Stocks To Their Own Companies At Record Pace

DHL Is Keeping Pace With The Holiday Rush By Adding 1,500 New Robots

Hackers Blamed For Cream Cheese Shortage Currently Afflicting The US

What’s amazing about Australia is that despite ~90% of everyone over 16 being vaccinated, mask mandates, vaccine passports and forced quarantines, cases are actually rising again

A Dozen Major US Cities Hit All-Time Murder Records With 3 Weeks Still Left In 2021

Be careful out there!

 


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  1. hi phil,

    have you heard anything about the apparently serious cyber security threat affecting governments and large corporations globally.

    revenue canada  severed itself from internet and is offline as a precaution. im wondering how widespread it is.


  2. Good morning!

    • Almost time to short /ES again at 4,700 (tight stops above). If RUT fails 2,200 – it could be quite a ride!

       

    Hack/Tommy – I know it's been a year now since the Solar Winds attack and now there's a thing called Log4Shell, which is spreading fast as it's apparently very easy to launch.  

    The AP notes that the Log4Shell hack may be the worst vulnerability in years. That’s because it impacts a utility “ubiquitous in cloud servers and enterprise software used across industry and government.” Hackers who exploit it can easily get into internal systems, as they don’t have to hack a password to abuse the flaw.

    From there, they can execute code remotely to steal data, plant malware, and do all sorts of malicious activities. Nation-state attackers who employ highly trained hackers with access to massive resources could quickly weaponize the attack. And everyone would be at risk.

    “I’d be hard-pressed to think of a company that’s not at risk,” Cloudflare security officer Joe Sullivan told AP. He said that untold millions of servers might have the utility installed. As a result, the fallout from the Log4Shell hack will be a mystery for several days.

    I say unplug the internet for a few months – it would probably do all of us a lot of good…

    This is how stupid things are – there's a think called Log4j which is like a plug in many people use for log-in authentication that lets a system know the user has been verified so the "hack" essentially plugs in the "verified" status without actually verifying anything and PRESTO! – you have access.  Now, no one cares if some kids can log into a game for free but they can also log into your bank account or your company's records, etc.  That's kind of a problem…


  3. Sharp dip at the bell – great for the /ES shorts…


  4. 2,200 holding – not a good sign for the shorts so far – tight stops on gains. 



  5. Good Morning.


  6. Phil – would you be willing to share a little more on your entry process for a play like shorting /es at 4700? Are you shorting at the line every time? When you say tight stops do you have a set amount above that line you stop out of or is it more situational stop out for what you see across the markets? Thanks. 


  7. On the one side we crying about Corona on the other side some member wants to take a family vacation in the keys. Well what can I say?


  8. We used to play GPRO and I do still like them.  Their camera tech is fantastic and that's why I like them (high-end professional cameras), not so much the sports and drone markets.  They are up to $1.6Bn these days and finally making profits:  3.3M last Q3, 44.4M last Q4, -10.2M in Q1, 17M in Q2 and $312M in Q3 – so Q3 was pretty good.  Why?  

    • GoPro says it generated $166M of free cash flow due largely to continued camera mix shift to the high-end and execution of the company's direct-to-consumer, subscription-centric strategy.

    Yes, because of why I liked them!  

    Submitted on 2018/08/02 at 3:49 pm

    Earnings/Soma – I like GPRO down here as they beat last Q and sold 30M cameras (since 2009) and Jackie bought a knock-off and declared it total crap and then got the Hero and is thrilled with it.  They are pulling in $1Bn and most of their losses have been over R&D misses like drone systems.  They will still lose money, but probably less than 0.25/share and that's pretty good progress.  What I like about GPRO isn't the mass-market cameras but their $50,000 Professional Systems, where they are the king of the market by a wide margin.  

    Submitted on 2018/11/19 at 3:50 pm

    • GPRO – Let's buy 40 more of the 2021 $5 calls for $1.90 ($7,600) 

    Submitted on 2020/03/23 at 10:59 am

    $10K/Jeddah – I'd put $400 into 1,000 shares of FTR (0.40 – now 0.26) – just in case!  Another $360 in NAK (0.36 – now 0.51) as you can afford to gamble a bit when you are young.  Then there's F at $4.14 (now $5), X at $5.76 (now $6.36), HOV at $6.85 (now $9.84), CLF at $3.38 (now $3.76), SPWR at $5.93 (now $6.35), IMAX at $10.50 (now $10.09), GPRO at $2.51 (now $2.71), BBBY at $4.70 (now $4.63)… By sticking to things that are cheap, he can afford to buy 10% more whenever he gets $1,000 and all those stocks can double or triple in a recovery and not likely to lose more than 1/2 if they avoid BK, which would make the drip investing more powerful.

