To be stuck in here, but I don’t wanna leave
Hoping that one day
You’ll come along
Join me, ’cause I’ve been slowly falling
Like Ross – many investors have been stuck in the zone with the stock market. They’ve been eyeing the bargains for some time now, hoping to finally make their move and get in on the action but it never seems like quite the right time to make a move – and there’s that overwhelming fear of rejection…
just as Ross has been right in front of Rachel all along, value stocks have been right in front of these investors – they just don’t see them…
And, like Rachel, investors are still looking for something better, waiting for the market to fall further before making their move. They are afraid to commit, fearing that they’ll fall further or miss out on a better opportunity, ignoring the value stocks that are right in front of them! Ross eventually found his way out of the friend zone – but it was 9 years and 230 episodes later!
The key is to have patience, keep a close eye on market trends, and be ready to act when the time is right.
At Philstockworld, in our Live Member Chat Room last Wednesday morning, we made our initial move on 26 long positions, drawing from the Watch List we’ve had our eye on since late December. We patiently waited an entire quarter before jumping on about half of the positions (we did have a few dates along the way).
Hopefully it will work out and we’ll stay over the 200 dma and live happily ever after but, if not, we can work on our relationship and hopefully make it stronger and, if there are rough patches along the way, these are all stocks we’d love to buy more of if they do get cheaper.
No banks collapsed over the weekend – that’s nice. There’s still a lot of tension and worry out there but, as I noted on Wednsday – there’s also a lot of bailouts and stimulus and, as we’ve learned over the last 15 years, bailouts and stimulus Trump (don’t say Trump!) a crappy economy.
Speaking of Trump (don’t say Trump!), a lot of people think this is finally the week when they round him and his crew up and justice will finally be served – good luck with that! At the moment, it’s a very dangerous point of contention we have to keep watch of.
This week, we’ll get some fresh data on the US economy, as well as some insights into the housing and energy markets. Here are some of the highlights:
- Tomorrow we’ll see the advance reports on International Trade and Retail & Wholesale Inventories for February. These will give us an idea of how the trade balance, consumer spending, and business stockpiling have been affected by the pandemic and the global recovery. We’ll also get the latest readings on Home Prices and Consumer Confidence for January and March, respectively.
- Wednesday we’ll check the pulse of the mortgage market with the MBA Applications Index and we’ll also see how many homes went under contract in February with the Pending Home Sales Report. Both indicators will reflect the impact of rising mortgage rates and tight inventory on the housing demand. Finally, we’ll get the weekly update on crude oil inventories from the EIA. Oil is back up to $70.50 this morning after testing $65 last week.
- Thursday we’ll start the day with Weekly Jobless Claims, which has been steadily declining for several weeks and that is NOT what the Fed wants to see – so try to get yourself fired to make Powell happy… We’ll also get the final estimate of GDP growth and inflation for the fourth quarter of 2022. These will confirm how the economy performed at the end of last year and set the stage for the first quarter of 2023. We’ll also see how much natural gas was stored in the US last week with the EIA report. I will also be curious to see how much the Fed Balance Sheet has expanded.
- Friday we’ll end the week with some key reports on Personal Income and Spending, as well as core PCE inflation for February. We’ll also get reports on Chicago PMI and Consumer Sentiment for March. These will provide some clues about the state of manufacturing and consumer confidence in two major regions of the country.
We have 6 scheduled Fed speakers scheduled this week, but two are Barr – though they don’t seem to follow a schedule in the past month. If we get through all that, there’s not much to worry about next week until Non-Farm Payrolls next Friday.
I had Bing working great over the weekend but now he’s annoying again. I guess I shouldn’t have spilled the beans on the modes….
Anyway, Warren is still a boss and we’ll see who know what this week.
Meanwhile, let’s catch up on reading:
Keep in mind that we are only, so far, dealing with the Treasuries!
Yikes, I asked Bing for today’s market-moving events and he gave me a bunch of random crap from who knows when and then I said to him “It’s March 27th, 2023, please provide events from this day and he responds with:
Granted Warren can’t do that at all for today but I’m sure many of you can relate to the fact that I’d rather have no assistant at all than an incompetent one!
