Which way will things go?
For 2022, so far, we have -1.6%, -0.6% and + 3.2% for the first 3 quarters and that’s +1% overall. To have a Recession, we need two consecutive quarters of negative growth but there are other factors, so Q1 and Q2 did not qualify. Any positive number (and +2.8% is expected) means we won’t actually be in a declared Recession until Q4 – that is already further out than people were predicting just a month ago.
Recent surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in January in the manufacturing and service sectors. Parts of the economy also showed signs of cooling at the end of last year. Retail sales fell last month at the sharpest pace of 2022, existing-home sales fell for the 11th straight month, and hiring and wage growth eased.
The trajectory of the economy largely depends on how consumers fare in the coming months. There are signs consumers are starting to stumble. Shoppers have reined in spending on home electronics, furniture and clothing after stocking up on those goods earlier in the pandemic
Energy Stocks and Financials have contributed outsized proportions to the GDP with Energy Profits alone over $500Bn. That’s on roughly $4Tn in sales so about 16% of our entire GDP is Energy but, in 2021, that number was 8% so our entire GDP growth is due to higher Oil and Gas prices – that is NOT the sign of a healthy economy.
The Real GDP is adjusted for inflation but it’s an average adjustment and can’t account for a single major sector of the economy having that kind of impact but the numbers are very, very real so lower energy prices alone will plunge us into a technical Recession – even though that will actually be a good thing for the overall Economy.
Financials can do well without doing you harm but not Health Care (which is ironic considering the Hippocratic Oath), because your health is an absolute that should always be as close to 100% as possible so a higher cost of maintaining it (same goes for food costs) does you no benefit as it drains your recourses. Same goes for transportation costs – you NEED to get from Point A to Point B and doing it for more money does nothing to improve the necessary function.
8:30 Update: GDP came in just a bit better than expected, at 2.9% and that’s because the Deflator (which accounts for inflation) came down from 4.4% to 3.5%. Durable goods was a huge upside surprise at 5.6% vs 2.5% expected but don’t get excited as, ex-transportation, it was down 0.1%.
This is not actually good news for the markets with the Fed looking to cool things down. Despite all the headline news about layoffs, Initial Jobless Claims came in at 186,000, down from 190,000 in the previous report and the country still has 9.4M unfilled jobs – we are miles and miles away from bringing things into balance.
Earnings are still all over the place – look at this morning’s results. Last night, it was easier to talk about the misses (AZPM, BOOT, CACI, CALX, CATY, CNS, CCI, CVB, IBM, LVS, LC, SLG, URI, WOLF) and the guide-downs (TER, XM, PLX, LEVI, LRCX, FLEX, CLS, AXTA, AZPM) than the clean beats (AMP, AXS, CSX, ETD, HXL, LBRT, PKG, CASH, RJF, RLI, STX, NOW, TSLA). That’s 23 to 13 on the negative side!
You also have to pay attention to what the CEOs are saying on the Conference calls and, so far, the 2023 conversations have switched from Inflation to Recession – but we still have both and that is called STAGFLATION!
Here’s a good chart. As we discussed yesterday in our Live Member Chat Room, the S&P 500 is currently trading at 22.37 x 2022 earnings and we SHOULD be trading at 16x, which would be 2,861 though we can allow for inflation and growth and hopefully closer to 3,200 at a normal multiple. Well, here’s an illustration of what normal multiples do look like under various rate environments:
The Fed (rate decision next week) believes that, by knocking inflation back down, they will benefit the stock market to offset the pain they will cause with higher interest rates. I say that’s BS because the data they rely on, which goes back to 1960, doesn’t account for the MASSIVE amount of Corporate Debt we have today – apples and oranges…
Non-Financial Corporate Debt in the US is $14Tn, which is 56% of our GDP. In 2010 it was $6Tn so more than doubled in a decade, which renders the P/E to Inflation Chart relatively meaningless. What’s even worse (how can it get worse?) is how Corporate Debt has STUPIDLY jumped into short-term maturities – to take full advantage of the recent low interest rates. Had they been smart enough to lock down the rates, this would not be such a problem:
Unfortunately, Economorons are not generally flexible thinkers and, if they didn’t learn it in college, they are not likely to understand the underlying changes that invalidate their assumptions now. Heck, I wouldn’t have even guessed 66%, I was closer to 33% in my assumptions – now I’m depressed…
So are the British, who are often the canaries in our coal mine:
Phil – I am still confused on what you are suggesting the Fed should do (with the limitations placed on what they are allowed to do when the financial system is not at risk). Should they not increase interest rates?
