Cut stocks, buy gold and hold your CASH!!!
That is the advice from JPMorgan’s Marko Kolanovic, who’s team is advising their HNW clients to prepare for the worst – because the worst is what our Government is best at… “Hopes of a swift resolution to the US debt ceiling have somewhat bolstered market sentiment,” Kolanovic wrote in a note to clients. “Despite last week’s rebound, risk assets are failing to break out of this year’s ranges and if anything credit and commodities are trading at the lower end of this year’s ranges. With equities trading close to this year’s highs, our model portfolio produced another loss last month, the third loss in four months.”
Kolanovic was one of Wall Street’s biggest bulls across much of the market rout in 2022, but has since U-turned on a deteriorating economic outlook this year, cutting the bank’s model equity allocation in mid-December, January, March — and now May. More broadly, Kolanovic and his team said equities appear disconnected from bond markets and softening economic data, in addition to debt-ceiling risks.
I can’t disagree with him, we cashed out all of our portfolios and are just now starting to rebuild them but, in light of the same news that is spooking Kolanovic, we added hedges that have turned us bearish yesterday – going into the holiday weekend.
IF the Government doesn’t shut down, we will be pleasantly surprised – that’s a lot better than being UNpleasantly surprised if they do shut down, right? One additional factor that nailed it for my bearish bet is the renewed spread of Covid, which is up 22% in Russia in the past week, 73% in Brazil, 27% in Mexico, 26% in Bolivia, 100% in Spain, 100% in the Dominican Republic and Haiti and up 22% in Cuba.
And, if you don’t like hearing that, you really won’t like what WHO’s Chief warned about an even worse pandemic in our future. I say let’s just worry about the one that isn’t over before worrying about the next one, right? At the opening of the World Health Assembly in Geneva, Dr. Tedros said:
“The world was taken by surprise and found unprepared for the Covid-19 pandemic, the most severe health crisis in a century. We cannot kick this can down the road. If we do not make the changes that must be made, then who will? And if we do not make them now, then when?“
Of course we already have a plan that we’ve put into action and that is to raise the temperature of the Earth to a level that is inhospitable to the Covid virus – which happens to be 149 degrees – a goal we are on track to achieve by 2050 under our current climate policies… BRILLIANT!
Ron DeSantis is running for President and he promises to address the issue by packing the courts with judges who will outlaw any mention of Covid, which will make it go away like “Gayness” and, just to be sure, DeSantis says he will have the votes to raise the boiling point of water to 300 degrees – which will make the planet seem cooler by comparison – BRILLIANT!
Somehow Elon Musk is now backing DeSantis. For a Billionaire to back a politician who will cut taxes is a matter of simple math – an entire Presidential Campaign costs about $1Bn (legally the limit is $51,850,800 but HA!) and Elon Musk has averaged $39.84Bn in income in each of the past 5 years. If Ron DeSantis can pay Elon back with even a 5% tax decrease – that’s $2Bn a year for 4 years is $8Bn. Even if Musk backed DeSantis’ entire campaign – he could get back 8 TIMES his money, not to mention owning a President – which is even better than owning a Supreme Court Judge!
And why shouldn’t the richest people in America get to own American politicians? That’s how democracy works (according to Twitter).
Arrrrgh! Anyway, in other news: The Saudis have warned short sellers in oil to “watch out” as oil heads back to $75 – reigniting inflationary pressures around the World. This is coming a week before the next OPEC meeting and, last night, the API Report indicated a 6.8Mb draw in crude inventories, which would be the biggest drop since March if EIA confirms it at 10:30.
We also have the Fed Minutes this afternoon at 2pm and we’ll go over those in our Live Trading Webinar (Members Only). Tomorrow we get the 2nd estimate of Q1 GDP and the first estimate was 1.1% so we’ll see if it improved any but, judging from Earnings Reports and Economic Data – that doesn’t seem very likely.
Friday is a huge data day with Personal Income & Spending along with PCE Prices and Durable Goods seem like they are going to be terrible and then we’ll get Consumer Sentiment and see how that’s going into the long weekend but, this morning, Mortgage Applications are down 4.6% after being down 5.7% last week – so kind of falling off a cliff is how things are going…
Sure, the Fed is done raising rates, right?
And the economy is fine.
Good morning, everyone, Here is the link to today’s webinar
VIX has moved from 16 to 19.8 this week
Blasting up this morning too.
I have held these two reits for several years – collecting the dividends and selling call along the way. – but still with an overall loss. Are they screwed for the next few years due to all these sudden rate hikes? Take the loss and move on? I just know that CIM is a well run company and will eventually (hopefully) return but will they need to raise capital/dilute? Also worried about a reverse split because those never seem to work out.
