Throwback Thursday – Chengdu Lockdown and Low Productivity Keep Markets Under Pressure


Chengdu Covid TestingThis was our worst case.

Covid getting worse again is the worst thing that can happen to the Global Economy – worse than Russia allowing that nuclear plant in Ukraine to melt down.  But, is it getting “worse” or has China simply committed a colossal policy mistake?

China is the last country on Earth still pursuing a “Zero Covid” policy and clearly it’s not working – especially because they are surrounded by the rest of the World.  21M people live in Chengdu and they may no longer leave their homes without special permission.  Why is this happening?  Because 157 people caught Covid on Wednesday (vs 90,338 in the US).  

While a lockdown may be rough on President Xi, it’s better than having people think his Covid policy is failing only a month before he is expected to be handed an unprecedented 3rd 5-year term on October 16th. 

In Hong Kong (population 7.5M), they have 10,000 cases of Covid per day, which is a pace for 3.65M cases in a year – half the city’s population.  That is something the rest of China views as a cautionary tale about what happens when you ease restrictions.

China’s economy is suffering, of course and it’s probably not realistic to pursue Zero Covid but Xi can’t admit he was wrong – certainly not before his re-appointment.  So China will continue to suffer one way or the other and so will the rest of the World as they slow down – oil collapsed down to $87.12 overnight and let’s not forget that, when Covid first hit – the price of oil went briefly NEGATIVE (April 20, 2020) as traders were stuck with barrels that nobody wanted in the Global Lockdown.  

China just threw the “Off Switch” on 1Mb/d of demand and they have plenty of other mega-cities they can shut down if Covid keeps spreading – again.  Then that becomes yet another indicator that we’re likely to enter a Global Recession and this is all happening just a week after Powell and other Fed Heads said they don’t care if people are going to suffer from their tightening policies – they are still going to keep doing it!  

I hurt myself today
To see if I still feel
I focus on the pain
The only thing that’s real” – Nine Inch Nails

All this, of course, is panicking people back into the Dollar, which is back over 109 so, on the whole, the markets are holding up pretty well at the moment as we wait on the revised Q2 Productivity Report (8:30), followed by PMI (9:45) and then ISM & Construction Spending (10).  So it’s going to be a busy morning.

8:30 Update:  Productivity was a little better than the first estimate (-4.6%) but still down 4.1% and Unit Labor Costs not as bad as the first estimate (+10.8%) but still up 10.2% which makes us 14.3% less productive per Dollar than we were last year.  That is NOT GOOD! 

People who are struggling to make ends meet and juggling credit cards and checkbooks are yes, less productive and they are not as focused on their jobs – especially when they have to go right to a second job because the first job doesn’t pay them enough money.  We were discussing this in yesterday’s Webinar.

Nixon took the country off the Gold Standard (a dollar was, in theory, backed by $1’s worth of gold) in 1971 and the Dow went from 100 to 120 as liquidity increased but then Inflation hit (sound familiar?) and we fell almost to 60 (50%) into 1975, which led to Carter and an energy crisis (sound familiar?) and Volker came into the Fed and raised rates to 22% in 1982 and, by the end of Reagan’s 2nd term (1989), inflation was down to about 7%.

Fed Funds Rate Chart

This is what we have forgotten after 15 years of 0% interest from the Fed – THIS IS NOT NORMAL!  5% is “normal“, not 2.2% we have now.  The Fed is 3% away from normal and they are NOT going to go back to zero once they are done.  The sooner markets accept this and price it in, the better.  


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Good Morning.

Good morning! Interesting price action on /NG

Hurt – Trent Reznor wrote a hit tune and Johnny Cash gave it a soul…

was it constuction ism data at 10 that cause big spike in dollar or something else?

Phil / AVGO – Earnings today – I’m thinking they may be solid given AAPL Last Quarter and the early launch of the new phone. They may have exposure going forward on Data SW services should also be solid…. Thoughts?

