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Inflationary Thursday – Lael Brainard Testifies to Congress

Omnicron is still surging.  

I know this chart can be surprising to some of you who were just watching the "news" about how Fauci is losing his cool as Republican Senators continue their campaign to discredit him and his "facts" but perhaps it's also a fact that Senator Roger Marshall (R-Kan) is a moron – as with everything else, he refuses to be tested….

What the Republicans are trying to "prove" of course is that Fauci invested in some company that makes vaccines or something (we bought GILD, PFE. MMM and MRNA early on in the Covid cycle as it seemed sensible) to "prove" this who vaccine thing is nothing but a profit-making hoax for Fauci – kind of like the way Florida's ex-Governor (and now Senator), Rick Scott pushed for welfare recipients to be drug-tested by a company he had a $62M investment in.  That's one thing about Republicans – they know how all these scams work – because they originated them!

It's not so much that Covid is just a giant scam that is angering the GOP but that they didn't get in on the ground floor - since their leader was so busy pretending it didn't exist at all until he finally caught it himself.  That made it impossible for Republican lawmakers to invest in vaccine companies without being branded a "traitor" to the party – and now they are bitter about missing out.

Republicans also need Covid to be over so their other investments can make money.  They are working hard to start a new war with Russia or China but, in the middle of a Global Pandemic, it's hard to get people worked up about protecting the Ukraine or keeping Taiwan independent (we gave up Hong Kong without a fight).  Since the virus isn't going away on it's own, they are going back to the playbook of denying it is actually a threat and attacking anyone who says it is.  

Yes, 4 TIMES as many cases as our previous, pre-vaccine peak and only 110% as many hospitalized (though it's a lagging indicator) is a "milder" form of Covid but the hospitals are being overwhelmed and we're running out of supplies and doctors and nurses are getting sick, which makes the staffing shortages worse and suppliers have the same problem so costs are skyrocketing, etc.  Mild is a strange way to describe what is happening.

Fortunately, we don't have to be Republicans.  We can still invest in stocks that benefit from their stupidity instead.  Moderna, MRNA, has fallen more than 50% below it's peak and yes, it's peak was silly, but $222/share is $90Bn in market cap for a company that will make $11.5Bn in profits this year.  It's being sold off because people think it's a one-trick pony but the Covid vaccine was more of a proof of concept for their process and they now have $22Bn (2 year's profits) to play with in the R&D department:

The thing about the mishandling of the pandemic is that we gave the virus a chance to spead so widely that it is now ENDEMIC, like the flu – and we're never going to be completely rid of it.  That means MRNA will make money for many years to come on covid vaccines so, even if they are a one-trick pony, that trick may last a lifetime.  Still, they have a robust pipeline – as noted in their recent report:

We have been waiting for MRNA to bottom out so we could get back in (we sold our old position near the top) and we discussed making a move in yesterday's Live Trading Webinar (replay available here).  We sold 5 of the 2024 $200 puts for $25 and they are now $50 so we're down 100% on those but our net entry is $175 and MRNA is at $222 so it's only a loss on paper – we intend to stick it out.  As a full trade for our Long-Term Portfolio (LTP), I would like to add:  

  • Sell 10 MRNA 2024 $180 puts for $40 ($40,000) 
  • Buy 20 MRNA 2024 $200 calls for $78 ($156,000) 
  • Sell 20 MRNA 2024 $250 calls for $59 ($118,000) 

That's a net credit of $2,000 on the $100,000 spread.  There's a heavy obligation there to buy 1,000 shares of MRNA at $180, or net $178 but that's a 20% discount to the current price.  If MRNA fails to hold $200 or our $200 puts (the ones we already sold) go over $60, we will stop them out with a $35,000 loss and stop out of 5 of the short $180s for about $25,000 and then we'd be in for net $58,000 on the $100,000 spread and we'd reposition from there.  Hopefully, it doesn't give us that kind of trouble and we make $102,000 (5,100%) against our cash investment.  

