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Foolish Friday – Is America Working?

Non-Farm Payrolls are out at 8:30.

Expections are that 500,000 new jobs were added in March and remember, that's extra-impressive since our population hasn't grown at all since 2020 and, usually, we need 150,000 a month just to cover 2M new Americans each year.  So 500,000 new jobs with no population growth means LOTS of people are getting paid and, with minimium wages rising as well (we will also get Wages Reports), it means US Consumers have much more money to spend.  

Personal Income was up 0.5% for Feb but, unfortunately, PCE Inflation was up 0.6% – so wages are not keeping up with inflation and that's scary, which is why Personal Spending was only up 0.2% – as consumers are starting to cut back and reject these higher prices.  A pullback like that is a Recession and Recessions make people sad and prolonged sadness about their economic situation can lead to DEPRESSION, which is where that term comes from – it's an attitude as much as a monetary crisis – people just don't want to spend anymore.  

But we're not there yet, not by a long shot because there are lots of jobs and people whose wages aren't keeping up with inflation at their current job have, so far, had a pretty easy time of quitting that job and getting a better one – hence the "Great Resignation" we find ourselves in the middle of.  Believe me, it's a lot better than a Great Depression – so have fun finding better-paying jobs, folks! 

As you can see from the chart, Income is not keeping up with spending so, eventually, spending has to be cut back and keep in mind these spending levels were stimuluted in the past two years by stimulus but it's been a whole year since Biden gave us $1.9Tn in the "American Rescue Plan", which was $1,400 per person so about 5% of the average family's wages last year but it was also 10% of our ENTIRE GDP as stimulus – in a year GDP growth was 5.7% so -4.3% without the stimulus.

there was significant SHRINKAGE - George Costanza | Meme GeneratorThat's because, in 2020, the US Economy SHRANK by 3.4% and two years of shrinkage is, essentially, a Depression and the Government will spend whatever it takes to avoid that economic label.   The Jobs, assuming they keep being added, SHOULD keep us out of major trouble as 500,000 $35,000 jobs is $17.5Bn x 12 months is $210Bn and, while that's nothing compared to a stimulus check for everybody – it's certainly a lot better than nothing.

If only that were the only factor.  Unfortunately, however, Inflation has reared it's ugly head and Real Hourly Earning have been shrinking for all workers at an alarming rate.  In the past year, the Real Average Hourly Eanrings (adjusted for inflation) for Americans fell from $11.41/hr to $11.11/hr and that affects ALL 165M workers so 165M x 35 hr average workweek x 52 weeks x 0.30 less wages is $90Bn LESS Real Dollars earned by the exisiting workforce which cuts the $210Bn worth of new wages in half – SHRINKAGE!

8:30 Update:  431,000 jobs were added in March, that's a 14% miss but not so terrible but less is less but it's not less enough to take the Fed off the table as the worst kind of inflation is Wage Inflation because that doesn't help our Corporate Masters at all, does it?  So the Fed will fight wage inflation with everything it has and adding 431,000 jobs to a stagnant populaiton is a lot of wage pressure – eventually.  Remember, our Corporate Masters don't care that the Real Wages don't keep up with inflaiton – more is more to them and it impacts their bottom line and Earnings Shrinkage is the worst kind of shrinkage there is!  

And, by the way, just because people have jobs doesn't mean they are making any money.  Just ask any realtors you know or car salespeople or mortgage brokers – there are tens of millions of people who are "working" but not making enough money to live on – that's the kind of Stealth Recession that creeped up on us in 2007.  Home Sales have been dropping for 3 consecutive months and now Auto Sales are down 16% from last year – both of those jobs pay a lot of commissions and now a lot less than they used to.

And it's no wonder Home Sales are slowing dramatically as the average 30-year mortgage has shot up to 4.67% from 3% last year and the Fed has only just begun to tighten.  We've been disussing this in our Webinars and it's happening faster than we imagined and that does not bode well for home sales going forward as people don't buy a home, they buy a mortgage and a 50% jump in rates in a year with another 50% promised by the Fed during 2022 is a lot to swallow in an unstimulated economy.

