Two Percent Tuesday – Weak Bounces Accomplished – Now What?

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Better late than never.  

I said on Friday, in a Report that was titled "5% Friday – Down Week Needs 2% Bounce Into the Holiday Weekend":     

Usually we're happy with a 1% bounce off a 5% drop but really this is a 10% drop so we need a 2% (of the index) bounce, which would be 80 points (20% of the 400 we lost) on the S&P 500.

That would take us to 3,780 and that would be a massive one-day move in /ES (not that we haven't had them on the way down) so let's not count on it.  That means we can't be cute with our hedges and need to stay well-covered into the weekend – even if today does look LIKE a recovery.  

We're not "there" yet but I'm sure we'll get back to 3,780 but then what?  There's nothing technically pretty about failing below 3,800.  3,840, in fact, is the weak retracement of 4,000 and, if we hang out below 3,840 for too long, all we do is prove that we're in the weak end of the 4,000 channel while we wait for the 50-day moving average to cross below that line and THEN we are in BIG TROUBLE

3,840 is 277 points below the 50-day moving average so it's going to drop 5 points per day while we're down here, which means we have until about July 20th before things go critical.  Fortunately, that's plenty of time for the overold MACD to resolve itself and, HOPEFULLY, that will give us a little bit of bullish tailwind but will it be enough to get us back over the 4,000 line?  That's going to be up to bank earnings, which begin on July 14th.

Any bounce is a good bounce at the moment and volume was HUGE on Friday and we didn't go down – so that was a bit encouraging.  When I was asked on Friday if I wanted to add more hedges to our Member Portfolios, I responed:

Bearish/Pman, SK – Yes, no changes.  I'm tempted to add more hedges actually but the SQQQ 2024 $60 ($29)/80 ($24.50) bull call spread is $4.50 and was at a low of $3 this week so I doubt it would be more than $5 next week and we can add more of those with a 3:1 payoff if we need to – so why do it unless we need to?  

Let's not delude ourselves, we have $1.4M in cash BECAUSE we took a chance this will be a bounce so we can't be shy about putting $400,000 back to work to buy another $1.6M worth of protection (net $1.2) if it turns out things are not bouncy.  The real chance we're taking is that the markets don't collapse 10% over the weekend and we end up paying $6, not $5 for each $20 of protection.  Could end up being a $100,000 or even $200,000 mistake – but it's very unlikely to kill us.

We don't want to overhedge out of fear – that's just flushing money down the drain.   

Understanding that we have all these outs is key to playing a calm game while the sands are shifting beneath our feet.  The other key component though is BELIEVING that there is, in fact, a bottom to the market.  That's something a lot of people struggled with in 2009 but it was  very rewarding for those who kept their heads during the sell-off.

The Worst-Case Scenario: Getting Real With Global GDP!

Global GDP by Country 2021That is the key to investing in a bear market – you have to have FAITH and that's where Fundamental Investors have a clear advantage over Technical Investors – because we KNOW when a stock is done falling.  Or at least we know when it SHOULD be done falling – you can't stop people from panicking.  That's why we scale into our positions (see our Strategy Section) – we may not be right about the bottom in PRICE but we're very good at calling the eventual VALUE.

As noted in my article from 12 years ago, as long as our ability to live our lives is not compromised and population is about the same, there is a minimum amount of economic activity that 8Bn humans will generate and, at the moment, Global GDP is about $94Tn and inflation is going to drive that over $100Tn next year and who is it that causes that GDP number to move?  COMPANIES – the same companies traders are bailing on now.  

Sure we may have a no-growth year or even a recession but you will still go to McDonalds (MCD) and you will still drink Coke (KO) and you will still use a car to get there (F).  Just by doing those things you are living well beyond the means of rice farmers in China – and they are generating $6,500 per peron in GDP – surely you can do better than that!?!  

