Update 92: Stock Market-Higher…Why? Read This & I’ll Tell You

May 9, 2020 Option Professor Opinions & Observations

Ok…Who’s Confused??…Put your hands down & I’ll share with you our opinions & observations on what the heck is going on out there. We’ve told you about some reasons in past updates & will discuss potential tactics that we are considering right now. It comes down to OPERATIONAL LEVERAGE & RETURNING TO PEAK EARNINGS. Let’s start with the Unemployment Report which was the worst on record. Up to 34 Million that we know of out of work….we got PPD/SBA Rescue Programs with money going out people who don’t need it & people that are Deceased plus companies like Shake Shak (they gave it back others won’t). Two guys Ken Langone & Bernie Marcus were on TV saying it’s a travesty that they get Social Security checks when they made so much money off the system with (Home Depot) & the money could be directed elsewhere. A Continuing Chaotic Disaster.

The 3 main reasons behind the rally (after $5Trill to $12 Trill Stimulus & Fed Socializing markets) are #1. Rebalancing as Stocks were Discounted to Bonds #2 Reversion Rally back toward the 200 day Moving Averages #3 Belief that Operating Leverage will return companies to peak earning faster than expected & TINA (there is no alternative) is irresistible allure to $5 Trillion in money markets and Global money that has been sitting in Death Valley (a.K.A Europe/Asia/Emerging Markets). When the market were in the midst of wholesale selling in stocks & buying of Treasuries in March..the FED stepped in and stabilized the Credit Markets first…Why?..because if you went to cash a check & the system was frozen or money markets broke the buck…real panic would have set in. So FUNDS in allocation models had to sell Bonds & Buy stocks to return to their percentages (e.g 60-40/80-20 ect). Selling volume was exhaustive so we snapped back 400 SP points quickly. After a 1200 point drop..we told you the moving averages were way above the market so with the FED involved…odds were great for a snap back to either 2640 (38.2%) 2790 (50%) or 2950-3020 (61.8%- 3yr M/A/200 Day M/A). We are at the TOP of those 3 levels & some sectors (examples include Tech-Healthcare-Consumer Discretionary-Communications) have already risen above. AS WE TOLD YOU-in 2001 & 2008-the 1-2-3 yr SP M/A’s inverted to the DOWNSIDE and it took years to turn them back UP….in 2016 & 2018; those averages were BREACHED but never CROSSED & in MONTHS we resumed UPTRENDS…I am sure the Admin-Treasury-Fed are well aware of this & explains the PANIC to print money in the Trillions & the FED either THREATENS to buy things & send money out in a very CHAOTIC fashion. Desperate to avoid ASSET PRICES languishing thru the election..they said what the heck..let’s BLOW OUT the fiscal DEFICIT & National DEBT and REINFLATE ASSETS (like what happened after the tax cut-buy back financing)…..Get that S&P back above the 3 yr M/A (2790) so investors can feel OK again….if it doesn’t work…we’re gone after the election..we’ll leave a pile of manure for the next guy…..if it works…reelected & maybe 4000 SP. Now let’s talk about #3 which is the IMPORTANT ENGINE of the scheme. It’s NOT PRETTY but if it WORKS…the rich will get richer. Here ya go….the return to PEAK EARNINGS (like after the 2008 Crash) can happen thru Operational Leverage…it’s SIMPLE….you have less REVENUES so how do you return to profitability??…..you CUT COSTS…..the WORK FROM HOME has exposed inefficiencies in business as to how TECHNOLOGY can replace people (cloud) & all this real estate expenditures can be consolidated (zoom) So: if you have less labor costs & real estate costs your lower revenues are profitable & if revenues jump over time…you do the MATH. Sound familiar??…Business did the same things with their supply chains when overseas cheap labor/no factories led everybody over to CHINA….no buildings no employees no RUST BELT ect….China didn’t KIDNAP our companies…they went there to MAKE MONEY at American worker expense. Look at BIG 5 TECH firms & see how many people in the USA they employ & how much USA real estate they use in relation to the $5-6 Trillion market cap…..a joke….FINALLY…the dirty little SECRET…..most of the unemployed either NEVER FINISHED high school or only finished high school. As such; 2 things have come out….they weren’t MAKING any money (only a 10% hit to Income) which the FED can make up with printing BUT worse yet if this scheme works out as it has in the past….these people are NOT all coming back to work. So you could see HIGH unemployment but a RISING stock market due to VIGOROUS EARNINGS RECOVERY based on cost cuts. FINALLY..the Fed has played this game BEFORE after 2008….get money market rates (cash) down to ZERO & FORCE PEOPLE to take risk if they have any hope of any return on capital & it TRANSFERS some of the BAILOUT to investors & PRIVATE EQUITY & OFF the FED who is so far off the ACT of 1913 it’s RIDICULOUS….TINA’s back with a vengeance. It is BULLISH the FED can LEVERAGE their balance sheet to INFINITY & the SCHEME to INFLATE ASSET prices is working so long as we STAY ABOVE the SP 2790 area. WHAT’S THE RISK? The RESTART is SLOW…..The VIRUS explodes….the DISPARITY in WEALTH spells trouble AFTER unemployment runs OUT….INFLATION pops…and if (when?) we see China & or Russia ACT UP