Broadcom (NASDAQ:AVGO) is scheduled to announce FQ3 earnings results on Thursday, September 1st, after market close.
The chip maker topped FQ2 estimates, with revenues rising 22.5% Y/Y to $8.1B. It guided to Q3 revenue of approximately $8.4B and adjusted EBITDA of approximately 63.5% of projected revenue.
The consensus EPS Estimate is $9.55 (+37.2% Y/Y) and the consensus Revenue Estimate is $8.41B (+24.0% Y/Y).
Investors will be tuning into updates on Broadcom’s acquisition of VMware (VMW) for about $61B in cash and stock, announced in May. VMware is slated to report Q2 results on the same day, and investment firm Monness, Crespi, Hardt expects investors will be parsing through VMware’s results for signs of slowdown in growth as well.

Phil / Nasdaq – this looks to me like it’s heading to the11,000 – SQQQ to 55 ish. What do you think about this? May not get better till after Fed Announce….

SQQQ – Jan 2024 $30 call just sold for $25

Phil / Hedging

I have SQQQ 2024 30/80 calls & TZA 2024 40 / 60 calls.

When SQQQ 80 calls went low, I had bought back 40%. When would be a good time to sell SQQQ 80 calls? You were looking for SQQQ 30s to be 25. Now it’s here, were you planning to sell them?


Website issues

I could see all the comments though I was not not logged in. But, I couldn’t post comments. When I tried to log in, it kept waiting and couldn’t log in. I clicked around and suddenly I am in.

Great idea.

Would’t that be a $39.70 for $50 spread?

I want to make sure I understand your thinking. Of course, now $30 is $23.45 and $80 is $14.02 netting $37.47 for a $50 spread. Should I wait some more or just do it now?


Wouldn’t the max be $50 on a $30/$80 spread. Don’t understand the max $30.

Sorry to keep asking questions.

Phil / AVGO – for some reason my earlier post did not post…..

I have them at 8.5B rev and eps of 9.7. Next quarter may be mixed with Mobile strong due to early release of iPhone and Server maybe weaker…

Was looking for your view ( this AM) going into earn gins….

I actually closed out my Sept Short callers and am hoping for a pop to re cover my longs…. they were 90% in the money so decision was kind of made for me

Phil / v ( VISA) – looking interesting at 200 ?

Does anyone know why the Russell is down 2.4% and much more than other indeces?

Finally, I understand the mechanics of Hedging. I didn’t do them in Nov 2021. The current hedging has helped. Thanks.

Hey Phil and Andy – I am trying to get an paid invoice for the last charge early Aug. Please email it to me.

Phil / AVGO 

  •  Broadcom  Q3 Non-GAAP EPS of $9.73 beats by .18
  • Revenue of $8.46B (+24.8% Y/Y) beats by 50M
  • Adjusted EBITDA of $5,378 million for the third quarter
  • Repurchased and eliminated 3.2 million shares for $1,792 million
  • Q4 Guidance: Revenue expected to be ~$8.9 billion vs. consensus of $8.72 billion; and
  • Fourth quarter Adjusted EBITDA guidance of approximately 63 percent of projected revenue. 

Rev 8.46B , YTD 24.3 B 
EPS 9.76,  YTD 27.19 

My Q4 Projections 
Rev 9.1B,  EPS 10.25
FY22  EPS of 37.44 Tack on a 16.0 Multiple 
Share Price 600 / SH 

Operating Margins grew to 61% overall, Semi 72%, and SW at 90%

All businesses ( except SW ) will grow in the 20 to 30 % range next Quarter
Next year at a conservative 12% growth get to a 40 ish EPS 
16 multiple gets you to 630….   Does this look reasonable to you?

I have the following that I’m contemplating uncovering But am struggling since there are no ’25 out yet….  Was looking at closing out 20 to 30  of the 660 callers and waiting for a pop to recover with more 640 at 35 ish….   Any other thoughts on this one…..??

 I’ve made money on selling 25 to 30  Quarterly short puts and calls to cover most of the paper losses on the spread ie the spread is a only about 30K in hole… 

Long 100x Jan ’24 500 Calls ( 161) 
Short 55 x Jan ’24 640 Calls ( 60) 
Short 60 X Jan ’24 660 Calls (108) 
Short 12X Jan ’24 500 Put (66)
Short 4X Jan ’24 450 Puts (55)