Powell and Bernanke are speaking on Friday at 11 am.
Before they have a go, we will hear from 11 Fed Governors this week – the most all year and that’s because, at any given moment, the talks on the debt ceiling may collapse – along with our economy. Due to the series of delays leading up to this point, the Government now has $88Bn worth of measures remaining to avoid default, down from $333Bn that were available.
Keep in mind that this is for a Government with a $6Tn budget that pays out $16Bn a day although, fortunately, May is a good month for tax collections though the money has, so far, drawn down faster than expected due to lower than expected rates of collections.
The debt limit is actually $31.4Tn so we are $348Bn over the limit already so the $88Bn we have left is up for debate but that’s the number the government is going for and the deficit is about $4Bn per day so, if we are very, very lucky, we have 22 days left until the Government is completely broke.
This is worse than the last shutdown because the last shutdown was declared when the Government still had $300Bn of reserves. This time we’ve blown through them ahead of the shutdown so this may be the last Social Security check Grandma sees for a while and, if you have any Medicare-funded pills or procedures scheduled – I’d move those up as well!
22 days is also when we will no longer to be able to pay interest on our bonds, which will place us in default and there will be no point in scheduling any more bond auctions – as we will not have the authority to sell more bonds. There are layers and layers to this catastrophe and they will begin peeling off very quickly and yes – we will all be crying!
Back to 2011, the debt ceiling debacle led to the first-ever downgrade of the U.S. credit rating. The threat of default loomed large, and Uncle Sam’s financial reputation took a hit, leaving investors jittery and markets rattled. In the end, a last-minute deal was struck, narrowly averting disaster.
Nonetheless, we did it again in 2013, which resulted in a 16-day government shutdown. It was a moment of political brinkmanship that showcased the ‘art’ of negotiation and left federal employees twiddling their thumbs. That cost the Government and additional $24Bn when our deficit was less than half what it is today.
So let’s buckle up for this rollercoaster ride of political brinkmanship. The outcome will have a domino effect on Global Financial Markets, Investor Confidence (which already collapsed last week) and the overall economic landscape.
Standard and Poors still has the US credit at AA+, not AAA and, keep in mind that a lower credit rating means higher borrowing costs and even more interest on our $31.7Tn in debt – that’s how idiotic our Government is being!
Meanwhile, Corporate Bankruptcies are already up 216% from last year and that is only through APRIL!!! UBS also found in a recent study that bankruptcies worth $10 million or more had a rolling average of about 8 per week. “Banks are battening down the hatches, hogging their bailout money instead of lending it out,” said Economist Peter St Onge, adding small business surveys reveal the biggest deterioration in lending since the 2008 crisis.
That means major banks will have to increase their loan loss reserves, which comes out of profits and further tightens conditions.
What other ingredients do we need for the kind of perfect storm that sank the economy in 2008? How about that, aside from the well-known, looming disaster in CRE – with 50% of leased office space currently unutilized and 1/3 of all leasable space already empty – we are now seeing signs of weakness in the housing market.
Financial institutions lost an average of $301 per loan they finalized in 2022 — in stark contrast to the $2,339 profit per loan that was reported in 2021 — equating to a 113% decrease, per Business Insider. The MBA noted this is the first time it’s seen profits in the red since reporting began in 2008. It’s yet another result of a very tenuous housing market in which there aren’t many available properties. Buyers and sellers are both holding out with interest rates soaring, now nearly double the 2-3% fixed APR the market had seen in recent years.
“The rapid rise in mortgage rates over a relatively short period of time, combined with extremely low housing inventory and affordability challenges, meant that both purchase and refinance volume plummeted,” Marina Walsh, vice president of industry analysis for the MBA, was quoted as saying in a press release. “The stellar profits of the previous two years dissipated because of the confluence of declining volume, lower revenues, and higher costs per loan.”
We will look for signs of this affecting companies in this week’s earnings reports, which are mostly about the Retail Sector:
“And the sign says “Everybody welcome come in, kneel down and pray”
But then they passed around a plate at the end of it all
And I didn’t have a penny to pay“ – Five Man Electrical Band
Another BS Futures pump being wiped out at the bell – signs are not looking good at the moment.
We’ll see if Brent can get back over $75.
Honey badger is back again.
But oopsie – more panic.
I just read the Florida crop report and I’d play OJ (/ONJ23) over $250 with tight stops below – Beaks!!!
Dollar hitting resistance at $102.50 – as expected but I’d say consolidating for a move up because every economy is F’d if we default – not just ours.
Must read article:
U.S. Dollar: Economic Math Vs. Prevailing Narrative
🤖 The article discusses the core problem of high consumption in the United States compared to other major economies. It highlights how the US has maintained a structural savings deficit, resulting in large trade deficits. This deficit has been balanced by foreign capital inflows into various US assets. The author attributes the overconsumption to government policies, such as budget deficits, transfer payments, and easy consumer credit, as well as the cultural emphasis on a consumer-driven economy.
