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Wuhan Wednesday – China Stimulus Pulls Markets out of Their Tailspin

MORE FREE MONEY!!!

This time it's China's turn to wave the stimulus wand with Vice Premier Liu saying Beijing will roll out more measures to boost the Chinese economy as well as (and this is more important) "favorable policy steps for its capital markets."  China had been cracking down on their own Tech Oligarchs sending stocks like BABA, BIDU and DIDI down more than 2/3 but it was beginning to get real and those companies were about to start laying people off – and that is where the Chinese Government had to relent.

It's all well and good to be hating on Capitalism – but you have to have something to replace it with.  No one seems to have figured that out yet.  So the Hang Seng is up 9% this morning and BABA is up a ridiculous 21% pre-market, BIDU up 15% and DIDI up 45% – how insane is that?  Investors also took comfort from Ukrainian President Volodymyr Zelenskiy's comments on Wednesday that peace talks with Russia were sounding more realistic.  

So everything is awesome again this morning and the S&P is running right back to test resistance at 4,320, where it wil fail because the Death Cross just happened and this news doesn't actually change the fact that China is in lockdown and Russia is at war and the Fed is tightening anyway due to out-of-control Inflation and the Supply Chains are still F'd and the planet is daying.  Happy Wednesday!  

Ignoring World events, it's actually good news to see us bounce off the weak bounce line on /ES and go right back to the strong bounce line but it's only REALLY good news if we get back over it and hold it and that's unlikely with the downward pressure from the Death Cross but that Powell is a silver-tounged devil – and he's been excellent in the past at telling the markets what they want to hear so it ain't over 'till the Fed lady sings this afternoon, at 2:30 and we will be covering it during our Live Trading Webinar, which begins at 1pm, EST.  – YOU CAN JOIN US HERE.  

We got throuogh our Future is Now portfolio review during our Live Member Chat (you can join that here) and there was nothing there we want to get rid of, so I guess I'm satisfied with the 20% market correction though not enough so that we don't have $1M worth of hedges in our Short-Term Portfolio.  On the whole, as I said we'd be through mid-March, we're still waiting to see how our Bounce Chart resolves itself:

  • Dow 36,000 to 28,800 would be a 7,200-point drop with 1,440 bounces to 30,240 (weak) and 31,680 (strong).   
  • S&P 4,800 is 20% above 4,000 and that makes it an 800-point drop with 160-point bounces so 4,160 (weak) and 4,320 (strong).
  • Nasdaq is using 13,500 as the base and we bottomed yesterday at 13,103.  14,100 is the weak bounce and 14,700 is strong.  
  • Russell 1,600, would be about an 800-point drop with 160-point bounces to 1,780 (weak) and 1,960 (strong).

Nothing at all has changed since Last Wednesday.  While it would be encouraging to see 4,320 turn green this week – it won't matter much if the Nasdaq is still below the weak bounce at 14,100 and, even after this 2-day rally, they are still down at 13,700.  Keep in mind that 1,600 is down 33% for the Russell as it passed its 20% line (1,920) back in January.  At least it's back over that now.  

Now, on to the next crisis.  Russia is about to default on up to $150Bn worth of debt if they follow through with their plan to make interest payments in Rubles instead of Dollars (as required).  They can't get Dollars and the Ruble is essentially worthless due to sanctions and the bill is due today.  As noted by Bloomberg:

Failure to pay, or paying in local currency instead of dollars, would start the clock ticking on a potential wave of defaults on about $150 billion in foreign-currency debt owed by both the government and Russian companies including Gazprom, Lukoil and Sberbank.

Because much of Russia’s debt was rated investment grade just weeks ago, the securities were pervasive across global fixed-income portfolios and benchmarks, meaning the impact could ripple across pension funds, endowments and foundations.  Russian businesses and households are facing a double-digit economic slump and inflation accelerating toward 20%.  About half of the country’s foreign-exchange reserves, some $300 billion, have been frozen.  Regardless of the Kremlin's policy on foreign debt payments, companies will find it harder to service their obligations as falling demand hits sales and profits.

Possible Default Scenarios

 

Russia pays in dollars Debt crisis averted, for now. Investors will then look ahead to other payments, such as a dollar bond maturing April 4.
Russia pays in rubles Some of the bond contracts have a built-in rule allowing this. But the ones with interest payments due on Wednesday don’t, so most investors would consider it a default.
Russia doesn’t pay at all After a grace period, this would be a classic, hard default. Russia is locked out of markets until it is remedied.

Technically, Russia will have 30 days to cure it's default so, as long as they end aggression in the Ukraine and the US removes sanctions by April 15th – everything will be fine…  sure it will…  Can you name any other countries with crashing bond values due to out-of-control Inflation and crushing Debt?  AnyoneBueller?  