Then why are we trading F like they are going broke?  Yes, chip shortages, supply chain issues, rising rates, EV restructuring costs, blah, blah, blah.  I imagine Henry Ford went through a lot of those issues between 1906 and 1945, while he was running his little motor car company.  

In fact, in 1914, due to a labor shortage, Ford began paying his workers $5 per day (double) so they wouldn't quit and said "I think my employees should make enough to afford the cars we produce" ($500 at the time).  Ford was also, at the time, investing a great deal of money in new assembly lines, which ramped up production from 95,000 cars in 1912 to over 250,000 cars by 1915 – so he needed every worker he could get.

That's what we're punishing companies for now.  Inflation is causing companies to adjust and labor rates are rising but most companies are covering them with price increases that, so far, have not slowed down consumer spending.  More raises put more money into consumers hands but, looking at F, another $2.50 per day doesn't let you buy a Model T next week – it takes a while for these things to evolve – but "investors" today have no patience at all.  

At $11.23, F has a market cap of $45Bn – even though they made $18Bn last year (not a typo).  This year and next year they expect to make a more normal $8Bn but that's still a p/e of 5.5 going forward.  F does have $94Bn in debts (net of $41Bn in cash) but that is the nature of their business and we assume it will take 3% more to service the debt going forward, so that will hit F for $3Bn a year and drop eanings down to $5Bn BUT, a lot of F's outstanding debt is for financing – so they may not be hit so hard by increased rates.

Still, if we say they make $5Bn a year until inflation gets them back to their usual 5% Net Profits and we give them 10x in a non-panicked market – that's going to be a $50Bn valuation at about $12.50.  That's where we'd draw the line.  So, as a new play on F, I would like:

  • Sell 20 F 2024 $12 puts for $3 ($6,000) 
  • Buy 50 F 2024 $10 calls for $3.25 ($16,250)
  • Sell 50 F 2024 $15 calls for $1.40 ($7,000)

That would be net $3,250 on the $25,000 spread so the upside potential, at $15 or above, would be $21,750 (669%) and we're starting out $6,000 in the money already.  Worst-case scenario is owning 2,000 shares of F at $12 and, if we lose the $3,250, our net cost would be $13.62/shar but then we could sell 2026 puts and calls and knock $4.65 off that price, right?  

Meanwhile, F pays a nice 0.40 dividend so we could do the above as a stock play as such:

  • Buy 2,000 shares of F at $11.23 ($22,460)
  • Sell 20 F 2024 $12 calls for $2.45 ($4,900)
  • Sell 20 F 2024 $12 puts for $3 ($6,000) 

In this case, we're in 2,000 shares at net $11,560 or just $5.78 per share and that makes the 0.40 annual dividend 6.9% while we wait to get called away at $12 ($24,000) for an additional $12,440 (107%) in profits – and that's at $12 – LOWER than the stock is trading now.   The worst-case scenario to the downside is you are forced to buy 2,000 more shares for $12 ($24,000) and then you are in 4,000 shares for $35,560 or $8.89/share – which is 20.8% below the current price.  Not even including the dividends.  

When your worst-case scenario is something that sounds pretty good – then it's a good trade to make, right?  

These are the kind of opportunites we get in a bear market because we are able to remain calm and do simple math while others are in a panic (a TA person would never buy F's chart).  There are many stocks we'll be able to take advantage of – our Members already have F in their portfolios but this is a rare opportunity to get in at rock-bottom prices if you don't have it alread. 

We'll be looking at more opportunities like this inside PSW's Live Member Chat Room all week.  

On the Calendar, Powell is speaking to Congress tomorrow and Thursday with other Fed speakers scattered around him.  The 20-year note auction is important tomorrow and the Chicago Fed was flat this morning, but that's better than the terrible NY and Philly Fed reports.  Home Sales will suck – that's no surprise and then all we have is PMI and Consumer Sentiment – so not much of a data week.

And, surprisingly enough – there are still some interesting Earnings Reports to follow:

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It should be a nice, bouncy day but be careful out there and watch those levels.