    GPRO/Lionel – I know we had it in the old LTP but I don't think we've played it in the new portfolios though I know I just told Jeddah I liked them at $2.51 for a small portfolio.   I have no idea what that quote is but, if you are looking at the 2022 $1.50/$4 bull call spread for $1.55 I think I'd rather go for the $2 ($1.30)/4 (0.75) bull call spread at 0.55 as you can buy 3 times more for the same price with the same target and I don't see the point in selling puts – it's just a cheap chance at nearly a triple.  

    GPRO/Potter – That's not the point, the point is that GPRO is a stock we looked at before, they are a solid company that has real sales (no profits) and $2.50 is $400M and they were on track to make over $50M by next year and, while this interrupts their plans – I doubt it permanently derails them so I would buy them at $2.50 and DD at $1.25 and DD again at 0.67 as I think it's a fair gamble down here if other people don't want them.   Even so, I was simply looking at paying 0.55 for a $2 spread that's 0.50 in the money so it pays almost 3:1 if GPRO fails to go BK.   Worth a gamble.

    I think we can play GPRO in our Future is Now Portfolio as follows:

    • Sell 10 GPRO 2024 $10 puts for $3 ($3,000) 
    • Buy 25 GPRO 2024 $7 calls for $6 ($15,000) 
    • Sell 25 GPRO 2024 $12 calls for $4 ($10,000) 

    That's net $2,000 on the $12,500 spread that's almost entirely in the money to start.  Upside potential is $10,500 (525%) and worst-case is having to own 1,000 shares at net $12, which is just a bit over the current price.  Since that's not a bad-sounding thing, the whole trade is excellent!  


  9. Morning.  Clarification on the log4j explot Phil.  Not related to anything login (authentication). It's a popular logging library in Java to allow developers flexibility creating useful logging messages on their Java programs.

     The exploit is a Remote Code Execution vulnerability in the Apache Log4j library, a Java-based logging tool widely used in applications around the world. This vulnerability allows an attacker who can control log messages to execute arbitrary code loaded from attacker-controlled servers — and we anticipate that most apps using the Log4j library will meet this condition.


  10. Phil / GOLD – I'm confused how badly gold is performing in a market where the Fed says inflation is transitory but more evidence shows it's not. You'd think investors would hedge regardless.  If the Fed has to raise rates, I know stocks will tank but how will gold react?  I've sold '23 puts for $3.10 a while back and interested in BCS but for the life of me, I can't figure out what the right market conditions are for it as it continually heads south. Appreciate your insight. 


  11. Log/Jeddah – It certainly sounds like you know a lot more about this stuff than I do.  Thanks for clarifying.  This is the problem when all these programmers use the same code to do things – they create a fertile ground for viruses (kind of like the way the World only has like 1 type of banana).  

    Crying/Yodi – Well if you are held prisoner you still enjoy going out in the yard – even though that's where you get beaten.  I can't believe my kids have to grow us in a world where they'll be saying "remember those 2-3 years that we barely went anywhere or did anything?"  

    Shorting/Willsons – Well, the most important thing is learning NOT to play.  Like 99% of the time you should NOT play.  And when you play, you have to have time to play and PATIENCE to play and margin to play with or – DON'T PLAY.   

    When to play?  Well, at a certain period of time, we notice that 4,700 is strong resistance on /ES but we watch it for a month or so before playing it.  Then the economic conditions come into play, the 5% rule, valuation and, of course, news flow.  The summary is I think 4,700 is a point of resistance on /ES and I think it's an overbought one so, when it fails, we have a good chance of getting a run lower?  

    How much lower?  Well, if we call prior consolidation 4,500 then it's a 200-point run and we expect 40 and 80-point pullbacks but we know the S&P moves in 800-point chunks so, around here, it's 4,000 and 4,800, whether we got there or not so the real failure is at 4,800 and 4,400 would be the last consolidation so that's 400 points with 80-point pullbacks to 4,720 (weak) and 4,640 (strong).  NOW the shorter-term chart makes more sense 

    Still, the general public doesn't use the 5% Rule so 4,700 is a better general line and we expect at least a 40-point pullback on a rejection so that's pretty much what we play for and anything else is bonus money.  Since I expect to make 40 x $50 ($2,000) then that determines my risk should not be more than $200 or $400 at most so that I can be wrong 4 times and still make money on the 5th.  Once we're profitable – that's about the same stop you want to use to hold the gains as well. 

