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Two and Ten Tuesday – Yield Curves Invert – Recession Ahead?


There have been more yield curve inversions than Recessions but every time there is a Recession you can look back and find a yield curve inversion.” – Altaf Kassam

When the short-term interest of a 2-Year Note is higher than the interest on a 10-Year Note, you generally get a Recession.

It's not the rates that cause the Recession, it's the fact that there has, at that point, clearly been a mis-pricing in the mid-term Bond Market that will cause a recession because the average mid and long-term note-holders will have to refinance at higher rates, which then means they will have less money for other things and that means the econmy will begin to slow down and hence, a Recession is ahead.  

Don't worry though, we got the last clear Recession warning back in early 2007 and everyone ignored that and the market continued to trade pretty well for another year – and then it crashed 66% and the World almost ended…  So party on World – we still have time. 

Of course, this time may be a little different because of the MASSIVE amounts of Corporate and Government debt that have been fueling the rally for the past decade – a level of debt we all doubled down on in the past two years of Covid.  It wasn't the virus we've been fighting for $11Tn but the Recession which was supposed to accompany it and 

We've discussed the burden of the Government having to refinance debt at 2% higher levels (the Fed's target) next year and this $12Tn of Corporate Debt is ONLY the Non-Financial Debt – it was the FINANCIAL debt that killed us in 2008 but that's very hard to get data on.  Still, $12Tn x 2% higher rates is $240 BILLION a year in additional interest and that's money that will be removed from the bottom lines of the companies we invest in so I would go through my portfolio very carefully and check the debt levels of the companies you invest in and make sure you take that into account…

On the whole, Non-Financial Corporations make about $3Tn in profits and $240M is 8% of $3Tn – that's 8% less profits in 2023.  Do you see that reflected in the forward earnings estimates yet?  Now that the Fed has clarified their intent, responsible CEOs of indebted companies are going to need to take down their forward profit estimates – which is why we are very, very concerned about the upcoming earnings season.

As you can see from the chart, Forward EPS estimates last year were for roughly $180 per 3,800 S&P point (21x forward earnings) and now they are at $230 per 4,500 S&P point (19.5x forward earnings) but what if those earnings estimates are, in fact, 8% too high?  That would push us up to 21.3x and, let's keep in perspective – 16.5x is the normal forward P/E Ratio for the S&P because, as you can see from the above chart, Recessions do happen and those Forward P/E Estimates don't always come true.  

Also keep in mind that those earnings include $11Tn of stimulus by the Government and the Fed in the past 24 months, that's almost $500Bn a month!  Certainly that's not going to continue yet forward growth is being extrapolated as if it is and, as I just said, no one is taking into account the higher rates that will have to be paid on borrowed money – not after 10 years of ZIRP.  

The 2-Year Note has been trying to tell us the party is over since October and the last time it fell this steeply was the Great Crash of 2000 – yet no one is listening, are they?  

At the moment, we have a nice war to distract us and that's already been a huge boon for Oil Companies and Defense Contractors just as Covid was for Internet Companes, Delivery Companies and Media Companies with 300M people sitting at home with nothing to do for much of two years.  Those companies haven't projected lower forward earnings but the Travel Companies have projected a rebound – as if you are expected to stay at home and keep ordering on-line while taking your vacation.  

Not to mention companies like Pfizer (PFE), who made $20 BILLION more than usual last year and I don't begrudge them the profit for helping to save the World but there's also MRNA, who made +$10Bn, BNTX ($9Bn), JNJ ($13Bn), AZN ($8Bn)….  This is simply not sustainable – EITHER the companies that made money on Covid will go back to normal or the companies that make money in a normal World WON'T – you can't have BOTH!

And that's what the market is currently priced for – BOTH Covid and non-Covid companies are projecting continued growth and EVERYONE is ignorning rising rates.  

Something has to give.


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  1. Good Morning.

  2. Sri Lanka is on the verge of default … remember in 2008/9 when those little countries did not matter until they did. Lanka faces worst-ever economic crisis, triggering food and fuel shortages and protests


  3. Media measuring company Nielsen to be acquired in $16B deal

  4. Good morning!

    Big pop at the open but sellers are showing up so we'll see.  We're miles out of danger now so not really worried.