 

97 COMMENTS

  1. Booster/Rn, 1020 – Hopefully I'll be fine but I did get sick from my 3rd dose or MRNA so I'm just making sure it's not OPEX or holiday week in case I'm grumpy for a few days.  Disney really scared me, as did the plane to Vegas so, if I'm planning to be back out there – I'll feel much better after getting another booster.  

    TROX/Rn – Everything old is new again.  I only have to look back on our old LTPs to find stocks we love when they are cheap.  We used to have RH, CROX, etc. in our portfolios so it's easy to buy them again. I thought TROX was being sold or something?  $16.60 down from $26 is $2.5Bn and it's silly because they made $1Bn in 2020 (their first year of profit) and $286M last year and expect $512M this year and $578M next year so there's the whole company paid for in 4 years!  They just RAISED guidance and it's not like people have a lot of alternatives for titanium dioxide, is there (and most of them are in Russia)?  

    Net $2.3Bn in debt means $60M (10%) chopped off earnings going forward but they'll pass that through to end costs.  TDiox is one of those things that's essential to many things but not a major ingredient so a bump in cost is not likely to get a lot of pushback.  

    I think, for the LTP, let's just sell 20 of the TROX 2024 $18 puts for $4.50 ($9,000).  That nets us in for $13.50, which is a 20% discount and it will remind us to keep an eye on them.

    The $15 puts are $3 so net $12 but I'm confident this is a good price for them and I'd rather make $4.50 than $3 on a move up.  What's really crazy is you can sell the $10 puts for $1 and that's net $9 – almost half the current price.  The Jan $20s are $4.50 so if we can roll them down $2, then we can roll to the 2025 $16s and the 2024 $14s, etc.  Since we REALLY don't mind owning TROX for the long haul – there's no reason to be cheap about our initial put position. 

    How do we keep forgetting about BBY?  $70.50 is $16Bn in market cap and they made $1.5Bn in 2020 and $1.8Bn in 2021 and expect $1.9Bn this year, etc…  How can you not love that?   They only have $545M in net debt too.  

    For the LTP, let's put our foot down here:

    • Sell 10 BBY 2024 $70 puts for $14.50 ($14,500) 
    • Buy 20 BBY 2024 $60 calls for $18.50 ($37,000)
    • Sell 20 BBY 2024 $90 calls for $7.10 ($14,200) 

    That's net $8,300 on the $60,000 spread so we have $51,700 (622%) upside potential and we're $20,000 in the money to start.  Aren't options fun?  Downside risk is owning 1,000 shares at net $78.30 – 10% higher than it is now but I don't think that's too aggressive and we could sell another $25.60 set of puts and calls and we'd be back to net $51.70 – that would actually be a good thing to have!   When you love the worst case – it's a good trade!  

  2. Scary Disney/Phil……shucks, I was in DC, Foggy Bottom, for a Korea Peace Corps Volunteers reunion a couple of months ago. Only people masking were us old farts (and not all of us), service people, and the college kids on the GWU campus.

    Disneyland Anaheim, of course, has a history of being the point source (epicenter is a geology term, not epidemiology) for infectious outbreaks, for example the 2015 measles outbreak (led by anti-vax parents from Marin County visiting Anaheim over winter break).

  3. ETFs/8800 – They generate a lot of fees and have a lot of friction from their churn so I don't generally go for the ETFs.  I'd rather pick specific companies with solid Fundamentals that will benefit from inflation.  BCI, for example, simply invests in the Bloomberg Commodity Index but I don't want them to buy me oil at $110.  I DO want to buy Lumber at $600 and Sugar at $18.80 and Silver at $21.50 but not Copper at $4 or Feeder Cattle at $175 and certainly not Corn at $800.  You are so much better off doing your homework.  

    Which is the one I kept picking all these years?  DBA.  

      Finally back over $20 for the first time since 2017 but food costs are significantly higher than that – that's the decay of the fund as you hold it – giving you a huge disadvantage.  

