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TGIF – Hedging for Disaster with our Short-Term Portfolio Review

What is hedging? | Advanced trading strategies & risk management | FidelityAren't you glad we added hedges last week?  

We did a review of our Short-Term Portfolio last week and our timing was excellent as this has been a rough week for the markets but we were able to relax as our STP bumped up from $245,485 to $281,128 as of yesterday's close, gaining $35,643 (14.5%) for the week.  Meanwhile, our Long-Term Portfolio (LTP) positions, which the STP is designed to protect, are down $79,067 (4%) since our April 16th review, so our STP is mitigating about 1/2 of the damages – as it's designed to.  Of course the STP kicks in a bit harder between a 10-20% drop but no real signs of that so far as we're bouncing nicely this week after a 7% drop in the Nasdaq (more on that later).

Let's take a look at where we stand now in our STP:

  • XRT – We went from 20 to 70 last week and caught a nice downturn and a lot of retail earnings are coming out next week – so we'll leave these for now – even though we should take 1/2 off the table now that we're even(ish).  

  • SCO – During the week we doubled down on the long calls as oil got expensive ($66.50), taking advantage of the lower price on the calls.  We also shorted Oil Futures (/CL) in our Live Trading Webinar and we bottomed out at $63.50 – up $3,000 per contract – that's another way we can enhance our returns while we wait for these longer options to play out.  At net $13,000, this is a $30,000 spread if oil is under $60 in January and half of our gains are uncapped – so I still like this spread but we do expect oil near $70 in the summer – so it's going to be a rough ride.   Rembmer, these are hedges – if the economy collapses, oil goes down and we win.  If the economy stays hot – we still think $60 is too much for oil – that's what makes it a good hedge.  

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Comment by BertII

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  1. BertII

    RN223- thank you for the Fidelity info my CHL shares will be converted in to Hong Kong shares in 7 to 10 day. According to the rep they still need to be divested by November. The conversion fee is about 30 but selling the shares is about 100 

13,000 Thursday – Nasdaq Poised to Fail Critical Support

"Transitory" Inflation is still here – month 5.

While the Fed tries to convince us it won't last, inflation is soaring higher and higher and bonds are dropping as that market doesn't believe a word the Fed is saying – especially after yesterday's decade-high 0.8% jump in Consumer Prices – double the projections by the usual crew of leading Economorons.  How long inflation readings persist on the high side has implications for when the Fed decides to start withdrawing monetary stimulus by paring back bond-buying and raising interest rates from near zero.   

“Transient does not mean one month. As supply shortages run up against aftershocks from fiscal stimulus, and the base for comparison remains low, the CPI will continue to run hot into the summer. The impact of the Colonial pipeline shutdown on fuel prices will also have to be monitored closely.” — Andrew Husby and Yelena Shulyatyeva, U.S. economists

Transitory pandemic influences clearly contributed to the surprise but there’s residual firmness in core inflation that’s hard to ignore,” said Michael Gapen, chief U.S. economist at Barclays Plc. Aside from the reopening effect, “there was still some residual firmness that suggests risks around inflation in the near term are still skewed to the upside.”  Wages have shown signs of picking up, and supply chain challenges have elongated delivery times and driven materials prices higher.

Tranportation Services have not jumped 5.8% since 1975, when the Fed Funds Rate was at 7%.  More Federal Spending means more inflation, not even Powell can pretend that it doesn't and Biden still has proposals to spend $4Tn more on Infrastructure along with the Fed's ongoing $2Tn giveaway program and, of course, 0% borrowing rates.  If either the stimulus bill is dropped or the Fed allows rates to rise to contain inflation – the blowback on the market could be tremendous.

It's not just the $28Tn National Debt we need to be concerned about but the $10.5Tn of Corporate debt that is 100% higher than the last time the market crashed – as companies have been on a low-rate binge ever since.  And what is the main thing corporations spend all that borrowed money on?  Buying back their own stocks to make their static earnings look like they are making more…
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Which Way Wednesday – Dow 34,000 Edition (again)

Here we are again.  

After testing 33,900 last night, the Dow is back to 34,100 pre-market and we did spend April building a base at 34,000 so it should, at least, be bouncy.  If we look at this as being rejected at 35,000, it's a 1,000-point run so the weak bounce takes us to 34,200 and the strong bounce would be 34,400 – nothing less than that is going to impress us today and I don't think we'll even get to the weak bounce as sentiment seems to be shifting a little. 