At this moment, our own National Debt is $30.3Tn and I have long been warning we will hit $32Tn by the end of the year but I was wrong as the Budget Deficit for 2022 – even WITHOUT more stimulus – is $2.7Tn so we will pass $32Tn in the 3rd quarter at this pace.  Additionally, if the Fed raises rates just 0.25% this afternoon, that will be an additional $75Bn in interest due on the current debt.  So, if it's $75Bn per 1/4-point rate hike then the 6 rate hikes expected in 2022 will cost the Government an additional $450 BILLION – and that is JUST a 1.5% rate hike for the year. 

So pay close attention to Russia's default, we are not far behind them!  Now, the Fed could NOT raise rates but then inflation will run out of control and then the Government that spends $6.8Tn a year would spend 10% more and that's $680Bn so, really, there's no way to win – either inflation continues and we spend outselves to death or we contain inflation and Government spending pops to $7.3Tn with a $3Tn deficit.   

Since Government revenues are $4Tn, covering the $3Tn deficit would mean raising all taxes by 75%.  Though not all taxes can be raised.  Our glorious Corporate Masters are already paying $324Bn in taxes – that is almost 8% of all tax revenues and almost 5% of what they make – surely we can't expect them to do more for the country – they will leave!  Well, that's what they keep saying but they never do.  How has Russia and China worked out for them so far?  

That's right, Globalization is no longer a given and suddenly the US is looking like a very safe haven to conduct your business (although we may elect Trump again and then you are on your own) – companies SHOULD pay a premium for that.  Instead we give them a discount and the country falls apart, destroying the very same safe haven status they have profited from.  Doesn't matter to the corporations – they will just relocate – but it would have been smarter to contribute to protecting the haven they were in, right?  

 


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  1. Good Morning.


  2. This Is How World War III Begins








  3. Good morning!  

    We are blasting higher as everything must be AWESOME again.

    Good thing we didn't fold on BABA.  

    I'm still not ready to spend more money on BABA but Munger may have nailed it getting in at $100.

    EIA not helping oil but we'll see how much SPR was used at 1pm:

    It's a net small build.

        

    The contracts roll over tomorrow so there may be a lot of people on the wrong side of April with 119,000 contracts still open as of this morning.  We could be looking at a big sell-off as the contract closes but May, June and July are only a bit over 500,000 open – so it's not a rolling crisis like we had last year.

    Click for
    Chart
    Current Session Prior Day Opt's
    Open High Low Last Time Set Chg Vol Set Op Int
    Cash - 96.44 96.44 96.44 21:00
    Mar 15

    96.44s*
    -6.57

    -
    103.01

    -
    n/a
    Apr'22 95.23 99.22 94.82 96.01 09:27
    Mar 16

    -
    -0.43 149184 96.44 119614 Call Put
    May'22 93.70 97.93 93.50 94.43 09:27
    Mar 16

    -
    -0.36 72226 94.79 273240 Call Put
    Jun'22 91.65 96.00 91.65 92.58 09:27
    Mar 16

    -
    -0.25 34325 92.83 181156 Call Put
    Jul'22 89.20 93.88 89.20 90.69 09:27
    Mar 16

    -
    -0.18 13606 90.87 97644 Call Put
    Aug'22 88.24 91.83 88.04 88.67 09:24
    Mar 16

    -
    -0.28 7280 88.95 55416 Call Put
    Sep'22 86.52 89.88 86.45 87.30 09:26
    Mar 16

    -
    -0.05 9265 87.35 78503 Call Put
    Oct'22 85.80 88.50 85.47 86.28 09:26
    Mar 16

    -
    0.18 3223 86.10 63043 Call Put
    Nov'22 85.10 87.15 84.57 84.57 09:21
    Mar 16

    -
    -0.50 2561 85.07 55159 Call Put
    Dec'22 83.50 86.38 83.30 84.17 09:27
    Mar 16

    -
    0.04 19935 84.13 244382 Call Put
    Jan'23 83.65 85.18 82.65 82.65 09:21
    Mar 16

    -
    -0.59 1041 83.24 49624 Call Put
    Feb'23 82.40 84.15 82.40 83.83 08:30
    Mar 16

    -
    1.44 399 82.39 39027 Call Put

    Nas and RUT at 2.5% lines for the day:

       

    Of course, /ES 4,320 is most important but Russell 2,000 matters too.  




