*[Phil will be on* Bloomberg Money Talktonight at 7pm!]
What will it take?
Yesterday the Trump Administration announced that they will be seeking the ELIMINATION of Payroll Taxes for the rest of the year. The Government collects $1.26 TRILLION in payroll taxes so this is a $630Bn bonus for working Americans (the other $630Bn goes to the companies that pay matching funds) and, for Trump, this is his fairest tax cut yet, with only half the money going to corporations and rich people who don't need it - instead of the usual 90-100%.
Aside from the fact that this is yet another thinly-disguised tax break for corporations, NOT collecting $1.2Tn will push our annual deficit close to $2.5Tn – that's adding more than 10% in a single year! This is in reaction to a virus that, so far, has infected 1,039 Americans – we could just give each person who's infected $1.2Bn – that would make them feel better!
The Bank of England did an emergency rate cut this morning and India, South Korea and Malaysia are also considering cutting rates and our own Fed has a meeting next week along with Japan, Indonesia and the Philippines followed by Thailand and New Zealand at the end of the month. Thailand, Japan and China have already made stimulus moves and we're waiting on the ECB and Bank of Canada as well. MORE FREE MONEY FOR EVERYONE!!!
Yet the markets are not doing better at all. Despite yesterday's impressive "***rally*", we remained firmly on the sidelines as we never even came close to our "Weak Bounce" line at 2,960 and that's not even a recovery until we cross back over the "Strong Bounce" line at 3,070 and hold that for 2 consecutive days.**
Failing to get back to the weak bounce line in the amount of time it took to fall below it (2 days) means you can kiss a V-shaped recovery goodbye and failing to make a weak bounce in the time it took you to fall from the top (2 weeks) means you are just consolidating for a move down – so that's what we're paying attention to at the moment.
With all this stimulus talk being bandied about, however, I did put out an Alert to our Members this morning to be on the look-out for a cross on the S&P 500 Futures (/ES) over the 2,800 line (with tight stops below) as we should get a run to at least 2,850 again as stimulus gets talked up and that's a nice $1,000 per contract if it works out but the weakness in the Futures is scary because, as I said, they already floated $1.2Tn in stimulus yet the Futures are down 2.5% this morning.
We are doing a Live Trading Webinar this afternoon at 1pm and, this evening, I'll be onBloomberg's Money Talkat 7pm discussing the trading environment and making adjustments to our Money Talk Portfolio, which we only trade on the days of my appearances on the show so it's generally a low-touch portfolio with very conservative trades – let's see how they are holding up:
Down 8.4% is not bad in a market that is down 20% – especially as we don't have any proper hedges (we had no major gains to protect and lots of cash) but it's too early to go on a buying spree so what we are going to do is "improve" our current positions where we can. I was on the show back on Feb 5th, while the markets were still riding high and we did add two plays but that evening I urged caution. We should still be cautious but that doesn't mean we shouldn't take advantage of opportunities:
- SPWR (SPWR) – A great solar player now stupidly cheap. We sold the $8 calls for $3.10 so our net entry is $4.90 and certainly the position is not in trouble but we're going to take the opportunity to add 20 2022 $5 ($3.60)/10 ($18) bull call spreads for $1.80. That will cost us $3,600 in cash turning this into a $10,000 spread we paid net $500 for. Potential net gain is now $9,900 (9,900%) at $10.
- FCX (FCX) – We just added those last month and already down a bit. Our 2022 $10 calls are now $2.68 and the 2022 $5 calls are $4.70 so about $2 to roll $5 lower would be silly not to do if we intend on keeping the positions. Spending $4,000 more widens the spread to $20,000 and we were in for $1,500 so now net $5,500 but the spread is $8,000 in the money – so I feel good about i as we have 2 years to recover Let's assume we get back to $12 and net $14,000 rather than the full $20,000 for an expected gain of $8,500.
- GOLD (GOLD) – Our Stock of the Year is holding up very well and our trade is 100% in the money so not much to do with this $12,000 spread that's currently net $3,330 other than wait to gain the next $8,670 (260%). See, even if you missed our original net $675 entry – 260% in two years on what's left is still a nice return, right?
- IBM (IBM) – 2019s Stock of the Year has gone on sale and you know we are going to take advantage of that. We can roll our 2022 $120 calls at $17.70 to the 2022 $110 calls at $22 for $4.30 ($3,440) and that's certainly worth doing as now it's a $24,000 spread we paid net $2,980 for (we began with a small credit). I'm not worried about the target so we expect to make the full $21,020 and it's now net -$5,190 (plus the roll) so FANTASTIC as a new trade too.
- IMAX (IMAX) – With China essentially closed and Europe closing and America just starting to panic, box office revenues are off about 50% and IMAX will have a terrible couple of quarters – but that is why they are on SALE and I LOVE them at this price. We're going to buy back the short $20 calls for 0.60 ($1,200), not because we think they'll get to $20 but to free us up to sell other calls when they bounce and we will add 10 more $15 calls at $2.40 ($2,400) with a plan to roll down to the $10s if the roll gets cheaper than $2.40. Adding the 10 gives us 30 long Sept $15s and let's say they just get to $18 and net us $12,000 against the current net $100 credit and the $3,600 we're spending is net $3,500 with an expected gain of $8,500 (242%), which would not be bad at all for a stock that tanked on us like this.
So, now we've spent $14,540 to improve our positions and that still leaves us with about $85,000 in cash without increasing our margin significantly so still very much in cash and margin but now we have a potential to gain $56,590 if all goes well and we do feel good about those targets, despite the current mayhem.
While that's an excellent gain for a $100,000 portfolio, we can also begin building a "Watch List" for stocks we'd like to buy if they get cheaper and one way we can add a little cash in the portfolio is to take advantage of the very high Volatility Index (VIX) and sell some overpriced puts while they have panic pricing:
- Valero (VLO) – Top-notch refiner and energy is way out of favor but refiners don't make money on oil or gasoline but on the (crack) spread between the two prices and lower oil prices often means more money for the refiners, not less. With the stock at $60, the 2022 $40 puts are $7.50, which would put you in for net $32.50 so let's sell 5 of them for $3,750 to remind us to keep an eye on the stock. We expect to make the whole $3,750, of course.
- Tanger Factory Outlet (SKT) – This is an outlet mall REIT that has been destroyed but it pays a $1.43 (13%) dividend at this price ($10.40) and we can buy 1,000 shares for $10,400 and improve upon that by selling 10 2022 $10 calls for $1.80 ($1,800) and 5 2022 $10 puts for $2.85 ($1,425) so it's a net $7,175 cash outlay and, if SKT stays over $10, we get called away with a $2,825 profit plus $2,850 in dividends would be a $5,675 (79%) return in two years – that's very nice!
- Ford (F) is another great dividend-payer at $6, paying 0.60 (10%) so we'd love to won them but we don't have to as the 2022 $5 puts are $1, which is almost as much as the dividend but puts us into the stock for net $4 in the worst case – that's 33% off the current price. So how much F are we willing to buy for $4? I'd say 2,000 shares would be no problem so let's sell 20 of those puts for $2,000 and we expect to simply collect that $2,000 as well.
There's a quick $11,425 added to our expected gains and only taking net $1,425 in cash to add them – that's a very fair trade-off as we still have PLENTY of firepower left to adjust with if the market makes another leg down but, hopefully, we don't all die horribly from a virus that destroys the global economy and we just make the $68,015 as planned!