    Oil fell all the way to $98.44 this morning but back over $100 now – we'll see how the bounce looks:


    $114 to $100 gives you $2.80 bounces so call it $102.50 and $105 would be the levels to watch.

    Brent is back to being well ahead of WTIC.

    /GC actually fell below $1,900 briefly.  /SI touched $24 – that was a no-brainer long but I missed it.


    Sri Lanka/Malsg – Yes, those kinds of things are really slipping through the cracks but so many countries are in crisis over food, resources, energy, Finance….  Conditions are more like what came before the Great Depression than just an ordinary Recession.

  5. Ukraine Update: Kyiv Sets Out ‘Minimum’ Goal From Russia Talks

    NATO Allies Are Split on Whether They Should Talk to Putin

    The Yen's Plunge Is a Dilemma of Japan's Own Making.

    Ukraine War Increases Risk of Debt Defaults by Developing Countries

    Fed Factory Surveys Show Pickup in Inflation Expectations.

    Soaring Prices Are Changing the Way People Eat

    China Is Not the Only Country to Face Financial Woes In the Property Management Arena, Now Commercial Property in the US is Uncertain.

    Oil Extends Losses on China Demand Concerns Ahead of OPEC+ Meet

    World Moves From Shortages to Possible Glut of Covid-19 Vaccines.

    "I'm A Wartime General" – Mayor Adams Pledges To Tackle Crime Wave

    “You’re Asking Me to Do What?” – Madison Cawthorn Talks about the ‘DC elites’ Having Orgies and Doing Cocaine (VIDEO)

    The Lovesac Company (NASDAQ:LOVE) soared on Tuesday after the retailer cruised past estimates with its Q4 earnings report.

    Sales were up 51% for the quarter due largely to higher sales volume and lower promotional discounting. Showroom sales, which include kiosks and mobile concierges, were up 59.8% for the period, while Internet sales rose 22.8% and an increase of 164.9% was recorded in the Other channel category.

    Gross profit was up 46% during the quarter. An increase in total freight including tariffs and warehousing costs over the prior year period was said to be principally related to a 590 basis point increase in inbound container freight costs and increased tariffs related to higher product sourcing from China, partially offset by a 110 basis point improvement due to higher leverage of warehousing and outbound freight costs.

    Operating expenses rose 60% during the quarter to help take down the gross margin rate from 57.9% to 55.9%.

    Adjusted EBITDA rose 23.6% for Lovesac (LOVE) to $32.0M.

    A big share price swing in Lovesac (LOVE) was tipped off yesterday based off the options trading on the stock.

    Congrats to all who played that one!

  6. Mar. 29, 2022 10:02 AM ET1 Comment

    • Conference Board March Consumer Confidence Index: 107.2 vs. 107.0 expected and 105.7 (revised from 110.5).
    • The Present Situation index in March improved to 153.0 from 143.0 in February, while Expectations index fell to 76.6 vs. 80.8 in the previous month.
    • "Consumer confidence continues to be supported by strong employment growth and thus has been holding up remarkably well despite geopolitical uncertainties and expectations for inflation over the next 12 months reaching 7.9 percent—an all-time high. However, these headwinds are expected to persist in the short term and may potentially dampen confidence as well as cool spending further in the months ahead," said Lynn Franco, senior director of economic indicators at The Conference Board.
    • Last week, consumer sentiment held mid-March level.

    ETSY +0.81%Mar. 29, 2022 9:55 AM ET

    Loop Capital Markets drooped its rating on Etsy (NASDAQ:ETSY) to Hold from Buy.

    The firm warned that the macroeconomic environment has materially worsened, which is expected to clip Etsy's (ETSY) earnings.

    In an important pullout, the Loop analyst team said it is hearing from several consumer companies that digital marketing inflation is in the 20% to 40% range with consumers being distracted by the macro headlines. That is considered a negative near-term catalyst with customer acquisitions costs on the rise.