Another risk the market is ignoring is inflation and Tuesday, Fed Chairman Powell testified to Congress that they can have their cake and eat it too and the markets loved it and we have rallied strongly since – albeit on low volume.  As I have noted before, the trick in this market is to simply stop the sellers from selling and the inflows will take care of the rest.  

The S&P topped out at 4,800 and we bottomed out at 4,600 (spikes don't count) which is a 200-point drop so the zones we watch are 40-point bounces so 4,640 was the weak bounce, 4,680 was strong, 4,720 (where we are this morning) is a strong retracement from the top and then 4,760 is a weak retracement from 4,800.  Those are the zones we'll watch on the S&P 500 but the bigger concerns are that the Russell is still failing to take back 2,200 and the Nasdaq keeps failing at 16,000.

Today we hear from Lael Brainard, who is very dovish, at her Senate confirmation hearing to be #2 at the Fed and we'll see what kind of inflation hawk she has turned into since December, when the Fed was still calling inflation "transitory".  Powell is Powell and we knew what he'd say but Brainard could signal the new tone for the Fed as they turn from stimulating to inflation-fighting in 2022.  

Brainard is replacing Clarida, who is retiring and he had been a centrist and I think the markets think she will come in dovish, as usual but I think her concerns about the damage inflation causes to working people will trump her other concerns as we're essentially at full emplolyment with a pretty strong (stimuluated) economy – so it really is time to reign things in a bit.  

We'll see how the market digests this later this morning.

 


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  1. Good Morning!


  2. Good morning! Take a look at sqqq and sds. Apparently they have sold more shares and screwed us over again! No cost basis, not saleable and only "for overnight trades" according to TD. This has happened so consistently that thankfully I almost had a free trade by selling the calls. Can't buy those back either it seems. Wow, they are consistent like the Vix always pulling this b-4 a big market move. Obviously they are expecting everything to tank and so much for hedges!


  3. Closed it all out fast. thankfully.



  4. Europe’s Bond Sales Just Set a New Record





  5. Good morning!  

    Nas and Rut coming down, waiting for Dow and SPX to follow suit.

       

    Brainard not as good at doing the spin thing as Powell is.

    SQQQ/Pirate – It's only because they reverse-split.  Things will get back to normal soon.  

    SQQQ is splitting 1 for 5 so our 200 long 2023 $5 calls become 40 long 2023 $25 calls with the same cost basis ($83,000) or $20.75 but now SQQQ is at $32 so we're $7 in the money ($28,000) and we will roll out the other calls to widen the spread but now a 20% drop in the Nasdaq would boost SQQQ from $32 to $51 – so that's our new target and would be $26 in the money ($104,000).  The short calls get similarly shoved up and reduced.  

    TQQQ is a similar mess (2:1 split) but, on the whole, it's good for us.  TQQQ is now $75 and we had 20 of the $200/150 bear put spreads so right at the money for the full $100,000 payoff, no matter how they split them up.  

    The forward splits will decrease the price per share of each fund with a proportionate increase in the number of shares outstanding. For example, for a two-for-one split, every pre-split share will result in the receipt of two post-split shares, which will be priced at one-half the net asset value (“NAV”) of a pre-split share.

    Illustration of a Forward Split

    The following table shows the effect of a hypothetical two-for-one forward split:

    Period

    # of Shares Owned

    Hypothetical NAV

    Value of Shares

    Pre-Split

    100

    $120.00

    $12,000.00

    Post-Split

    200

    $60.00

    $12,000.00


  6. Phil / MRNA – For the MRNA trade, what is the portfolio margin that your broker is asking ? In my portfolio margin account, it's 94K. Does that sound right?


  7. Phil / SQQQ – Would you recommend closing the pre-split SQQQ options and entering into equivalent new SQQQ positions?


  8. Phil-I"ve waited them out before and it wasn't worth it to me. I'll get back in at the new level. I had "fit" which my options were assigned to new shares. I was supposed to make some money on it. Never happened. I was assigned the shares alright BUT there were no shares!!! Tried to get the compensation that was promised and TD just worked me over. Really don't trust them at all..