  4. Phil//. What is your take on NLY?  Here is an article that talks about the negative side of investing in NLY.  Wanted to hear your thoughts 

    Thanks 


  5. Butterfly Portfolio Review:  $1,460,944 is down $60,760 since our 2/17 review but we were up a silly $165,342 then so it was bound to correct.  We don't sell many March contracts – that's another factor as we make more money on quarterly expirations (Jan, April, July, October).  The VIX is higher and we sell a lot of premium so we always look bad in a sell-off.  On the bright side, a lot of short calls that were a problem are not anymore. 

    We are very AAPL-dependent as well and AAPL is down from $170 to $158 (7%) but we sold the April $155 calls (which we bought back) – so really right where we thought it would be.  We have very close to $900,000 (63%) in CASH!!! so lots of room to adjust, so let's see if anything needs adjusting:

    ?

    • AAPL – Too low to sell more short calls so we wait.

    AMZN – Right in the zone for our short puts and calls to go worthless.  

    • BDX – Good for a new trade.  We should have sold some calls.

    • DIS – Thank goodness we covered this one!   The short calls made $45,000 – staving off huge losses from the longs.  Obviously we'll buy back the short April $160 calls at $530 – maybe we can sell them again on a bounce.  

    • F – We rolled our longs lower and sold some calls last month.  Now we can buy back the 60 short April $20s and the 100 short 2024 $27s, not because I'm raising the target but because we'll sell something for more than $1.60 on a bounce – even if it has to be the $25s.

    These little nudges are what we do in the Butterfly Portfolio to take advantage of moves within the channels our stocks make.  If we're wrong – we simply sell a lower strike than we hoped but when we are right – it can be extremely rewarding.

    • GNW – The spread is in the money and the puts are net $4, so those are on track too so it's still good for a new trade at a net $1,575 credit on the $10,000 spread.  This was meant as an example as a simple way to make money playing conservative spreads.  Our original cost was net $1,000 to profit $9,000 (900%) so way better payout now.  Since we spent net $1 on the bull call spread and we can sell the $3 calls for 0.80 ($4,000) and salvage most of that $1, let's do that and roll them to 100 2024 $3 ($1.70)/4 ($1.10) bull call spreads at 0.60 ($6,000).  So we're spending $2,000 on top of our original $1,000 and now for $3,000 we have the $10,000 2024 spread ($7,000 upside potential at a lower strike), 40% covered by the 2023 $5 calls.

    It's nice to want to make 900% in 18 months if everything works out perfectly, spending $1,000 to make $9,000 but, when it doesn't go perfectly, the fallback is to spend $2,000 to make $7,000 (350%) in 30 months is not too bad for a trade that didn't work out yet.

    • GOLD – We're worried about peace breaking out so we'd better cover, I guess.  We got the pop we wanted so we don't look a gift horse in the mouth.  It's tempting to buy back the puts but I don't mind owning GOLD at net $14.90 so there's really no point in being cautious, is there?  The Jan $15 calls are $8.50 in the money and we can sell the 2024 (yes, a year longer) $22 calls for $5.30, so let's sell 35 (2/3 cover) of those for $19,250 and we only spent net $10,000 on the spread so a double off the table and the $19,000 is plenty of money to roll our $15s to the 2024 $10s (now $13.50) if need be – but I'm sure we'll be more creative than that.  

    • IMAX – I see blockbusters making good money again and that's all IMAX cares about – they don't do small movies.  The March $19s were a perfect sale and will expire worthless and let's give it a chance to pop before we cover again.  China lockdown will have some negative effect – hopefully it doesn't spread. 

    • KO – Nice safety stock.  Not worried about them but too low to sell calls. 

    • MJ – Let's buy back the April $10 calls and see how things go.

    • UL – Our newest position (we don't add many).  Right on track at the bottom of our projected range.  May as well buy back the short May $55 calls as they are already up 90% so we'll wait for the bounce to sell more.  

    • WBA – Short April calls can be bought back with an 86% gain so let's do that with a month to go.  

    • WHR – Lets buy back 15 (1/2) of the 2024 $250 calls while they are half price. 

    Gosh, I'm more bullish than I realized.  


  6. is there a link to todays webinar?


  7. BDX – we did sell calls against it (https://www.philstockworld.com/2022/01/11/tuesday-top-trade-review-q1-2021/#comment-8111799). 

    Note that there is an embecta spin off that will occur next week – we should know if we are going to end up with irregular options very soon, so might make sense to exit the position next week once we know more and re-enter using the regular options. 


  8. Phil maybe we should have a hedge/ inverse of the Future is now portfolio called something like Their time is past. It would short Buggy Whip type companies that are hopelessly outmoded. :)


  9. Webinar/Tommy – It's in the morning post!

    Gosh, if I'm the only one who reads that thing, I'll just start getting up later…

    NLY/Rookie – I love NLY/CIM.  They have proven over the long term and through the 2008 crisis that they are flexible enough to handle whatever the economy throws at them.  With a REIT, it's really the management team you are investing in, the properties are incidntal.