People get excited about these housing markets but what's going on in housing is a lot like what's going on in the market as LESS people are buying homes and paying more for them.  With less homes being sold (almost 50% less), who do you think drops out?  Not the Top 1% – they move when they feel like it and don't even flinch at the prices so it's less people from the bottom 99% buying their cheap homes who drop out of the market and THAT is what raises the average sales price of the homes that are still transacting.  

From 1990 to 2006, home prices went from $120,000 to $240,000 before they crashed BUT post 9/11, rates were coming down and offset the last leg of those gains.  We'll call 2010 $220,000 so $440,000 would be up 100% and we're just about there WITH rising rates so I think it's pretty much INEVITABLE that we will have a correction in the housing market of about 20% in the next 18 months.  

Unfortunately, for home buyers, that correction in price will be wiped out by the rising rates and homes will be left no more affordable.

Have a great weekend, 

- Phil

 


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  1. Good Morning.


  2. Comment content omitted because it is too long.


  3. Good morning!  

    Expect gyrations today and it's too late to matter as we close the Quarter in the red and there's nothing today is going to do to fix that.

    • Dow  36,000 to 34,200 has bounce lines of 34,560 (weak) and 34,920 (strong) 
    • S&P 4,700 to 4,465 has bounce lines of 4,512 (weak) and 4,559 (strong) 
    • Nasdaq 16,500 to 15,675 has bounce lines of 15,840 (weak) and 16,005 (strong) 
    • Russell 2,400 to 2,080 has bounce lines of 2,144 (weak) and 2,208 (strong)

    That's a lot of red and we're in danger of falling below the retracement bases of the Nasdaq and Russell and that would force us to go back to the -20% chart – and Mr Death Cross didn't go away but we can do the math as the 50 dma is at 4,412 and the 200 dma is at 4,485 so there's a 73-point gap to fill and we're currently at 4,543 so 131 above the 50 and 58 above the 200 so, if we close here today, the 200 dma will come up 58/200 (0.29) and the 50 dma will come up 131/50 (2.62) and that means the gap would close by 2.33 so it will take about 30 trading days this much over the 200 dma to Un-Death Cross us.  See how easy that is to figure out?!?  

    So mild outperformance is NOT going to change the big technical picture for the entire month of April and with no stimulus bill and the war – it's not likely we'll see wild outperformance so that means that any real improvement in the market is going to have to come from Earnings (which I have been saying for the past month) or Data (which, by all indications, is going to suck).  So really it's a matter of whether Earnings (and Guidance) will be good enough to convince traders to ignore the Q1 data on the assumption all these bad things will magically go away on their own (very, very 2007).


  4. WBA how low can it go???? Did I say dead duck?


  5. Fortunately, for the sake of taking a breather – there's hardly any data at all next week:

    Not too many major earnings either - the Big Banks begin clocking on Wednesday, the 13th and then we're back into things.

    So it should be a good week to take off next week but come back ready to deal with a whole lot of crap!


  6. Phil,

    Reminding you of Lowe, as requested COB yestreday. LOW (and HD) underperformed the market up and down over the past week. The only apparent cause I see is Lowe's new $5 bn debt issuance. Both LOW and HD are heavy debt issuers (LOW:49 bn, HD 42 bn) with negative equity for both (LOW = -4.8, HD -1.7). LOW has a PE of 16 and HD 19. Low's current PE is below its 5 yr average. Is recent selloff reflecting the grim economic outlook ? If sales of new homes were to decline, wouldn't that benefit LOWE because of increased home improvement projects? Would appreciate your thoughts.