In the absence of Immigration reform, we will have low jobless claims for quite a bit, IMO – and the Fed cannot fix immigration.
Given their only knob seems to be the fed funds rate, they cannot *not* increase it – from their perspective, messing up the debt burden of high debt companies (high funds rate and QT) and slowing them, resulting in more middle and upper middle class folks lose jobs, and miraculously hope that reduce inflation seems their only option.
TLDR – if you were Jerome Powell, what would you do?
What the Fed SHOULD do is complicated. We discussed a lot of it in yesterday’s Webinar.
I wrote an article a while ago about how GOVERNMENT should fix day-care and that would allow 20M stay at home moms to choose to work – that’s an easy fix, actually.
The Fed is way trickier because they have to have the ability to lower rates in a crisis so they need to have dry powder (around 3.5% rates) as a baseline. Then there’s inflation but inflation isn’t a problem if wages keep up (see the 80s) but it hurts the banks and the Fed is not the Government, it’s the Banks so when you say what the Fed should do – for who? They are a banking cartel, not a Government Agency.
They work with the Government and the Government allows it or they would buy a new Government that does allow it. That’s why, aside from radicals like Warren and Sanders, when Powell testifies to Congress it’s 90% ass-kissing.
As Warren notes, Rate Hikes don’t fix food or energy – they “moderate demand” by hurting the bottom 90% (who get zero benefit from higher rates) and curtail spending power (allowing the rich to buy assets more cheaply) and reduce wages. This has nothing at all to do with helping 90% of US Citizens and everything to do with making sure Financials continue to do well – no matter what economic cycle they find themselves in.
You don’t slow your way out of inflation (many African and South American countries have tried), you invest in recourses and efficiency and production until supply catches up with demand and that employs people and grows the economy. Slowing the economy because there’s too much demand is like applying leeches when someone has a fever.
The Fed should have said, “Rates are historically between 3% and 5% and inflation is historically between 2 and 2.5% and we intend to restore that balance by raising rates to approximately 4.5% over the next two years, giving inflation a chance to cool off. Here is our schedule, subject to change depending on conditions, and companies and consumers should plan accordingly.”
How hard would that be.
Meanwhile, it’s up to Government to encourage investment. CVX, for example, just announced a $75Bn stock buyback AND a dividend boost. Great for the Top 1%, who own them, not so good for the American People, who gave them that $75Bn in profit ($225 per person) yet, instead of investing in our energy future – CVX is taking the money and running. Why not – no matter what they charge, apparently we’ll pay it so why invest in things that keep the cost down – that’s wasteful compared to buying their own stock at 11x.
Though it’s not 11x, is it? Normally CVX earns $10Bn a year, not $35Bn so, when they go back to making $10Bn, they will be at 27.5x and probably the stock will drop 30% and they will have clearly wasted at least $25Bn on the buybacks but it won’t seem that way since they bought back 20% of their stock so the earnings per share won’t seem so bad. That’s very good for Chevron and their investors, not so good for their customers.
The Government should simply tax buybacks as if it’s a capital gain (20%) and put that money into small-cap companies and startups that are going to put the fat-cat companies out of business down the road (before they become the fat cats and repeat the cycle) at least that way – there’d be some hope of innovation and progress.
Rather than having the Fed drive rates up 3.5% and costing us $1Tn a year in interest payments on our debt, we put $1Tn into Education and Job training to make sure our labor force has the skills that are needed to fill 10M jobs – and the day care while we’re at it.
Maybe expire Trumps $1.7Tn Corporate tax breaks too?
phil where is your /cl stop?
Hmm, my morning comment didn’t post. I wonder if this one will. $82.50 is where we started shorting, not stopping.
March /NG down to $2.70 this morning!