The article also points out the exploding federal budget deficit and its negative implications for the economy. It discusses the expanding trade and current account deficits and their impact on the US balance sheet, as reflected in the Net International Investment Position (NIIP), which has steadily deteriorated over time. The author raises concerns about the potential for a currency crisis and emphasizes the need to address the twin deficits of budget and current account to avert a crisis.
Based on the overall understanding of Dollar dynamics, it is evident that the article raises valid concerns about the sustainability of the US consumption-driven economy and the consequences of the twin deficits. High levels of consumption and persistent budget deficits can lead to an overreliance on foreign capital, which poses risks to the stability of the US economy. The article highlights the potential vulnerability of the US dollar and the negative impact it could have on asset values, bond yields, and inflation.
It is important to note that currency dynamics are influenced by a complex interplay of economic factors, global trade, investor sentiment, and policy decisions. While the concerns raised in the article are valid, the timing and magnitude of a potential crisis are difficult to predict. The US dollar remains the world’s primary reserve currency, backed by its economic strength, financial markets, and geopolitical influence. However, prolonged imbalances in the US economy, such as high consumption and increasing debt levels, could erode confidence in the dollar over time.
Addressing the core problem of overconsumption and reducing the twin deficits would be crucial for the long-term stability of the US economy and the dollar. Implementing fiscal discipline, promoting savings, and pursuing policies that encourage domestic investment and productive capacity could help rebalance the economy. Furthermore, fostering a favorable environment for innovation, productivity growth, and exports could enhance the competitiveness of the US economy and reduce reliance on foreign capital inflows.
Holy cow that is bad!
So bad traders are thinking it takes the Fed off the table – so it’s good?
Wow, and it does not get any better when taking the Philly Fed into account:
Good morning Phil,
at what point do I pull the plug on SOFI?! As bullish as i am, it’s hard not to get cold feet after weeks of downward pressure and now a downgrade from WB.
I’ve rolled and closed short calls.
(mostly uncovered $3s, a few short $10c and short $10p’s)
SoFi: Major Disconnect
The article discusses the disconnect between SoFi Technologies’ (SOFI) strong performance and its stock price, which has been trading at lows despite significant revenue growth and improved profitability. SoFi reported a 43% revenue growth in Q1’23 and exceeded analyst estimates, yet the market has undervalued the stock. The market initially saw SoFi as overvalued when it went public via a SPAC, resulting in a repricing and multiple compression.
However, the author argues that the market has gone too far in undervaluing SoFi, considering its robust growth and profit potential. The article suggests that investors may be confused by the use of the adjusted EBITDA metric and proposes that SoFi should shift to an adjusted profit metric to provide a clearer picture of its profitability. It also addresses misconceptions about SoFi’s loan book, emphasizing that the company appropriately accounts for expected loan losses.
I agree – I think everyone else is wrong and we’re right.
Even without the short call selling, the upside potential at $5 (up 10%) is $6,550 (189%) and the worst case is we own 2,000 shares for ($11,000 + $3,550 =) $14,550 or $7.275/share.
So our worst case is owning SOFI for 54% above the current price and our best case is a $6,550 gain. The intention is to lower the basis by selling short-term calls over time until we bring it down to zero – but it’s too soon for that.
In fact, let’s make that the first official trade for our $150,000 Income Portfolio!
Hello Phil, I’m a new member here. I’m planning to initiate a new trade, but I’ve noticed that the options’ prices are not exactly as your target, especially when SOFI is experiencing rapid movements. Could you advise me on the best approach to take? Is there a specific target range that we should aim to stay within? Thank you
Well first of all be very aware that your broker may not be showing the best prices so you need to use “limit offers” when buying or selling contracts.
You also need to use PATIENCE – everything does not need to be filled at once.
At the moment, SOFI is at $4.66 – not because of anything that changed other than my putting out a trade alert. You have to be careful as some people jump in and overpay.
In any case, we are bullish so we look at where things are:
The stock is $4.66
The 2025 $5.50 puts are $1.93/1.96, last sale $1.95
The 2025 $3 calls are $2.50/2.55, last sale at $2.52
The 2025 $5 calls are $1.62/1.65, last sale at $1.63
So I would start with 15 of the 2025 $2.50 calls and offer $2.50
I would ask for $1.65 for 5 of the 2025 $5 calls.
Then give it a while and see what fills. If the stock goes lower, the puts can be filled for $2 – no harm in offering that.
If the stock goes higher, we can always sell the $7 puts, now $3 – we were looking to raise $4,800 so we’d only have to sell16 of them, not $20 and we’d do that 5 at a time and then fill the longs and the net.