    Thanks


  7. Re housing crash .. problem is that rents are rising even faster than housing prices in many cities.  Many young people see housing as more stable place to invest and don’t have to worry about monthly payments going up.  I am in Denver this weekend trying to help my son buy a condo.  Incredibly low supply.  This will get worse as people who financed at 2-3% hold on to their starter houses longer.  Historic economic theories sometimes don’t work!  


  8. Phil / LABU – interesting   — I looked a the make-up of this recently ( feb) and it seemed to have a lot of ETFs in there ….

    https://seekingalpha.com/article/4498949-labu-3x-leveraged-etf-best-avoided?mailingid=27223557&messageid=portfolio&serial=27223557.36564&utm_campaign=nl-portfolio&utm_content=portfolio_digest&utm_medium=email&utm_source=seeking_alpha&utm_term=27223557.36564

    LABU: A 3X Leveraged ETF Best AvoidedSummary

    Extremely poor, mostly high negative return since LABU’s inception.

    3X derivative investments are extremely volatile and risky, and invite higher expense ratios.

    LABU’s benchmark index made losses in more number of days than it made gains, a trend which may continue for the foreseeable future.

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  9. LOW/8800 – $203 is $134Bn for them and they are good for $8.5Bn in profits, so reasonably valued after the drop but you don't pay 20x for companies like this so it was simply over-priced before and we don't know how much of that $8.5Bn is because people are stuck at home with nothing to do but projects.  Think about all the Travel and Leisure money that has been diverted to other industries in the past two years…  That is going to normalize and companies that benefitted from the lockdown may find re-openings to be detrimental.

    LOW and HD also supply a lot of builders and building is very much slowing down so these guys aren't home-run bargains and, given I see no reason they would stand up well in an overall market crash – I see no reason to add them at the moment.


  10. Hi Phil – Do you see housing prices peaking this quarter?

    With one of the twins graduating in June and the other one year behind, a change is coming and me thinks the flexibility that comes with renting for a couple of years could be beneficial. Thanks.



  11. FL/John – We stayed away from them because NKE has been pushing to go direct and it's widely expected this is going to hurt FL.  

    Foot Locker is cut at Argus due to Nike sales loss

    I think it's an over-reaction as yes, some Nike fans will not buy at FL but FL will simply sell other stuff to people who aren't so brand-loyal.  $30 is back to where we came in in the first place on them and I think they are very solid down here as it's only $133Bn and they made $6Bn last year and project $8.5Bn this year so, even back at $6Bn – it's not too terrible of a price.  It's also not a fantastic price so, if I were going to play it (and I see no urgent need to do so), I'd just sell some puts and see what happens.  The 2024 $25 puts can be sold for $5 so that's a nice net $20 entry as a worst case.

    WBA/Yodi – I'll be sure to let you know when to buy more.  Maybe this time you'll listen.

    WBA in our Money Talk Portfolio is just about back to where we started:

    WBA Long Call 2024 19-JAN 40.00 CALL [WBA @ $43.26 $-1.51] 15 12/1/2021 (658) $13,500 $9.00 $-1.23 $9.00     $7.78 $-1.12 $-1,838 -13.6% $11,663
    WBA Short Call 2024 19-JAN 52.50 CALL [WBA @ $43.26 $-1.51] -15 12/1/2021 (658) $-6,375 $4.25 $-1.08     $3.18 $-0.78 $1,613 25.3% $-4,763
    WBA Short Put 2024 19-JAN 40.00 PUT [WBA @ $43.26 $-1.51] -5 12/2/2021 (658) $-3,250 $6.50 $-0.80     $5.70 $0.66 $400 12.3% $-2,850

    And the only other place we have it is in the Butterfly Portfolio, where we just bought back the short April calls:

    WBA Short Put 2023 20-JAN 45.00 PUT [WBA @ $43.26 $-1.51] -20 5/25/2021 (294) $-10,640 $5.32 $0.71 $-7.18     $6.03 $0.88 $-1,410 -13.3% $-12,050
    WBA Long Call 2024 19-JAN 40.00 CALL [WBA @ $43.26 $-1.51] 25 10/15/2021 (658) $32,500 $13.00 $-5.23     $7.78 $-1.12 $-13,063 -40.2% $19,438
    WBA Short Call 2024 19-JAN 55.00 CALL [WBA @ $43.26 $-1.51] -25 11/5/2021 (658) $-12,750 $5.10 $-2.42     $2.68 $-0.62 $6,050 47.5% $-6,700
    WBA Long Call 2024 19-JAN 40.00 CALL [WBA @ $43.26 $-1.51] 25 2/17/2022 (658) $26,275 $10.51 $-2.74     $7.78 $-1.12 $-6,838 -26.0% $19,438

    Since the Butterfly Portfolio is swimming in CASH!!!, it's most likely we'll want to roll the 2024 $40s down to the $35s (now $10.60) or the $30s (now $14.20) if we can make them for $2.50 or less per $5.  

    I guess, if they keep going down – we'll have to re-establish an LTP play as well – or perhaps also the Earnings Portfolio, since this is clearly the kind of stupid reaction to earnings we like to bet on in that portfolio.

    Rents/Nom – That's what's still driving people into houses but when the deposit you need to make on a home rises from $50,000 to $60,000 – that can be enough to stop most home-seekers.  Also, my longer-term prediction is that taxes are going to become a major issue because states and towns MUST balance their budgets and that means they have to raise property taxes and that also gets factored into home affordability.  Most people don't buy homes making investment decisions – they buy them making cash-flow decisions.  

    What you'll actually get is an exodus from the cities and lack of occupancy will cause these rents to collapse eventually.  The only reason they haven't already is all that stimulus that ended up in the landlords' pockets. 

    How insane is that?  Even the lowest states are about 10% vacant.  17% of the homes in Florida are vacant – just not the ones by the beach where you guys hear your friends complaining they can't find a nice place to live…  

    Do you know there are only 500,000 homeless people in the US yet we have 10M empty homes and NO ONE can figure out a solution?  

    When/1020 – These are decade-long trends – it's hard to pick a quarter but, by next year, if the Fed follows through with 2% rate hikes – I don't see how housing prices can hold up.

    LABU/Batman – We knew all that, that's how it got so cheap.  We decided it would turn around though – especially as LABU had a lot of cash to buy while Biotech was low again.  I'm sure these same geniuses made the same points about how bad LABU was in early 2020.

    LABU/Seer – Actually, I just looked up their holdings and I can see the problem already – they are mismanaging this thing.  It's 50% in cash and treasuries – WTF did these guys do?

    Top 10 Holdings (60.04% of Total Assets)

    Get Quotes for Top Holdings

    Name Symbol % Assets
    Dreyfus Government Secs Cash Mgmt Admin DAPXX 37.96%
    Goldman Sachs FS Treasury Intms Instl FTIXX 12.05%
    S&P Biotechnology Select Industry Index Swap N/A 6.58%
    Intellia Therapeutics Inc NTLA 0.64%
    Editas Medicine Inc EDIT 0.51%
    Anavex Life Sciences Corp AVXL 0.50%
    Beam Therapeutics Inc BEAM 0.49%
    MannKind Corp MNKD 0.45%
    Ocugen Inc OCGN 0.43%
    Translate Bio Inc TBIO 0.43%

    It's possible they were forced to liquidate due to withdrawals and that then puts them in good shape for a rebound but it's disturbing to see they don't actually hold the stocks we would like to see in there at the moment.   I would call it a stay-away for now – unless you want to just take a flyer baaed on it being back to last year's lows.

    Submitted on 2022/02/14 at 11:28 am

    But MDT reminds me we like LABU, and I think they've suffered enough at $18.50 and they have such exciting upside potential.  So, we're going to do a mixed trade by selling MDT puts to pay for a LABU bull spread:

    • Sell 5 MDT 2024 $90 puts for $9 ($4,500)
    • Buy 20 LABU 2023 $15 calls for $8 ($16,000) 
    • Sell 20 LABU 2023 $30 calls for $4 ($8,000) 

    That's net $3,500 on the $22,500 spread so we have $19,000 (542%) upside potential and plenty of room to  adjust along the way.  