    BDX/Rn – That's right.  We bought those back on a dip and I wish we sold on the spike – it would be nice if we timed everything perfectly, right?   Damn, I hate spin-offs.   Please remind me to deal with that but you are right – we are ahead and have no short calls so why not just go back to cash until after the mess is cleaned up.

    Buggy whip/Randers – I love that idea.


  10. Phil,

    Great Clip!  We could follow Joe Manchin's corporate donations. 


  11. Just about Webinar Time 

    ROFL Randers!  See if you can find a list, it would be a very funny article to write if it correlates.


  12. Wow, BIDU strong buy.

    Bought 10 NEE Jan23 135 calls for 0.25


  13. VALE – Phil, I sold when it peaked last week.  With China stimulus, think they may move higher from here?  Thinking of getting back in as they are at channel support.


  14. Comment content omitted because it is too long.


  15. BIDU/BDC – Isn't it crazy how things snap back?

    This is why I say, if you are going to stick with a position, you really have to keep rolling it down when you can.  A reversal like this is a real shame if you didn't take advantage of it.  We didn't keep going with BABA and now we really regret it – but at least we didn't capitulate.

    So Powell did a good job of making the hikes seem not so bad but these are some nasty, nasty numbers:

     

    Variable Median1 Central Tendency2 Range3
    2022 2023 2024 Longer run 2022 2023 2024 Longer run 2022 2023 2024 Longer run
    Change in real GDP 2.8 2.2 2.0 1.8 2.5–3.0 2.1–2.5 1.8–2.0 1.8–2.0 2.1–3.3 2.0–2.9 1.5–2.5 1.6–2.2
    December projection 4.0 2.2 2.0 1.8 3.6–4.5 2.0–2.5 1.8–2.0 1.8–2.0 3.2–4.6 1.8–2.8 1.7–2.3 1.6–2.2
    Unemployment rate 3.5 3.5 3.6 4.0 3.4–3.6 3.3–3.6 3.2–3.7 3.5–4.2 3.1–4.0 3.1–4.0 3.1–4.0 3.5–4.3
    December projection 3.5 3.5 3.5 4.0 3.4–3.7 3.2–3.6 3.2–3.7 3.8–4.2 3.0–4.0 2.8–4.0 3.1–4.0 3.5–4.3
    PCE inflation 4.3 2.7 2.3 2.0 4.1–4.7 2.3–3.0 2.1–2.4 2.0 3.7–5.5 2.2–3.5 2.0–3.0 2.0
    December projection 2.6 2.3 2.1 2.0 2.2–3.0 2.1–2.5 2.0–2.2 2.0 2.0–3.2 2.0–2.5 2.0–2.2 2.0
    Core PCE inflation4 4.1 2.6 2.3   3.9–4.4 2.4–3.0 2.1–2.4   3.6–4.5 2.1–3.5 2.0–3.0  
    December projection 2.7 2.3 2.1   2.5–3.0 2.1–2.4 2.0–2.2   2.4–3.2 2.0–2.5 2.0–2.3  
    Memo: Projected appropriate policy path
    Federal funds rate 1.9 2.8 2.8 2.4 1.6–2.4 2.4–3.1 2.4–3.4 2.3–2.5 1.4–3.1 2.1–3.6 2.1–3.6 2.0–3.0
    December projection 0.9 1.6 2.1 2.5 0.6–0.9 1.4–1.9 1.9–2.9 2.3–2.5 0.4–1.1

    GDP has been downgraded 30% from 4 to 2.8 and inflation is up over 50% from 2.6 to 4.3 and that's AFTER doubling the rise in Fed funds from 0.9 to 1.9.  What exactly are the markets excited about here?  

     


  16. VALE/Jeddah – I do like them long-term and we have an aggressive position in the LTP that we haven't even re-covered yet. 

    VALE Short Put 2023 20-JAN 15.00 PUT [VALE @ $17.64 $0.40] -40 9/13/2021 (310) $-17,000 $4.25 $-2.41 $-4.25     $1.84 $-0.09 $9,640 56.7% $-7,360
    VALE Long Call 2024 19-JAN 10.00 CALL [VALE @ $17.64 $0.40] 50 11/29/2021 (674) $16,250 $3.25 $4.83     $8.08 $0.62 $24,125 148.5% $40,375

    When we get to it, however, I think we should sell some calls. 


  17. Wow, big finish in the indexes:

       




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