A lot of cross-currents in the indexes, just need to sit back and see how things settle out.
Anyone no why PBR halted?
I don’t see anything yet
New CEO. Also they just closed a $1.6Bn lease deal but it’s not like either of those weren’t expected.
Wow, we should play the 15 minute Futures on /ES – amazing moves.
Phil/LABU- a while back I was assigned shares of LABU at $12 . I have been selling some covered short calls about 3month out every time the price jumps to around 8 or 9 and have got the ACB to $10. I understand there is a natural time decay on a 3X ETF like this one and therefore not the best for a long term position. Should I just sell my position or keep selling calls (maybe further out)? Would like your thoughts on what I should do with this stock.TIA
$10 is good. It’s $8.15 now. You seem to be able to handle the call-selling well so why not keep it up. Biotech hit a down cycle in the fall so it’s kind of cheap now though the index (based on XBI) is SO diverse, that no single stock can affect it and it’s also SO diverse, that there is a ton of crap companies in it along with the good ones.
That’s why we stopped playing with it – I’d rather just own PFE or MRNA or BNTX or GILD than spread that money across 100 mall caps in an index that churns fees.
And, by the way, we sold the puts in Sept (when everyone else was selling) and we bought the spread in Dec for a net $41,700 credit so, at this point, we COULD buy back the short puts for $44,850 and essentially be in the spread for free. If we weren’t up 600% in the LTP, I would do that but we have $2.3M in CASH!!! and I love MRNA so not buying 3,000 shares for $120 ($360,000 or $180,000 in margin) is not a good enough reason for me to spend $44,850 now.
If we do get assigned at $120 (assuming we do nothing to prevent it, don’t roll, etc), then the 2025 $190 calls (at the money) are currently $56 so, even if the $120s are, say, $35, that would still drop our net $85 – without even selling more puts.
So it’s not just about deciding whether you want to risk an assignment but you have to think about what you will do with that assignment as well.
TSLA having a good day off earnings.
Things that make you go hmmmm:
phil, i am confused. you posted an image of your trade that showed you went 2 contracts short on Tuesday or before at $80.6450. did you close that trade at some point and then go short again at $82.50?
No, I didn’t. $82.50 was just the previous short. I still have those 2 short /CLs at $80.645 – didn’t want to change them as I’m already hurt by /NG ($3.0367) longs so I don’t want to have 2 big positions at once. Since the oil is short and the /NG is long – I figure one of them should pay off one day.
See, $82.50 was a double top, so I thought it was good for a new short if people were interested, that’s all:
Dollar still can’t crack 102 because people think the Fed is pausing.
/NG finally perking up a tiny bit:
Is there a way to take some profit out of the TSLA top trade or should I just try to be patient?
ROFL! You guys are so funny.
We’re kind of a victim of our great timing as TSLA is testing $160 and we have the 2025 $100/125 spread. That’s net $83/68.50 so $14.50 out of $25 still has $10.50 (72.4%) left to gain and you have to consider how safe-looking that gain is compared to taking a new risk. The $85 puts are $10.70 but it would be silly to buy them back.
In the LTP, it’s 10 puts and 30 spreads so about $30,000 left to gain if we hold $125 (plus $10K on the puts expiring worthless) so, if you want to get fancy, you can roll the $125 calls to the $135 calls ($63.75) for net $4.50 ($13,500), which gives you $30,000 more upside potential.
You can pay for that by rolling the 2025 $85 puts ($10.70) to the $120 puts ($22) for about $11,000 and/or you can sell 5-10 April $200 calls for $6 ($6,000 to $10,000) because, even at $6,000, you’ll pay for you roll in 2 quarterly sales and then you can wash, rinse and repeat.
That way, you are sticking around for your 72% as well as the short put money and you are also making a new trade, which is your investment in 30 x $10 of 2025 position against 5 (or 10) short calls that are way out of the money.
I almost like that as a new trade!
Anyone see the PFE employee, Jordan T Walker video ?
That may be a hoax, I wouldn’t worry about it until it’s verified.
Even if he’s really a PFE guy, so he’s drinking and playing what if at a bar – are we now cracking down on talking to friends?