Well, you probably don’t need to worry about a reverse split unless they are well below $5 (CIM is there). It’s not the higher rates that hurt the RMBS players but the rapid change that doesn’t give them time to adjust. They are collecting money at 3% and they are borrowing new money at 5.5% – that looks bad, doesn’t it? But the new money they borrow at 5.5% is loaned out at 7% and all shall be well – with a few bumps along the way.
CIM is down 50% and TWO is down about 25% in the past year and the biggest danger you face is them cutting the dividend, which will send them flying down as all the dividend funds are forced to liquidate. They are both trading at about what they are worth under current conditions and I’m certainly going to be adding CIM if they ever stop going down.
If you don’t intend to be patient and accumulate more over the next two years – then cut your losses and get into something you do believe in because you’re likely to be miserable if you expect these two to turn around any time soon.
I was just looking at the stocks to see if we wanted to add them:
The problem with TWO is it lost $1.6Bn in 2020 and they only make about $200M a year so that loss wiped out 8 years of gains. Market cap is $1.2Bn so 6x is fine and they are trading at just 70% of book value but $10Bn in debt is scary (it was $24Bn in 2018).
For CIM, $4.79 is $1.14Bn and they make around $170M so about the same PW but they did not lose money in 2020 though they did lose $513M last year – at least they make enough money to make it back in the same decade. Same $10Bn in debt, also down from $22Bn in 2018 but, in both cases, that’s because they sold assets and now have less potential revenues and, as I said, it will take a long time to build things up under current circumstances.
CIM pays a 19% dividend and TWO pays 11% so you may say TWO is more stable but I say CIM has more room to cut.
Let’s say CIM goes down to $2.75: The $7 puts are $3.30 so we could cut our losses at $4,125 or we can DD with more short puts and some short calls which would likely bring out net down below $2.50 – so those are our likely choices if things get worse.
If things get better, the short puts are a free $4,125 and 100 of the 2025 $5 (0.60)/7 (0.25) bull call spreads would be $4,500 so essentially net free on the $20,000 spread is definitely how I’d like to play.
It’s like the school of ugly charts!
Hi Phil – What are your thoughts on this writers opinion? Thanks!
We’re entering a brutal new era for the housing market (msn.com)
The housing market is very cyclical and there are so many factors that you can’t really generalize it like that. There are migratory issues (which we’ve discussed), rate issue and, property tax issues – which no one is discussing for some reason. They are assuming rates will keep rising and inflation will stay high anyway and, of course, there’s a whole timing effect like a person who bought a house for $350,000 in 2012 that is now more like $550,000 with a 3% mortgage is in a very different position from someone who bought the same house for $550,000 in the last two years with a 5% mortgage.
So far, there’s only a 1-year window of people who’ve paid more than 3% for a mortgage in the past decade or so (or have been able to refinance) and the real problem in housing is the people who have $300,000 in equity (at $550,000 valuation) in the home they bought in 2012 have a 3% mortgage of $1,265 + 1% state and 1% local/school taxes is another $1,000/month so they are paying $2,265/month plus whatever other expenses.
For those people to go to another home, even if they put up the whole $300,000 – they still have a $250,000 mortgage at 6% ($1,499) and the same taxes (unless the move to a cheaper tax state). So there’s no actual reason to sell your home unless you REALLY need to move. Unless you are drastically downsizing, you will pay more for new mortgage and moving costs, etc.
This is why no one is selling and this is why people are renting – the taxes are making home ownership pointless. The state/county are essentially stealing all the gains people would have had from selling their homes and the banks are sucking up the rest.
So the housing market won’t likely collapse as there’s a shortage of housing but it will be slow and sad for a long time.
Commercial, on the other hand – is a rental only expense for the companies and the ones that can leave their $100/ft rentals in the cities and move out to $40/foot rentals in the suburbs (with half the space due to remote work) are going to be grabbing those savings and then those landlord’s are well and truly F’d.
🤓 The housing market is very cyclical and influenced by many factors, so it is difficult to generalize it. However, some of the main factors that affect the market are:
These factors have created a challenging situation for the housing market. Home prices are still very high, but sales are slowing down and inventory is low. Buyers are feeling the squeeze and waiting for prices to drop. Sellers are reluctant to sell and lose their low mortgage rates or face higher taxes elsewhere.