  9. MRNA/Jij – If you don't have portfolio margin then yes, that may be the case and, if so, it may not be a good trade for you.  As I noted earlier, the LTP is a $2.4M portfolio (with Portfolio Margin) and $1.7M in cash with $700,000 worth of hedges in the STP and the size of the trade is appropriate to that – it's certainly not something you would even consider in a portfolio where even $94,000 in margin would make a difference.  

    To make 50% next year in the LTP, we need to make $1.2M – so of course we need large trades that can make $100,000 and, if it costs us $1.2M in margin to make $1.2M – that makes sense too, right?

    Notice with PM, only $10K of buying power is being used on the $180 puts:

    You are also using $38,000 in cash for the bull call spread.   Under no circumstances do you want to be on the hook to buy more MRNA than you are comfortable being long-term long on.  In this case, we risk being assigned 1,000 shares at $180 (assuming we let the spread expire worthless) and let's say we go to $80 — then our real risk is $100,000.  And what would we do at $80?  We would double down to average $130 and then we'd sell the 2025 or 2026 $150 calls for $40 (the 2024 $250 calls are currently $56) and then sell 20 of the 2025 or 6 $80 puts for $20 (total guess) and that would knock the basis down to $70 and $75 if it keeps going lower on 4,000 which is $300,000 and would cost us $150,000 in margin.  So, if you don't REALLY want to own 4,000 shares of MRNA for $75 – why on Earth would you be buying any bullish position at $214 (nice dip today for our entries)?  

    ANY time you enter a trade, you need to think it through to its worst (reasonable) case scenario and, if you are comfortable playing that out – then it's a good trade.  If you don't have the money, margin or conviction to play it out long-term – what's the point of getting started?

    SQQQ/Jij – If you can get good prices going to cash then sure, you can always re-buy later.  Officially I'm just going to let them settle down and see where we are.  


  10. TD/Pirate – Good point, they are not very helpful when there are splits.  


  11. Phil – I have a portfolio margin account with Schwab. The total portfolio margin that Schwab is blocking for the trade is $94K with the short puts accounting for $86K of it. Looks like it's time to switch to a different broker.


  12. PM/Jij – Sometimes they boost the PM requirement for volatile stocks.  

    Fun action this morning:

       

    What crisis?  I don't see any crisis.  Nothing to worry about:

    The administration will procure more tests to meet demand, deploy military medical teams to hospitals in six states, and will unveil a plan next week to provide free masks for Americans, the president said.201 3 min read

    President Biden’s choice to be the central bank’s second-in-command is testifying in a confirmation hearing before the Senate Banking Committee. 2 min read

    Mortgage Rates Jump to Highest Level Since March 2020

    Rates have now risen for three straight weeks, but still remain near historic lows. Higher borrowing costs, combined with record-high prices, could push some buyers out of the market.32 min ago 1 min read

    The global average surface temperature last year reached its sixth-highest level since reliable temperature record-keeping began in 1880, according to reports released by two federal agencies. 4 min read

    All Is Well GIFs - Get the best GIF on GIPHY


  13. Fidelity is using 20K in buying power for the MRNA puts on a PM account. My understanding was that the buying power used for each position is a function of the diversification of the portfolio (so if it is a pharma/biotech heavy portfolio, the buying power required will be higher) – is that not the case? 


  14. Diversification/Rn – I know they supposedly take overall risk into account and perhaps having the STP positions lowers the overall risk rating and, of course, I'm all about diversification.  Never hear it put that way though that there's an actual algo tracking your sectors.  Good idea if there is.  

    Nonetheless, per my worst-case calculation above, $100,000 is what YOU should be allocating to that position – regardless of what your broker allows you to do.  Using too much margin is never a good thing.  

    Kind of scary how fast the Nasdaq gives up it's gains. 

    Funny how that happens on split day for the ETFs.


  15. That's the problem:  How many buyers are there going to be for $2,800 shares of GOOGL or $1,060 shares of TSLA when sentiment turns negative?  Not too many Robin Hood traders can afford that.  

