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Fickle Friday – Market Sentiment Shifts Like the Sands

Market Sentiment - Investment.CeoFeeling Anxious?

Clearly not a great place to be on this chart as the next phase is Denial, as in: "I'm sure the markets will bounce" or "I'm sure the Fed will save us" but the Fed just told us they are not going to save us at all with more free money.   In fact, there will be no more free money by April and, on top of that, they are going to start raising interest rates.  

Are they doing this because we have a healthy econmy with full employment and strong GDP growth?  No.  They are doing this because we have miscalculated the economy, miscalculated the pandemic and now all the misallocated money that has poured out of the Fed is causing rampant inflation that they don't know how to contain – so they are going to do the same thing that worked in the 1980s and hope nothing has changed in 40 years – because they don't actually have any new ideas.  

And it's not just our Central Bank that has concerns.  Early this morning the Bank of Japan said it would wind down its holdings of commercial paper and corporate bonds, but kept monetary policy ultraloose overall.  The benchmark Nikkei 225 index fell 1.8%. Other Asian indexes were mostly lower, with Hong Kong’s Hang Seng down 1.2% and the Shanghai Composite Index 1.2% lower.  On Thursday, the Bank of England raised interest rates, taking investors and analysts by surprise. The European Central Bank said it would phase out an emergency bond-buying program, while ramping up other stimulus measures. 

Omicron has prompted restrictions all around Europe ahead of the holidays and, while it may be too late to cancel Christmas, sick relatives that can't get into overwhelmed hospitals are putting a damper on the holiday spirits.  On Wednesday, the UK reported the highest number of new Covid cases since the pandemic began (78,600 vs 68,053 in Jan – the previous record).  Omicron infections are doubling in the UK every 1.9 days – a very dangerous number!  Denmark, Norway and France have shut down nightclubs and Germany is now considering making vaccines mandatory. 

ImageIn the US, at Thanksgiving last month, we had a 7-day average of 71,795 infections and, as of yesterday, it was 123,485 – up 50% in less than a month.  Now the families are going to gather again for another holiday and friends will gather to celebrate the new year as our Government downplays the risk in order to insure it's business as usual, lest Quarter 4 be a disappointment to investors.

Epectations are indeed very high for Q4 our inflation-fueled GDP is expected to be over 6% for Q4, coming back from Q3s very disappointing 2.1%.   Remember, it's easy to grow 6% when we had a quarter last year (Q2) in which the economy fell 31.2%.  Q1 was -5.1% so, if we started with 100, Q1 took us down to 94.9 and then Q2 leaves us at 65.3.   The stimulus in Q3 last year added back 33.8%, so (65.3 x 1.338) =  87.37 and Q4 was 4.5% (91.30), Q121 was 6.3% (97.05), Q2 was 6.7% (103.6) and the 2.1% we just had leaves us at 105.8.  

So, after all that, 2 years after the virus began, we are running a qarterly GDP that is 5.8% greater than before.  That's pretty much 2.5% annual growth (as it compounds).  That's fine if we can sustain it but the problem is the markets haven't done that math and they are up 50% since 2019.  The Nasdaq is up 100% since 2019, in fact.  

Can we justify it?  Not really.   A lot of it is because there are a lot of tech companies that benefitted from a stay at home population.  Moving about 1/3 of the workforce of 165M people to remote office set-ups caused a massive buying spree, fueled by Government stimulus money so it was artificial demand enabled by artificial funds and it's neither likely or possible for that pace to continue so investors that are paying 40x earnings (the Nasdaq average) for stocks are in for a rude awakening when earnings stop growing or even reverse when workers go back to the office and now longer need two of everything to get their jobs done.  

WITH Trillions of Dollars in stimulus, the economy has grown 5.8% in two years – and that's assuming we can sustain this level going forward, now that the stimulus is over.   But soon, student loans will no longer have their payments suspended and the banks are able to foreclose and landlords are able to evict and unemployment benefits now run out – a lot of that extra money that's been pumping around the economy is about to be drained out – at the same time as the Fed is putting the brakes on adding more.  

What Money Velocity Means for U.S. Economic Recovery | Penn Mutual Asset  ManagementThe Fed HAS to put on the brakes because, IF the economy does pick back up, inflation can quickly get out of control.  All that QE has driven the money supply up 25% since the pandemic began but the velocity of that money has dropped 25% – so they've been just trying to keep up but it's very tricky if it goes the other way because the money supply is hard to put back in the bottle and if $15Tn moving at 1.4x gave us a $21Tn GDP so does $19Tn moving at 1.1x but $19Tn moving at 1.3x is $24.7Tn – and that is where we get inflation because the GDP isn't growing because we are producting more goods and services – it's just more money chasing the same amount of stuff – and that is very unhealthy.  

It COULD, however, be good for stocks.  Not because our companies are actually earning the money but because they get paid more for the same amount of goods and services and the value of the Dollar vs the stocks we buy with those Dollars decreases and so, owning stocks is a nice inflation hedge – as long as the economy doesn't collapse.   