However, this does not mean that the housing market will collapse as it did in 2008. There are some differences and safeguards that prevent a free fall in home prices, such as:
Therefore, the housing market is likely to cool down rather than crash. Home prices may drop by 20 to 30 percent in some markets that saw the most appreciation, especially in the Mountain West region and the South. But most homeowners will still have some equity left after a price correction. Sellers will have to work harder to attract buyers and close deals. And buyers may find some bargains and opportunities in the market.
The housing market is also different from the commercial real estate market, which faces its own challenges and opportunities. Commercial real estate is mainly driven by rental income and occupancy rates, which depend on the demand and supply of office space, retail space, industrial space, and other types of properties. The pandemic has disrupted the demand and supply of commercial real estate in various ways, such as:
These trends have created winners and losers in the commercial real estate market. Some types of properties, such as office buildings in downtown areas or shopping malls in suburban areas, have seen their values decline and vacancies rise. Other types of properties, such as industrial buildings near highways or airports or multifamily buildings near amenities or transit hubs, have seen their values increase and occupancy rates improve.
The commercial real estate market is also influenced by interest rates and inflation, which affect the cost of borrowing and the return on investment for investors. Higher interest rates make borrowing more expensive and lower property values, while higher inflation erodes purchasing power and increases operating costs. However, inflation can also benefit commercial real estate investors if they can pass on higher costs to tenants through rent increases or lease adjustments.
No real damage if we turn back up but real damage if we don’t by the end of the week.
33,000 is critical on the Dow or there’s a 1,000-point drop (3%) with no real support.
4,160 is our Weak Bounce Line, 4,100 should be support but, if not, 4,000 (2.5%)
If 13,500 doesn’t hold on the Nas, very ugly drop back to 13,000 (3.7%)
50 points on the RUT is 2.5% (2.85 really)
EuroStoxx already down 3.5%
Dollar up 2.5% for the month.
What does this mean? Expectations for long-term rates have gone up 6% since the 30-year topped out at 134 in April. This whole “Fed will return to lower rates” narrative is BS – 3.5% IS “normal”, not 0.25%!
Doesn’t look like we’re doing a lot of building, does it?
Gappy jumps are bad…
PFE – our plan was to sell the Sept 40s for 1.5 or more – and they have reached that now with the jump up in PFE this week. Should we be doing that now? Or wait till the new covid spread becomes an even bigger deal?
Yes, PLEASE stick to the plan. This is like buying a home you intend to rent out for the summer and then you get an offer for a price that covers your mortgage exactly as you planned but then you decide to get greedy and wait for a better offer while your home sits empty costing you money.
Seems silly when you think about someone else doing it, right?
Our PFE plan for the Butterfly Portfolio was:
OFFICIALLY, in the Butterfly Portfolio, let’s sell 10 of the PFE Sept $40 calls for $1.70 ($1,700) which changes the net of the spread to $1,300 and, if PFE goes up, we simply DD on the spread to fully cover the short calls.
Phil great example with the house rental.👍
Don’t expect a debt ceiling announcement prior to the last minute…
I would expect just a touch of panic heading into the weekend once psychology kicks in and the algo’s bail “just in case” something hasn’t been / won’t be worked out.
Don’t forget your hedges (STP).
2025 $20 calls are now $11.70
2025 $25 calls are now $10
2025 $50 calls are now $6.85
2025 $70 calls are now $5.40
2025 $20 puts are now $4.70
2025 $25 puts (now our preference) are now $8 (60 instead of 100 shorts)
60 of the $25s have an assignment risk of $150,000 vs $200,000 for selling 100 of the $20 puts – so it’s a better bet. The extra $5 strike doesn’t matter as we can always roll down to more puts at a lower strike.
The original goal was to buy 200 2025 $20s for $10.25 and sell 100 2025 $50s for $6 and 150 $70s for $5. If you buy the $25s instead, there is less upside potential but it’s still way more than we need at the moment and we can always make adjustments so “Don’t let the perfect be the enemy of the good.” (Voltaire – “le mieux est l’ennemi du bien“).