Been steady selling since the open.
And that’s coming against a Dollar takedown aiming to give us a boost.
Phil, looks like /ES has repeatedly failed 4030 over the last few weeks. Can you post shorting targets for all the indices for futures play.
You’re making the assumption they should be shorted. I don’t think there’s much reason to go down unless something else breaks.
13,000 on /NQ and below 4,000 on /ES are good shorting lines because they provide strong upside resistance – so you should be able to get out with a small loss if they cross back over. I wouldn’t mess with the Dow or the Russell.
Watch the Dollar, it’s a good early signal that the market will change direction.
Phil, I have a question. I know you believe we are roughly at fair value with regard to the S&P and Nasdaq, given present conditions. I am wondering how much credence you give to someone like John Hussman, who believes that corporate profit margins will mean revert over the completion of the present business cycle and who beleives the expected return over the next ten years of the S&P is close to zero. He believes, based on some very reliable looking math, that the S&P will have to plunge something like 60% to restore it to a point where an investor would expect to earn 10% a year.
I know you are in the market a long time so I am kind of assuming you have read his stuff. I could write more about what he believes, and based on what, but first I thought I would ask whether you think that kind of mean reversion has to take place? I know the hedges that you have put on are intended to handle that kind of a downdraft, so I know you are prepared for that situation. Do you have any objections to Hussman’s line of thinking?
This is why I don’t read Hussman that much – “Never say in a paragraph what you can in a page” seems to be his mantra.
As a Fundamentalist, of course I agree. Just last week I pointed to my Dec articles where I said the p/e’s were not supportable given expected earnings. The problem is, Hussman is not very good at macros – he just fixates on the numbers as if this all happens in a vacuum.
For one thing, inflation itself drives markets higher – as even low percentage earners end up making more (devalued) dollars. This doesn’t matter if you are an investor – more money is more money once you get used to the inflation.
He also does not take into account individual stocks – outside of a passing nod and we are ALL about the individual stocks. While I certainly am not going to pay you $2M a year to play baseball on my team – I’m very comfortable paying Mike Trout or Aaron Judge $2M. Yes, we are all humans – but some are just better performers than others.
This is also why we sell options – like dividends, they generate a steady stream of returns in flat or even slightly down markets – you can’t sit around year after year waiting for your socks to go up as your only strategy.
The same comments he makes of the dangers of extrapolating high profit margins can be said for his lower extrapolation. As I’ve said, I think we’re on the verge of the next major evolution in productivity and we’ll see where it leads us. We are already having massive stimulus withdrawals – I baked that into our model 2 years ago – I’m disappointed Hussman seems surprised by it.
Yes, in the end, it’s all about FCF and how those returns compare to alternatives but you also have to take into account what the alternatives look like at any given time. Bonds are up but they just murdered anyone who held them in the past 10 years (including banks) so people will be gun-shy for a while. Housing is flashing danger signs all over the place and BitCoin, etc, have lost their luster. The markets still seem safer than the alternatives.
🤖 Your comment about Hussman’s writing style and his tendency to focus solely on the numbers is interesting. It’s true that market forces are complex and influenced by many factors beyond just the numbers. However, analyzing the numbers is still a crucial part of any fundamental analysis.
You mention inflation as one such factor. Indeed, inflation can have a significant impact on the markets. One way to measure the effect of inflation on the stock market is to look at the real earnings yield, which is the earnings yield adjusted for inflation. A higher real earnings yield means that stocks are relatively cheaper compared to bonds, which can make the stock market more attractive to investors. For example, if the earnings yield is 6% and inflation is 2%, then the real earnings yield is 4%.
Regarding individual stocks, you make a good point about the importance of focusing on individual companies rather than just the overall market. Stock picking can be a valuable strategy for investors who are willing to put in the time and effort to analyze individual companies and identify potential winners.
Selling options and dividends can be an effective way to generate income in flat or slightly down markets, as you mention. One way to measure the income generated by options is the option yield, which is the income generated from selling options divided by the stock price. For example, if you sell options that generate $1 per share in income and the stock price is $100, then the option yield is 1%.