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Stock Market

We just went over why we continue to see higher prices…..sector ETF’s like MGK VHY VCR VHT SMH have all been mentioned here and all have been doing just fine surpassing their 200 day moving averages. NOW the question is will they hold water or simply see the PACE of advance moderate. If you’re BULLISH you hope for the ladder as investors by these areas REGARDLESS of valuation models. One of the RISKS is the cutting of BUSINESS & CAP EX spending that many firms are announcing and the pace of the restart….even Cloud/Cyber Security ect. need capital outlays. If you subscribe to a RETURN TO PEAK EARNINGS via cost cuts…then your OUT OF Favor sectors (virus epicenter) with low P/E’s and still OVERSOLD basis their 200 day moving averages could be worth a look as many are trading BELOW Book Value…Retail, Restaurants, Banks, Hotels, Travel-Leisure Oil. Mega-Tech, FANG, Health Care clearly has led ; but if this rally is to broaden and the effects will be muted due to FED/Fiscal stimulus, then the catch up trade could be ok. Some Banks & Mortgage Processors may have a bumpy road ahead but some have low P/E’s & are priced below book & can take some heat due to good cash positions. Regionals (KRE)…Large (C & BAC) & processors (ESNT, RDN MTG) are on our radar. For the REST OF THE MARKET…..Option prices have been ELEVATED for some time….which means pricing out COVERED CALLS for some downside protection & pricing out fully paid cash SELLING PUTS on stocks you like at lower prices is worthwhile strategies to investigate for suitable investors. Remember Buffet sold $6.5 Billion in April/$137B in Cash….and while still bullish Long Term on America…valuations & this experiment has a range of possibilities

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Bond Market

ISSUANCE is the buzzword this week as $37B came to market & BA & other troubled companies continue to raise funds via the markets much to the DELIGHT of the FED. The line was drawn this week as UAL had to pull the $2+ Bill offering as investors apparently are not that DESPERATE for yield. Fed to buy some HYG next week we hear & we noticed many fund that were trading at a PREMIUM have sold off to flat as the FED said they would not buy over NAV. China exports to the USA up 2.2% while Imports -11% suggesting FRONT RUNNING Tariffs again & poor demand. Treasury offering $3 Trillion..over 10% of National Debt…off the charts. Some sayy CAVEAT EMPTOR to those buying DURATION as the Fed has little control past 10 yrs..we agree & focus on VUSFX VFSUX VMBS VCIT when hunting.

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US Dollar/International Markets

Well…Dollar Index is around the 100 mark still (99.76) so again we say the the Japanese Yen & Euro are sitting just under their 50 & 200 day moving averages and the are inverted to the DOWNSIDE so that is the path of least resistance for the YEN while the Euro is hanging on for dear life at about 110. Hey we got yield advantages (albeit smaller) and the restart has instigated optimism….Canadian $$ & Aus$$ improving in tune with oil improving..may be a proxy for an oil trade?…slice it anyway you like…so far the Dollar is stable to strong and if 35 mill jobless is ok..What kills it?? AS far as International markets (Europe/Asia/Emerging)…..they all look dead and haven’t really done anything on a 1-3-5 yr basis so tread caefully.

Crude Oil

In the last 2 weeks they have called off the dogs in oil…can you trust it up 20=% for the week 60+% for the month? Another expiration ahead and a break under 20 could spell relapse. Stocks on our radar brought to your attention XOM CVX VLO MPC HES COP PSX OXY WPX HAL ect & gas guys like LNG have has good runs so in the short term covered calls collars & married put could be worth a look if the legs go out, LONGER TERM….as we have said the SUPPLIES may be L shaped (shale/rig counts disappear/OPEC) with DEMAND returning V shaped (cheap gas-America travels) so we stick with 25-35+ year end & potential of 40-55 in 2021 we get cooking as hoped.

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Gold Silver Copper BITCOIN

The Gold prices were pretty sideways this week with Silver getting back to a 15 handle while Copper is pressing toward the 2.50 neighborhood. The BIG NEWS this week was the story of Paul Tudor Jones (one of our favorites & runs the JUST fund) who said he was going into Bitcoin as a HEDGE 7 viewd it as Gold in the 1970’s (early years/just off Gold Standard/beginning of leveraging USA exploding Money Supply). You obviously can buy BITCOIN futures (if you are suitable) but not for the faint of heart as the 52 week range has been about 14 Grand to 4 Grand now at 10 Grand…if you drove like that on the freeway…you’d get a DUI:):)…on our radar GBTC. Gold/GDX flirting with legitimate breakouts so we hold core positions from much LOWER levels..so far no add….2-3 yr M/A’s way under the market suggests overbought and would rather buy dips in a BULL market…Silver rebound & stocks up is nice but still fall Short of resistance while China back to business helped Copper prices & our buddies FCX & SCCO

Want to know more…email us optionprofessor.com

Soybeans Ect

It’s getting warmer…and the prices are heating up as well as we went up almost 25 cents a bushel this week albeit we fell a bit on the close. Our gut (without much price evidence) was that $8 Beans could go 9-10+ this summer if China buying & supply/yield disruption would give us the juice needed to get the trifecta of spec/fund buying with farmers lifting hedges & squeeze on whatever shorts could be squeezed. the price areas of 8.60 to 8.80 the 9.0 to 9.50 could really tip the scales for the bulls…nice week…need more…coffee prices turned up a bit (SBUX opens??)..otherwise not much.

REMEMBER There is a substantial risk of loss in short term trading and option trading and it is not right for everyone. Consult your brokerage firm, broker, advisor to determine your own suitability. Past performance is not necessarily indicative of future results Use Risk Capital Only ,

Jim Kenney

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