Big draw in oil but not getting us over $75:
• The War on Poverty Is Over. Rich People Won. The sociologist Matthew Desmond believes that being poor is different in the U.S. than in other rich countries. How is poverty different in America than in its peer countries? Matthew Desmond: We have more of it. We have double the child-poverty rate of Germany and South Korea. We have a lot less to go around with, in terms of fighting poverty. We collect a much smaller share of our GDP in taxes every year. (The Atlantic)
• Justice Thomas Ethics Review Questioned by US Court Leader in 2012: Thomas faced complaints in 2011 over reporting wife’s income Judiciary leadership member objected to lack of information. (Bloomberg)
• The “return to the office” won’t save the office: The so-called “return to the office” has been underway for a while now, and it’s a bit of a mess. Sure, more people are going to the office more often than they were a year ago, but we’re still eons away from where we were before the pandemic. And despite the gains in office attendance, many office buildings themselves are in big trouble — some of which goes beyond remote work and started long before the pandemic. So despite what you’re hearing from some bosses, things will likely never go back to the way they were. (Vox)
• Young Americans Are Dying at Alarming Rates, Reversing Years of Progress: Car accidents, homicides, suicides and drug overdoses have pushed up death rates for children and teens in the U.S. (Wall Street Journal) see also Students are increasingly refusing to go to school. It’s becoming a mental health crisis. Since the pandemic, more students are school-avoidant, leaving parents feeling hopeless and schools unequipped to find a solution. (USA Today)
• AI just killed its first big stock: AI claims its first casualty… How to improve the odds of your kid earning a high salary… Eighty percent of kids say they’re learning faster with this new tech… My favorite way to play the AI education trend… (Risk Hedge)
• The United States of Bed Bath & Beyond: The story of Bed Bath & Beyond is our story, the story of the United States here in the fin de siecle of The Long Now, where our entire country has been busted out and stripped for parts by grown men, rapacious men, different from Tony Soprano only in that they plunder legally within a system of courts and laws and regulatory agencies. (Epsilon Theory)
• Envision Healthcare files for Chapter 11 bankruptcy Envision suffered from declining profits amid hurdles from the COVID-19 pandemic and prolonged legal battles with health insurer UnitedHealthcare. “The bankruptcy wipes out private equity firm KKR’s investment in Envision. In 2018, the PE firm shelled out over $5 billion in 2018 to take Envision private, in a deal valued at $9.9 billion including debt. Last week, The Wall Street Journal reported that an Envision bankruptcy filing would be one of the steepest losses in KKR’s history.” (Healthcare Dive) see also Health Insurance Claim Denied? See What Insurers Said Behind the Scenes: Learn how to request your health insurance claim file, which can include details about what your insurer is saying about you and your case. (ProPublica)
• Drug Shortages Near an All-Time High, Leading to Rationing: A worrisome scarcity of cancer drugs has heightened concerns about the troubled generic drug industry. Congress and the White House are seeking ways to address widespread supply problems. (New York Times)
• Chatbots Don’t Know What Stuff Isn’t Today’s language models are more sophisticated than ever, but they still struggle with the concept of negation. That’s unlikely to change anytime soon. (Quanta Magazine)
• Elon Musk Didn’t Just Do Turkey’s Bidding. Censoring for Strongmen Is Now a Pattern. Free speech—unless a country doesn’t really do free speech. (Slate)
• Conservative pundits are increasingly open about who they think should be killed: Right-wing media cheer DeSantis’ expansion of the death penalty and try to justify the extrajudicial homicide of Jordan Neely. (Media Matters)
• How to Raise $89 Million in Small Donations, and Make It Disappear: A group of conservative operatives using sophisticated robocalls raised millions of dollars from donors using pro-police and pro-veteran messages. But instead of using the money to promote issues and candidates, an analysis by The New York Times shows, nearly all the money went to pay the firms making the calls and the operatives themselves, highlighting a flaw in the regulation of political nonprofits. (New York Times)
• Apple’s New Headset Meets Reality: The device has strayed from Tim Cook’s original vision, but it will still define the field. (Businessweek)
• The Swedish theory of love: All countries must balance the freedom of individuals with the demands of the community. Sweden’s solution is unique. (Aeon)
The test of S&P / 4,100 is coming today!
Still no volume (31M so far today) – imagine what will happen if people panic?
Short story on the Fed is they are still very concerned about inflation and expect a mild recession – nothing good about those notes.
Fed Officials Were Divided Over a June Rate Pause
“Several” is not a majority.
Debt-Ceiling Fight Comes Down to Spending Limits
Conservatives are pushing House Speaker Kevin McCarthy for deep reductions, while the White House is offering a spending freeze.6396 min read
Heard on the Street: For Banks, Debt-Ceiling Drama Doesn’t End With a Deal
Live Markets: Dow Falls Over 200 Points
Yellen Says U.S. ‘Almost Certain’ to Miss Early June Payments Unless Debt Limit Is Raised
Fitch just warned of a possible downgrade to US credit rating!
Phil / NVDA. Quarter earnings beat but still negative…. outlook blew doors down. Thoughts?