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Tuesday, July 5, 2022

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Follow-Through Thursday – S&P 3,840 is our Next Stop on the Way Back to 4,000

"Well, we know where we're goin'

But we don't know where we've been

And we know what we're knowin'

But we can't say what we've seen" – Talking Heads 

We had a very nice Macro Discussion on our Live Trading Webinar Yesterday.

The bottom line is the "Recession" is a lagging measurement of the damage that's already been done by War, Supply Chain Disruption, Covid, Inflation, Global Warming and the Labor Shortage – it's like getting the bill after you've eaten the food – the bill doesn't make things worse – it just sums up the damages.

That's the problem with Stimulus Spending – the Government spent $11Tn in the past two years and we have/had a $22Tn economy so 25% of it has been stimulus and now there is no more stimulus (after Biden's last $2Tn) so we have to stand on our own and, if you think a $17Tn economy (without stimulus) bounces back to a $22Tn economy in one year – you just don't understand how economies work.  So, that means we'll be at LESS than $22Tn without stimulus and that means, on paper, the economy will contract.  

The thing is, it already contracted 25% during Covid but we pretended it didn't and we papered over the gaping economic hole with Trillions of Dollars and now we are finally paying the proverbial piper but there's no sense in whining about it or panicking over it – this is simply an honest measturement of our economy for a change and labeling it a "Recession" doesn't make it worse.  That's like saying you can say the temperature is 32 degrees but don't say "freezing" – because that would make it cold…

30 Inspirational Warren Buffett Quotes on Investing and LifeSo stop whining and find things to buy but buy with caution and scale into the positions (see our Strategy Section) because, as we learned in 2008/9 – there's no limit to how panicked traders can get.  The entire banking sector was trading below 5x earnings, many Blue-Chip companies were priced like they were going bankrupt.  Did the whole thing turn around in a month?  No, but by September of 2009, we were happily counting our winnings! (see: "Stock Market Crash – Year One Review III – March Madness!")

LEN beat this week, as did LZB, WGO, KBH, DRI and RAD this morning, which makes me happy about our HOV and THO positions and RAD reminds me to look at WBA, who are back to $40.  We have WBA in our Money Talk Portfolio but we can only adjust it when we are on the show.  That position looks like this:

WBA Long Call 2024 19-JAN 40.00 CALL [WBA @ $40.45 $0.00] 15 12/1/2021 (575) $13,500 $9.00 $-3.20 $9.00     $5.80 $0.00 $-4,800 -35.6% $8,700
WBA Short Call 2024 19-JAN 52.50 CALL [WBA @ $40.45 $0.00] -15 12/1/2021 (575) $-6,375 $4.25 $-2.24     $2.02 $0.00 $3,353 52.6% $-3,023
WBA Short Put 2024 19-JAN 40.00 PUT [WBA @ $40.45 $0.00] -5 12/2/2021 (575) $-3,250 $6.50 $-0.53     $5.98 $0.00 $263 8.1% $-2,988

It's cheaper than where we started and the targets are still good.  As it stands, it's a net $2,689 entry on the $18,750 spread that's at the money so the upside potential is $16,061 (597%) but now you only have to wait 18 months.  The downside obligation is owning 500 shares at $40 – plus whatever you lose as you let the bull spread run down but it's currently net $5,677, which is double what you are paying for the spread so, if you cashed it here (that would be silly if you are just now buying it), then all that would have to happen is for WBA to stay over $40 and you'd be up over 100% – despite the downturn!  

WBA is selling Boots so probably changing their name and Wall Street never liked the combination but I did.  Perhaps with the cash people will want in again and $40.50 is just $35Bn in market cap and these guys drop a very steady $4-5Bn a year to the bottom line so p/e around 8 and net debt will be under $4Bn (one year's earnings) once the sale of Boots goes through.

For our Long-Term Portfolio, as a new position, I want to add the following:

  • Sell 10 WBA 2024 $40 puts for $6 ($12,000)
  • Buy 30 WBA 2024 $35 calls for $8.50 ($25,500)
  • Sell 30 WBA 2024 $45 calls for $3.85 ($11,550) 

That's net $1,950 on the $30,000 spread so the upside potential, at just $45, is $28,050 (1,430%) and our worst-case obiligation is owning 1,000 shares at $40 less whatever we salvage from the bull spread, which is currently net $13,950.  People don't tend to understand this part, if you keep a stop on the bull spread at $7,000 – then the net if assigned is $35 on the shares – more than 10% below the current price.  We're a bit more bullish than that and would be happy to add more WBA if it goes lower.

Powell testifies to the House today but, after that, things should calm down.  Next week is pre-July 4th so it should be a very low-volume week.  As long as we finish this week over that 3,840, then we have a shot at S&P 4,000 into the holiday.

Meanwhile, we'll keep picking up those value stocks.



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Broadcom takeover of VMware could be derailed by EU antitrust probe

with oil down 12  bucks in the past week and oil stocks down big the oil report must have contained the reason. maybe insiders needed more time to cash out.

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