    Retail/Batman – We are short on Retail in the LTP, that's why.  

    FB and NFLX not participating.

    NFLX looks like it's just given up.  $170 is $78Bn and they are good for $5Bn so 15.6x means it depends on your growth outlook.  I don't see people cancelling subscriptions and 15.6x is fine by me and these guys spent a fortune ($17Bn) on show development, they can always scale that back 10% to bump earnings 30%.  About 1/3 of their content spend is on original shows and they haven't had enough of them to be an asset but, down the road – that leads to more revenues.  DIS, by comparison, spent $25Bn last year – but that includes major movies.  Paramount spent $14.7Bn and PARA only made $4.5Bn last year (yet their market cap is $16Bn).  

    Speaking of PARA – they are making a huge multi-year investment in Paramount + so earnings are expected to be under $2Bn this year and next but $16Bn is silly – but we already have huge, aggressive positions in all our portfolios.  

    DIS/Snow – I'm a proud Floridian so I don't wear a mask but I also don't go to risky places but, in Disney, the park was packed like floor seats at a concerts and the lines were insane and the restaurants were full but what really got me was the monorail shut down so we had to take the ferry, which had WAY too many people and took way too long – that was the most enclosed, dangerous thing I've done in 3 years.  I was thinking the people on the Ferry being terrorized by the Joker had it easy….

  4. Couldn't help getting into some Shiboshi's around 0.6 ETH. Ethereum has crashed 82% (4868 to 881, now back 1130). It's been about 7.2 months. These things usually run about 9 months on the crash and then another 12-24 months on the winter before another big run (3-5x over previous high). But past performance and future performance, yada yada…

  5. HBI/Pman – Based on your sample size, I wouldn't rush to any conclusions.  

    Hanesbrands, Inc. (NYSE:HBI) is a leading apparel company with some of the world's most recognized brands, including Hanes, Champion, Bali, and Maidenform, among a vast array of others. Hanes is the largest and most widely recognized brand in their portfolio. Additionally, it is the leading basic apparel brand in the U.S. and is found in nine out of 10 U.S households. Hanes and HBI's other iconic brands are marketed to consumers through most sales channels and can be found in some of the most highly trafficked stores, such as Walmart (WMT).

    As of the most recent filing period, the company operated in three segments: Innerwear; Activewear; and International. Sales are generally spread out evenly among the three segments, with Innerwear accounting for the largest share of sales, at about 37% as of Q1FY22.

    For the most recent quarter ended April 2, 2022, HBI reported total net sales of +$1.6B, which was 4.5% greater than the same period last year and +$40M greater than expectations. Non-GAAP EPS of $0.34 also came in $0.06 more than expected. In addition to a respectable beat, the company also reaffirmed current year guidance for sales, operating profit, and EPS.

     

    Driving sales higher in the quarter was a 6.3% increase in the Activewear segment, which added to the 1.6% growth reported for Innerwear. One notable brand within the company's portfolio is Champion, a brand that is expected to reach +$3.2B in sales by 2024. That would be a CAGR of 14%.

    Strong demand for Champion-related products during the quarter surpassed the company's ability to fill all orders. In constant currency, sales for the brand increased 6%. On a two-year basis, sales accelerated 28%, with strong growth reported both internationally and within the U.S. In the U.S., sales increased 2% over the prior year. Delays in receiving products from some of their suppliers, however, resulted in approximately +$40M of in hand orders going unfilled. If the products had arrived on time, management estimates sales of the brand would have increased at a high teen's rate.

    Feel free to dump it because you didn't see people at the store.  That seems to be what everyone else is doing.

    Coins/BDC – I know people selling blocks of BTC at discounts, crazy business.

    You're welcome, 8800.

    Good finish to the day, 2.5% lines across the board.

       

    Can't keep a good VIX down though – things are not settled yet.

    And it wasn't the Dollar – also a good sign.