    Loop's breakdown: "We're lowering our sales estimates this year and next to be more in line with consensus. Though Etsy beat expectations last quarter, we think the macroeconomic environment has materially worsened since our last note in late February. We now expect 15% GMS growth this year, down from our prior estimate of 19%. We have GMS targeted to grow 20% over the longer term, compared to our prior estimates of 25% (which were above management's long-term outlook). Our earnings estimates were already below consensus, but we are lowering them today on additional inflation in digital advertising."

    Loop took a hatchet to its old price target of $245 to take it to $140. The average analyst PT on Etsy (ETSY) is $212.11.

    BRDS +1.20%Mar. 29, 2022 9:43 AM ET

    • Bird Global (NYSE:BRDSrose after the company said it has received approval to extent its shared e-scooter services in New York City and Washington, D.C.
    • The expansion will result in its e-scooter fleet size increasing to double in New York City and up over 20% in Washington, D.C.
    • This comes right after commuters shift more to electric vehicles due to soaring gas prices. Bird has seen March's daily average ridership up by nearly 70% sequentially in New York City and 48% in Washington, D.C.
    • “Ridership in the Bronx has been incredible, demonstrating the very real and complementary benefits that micro-electric transportation can bring both to residents and established transit services in New York City,” said Renaud Fages, Chief Mobility Officer at Bird.

    I think scooters are a great way to get around cities.  BRDS is pre-profit but only $685M at $2.54 and revenues doubling from $100M in 2020 to $205M last year and $369M projected this year (but this deal should put them over $400M) and again a double to $732 next year is expected.  Seems like a great candidate for our Future is Now Portfolio so let's promise to buy 10,000 shares by selling 100 of the Oct (as far as they go) $2.50 puts for 0.70 ($7,000), which would net us in for $1.80 and we'll see how that goes.

  7. From BRDS CC:

    Travis VanderZanden

    1:54 Thank you, everyone, for joining us today for our fourth quarter and full year earnings conference call. We ended 2021 with strong fourth quarter results, capping off a record-setting year for Bird from both the top and bottom line perspective. Fourth quarter revenue was $54 million, representing year-over-year growth of 126%, and our quarterly ride profit margin before vehicle depreciation reached an all-time high of 53% despite macro-related headwinds from the surge in Omicron cases later in the period and disruption of the global supply chain. And we successfully executed against our goals while exceeding increased expectations and continuing our mission to provide environmentally friendly transportation for everyone.

    2:41 A number of significant milestones were achieved in 2021, most notably: one, the delivery of $205 million in revenue in our fourth year of operation, in line with the top end of our guidance and representing 117% growth compared to the prior year along with gross margin of 19% for the year, including four consecutive quarters of positive gross margin, culminating in record adjusted EBITDA performance ahead of expectations.

    3:48 And lastly four, entry into the public markets with the successful close of our business combination with Switchback II in November, and in tandem securing $150 million of vehicle financing from Apollo Investment Corporation and MidCap Financial Trust to support continued growth.

    Specifically, in 2021, Bird entered over 250 cities with populations of fewer than 500,000 each.

    6:35 According to recent research by our city partners, roughly 40% of US e-scooter trips replaced gas car trips. This would imply that Bird e-scooter rides taken in the US in 2021 helped prevent nearly 3,500 metric tons of CO2 emissions based on EPA CO2 emissions estimates for US passenger vehicles. Using methodology published by the Arbor Day Foundation, that is equivalent to the annual CO2 absorption of approximately 150,000 mature trees.

    7:10 Conservative estimates also show that Bird riders added more than $100 million in incremental spending in 2021 to their local communities as they used our vehicles to travel short distances to local food and beverage retailers. The stats underscore not only the environmental impact but also the positive social and economic impact that we have in cities and communities globally.

    Those last two are important because that's his sales pitch to cities.  The way it works is you sign up as a Bird "fleet operator" and your job is to pick up 100 scooters (geo tracked) each day and get them charged and back to where they belong the next morning.  Generally, the scooters move in towards the middle of the city during the day and they need to be re-charged and put back in the outskirts at night.  Algos learn the best places to put them based on usage data.