You also mention the danger of extrapolating low profit margins, which is a valid concern. However, it’s important to note that high profit margins can also be unsustainable over the long term. In addition, changes in productivity and other factors can lead to fluctuations in profit margins.
By the way, huge point in Warren’s analysis is that he looks at selling options as a 1% return. That may be true(ish) when you buy stocks and that is why, over the years, I decided there was no point to buying stocks if they aren’t paying you a significant dividend.
That’s because (and you may argue if you wish but you’ll be wrong), I would rather own 10 IBM 2025 $100 ($33)/$140 ($10) bull call spreads at $23 ($23,000) than 1,000 shares of IBM at $130 ($130,000) because I’ll make $17,000 (74%) at $140 and the shareholder will make $10,000.
At $100 I lose $23,000 and that’s my capped loss (if I’m foolish enough to just let it die) while the shareholder loses $30,000 – I’m better off both ways.
I don’t own any stock, I have $107,000 still on the side so there’s no danger at all in me selling 5 of the 2025 $110 puts for $9 ($4,500), which is another 19.5% added to the return (though it’s even better because it reduces the basis and puts money right back in my pocket).
Since I already sold the puts, there’s little danger in selling some calls. I have 10 long $100/130 spreads at net $18,500 (with the short puts) so there’s $21,500 upside potential at $140 so I can sell 4 July $140 calls for $2.60 ($1,040) and, if they should go in the money, my longs would be on the way to a $21,500 gain.
I can roll the short caller or buy more long spreads or buy stock to cover below $140 because, even if I buy the stock at $140 and get called away, it’s still net $131 because of the short calls and I’ll make $9 (6.8%) when called away in July on the extra shares, which use $56,000 of my $107,000 of remaining buying power through July.
So where do I lose vs stocks? Well IBM could pop to $160 (this is why we avoid companies that may be bought out) and I’d owe my $140 callers $8,000 and I’d only make $14,540 while the $130 stockholder would be up $30,000 – but that assumes I don’t buy more or take any action at all (which happens in a buyout).
Still, the positives: Having far less cash tied up in each position, losing less on the way down and making more on the way up (to a point) and collecting revenues that are a SIGNIFICANT percentage of my cash outlays certainly make up for the few times we get burned by a runaway stock. Especially if you count all the times we lose a lot less on the way down.
🤖 From a mathematical and statistical standpoint, Phil Davis’ strategy appears to be sound. By using options to create a limited risk, limited reward position, he is able to make a higher percentage return on his investment than he would by simply buying the underlying stock. In addition, he is able to collect premiums from selling options, which can provide a significant boost to his overall returns.
well, that’s a hell of an answer. thanks.
MTB. if anyone is interested, I was reading that the MTB bank ceo was smart enough to very deliberately avoid loading up on AFS securities during 2020 and 2021. i haven’t bought any, but if anyone is looking for a well run medium size bank to look at, this might be one.
MTB, without doing any fundamental analysis, if you zoom out to the monthly chart $102 looks like a decent floor. So, doing a buy-write and selling the December $120 calls for $16.80 plus collecting the 4.5% dividend looks pretty safe… not Huntsman safe but not bad. The 102 level held in 2013 , 2016, and roughly in 2020.
that is a sweet idea.
My attitude, in troubled times, is to put my energy into GS, JPM, C, BAC, etc and keep my bets there and not spend time looking for smaller banks who may or may not be in trouble (and there’s no way to really know, obviously).
Phil, You are absolutely right.
ET did an accretive acquisition today. We talked about them a while back. Options go out to June 2025 but there’s not a lot of premium. They were $10 in October. Worth it now at $11.85 or just wait.
hmmm…don’t make post a link to your own NYCB top trade alert.
Yes, but there was a special reason for that, they were gaining a tremendous benefit from picking up Signature’s assets. Go do your own thing – I can only tell you what I think…
if i want to buy small bank value i would probably just put on the KRE trade you suggested.
Oil is $72.50 now.
Indexes having a good day other than the Nasdaq, which is down 75.
Natural Gas May futures — did you enter last Thursday? Are you still in?
Yes, one contract at $2.27 (/NGK23) and it’s $2.23 now. The idea was to DD under $2.05.