    Notice we didn't sell LABU puts, we sold MDT, which we're very happy to own if they get cheaper.

    We also still have the older LABU play in the LTP, that one we'll be rolling to a lower strike by the next review.  The 2024 $10s are $10.50 so $3.35 ($16,750) to roll down $10 is always a good deal – let's make that official and I guess we may as well buy back the 40 short Jan $30 calls for $2.75 ($11,000) as we can sell 50 of the 2024 $40 calls for $3.75 ($18,750) and that would pay for half the roll to the $10s on a wider spread and we'll certainly make up the rest of it selling short calls along the way.  


  12. Like MJ, we don't really care whether LABU goes up or not, the 2024 $10/40 spread, from scratch, is net $675 so if we buy, as a new spread, 25 of those for $16,875 and sell 10 of the 2024 $15 puts for $6.40 ($6,400), that's net $10,475 and we can sell 10 of the June $20 calls for $2.25 ($2,250) using 77 of the 658 days we have to sell to make 21.4% but, since we're selling the short calls, we can also sell 10 of the June $15 puts for $2.30 ($2,300) and now we've collected back 42% of our net cost using just 11.7% of our time.

    All we have to do is roll the losing side (if any) and then sell more puts and calls next Q and, unless we are very unlucky – we will have the spread paid off long before 2024 and then whatever money we make AND whatever money the $10 calls are worth at in Jan 2024 – will be a bonus.  



  13. JCPenney’s CEO Is Done Chasing New Customers


  14. Can you do the same thing with XBI, which is the base off which LABU is leveraged? There is sufficient volatility in that too. The 3X till 2024 will just decay, have a reverse split, and we will need to readjust options. 


  15. You can do it with XBI but I thought it was interesting that LABU had gone to so much cash just as the Biotechs were falling apart.  







  16. Phil/BIG-

    I know we have played them before – not sure if they are currently in a portfolio or not.  I have a Jan 2023 40/60 BCS left over from a previous trade currently at net $3.00

    Adjust or just scrap it and move on???


  17. BIG/Jeff – They are in the LTP and, unfortunately, they have reversed themselves after a good start.

    BIG Long Call 2024 19-JAN 40.00 CALL [BIG @ $34.88 $0.28] 20 10/1/2021 (658) $23,000 $11.50 $-4.40 $11.50     $7.10 - $-8,800 -38.3% $14,200
    BIG Short Call 2024 19-JAN 55.00 CALL [BIG @ $34.88 $0.28] -20 10/1/2021 (658) $-13,500 $6.75 $-2.90     $3.85 - $5,800 43.0% $-7,700
    BIG Short Put 2024 19-JAN 40.00 PUT [BIG @ $34.88 $0.28] -10 10/1/2021 (658) $-10,000 $10.00 $2.45     $12.45 - $-2,450 -24.5% $-12,450

    I just said about them:

    PhilStockWorld March Portfolio Review – Part 2 (Members Only)

    BIG – We only need to make adjustments if our target changes and $55 in two years still makes sense.  While it's tempting to add more it's only a small discount to our initial position and we still have broad-market concerns so we're saving firepower.  

    At $34.11, they are at $985M – not even a Unicorn and that's kind of insulting since they have $6Bn in sales and make $150M.  They didn't even lose money during the pandemic – they are simply suffering though the logistics crisis like everyone else.  Do I not thing they'll hit $55 in 2024?  I still do so there's not much to do at the moment and, in your case, anything over $43 is a winner so why not let it ride? 

    For $1.5Bn ($50), AMZN should buy them to have a retail presence in 1,400 locations ($1M per location) along with 10,500 employees already running them.


  18. Have a great weekend, folks,

    - Phil