Like Bitcoin or Dogecoin, it doesn't take much of a dip for the bullish investors to start to wonder if maybe they overpaid for their positions after stupidly chasing the price up 35% from the November lows.  Were the people who valued stocks in November all crazy?  Did none of them understand how awesome the earnings potential of these companies are?  

Well, we're in the middle of earnings season now and it's not that stocks are not hitting their estimates – it's more like they are disappointing the bulls who have bought into fantasies that are impossible to realize.  We are re-opening this year but it's already mid-May and things are certainly not "normal" by any stretch of the imagination so why would the market be worth 30% more than the 2019 average of 26,500 on the Dow?  

Did the economy grow 30%?  No, it did not.  Then where would these magic beans have come from that made this valuation beanstalk grow up to the clouds?  We all know the answer – it's stimulus.  There are not 30% more people in the World spending 30% more money with 30% more jobs – the opposite is closer to the truth after losing 3.3M people – roughly the population of Los Angeles.  Another 160M people in the World have been infected and the jury is still out on the long-term effects of covid and the long-term drain on our our heath system for people with chronic conditions.  

Out of 160M cases in the World, 64M of them are actively infected.  The World has never had more active cases at one time.  817,345 people caught covid Saturday and we are partying like
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Televised Tuesday – Money Talk Portfolio Update

Down we go!  

As you can see from the chart, the Russell 2000 is almost back to where we were in March, which is only a bit above where we were in January, which may mean that all this rallying on nothing at all has been a huge mistake and people may be waking up and realizing that it's not just Dogecoin that's a hustle but the entire stock market bubble.  Are people beginning to realize that a truly good investment is one that returns profits that stay ahead of inflation over time and not just empty promises of an uncertain future?  Nah.

I must apologize to Elon Musk for pointing out yesterday that Tesla (TSLA) is also a scam – that stock hasn't stopped selling since and it's dropping like Dogecoin, back at the March lows in pre-market trading.  Aside from Mush admiting Dogecoin is "a hustle" on Saturday Night Live (see yesterday's report for full coverage), the catalyst for the sell-off is Tesla's very poor April performance in China (which accounts for 1/3 of TSLA's sales) with only 25,854 cars sold, down 27% from March AND they abandoned plans to expand the Shanghai plant – a sign TSLA doesn't see their sales bouncing back as electric car competition heats up in China (and globally).

At a recent Chinese Auto show, an unhappy customer clambered atop a Tesla to protest the company's handling of her complaints about malfunctioning brakes.  Videos that went viral showed a woman wearing a T-shirt emblazoned with the words "The brakes don't work" and shouting similar accusations while staff and security struggled to restore calm.  Police in Texas are investigating a fatal crash involving a Tesla Model S that hit a tree and burst into flames.  Rescuers found victims in the passenger and rear seat, not the driver's seat but TSLA claims the car was not on auto-pilot. Federal regulators are investigating the crash, and have a total of 24 probes underway of accidents involving Teslas operating on Autopilot.

All these were known issues with TSLA but that hasn't stopped people from buying the stock for as much at $900, close to $1Tn in market…
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Comment by 1020

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  1. 1020

    Good Morning.

Non-Farm Friday – Is America Working?

It's payroll time again.

We added 916,000 jobs in March (adjustments pending) and under 1M added will actually be a disappointment for April but I think the pace of hiring may have slowed somewhat.  Normal job growth is roughly 300,000 but we're adding back the 22M people who were laid off during the shutdown and, so far, we're still about 4M short and that's not including the normal growth we should have had

I know the ever-rising market makes us think the economy must be fantastic but it's not really.  Even with the endless stimulus, a lot of sectors are hurting and they are sectors that employ a lot of people like restaurants, movies, clubs.  We're getting back to normal but we're not normal yet and half the year has already gone by.   Fortunately, we've had $6Tn in stimulus measures in the first 4 months which is pretty much our entire GDP for 4 months – so who's going to notice a few holes in our economic ship?  

In fact, labor shortages now threaten to restrain what is otherwise shaping up to be a robust post-pandemic economic recovery. Some businesses are forgoing work, such as not bidding on a project, delivering parts more slowly or keeping a section of the restaurant closed. That reduces the pace of the economy’s expansion. Other companies are raising wages to attract employees, which could inflate prices for customers or reduce profit margins for owners.  Analysts say the labor shortages should ease over time as more potential workers are vaccinated, schools fully reopen and federal benefits expire, though the process could take months and the impacts are already being felt.