    And yes, it's situational because, at any given moment, you should be aware of WHY the index/commodity is rising or falling and determine how impactful that news will be and how widespread it is and how long it will take to run through the trading community.  Also, you can watch the standard support/resistance lines for clues – look how /ES bounced off the green line at 4,672 – that's game over at 4,675 then.  

    So now we're rooting for /ES to go back over 4,700 but I'm sure not playing it bullish as I'm generally bearish and the odds favor a bearish bet at the top of the channel and we're miles from the bottom of a channel – so back to being patient.  

    GOLD/Jeddah – The Fed also says they will raise rates and reign in inflation and strengthen the Dollar so, if Gold is based on "Fed says" – no wonder it's going down.  Anyway, your definition of down is a bit alarmist I think:

    $1,200 to $1,800 is 50% and that's 500 points so we have 100-point pullbacks or overshoots and $2,000 is a 40% overshoot – that's a lot.  That quickly pulled back and now we're consolidating around $1,800 (+/-20%) for a move up to $2,400 but the last consolidation lasted 6 years so, once again, patience would be the watchword.  

    This is why I like GOLD better than /GC – GOLD doesn't need gold to go up – only to be up enough that they make money.  Currently, it's ridiculously cheap at $18:

    In 16 years, if /GC holds it's current price, GOLD will return 100% of it's price to us via earnings.  /GC would return zero.  If /GC goes higher, GOLD's earnings will go higher too.  If /GC goes lower, GOLD will buy out their weak competitors and make even more money on the way back up.  

    The Dollar since November has been killing gold:


  12. Crying, you get believers and unbelievers until you get the buck. In that case I will send you a box full of Corona with red jackets on.


  13. They just about throwing T away!!!!


  14. T/Yodi – We'll see if $22 holds again.  Would be amazing to finally find a firm bottom.


  15. something strange going on investing.com does not have index data for europe or asia they are all reading 0.


  16. Phil / HRB – is it time to do something with this?   


  17. Inflation- "They have no interest at all in "fighting" it." That's funny as it brings back ancient memories of President Ford's WIN (Whip Inflation Now) efforts which, of course failed as was inevitable since corporate and consumer behavior in an inflationary environment is, at best tangential impact. At it's core, inflation is too much money chasing too few goods. The too much money part is the culprit and the perps, if you will are the bipartisan Congressional spendthrifts. Akin to the 17 year Cicadas, the foundation for currency debasement has been underway for decades and is absolutely bipartisan politically, despite the rhetoric. While the current administration will take the heat, they are just the unlucky ones at the end of the line stuck holding the bag.  


  18. HRB/Batman – They tend to cycle down at the end of the year and then, come tax season, people remember them again.  We had them in the Earnings Portfolio until 4/16, and they made good money ($5,525 out of a potential $6,000) but very boring.  Those were leftover short puts we had sold the year before.  Anyway, they are not particularly cheap now at $23.50, which is 4.1Bn and less than 10x earnings but that's normal for them.  At $20 I'd be more inclined to take a shot.

    Debasement/Pstas – The increasing wealth disparity is stunning yet no one seems to think it's a problem, mostly because the people who own all the outlets for discussing the problem are the ones who are benefitting.  I don't see how this will not end in Feudalism, mostly because I notice people don't own anything anymore – we rent everything.  We rent our phones and our internet and we pay for water, heat, cooling – we buy the disposable appliances to use these things but we NEED the service or our appliances and electronics are useless so all we end up buying is the right to engage in a lifetime of servitude to the Lords of gas, electricity, water and cable.   Then there are taxes – you can't even own a home anymore and be left in peace because the county says you have to pay them taxes, long after your bank is paid back.  

    Sure there were always taxes but not like they hit you up for now in some states.  I know so many people who were forced out of their homes due to rising taxes – people who thought they would be able to live in them the rest of their lives.  You can own your car but you still have to pay the insurance and the gas to go, your own body is subject to "health taxes" even as the government does almost nothing to insure the public health.

    Try writing down the price you pay just to keep things going every month – it's getting completely out of control and how on Earth can they expect people to go on like this with inflation driving all those fixed costs higher and higher?   The Cicadas have it right – come out once every 17 years for a giant feast and orgy and then go back in the ground until the next one.  

    Cartoon: Brood X Cicada Invasion | Columnists | tulsaworld.com



  19. The global economy is increasingly out of sync


  20. batman,

    HRB, as Phil says cycle stock, paying a nice div. though. Sell the Jan 24 22/22 @ 8.00 and buy the stock, discounting the stock to 15.40, and see how long you can collect the div.



  21. Hey all, yesterday was my birthday, the last one with a 6 in front. 

     Any gamblers out there?   