    8:02 In addition, earlier this year, we introduced our e-Bike sharing program and launched our Bird Design consumer e-bike. As we look ahead, we will continue to focus on vehicle innovation and lean into the benefits we gain from our end-to-end vehicle design as demonstrated in our margin performance to date. We see opportunities across our fleet to expand our reach as we build out our now multimodal operations. The demand for e-bikes continues to be robust, and we plan to aggressively build out both our sharing fleet as well as lean into our product sales division.

    For those who don't like scooters but you have to try them – they're great.

    12:53 Turning to our balance sheet and cash flows. We ended the year with total cash, cash equivalents and restricted cash and cash equivalents of $160 million in total liquidity of $251 million, including $101 million of undrawn capacity under our vehicle financing facility, which we expect to continue to draw again as we deploy 2022 vehicles over the coming quarters. We intend to continue to explore cost efficient forms of capital to fund the business and opportunities to further optimize our capital structure. With regard to cash flow, as discussed in Q3, we drew forward meaningful portions of our 2022 and 2023 vehicle CapEx. In the second half of 2021 as an important component of our proactive supply chain management strategy, in an effort to mitigate the impact of global logistics and supply chain interruptions of the type we experienced last year.

    Our business has grown and adapted rapidly amidst some challenging market conditions as best exhibited by our gross margin improvement. We recorded our first full year of positive gross margin, specifically 19% of revenue, with each quarter therein also positive, translating to a 44.0 increase as a percentage of revenue year-over-year. This is largely attributable to the effectiveness of our Fleet Manager operating model, and the resilience and extended operating life of our Bird designed and engineered vehicles

    20:51 Yeah, So we continue to add markets at a very fast pace, as you know, in over 400 cities now across the globe, primarily US and Europe. We continue to focus really on large cities and long tail cities. A lot of the newer cities are long-tail cities, although we want to further penetrate the bigger cities as well. An example is in New York City. We — after working closely with the city, and that program seems to be off to a good start. It looks like we're going to be increasing our fleet size by at least 2x this year. And so we're really trying to penetrate existing cities more, but then continuing to launch more and more cities across the globe and, again, operating in over 400 cities now globally, and as Yibo mentioned, that leads to '22 guidance on the revenue side of at least $350 million for the year.

    The main problem with Scooters is they end up being "litter" in cities as some people just drop them at their destination – like right in front of the door or on the sidewalk.  Cities like NY are doing what they did with CitiBike and setting up designated areas for pick-up and drop-off and that should help overcome objections that have kept scooters out of a lot of big cities.  LA has had them with little problem after the first bumpy year – the kids and I take them everywhere when we're there – it's much more fun than a taxi.  

  8. Phil / AMZN – The short 3300 Callers in the port – are you still confident these will expire worthless ?  It's been over 3300 for a few days, and it has the split coming up which may be adding upward pressure,   Are you looking to role this?

  9. This is nice: 

     According to the US Department of Transportation, there are over 500 billion annual passenger trips in the US and EU that are under 5 miles. McKinsey estimated that the micromobility industry would reach $300 – $500 billion by 2030.

  10. AMZN/Batman – Part of the lesson of the Butterfly Portfolio is teaching you NOT to constantly make adjustments.  Sometimes AMZN is up, sometimes it is down and right now it is up.  Recently it was below $3,000 and we did not adjust the short puts – now they look to go worthless while the short calls are in the money again.  

    AMZN Long Call 2023 20-JAN 3,300.00 CALL [AMZN @ $3,388.86 $9.05] 6 1/15/2021 (297) $330,000 $550.00 $-113.88 $239.78     $436.13 $-3.88 $-68,325 -20.7% $261,675
    AMZN Short Call 2023 20-JAN 3,800.00 CALL [AMZN @ $3,388.86 $9.05] -6 1/15/2021 (297) $-238,200 $397.00 $-177.58     $219.43 $-6.17 $106,545 44.7% $-131,655
    AMZN Short Put 2022 14-APR 3,000.00 PUT [AMZN @ $3,388.86 $9.05] -2 12/21/2021 (16) $-17,200 $86.00 $-79.80     $6.20 $-1.60 $15,960 92.8% $-1,240
    AMZN Short Call 2022 20-MAY 3,300.00 CALL [AMZN @ $3,388.86 $9.05] -2 2/4/2022 (52) $-33,000 $165.00 $46.60     $211.60 $-1.25 $-9,320 -28.2% $-42,320