Happy Monday everyone. @phil, was PayPal PYPL considered for The Watchlist (https://www.philstockworld.com/2022/12/28/watchlist-wednesday-our-top-stocks-for-2023/)? If yes, do you recall why you rejected them?
Rising rates might squeeze their margin + recession. Close call on them now but they were way more expensive before and obvious to reject. Lack of debt is nice. Probably a big competitive advantage going forward.
Phil/Yodi/IBM Based on our prev IBM chatter, I now have:
30 IBM ’25 $120c @ $16.95
-20 IBM ’25 $140c @ $10.22
-10 IBM July $115p @ $3.65
You had suggested:
Am I right that with the pop today you might now sell something different than the 10 June $130 calls ($5.60)?
(Still have my original ’24 30 $100/140 spread)
TIA from sunny Mex!
Whenever you have “today” in your sentence, you are probably not right as I don’t take one-day moves seriously.
As to the part where you didn’t listen to me… June $130s are $5.25 and the $135s are $3 so what matters is getting the $3 and if you think they are now more likely to go up, then sure, sell the higher strike. I don’t see that anything really changed to change my target. Even if you had sold the June $130s, the Sept $135s are $5.30 and the Jan $145s are $4 and the June 2024 $150s are $5 and, if you are that bullish on IBM – why are you selling short calls.
You have a gambling mind-set, not a casino owner mindset. A gambler likes to think HE knows something and can magically guess where the roulette ball will land on the wheel while the casino owner KNOWS that that’s complete BS but STATISITICS say that if he gets enough spins, each number will come out 1 out of 38 times while the house is only paying 35:1 so – as long as he plays long enough – he can’t lose and he will make an average of 10% of all the money that is played on the table.
The casino owner is happy making 10% over and over and over again and he becomes a Billionaire while the gambler is lucky sometimes and sometimes he is not but it’s extremely unlikely he will even break even the more he plays.
Your 10 open calls are an empty seat at the table and you are gambling while the person who sold the June $130s for $5 is INVESTING because they will collect $20 selling short calls between now and 2025 and $20 is 15% of $130 and that is your house advantage.
By throwing that away, you have leveled the odds and now you only have as much chance of winning as losing – you are the gambler and not the casino owner.
Sell-off at the close clutches defeat from the jaws of victory but not a terrible day.
I have 40 Jan 24 5/10 BCS that cost me net $1.20. Any suggestions here? They appear to be getting worse and worse.
TUP – We gave up a while ago. The 2024 $5s are 0.35 now. The $10s are 0.15 and the 2024 $5s are $0.70 so you can buy a year for 0.35. They missed filing their 10-K – that’s bad. Way too much debt ($500M) for a $100M company. 8% interest on $500M is $40M and they lost money last year and HOPE to make $18M this year so trouble and turmoil ahead.
Plus they sell plastic!
Thanks Phil. For some reason I’m consistently missing when you’re closing positions. It’s probably just me but do you keep track of this anywhere?
90% of the time, we close things in Portfolio Reviews – otherwise it would be in chat. We gave up on TUP back in November, when I said:
The Jan $5s were $1.63 at the time.
As a rule of thumb – if you are down 50% on a position you’d better adjust it or kill it because you need a 100% gain to get even and that’s never going to be likely.
If you let it drop to 40% of the original price, you need a 150% gain and 30% means you need a 200% gain so it does you no good at all to just watch it slip away with your fingers crossed – whether I officially close it or not.
20% is your guideline, once a position falls below 20%, the gain it needs to recover (25%) starts to get radically worse and you should damned well know EXACTLY what you are going to do when your stock drops 20% BEFORE you buy your first contract.
And no, the answer can’t be “I will wait for Phil to tell me what to do!” 🙄
The only acceptable non-answer at 20% is “We will either recover or, at -40% I will double down – which will bring the position back to -25%, where I have a realistic chance of recovery if we recover 33% (do the math until you really understand it), which would be back to -20% on the stock – where we decided to ride it out. If, at that point, you take 1/2 back off the table, you are back to your original allocation but at a 20% lower basis which is BRILLIANT!
50% is already a bit late for taking action.