    GME Feb $510  short calls will pay you $5.    Todays price $138. If so, its probably better to do it on an up day, not when its down  13% today



  22. Saudi Arabia Warns Traders Against Shorting Oil Prices



  23. seeing lots of put selling in C  2024.  plus, check out all that open interest (2024 puts) 

    They got a new CEO this year and she's working on a a lot of new initiatives  


  24. Not a good-looking way to start the week but I think it's bouncing now. 

       

    Happy Birthday, Stock!   GME is not for me, total guess which way it goes.  I agree with the logic, of course but last Jan they went from $17 to $450.  Not likely to repeat but, if I wanted to do such nonsense, I could sell a CMG March $2,000 call for $20 and I think that's just as unlikely to get hit.

    C/Stock – They got caught up in the Capital Reserve Requirements so they can't buy back anymore stock until they get in balance and that's bound to impact earnings as well but certainly an over-reaction and so – an opportunity.  The capital deficit may be as high as $5Bn so a 25% impact on annual earnings and the stock is down from $72 to $60, not even 20%.  Still, entering at this price you have a conservatively positioned bank with good earnings growth moving forward.  Worth keeping an eye on in the LTP so let's sell 20 of the 2024 $50 puts for $5.60 ($11,200) as we certainly don't mind owning C for net $44.40 – another 26% off the current price.



  25. Income disparity- mostly a canard, IMO. People may not grasp the arithmetic but intuitively understand the condition. Take the combined wealth of the worlds billionaires (+/- $13T) and cut a check to each man, woman an child in the US and you get about a $40K winning lottery ticket. Enough for a  family to buy a Tesla, take few shopping trips to Trader Joes and perhaps a jaunt to Disneyland but then what? 

    Feudalism- aren't we almost there already? Plug in European style welfare state in the definition of Feudalism and except for the castles, knights in shining armor and the  part about military protection (that gets farmed out to someone, can't recall who, though) and there you go. Not a bad way to go if you don't get hung up on the archaic notion of individual liberty and the Sovereign and Nobles remain mostly benevolent. However, history tells us that does not always work out as planned. 


  26. Wealth/Pstas – Not sure where you are getting $13Tn when the Global Top 1% have more like 60% of the World's wealth so, whatever it is the rest of the population have, they can double it by taking just 2/3 of that away from the rich (and the Top 1% would still have much more money left than the next 10%).  It's not the Top 80M that worry me though, it's the Top 800,000 as, roughly, each 10% you cut makes the remaining people 10x richer.  Get down to the Top 80 and THEN you are talking about Musk, Bezos, Gates, Etc. and don't forget the families that have riches that put all of them to shame – the Rothchilds, Al Sauds, Medicis (now Hapsburgs) et al have been Billionaires for 500 years – what do you think that has compounded to over time?   These guys don't show up on the Forbes list – they took their money underground hundreds of years ago.  

    Even just the Waltons have $238Bn, that's the GDP of Finland – so they could certainly rule them, or Egypt or Pakistan or Portugal – as rich as any Sultan or Pharaoh ever was.  The GDP of South Carolina is $250Bn, they could lord over that too if they wished…  I'll be happy to rule Vermont – just $36Bn for the whole thing!  

    It's not about the current disparity though, it's about the trend.  The "rental" trend we're now in has us engaging in a constant transfer of wealth from the bottom 99% to the Top 1%.  You watch TV – they get paid, you talk on the phone – they get paid, you eat a pizza – they get paid.  You work all day to survive and they have more money than 100,000 people make in a lifetime already and, at the end of the year, it's 110,000, 121,000, 132,000….  As they get richer they need more money to fuel the growth so they take over more assets and you are forced to rent more to survive – because the assets aren't even available for purchase anymore and PRESTO!  – you are born into servitude and, eventually, the only way they can make more is to let you have less each year for the same or more labor – until you die or rebel (and probably die).

    Not you, of course, you would be standing right by their side telling the slaves how lucky they are to have such a benevolent master, right?

    Woops, there was an attempted bounce but it failed miserably.

       

    Most significant if the Russell is now failing 2,200 and the S&P is failing 4,700 – can't tell from a single day though.

    /NG with a massive pullback – this is why we take money and run.  Didn't quite get back to $3.75.  Not as tempting this time after that massive drop.



  27. Why the Price of Wooden Shipping Pallets Has Soared





  28. for the future is now portfolio "Now he’s prepared to move into the spotlight with his warehouse robotics firm Symbotic, which he’s been building, largely in stealth, for nearly 15 years. Symbotic, in which he and his family have a 95% stake with employees owning the rest, is announcing today plans to go public in a $5.5 billion deal with a special purpose acquisition company"?