    We sold the puts and calls for $50,200 and we owe back $42,320 on the short calls but that's including $26,000 worth of premium, which we would be paying if we were to adjust them early.  Meanwhile, our $300,000 spread is at the money at net $130,020 so we have another $170,000 to gain if AMZN rockets higher.  At $3,800, the 2 long calls would be $100,000 and we'd still be up $70,000 more Dollars – and that's without rolling.  Since we COULD roll the 2 May $3,300 calls at $212 ($42,400) to 4 of the Sept $4,000 calls at $85 ($34,000) using just $8,400 of the $170,000 we have to gain on our longs – unless we feel AMZN is currently 20% undervalued – it would be pretty silly to worry about these short calls now, wouldn't it?  

    Just like a casino – we don't have to win every single bet – if we just let things play out, statistics are strongly in our favor.

  11. Phil/hedge

    looking for a new trade idea worth about $100k if the market corrects by about 20-30%. I know you discussed some recently but I can't find them for the life of me.

  12. They are in the STP!  

    TZA is currently at $29 and a 20% drop in the RUT is a 60% pop in TZA so 1.6 x $29 = $46 – so that's our target.

    • Jan $30s are $7.80 and Jan $45s are $5.15 so net $2.65 on the $15 spread packs a lot of punch with $12.35 (466%) protection.
    • 2024 $30s are $11 and 2024 $45s are $8.75 so net $2.25 there isn't bad either but you will not get much movement on those unless we have two very bad years.  On the other hand – it's two years worth of hedges for the same price. 

  13. Hi Phil,

    Do you think it will be a good idea to buy put spreads on DASH/TWLO/SNOW at these levels assuming that there will be a recession? Or are there other high flying stocks that can be more severely impacted by a downturn


  14. High flyers/Harip – Dash is already 50% off – all 3 are, I think so I wouldn't chase them down as you can have consolidation squeezes and, of course, look at GME and AMC – it's very dangerous to short small stocks these days.  

    I think TSLA is a more attractive short at $1.1Tn but they are splitting so also too dangerous but there's a number you can compare to reality and clearly see it doesn't fit.

  15. OK guys, I'm calling it quits soon so I can go enjoy my Birthday!

    Indexes just dribbling anyway.


  16. happy bday mr phil

  17. Happy Birthday Phil! Don't miss your own party!

  18. Happy Birthday Phil

  19. Happy Birthday!!

  20. AMZN, (Trade)   has been initiated by Exane BNP Paribas as a underperform at 2800.0.   

  21. Happy Birthday !

  22. Phil / Happy Birthday!  have a great day

  23. Thanks everyone and my girls are coming down for the weekend – so I'm in an excellent mood!

    So is the market, apparently.

    See you tomorrow.

    - Phil

  24. Happy Birthday Phil

  25. Happy Birthday Phil!

  26. Happy birthday!

  27. Happy Birthday Phil!

  28. Happy birthday! Thank you for all the help!

  29. Happy birthday!!!

  30. Happy birthday Phil! Scooters are great for orthopedic surgeons, also.

  31. Happy Birthday Phil! First Post from this newbie. I also want to express my deep gratitude for all of your help in getting me on this path. You are a God given blessing to me! May health and happiness follow you this day and for years to come! 

    Hey Phil! Not been on for a long time as my life is now super busy but had it on my calendar that today is your birthday! So Happy Birthday and hoping for many more!

  33. Happy Birthday Phil

  34. Happy Birthday Phil! Have an amazing day – the market is cheering for you too!

  35. Happy Birthday Phil and thanks for all you do!

  36. Happy birthday Phil

  37. Hey Happy Birthday , same as mine by coincidence , a very good day to be born .