    That's the trick with a lot of these $200+ stocks, only people with fat accounts tend to hold them and those people don't tend to be quick to sell so the selling volume is light but the 401Ks and IRAs (and buybacks) keep pumping money in, driving the scarce shares higher regardless of the price.   The problem is, when something breaks down and those ETFs are forced to sell – there isn't a buyer in site…  

    /NG took a bath today:

    Look out below if the Dollar pops back up.


  16. Nas giving up all the Powell gains:


  17. TSLA actually having a bad day – bouncing off the 5% rule:

    That's intra-day down 5%.  Overall rejected at $1,200 back to $900 was a 25% drop of $300 so $60 bounces to $960 (weak) and $1,020 is where we need to watch now from above.  Even if we are generous and count $400 and $800 as proper consolidation points, you are still dealing with the run from $800 to $1,200 so $400 is $80 pullbacks to $1,120 (weak retrace) and $1,040 (strong retrace) so it's below $1,040 that's going to be concerning.  

    So, when you see the same zone come up both ways ($1,020 – $1,040) – then you know that's a very key area to watch.


  18. Yes, it is a scam!

    So, if inflation is peaking in March and we're just getting the December reading, doesn't that mean we have 3 more terrible inflation reports to go?  

    "Look Ma, I'm spinning!"  

    Speaking of expensive stocks:

    Gravity is a bitch:


  19. Phil:  I have Jan 23 1/4 WTRH spreads.   The long 1s can be rolled to the .50s for perhaps .15.  With most stocks this would be a no-brainer.  Do you think that it is worth putting more money into WTRH?  At this point the value of the existing spreads is negligible.  So perhaps the only intelligent move is to assume a total loss, but hold on, on the off-chance that the original premise on WTRH actually materializes.  Any thoughts?

    Also, if Apple continues to pull back, at what price level do you think Apple warrants a spread?  The 120s seem like a nice threshold but it is hard to imagine such a pullback absent a severe market collapse or a major change in sentiment.

    Thank you.


  20. WTRH/John – Yeah, no love on those so far.  There's been no news at all and they spent $90M on Retail Innovation Labs in mid-December, which tanked the stock.  Now they bought Cova (dispensary) as well.  The idea is to run a cannabis delivery service but it's off-point for WTRH, which has a $159M valuation at 0.64 and they are doing about $190M in sales at break-even.  But they do keep signing up restaurant partners so I'm for spending money to buy more time, not so much position and we'll see how Q4 looks when they report in early Feb.  

    • Adjusted EBITDA1 for the third quarter of 2021 was $3.1 million, compared to $2.5 million in the second quarter of 2021 and $13.0 million in the third quarter of 2020.

    • In the third quarter of 2021, we continued to invest in technology and integrations in several key areas of the business, with the expectation of positioning ourselves for long-term growth.

    Mr. Grimstad noted, "We continue to recover from the third quarter hurricanes that affected our core Southeast markets and financial results. Despite these events, Adjusted EBITDA for the third quarter of 2021 increased by 24% from Adjusted EBITDA of $2.5 million in the second quarter of 2021 primarily as a result of increased operational efficiencies."

    Additionally, Mr. Grimstad emphasized, "Our strategy is to expand our ecosystem, which today is comprised of our restaurants, diners and independent contractor drivers through the enhancement of our platforms and providing additional products and services. During the quarter we announced the acquisition of several payments companies, ProMerchant LLC, Cape Cod Merchant Services LLC and Flow Payments LLC, which is consistent with this strategy. We have continued to make progress this quarter in offering this enhanced product suite to our ecosystem."

    Upcoming Events

    The 2023 $1 calls are 0.25 and the 2024 $1 calls are 0.40 and the 0.50 calls are 0.60 so spending 0.15 to buy a year is a no-brainer but spending 0.20 more to be 0.14 in the money is iffy so I'd go out to the longer $1s while they are cheap and then see how earnings go next month.  These guys are still very small – between Texas and Florida – along the panhandle.  The question is whether or not they are catching on and how well they can expand their markets.

    https://waitrapp.com/


  21. I ordered from Panera yesterday because they advertised to me that it's only $1 for delivery if I use their app but there was also a 10% "Convenience Fee" so BS on that and, worst of all, in the end they flipped it to Door Dash – who I have an annual pass with and don't pay fees anyway.  