The only reason we can’t get our price for the puts would be that we’ll collect more than we expected for the $5 calls as we fill them.
We just keep making adjustments along the way and keep in mind you always want to be bullishly positioned – that’s kind of the whole point of what we’re doing.
$4.76 now – calm down guys!
Phil I think you mean 5.50 PUT not Call
Please note I counted the put price wrong so it’s a debit spread, not a credit. We do still want it but there’s no rush to sell puts if you don’t get a good price.
The bull call spread by itself is net $1.11 on the $2 spread so there’s 0.89 (80%) upside on those alone.
I tried to redo the math (hope I got it right):
For the $5.50 puts, I calculate 20 X $20 = (4,000) for a net debit of $3,450.
Upside potential at $5 becomes $10,000 – $3,450 = 6,550 gain divided by $3,450 = 190%.
Worst case is owning SOFI for $11,000 + 3,450 = 14,450 divided by 2,000 shares = $7.2225/share – current price $4.50 = $2.725 divided by $4.50 = 60% above the current price!
If you don’t do the puts, then I calculate:
The bcs costs: $12,250 – 4,800 = $7,450
Upside potential at $5 becomes $10,000 – $7,450 = $2,550 gain divided by $7,450 = 34%.
Well that’s because 20 are uncovered in the bull spread so you can cover them and lock in the better gain or be bullish and wait to sell calls at higher prices, which is still the plan. If it goes lower, then you can cover and sell the puts for a good price.
I love the idea of the Income Portfolio. Just checked the watchlist. I know you aren’t fond of ETFs but other than that, wondering if JEPI would be a good fit for this sort of portfolio.
My usual answer is why should I pick up the crap holdings along with the good ones? ETFs are for people who don’t know how to pick stocks – it’s like asking why I don’t want a bike with training wheels after riding for 50 years….
HSY, MSFT, ABBV, PGR, PEP, MA, CMCSA, KO, V, UNH…. MSFT, CMCSA are on our list and KO was the first thing we bought after the crash – JPM’s list isn’t bad but there are many ways to ride a bike once you know how but we really don’t need them to establish a portfolio – especially as JPM charges a 0.35% fee for having made the list for you (not to mention what you lose on turnover churn).
Here’s a simple way to put it – we picked our Watch List in November and here’s how those 3 stocks performed against the JPM basket list:
Thanks Phil. I appreciate the answer. Makes sense.
The SOFI spread had an error. Selling 2 puts per combo trade @$2 yields 4000 (not 11000)
Damn, right, I was counting $5.50 x 20, not $2 x $20 – big difference!
Credit card debt flowing into serious delinquency (90 days or more) was 4.57%, up from 3.04% in Q1 2022. Auto loan debt flowing into serious delinquency was 2.33%, up from 1.61% in the year-ago quarter, the report said.
With the pause on payments of federal student loans still in place, student loan debt delinquency declined to 0.94% from 1.05% in Q1 2022.
This is very, very bad. Yet again, it is being taken as a positive as the Fed “has to pause” before this blows up but the Fed has other pressing concerns that take precedent and traders are fantasizing about a pause and certainly about a reversal.
phil, is there an options way of playing the OJ July over $250 bet?
I don’t know of any specific ETF or stock for OJ. It’s just a trade for people with commodity trading accounts – we can’t trade everything.
Shel-Bot has ambitiously attempted to predict earnings for tomorrow:
🤓 Based on the consensus estimates and the recent performance of some of the stocks, here are some possible scenarios:
Let’s see how it goes.
This is interesting. $88 is $48Bn and it looks like they lose $1.6Bn last year on $12.5Bn in revenues and this year they project $931M on $13.4Bn and next year $1.35Bn on $15.4Bn so people may get pretty excited about them hitting positive revenues.
Year End 31st Dec 2017 2018 2019 2020 2021 2022 2023E 2024E CAGR / Avg Total Revenue $m 414 827 2175 4376 9955 12450 13398 15387 97.5% Operating Profit $m -502 -989 -891 -1328 -1585 -1288
Still 40x but the Revenue growth is impressive and it’s Asia so they probably haven’t scratched the surface yet. Figure 20% growth for 4 years gets them over $30Bn and at least 1/3 of that should be profit and then we’re down to 5x.
Oh and they have $2Bn net of cash – I like that! Covid certainly slowed them down but I bet it killed a lot of their competitors.
phil, in the case of SE, wouldn’t you expect Covid to have sped up their revenue stream growth, instead of slowing them down? they are an online shopping , financial services and gaming, so can’t we think of them as Amazon, Paypal, and EA rolled up into one?
Because the stock price collapses starting in Jan 2022, when SE Asia started to reopen following mass vaccinations.
We’ll see but I don’t see AMZN losing customers.
sorry duplicate comment.