As I've said this week, we have plenty of long positions but we're also well-hedged – because things could go either way.  In the grand scheme of things, the S&P 500 looks very strong but it looked very strong in the winter of 2019, when we also ignored a rapidly-spreading virus that was shutting down Asia and Europe while our Government and our Corporate Media assured us there was nothing to worry about.  The S&P 500 made spikey little candle tops two months in a row then as well - right before the 35% correction.

Have a great weekend, 

- Phil


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  1. Alibaba investor day highlights 'ample' room to drive revenue growth, Morgan Stanley says

    08:02 AM | Alibaba Group Holding Limited (BABA) | By: Chris Ciaccia, SA News Editor



    Alibaba (NYSE:BABA) has the potential to drive average revenue per user, or ARPU, across multiple user groups, Morgan Stanley told investors, as the Chinese internet giant holds its investor event.

    Analyst Gary Yu, who rates Alibaba (BABA) overweight with a $180 price target, said the company's "core consumers," those defined between 25 and 44 years old, account for roughly 70% of gross merchandise volume and have an ARPU of 1.4 times the company average. As Alibaba (BABA) continues to diversify its supplies and products, this should "drive loyalty and spending," Yu wrote in a note to investors. Once they move to Alibaba's (BABA) paid loyalty program, known as 88VIP, customers have ARPU of eight times that of the average, Yu added.

    Alibaba (BABA) said it intends to have 100 million paid members, between 88VIP and Taobao Pass in the "future," up from more than 50 million as of October 2021.

    Younger consumers, those defined between 15 and 24 years old, are helping Alibaba (BABA) grow ARPU fast, with a five-year spending increase by three times in four to five years, while older consumers have a lower ARPU, but they are growing at a faster rate in terms of annual active consumers, as of September 2021.

    Alibaba (BABA) shares have declined more than 47% year-to-date.

    In addition, Alibaba (BABA) set a $100 billion gross merchandise volume target for its Southeast Asian marketplace Lazada, which Yu notes is key to Alibaba's growth, highlighting the "constant" improvement in customer experience, including live-streaming – Lazlive – providing unique value to both sellers and brands and setting up the second-largest logistics network in southeast Asia, driving lower costs.

    Yu notes that Alibaba (BABA) has to develop value for paid products to serve their consumers, including aspects like live-streaming and short videos, with Taobao Live growing annual viewers 62 million year-over-year in the second-quarter and average spending up 30%.

  2. Good Morning.

  3. Good morning and wheeee!  Down we go.


    Quad witching day so hard to call things a trend – lots of covering and re-positioning but, as I said above, things are not that good and the markets are due… overdue… for a correction.

    I'm only going to be here until noon as I have a big VC meeting in Miami.  I'll have to finish the portfolios over the weekend but I'll post the current status of the last 4 – there's no major changes to make and it does depend on how the market holds up anyway.

  4. Butterfly Portfolio:  

    We're going to be super-busy next month but nothing really needs changing here.  Next month is going to be very busy as all those Jan options expire.

    Dividend Portfolio:  

    We didn't make any changes and dropped about $10,000 but dividends get paid next month to make that up.

    Earnings Portfolio:  

    Also down about $10,000, nice and boring in rough times.  

    Future is Now Portfolio:

    This one took the worst hit, down about $44,000.  SPWR took a massive hit – that's half the damage right there so I guess we should take advantage of that one:

    • Buy back the 50 short SPWR 2023 $35 calls at $2.10 ($10,500) 
    • Roll the 50 2023 $20 calls at $6 ($30,000) to 50 2024 $15 calls at $10 ($50,000) 
    • Sell 30 2023 $27 calls at $3.75 ($11,250) 
    • Roll 20 2023 $20 puts at $4.95 ($9,900) to 25 2024 $20 puts at $7.50 ($18,750) 

    So we're spending net $10,400 to move to a $60,000 spread at a much lower strike (and it's not fully covered).  

  5. SPWR looking like a buy!

    Remember, money is a theoretical construct. Governments worldwide are positioning to protect their mythical monopolies. Because, without Wonderful Government creating money for us little people, how could we ever survive?

  6. Phil I see only one comment on SPWR 2023 what about the rest of the ports? No comments to any? Or is my site not working?

  7. yodi: Above the portfolios Pjil posted:

    "I'm only going to be here until noon as I have a big VC meeting in Miami.  I'll have to finish the portfolios over the weekend but I'll post the current status of the last 4 – there's no major changes to make and it does depend on how the market holds up anyway."

  8. daveo,

    Thanks got it!

  9. Not too much damage overall.

    Mythical monopolies/BDC – I'm starting to agree with you.  This QFS thing is starting to sound desperate.  

    SPWR/Yodi – We did the other portfolios already.  This was the only one we hadn't adjusted them on.

    Have a great weekend everyone!

    - Phil

  10. California pot companies warn of impending industry collapse