So Amazon offered $18/share for ONEM (awaiting Fed approval) but the stock price sits around $16. Does that mean big guns expect the sale to be denied?
ONEM there are 11,000 Jan24 $15 puts still in open interest. If you want to wait it out, those puts can probably still be sold for about $1.20 or so
I have to wonder why they are still available?
There’s always an arbitrage that the deal may not go through and, when there’s a change like that, there are certain funds or ETFs that MUST exit the position – so strange things can happen with the pricing.
This company was burning a ton of cash, I’m not sure they were going to make it and most traders weren’t either as the stock was diving (it was stupidly valued at one point) so settling at $10 and AMZN is paying $18 but without AMZN they are back to $10 or less and who knows what will come up in due diligence?
Not something I would play with.
Phil – at what price would you be interested in KMB (Kimberly-Clark)? Would the 110-130 or 110-140 BCS with short 2025 puts and shorter term calls be a good candidate for the butterfly portfolio? Seems a long term 20-25% range.
Well, they were just at $112 in October so there’s nothing sexy about $130, especially when that’s 20x. Diapers, Tampons, Kleenex, Paper Towels, Cottonelle – it’s a good, steady business selling disposables but that also means they are always shopping for supplies and that means they will have push-pull inflation hitting or helping their margins for quite a while.
Bottom line for me is they made $2.3Bn in 2017 on $18.3Bn in sales and this year $1.9Bn on $20.1Bn in sales and this year they expect $20.5Bn in sales and $2.2Bn in profit – there’s no forward motion so they are behind the inflation curve and we don’t pay 20x for declining growth in a very mature market segment.
4,070 and 12,091 – another productive day for the indexes.
INTC misses again. Hopefully when the cycle changes they will do well. Another couple of years I guess of missing till they hit the numbers.
One more year, I think.
Phil- Great calls on TSLA and META. Analysis was spot on. Looking at the different membership levels to stay on the site. Appreciate your work.
Remember when INTC used to matter in the Nasdaq. Now they are “just” $122Bn at $30 and no one cares that they are down 10% after hours…
Intel (NASDAQ:INTC) tumbled more than 6% in extended-hours trading after the semiconductor giant reported fourth-quarter results that missed expectations and issued first-quarter guidance that indicated further weakness for the Pat Gelsinger-led company.
For the period ending December 31, Intel (INTC) earned 10 cents per share on $14.04B in revenue, as Client Computing revenue and Datacenter and AI-related revenue tumbled, falling 36% and 33% year-over-year, respectively.
The company’s nascent foundry business, which Gelsinger is working to help lead Intel’s (INTC) transition, generated $319M in revenue in the quarter, up 30% year-over-year.
A consensus of analysts expected Intel (INTC) to earn 20 cents per share on $14.5B in revenue.
Looking to the first-quarter, Intel (INTC) expects to lose 15 cents per share, excluding one-time items, with revenue forecast to be between $10.5B and $11.5B. The company also expects gross margins to fall below 40%, coming in at 39%.
Analysts expect the company to earn 25 cents per share, $13.96B in sales and gross margins of 45.5%.
AMD (AMD) and Nvidia (NVDA) fell in sympathy following Intel’s (INTC) results.
In addition to the financial results, Intel (INTC) announced earlier this week that Frank Yeary would be the new Chairman of its board of directors. Yeary replaces Dr. Omar Ishrak, who stepped down as chair, but will remain on the board.
Santa Clara, California-based Intel (INTC) will hold a conference call at 5 p.m. EST to discuss the results.
In the LTP and Money Talk, we have the 2025 $20/30 bull call spread with short $35 puts so the puts may be a problem but INTC falling to $27 is not. It’s 80/80 with 30 short puts and we can roll the $35s at $8 (probably $9.50 tomorrow) to the $25s at $3 (probably $4 tomorrow) but I don’t think $35 is off the table in 24 months – so we’ll probably just see what happens.
As a bonus, in the Money Talk Portfolio, we sold 50 (vs 75 spreads) of the 2024 $40 calls for $5.50 and they are going to be below $1 for a $20,000+ profit – that will help pay for the rolls.