    Meanwhile, the soup is great and the bread bowl is great and the walnut cream cheese is great, so 3.5 stars overall.  

    Anyway, what's interesting to me is it doesn't seem worth it for Panera to have their own delivery people, which bodes well for these food services.  Aside from signing up all these restaurants that never used to have delivery, they are taking over the delivery of all the pizza places and chinese places that used to deliver.  It's a big market out there and there's loads of room for growth.

    Also, this "Ghost Kitchen" concept is growing fast – Kitchens that don't actually have a restaurant and are only for delivery.  The fact that that's a rapidly growing thing means it's likely the delivery companies are no flash in the pan.  

    WTRH sees a way to get into cannabis delivery and I think that's smart – as long as it doesn't detract from their basic growth.

    Check out WTRH is where DASH was in 2018ish. 

    Year End 31st Dec 2015 2016 2017 2018 2019 2020 TTM 2021E 2022E CAGR / Avg
    Total Revenue
    $m

          291 885 2,886 4,558 4,868 5,998 215%
    Operating Profit
    $m

          -210 -616 -436 -603      
    Net Profit
    $m

          -204 -667 -461 -625 -389 -272  
    EPS Reported
    $

    0.000 0.000 0.000 -0.652 -2.10 -1.45 -1.91      
    EPS Normalised
    $

    0.000 0.000 0.000 -0.652 -2.10 -1.45 -1.76 -1.13 -0.807  
    EPS Growth
    %

                       
    PE Ratio
    x

                       
    PEG
     

                       
     

    DASH didn't go public until Dec of 2020, when they were already doing $2.8Bn in sales.   I think WTRH went public way too early but they are signing up 1,000 new restaurants a month – that's solid.  


  22. Which Companies Won or Lost Your Affection During Pandemic?

    • This is the most important thing Biden can do to get inflation under control The truth is that presidents have relatively limited tools for fighting inflation. Biden has been reluctant to pull even those levers, such as lifting tariffs or accelerating the process for legal immigration. By law, it’s the Federal Reserve’s job to maintain stable prices. If Biden is truly worried about the threats posed by inflation, he will immediately nominate three professionals with a track record of political independence and a credible commitment to stabilizing prices. (Washington Post)

    • Look Ahead to 2032, at the Very Least: In this season for forecasts and resolutions, investors will be better off if they are able to think 10 or more years ahead, our columnist says. (New York Times)

    • Four reasons you’re seeing empty grocery store shelves The omicron surge, extreme weather and record December sales are among the reasons that toilet paper aisle is looking shaky again. (Washington Postsee also Why Grocery Store Shelves Are Bare. Again. Supply chains are made of people. (Slate)

    • 50 Company Stocks to Watch in 2022 From Airbnb to Volkswagen, keep an eye on these global stocks this year. Factors include growth prospects, management changes, and planned releases of noteworthy products and services. The impact of the Covid-19 pandemic was important, as were growing sales of electric vehicles, the transition to clean energy, China’s increasing regulatory scrutiny, power shortages, and opportunities in the metaverse. (Businessweek)

    • Are we witnessing the dawn of post-theory science? Does the advent of machine learning mean the classic methodology of hypothesise, predict and test has had its day? (The Guardian)


  23. Any feedback on /CL?  I bought one contract at $82.12 and then doubled down at $82.95.  Closed out one contract today at $82.10 so back to 1.


  24. You are in better shape than I am on /CL, You did the right thing, now you have a great basis. I’m still way behind so I’m letting it ride.  I have long-term conviction and I’m willing to ride it out.   

    Crap finish for the indexes, tomorrow could get ugly.  Possibly we will be saved by pre-holiday volume   


  25. Knock knock, anyone home?


  26. Phil slept in .. ??

    They should pause the day   ;)


  27. Not like Phil to miss a morning post, I hope he won the lottery! 


  28. Good morning!

    Sorry, believe it or not, I thought it was Saturday and went out for breakfast,  Then, while I was eating – I saw the market tickers and went "holy shit!" and raced back.

    Will put a quick post up shortly.