Companies are scrambling for workers.  Notice this McDonalds is offering a $500 sign-on bonus but still sells value menu items for $1.  Even if they make a 20% profit on those items, a new hire has to serve 2,500 of them before the restaurant just makes back the signing bonus and those of us who have worked in McDonalds know know that's about a month's worth of french fries or coffee as serving over  just over 100 per shift is as good as it gets

8:30 Update:  Oopsie!  Looks like I was right and the Economorons were…
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Thursday – US Covid Cases Drop but India’s Cases Surge to New Highs

Only 794 deaths yesterday.

45,085 people were infected and that's with 32% of the US population fully vaccinated and 45% having had at least one dose of the vaccine.  Unfortunately, we're now facing problems with the 1/3 of Americans who do not want to be vaccinated – because they believe Bill Gates is trying to put a tracker in their bodies or whatever other nonsense they hear from Fox "News" and other conspiracy-mongering outlets.  Not getting vaccinated is NOT a personal choice – it puts all of us in danger from vaccine-resistant variants resurging all around us – even as our own vaccines wear off over time.  

This is something John Oliver made a great report on this weekend:

The emergence of new variants, and whether vaccines are effective against them, is a subject of continued concern as a variant first detected in India, called B.1.617, spreads across the country. There is also a risk that further variants will arise there as the country’s outbreak grows, experts say. Another worrisome variant, P.1, is wreaking havoc across South America.  In the United States, experts now believe that attaining herd immunity is unlikely because of the spread of variants and hesitancy among some people in the country to be vaccinated. The variant that has caused the most alarm is B.1.1.7, which is about 60 percent more transmissible than original versions of the virus.

The Indian health ministry recorded about 410,000 cases in 24 hours, a new global high, and 3,980 deaths, the highest daily death toll in any country outside the United States. Experts believe the number of actual infections and deaths is much higher.  India’s pace of vaccinations has become a source of global concern as its outbreak devastates the nation and spreads into neighboring countries, and as a variant first identified there begins to be found around the world.

There were road blocks, fires and riots in southern Bogotá on Tuesday after a week of protests and strikes over tax reforms proposed by the Colombian government.In Colombia, demonstrations over the past week against the poverty and inequality that have worsened the lives of millions since the pandemic began have been met with a powerful crackdown by their
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Whipsaw Wednesday – Back Where We Started From

What a crazy week already.

In the last 3 sessions, the Dow has gained 400 points, lost 400 points and now gained it again and all that only takes us back to where we were on April 19th – 34,100.  Same with the S&P 500 – just under 4,200 now and the Nasdaq has lost a bit of ground, now 13,600 for the 100, who are mostly done with earnings.  So what's the next catalyst going to be?  The Fed can't loosen and Janet Yellen even said they may have to tighten soon, before inflation gets out of control.  We know what earnings and forward estimates look like so the only thing left to take us another layer higher has got to be MORE FREE MONEY!  Come on Uncle Joe – baby needs a new pair of shoes….

Oil is back to $66.50 on enthusiasm for the re-opening though oil was only $55 avg for 2019 – before the virus and more like $60 in 2018 but $50 in 2017 and $45 in 2016 – so I really don't see how $66.50 is going to play out over the long haul.  Of course, all commodities are inflating rapidly so oil is just on that bandwagon, along with the ever-weakening Dollar.

Still, according to Caesar's (CZR), weekends in Las Vegas are sold out "for the foreseeable future" and, even though the stock lost $1.7Bn last year and plans to lose $800M this year, people are still paying $20Bn at $95.50 for the recently-bankrupt company.   Why?  I have no clue.  Cruise ships are also back in the money, as are airlines though none of them proect much more than small profits this year and nexts.

As with any gambling, people just want to play and that's good for CZR and good for the markets at the moment.  

Just remember, the longer you keep playing – the more likely it is you are going to lose! 

Finally, courtesy of BofA,

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Comment by rick2006

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  1. rick2006

    Such great earnings for CVS, and reasonable valuation. Non-GAAP EPS guidance of ~$7.7 for the year (GAAP ~$6.40). Cash flow from operations about 12.5B for the year. And even after the runup today, the company is trading at 100B and $81/share. Holding my shares and LEAP calls, and added some short term May/June calls, since the stock appears to be breaking out above $80/share. 


Zero Hedge

Visualizing Key Generation-Defining Events In US History

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Dogecoin Soars After Musk Tweets "Working With Doge Developers To Improve System Efficiency"

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It is high time there was a carbon tax!

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Don't miss our latest weekly webinar! 

Join us at PSW for LIVE Webinars every Wednesday afternoon at 1:00 PM EST.

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00:00:01 - EIA Petroleum Status Report
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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. Contact Ilene to learn about our affiliate and content sharing programs.