The Week Ahead – S&P 3,500 and Nasdaq 12,000 in Play

clarisezoleta

Up and up we go.

3 weeks and one day from now we will have an election and the markets could not be happier. That's not good news for the soon to be ex-President as Joe Biden has the biggest lead three weeks before an election than any candidate since 1936, with a 55% to 43% margin among likely voters – even the Fox News poll has Biden leading by more than 10 points.

Even if every undecided or current third party voter went to Trump now, he'd still be down about 5 to 6 points nationally. That's never been the case since 1936 at this point, when Franklin Roosevelt took 60% of the popular vote from Republican Alf Landon with Roosevelt winning the electoral college 523 to 8 (Maine and Vermont).

A look under the hood reveals why Biden is in such a strong position. Since the coronavirus pandemic began, Covid-19 has either been, or been within the margin of error of being the nation's most important problem in Gallup polling. Biden has a huge advantage over Trump when it comes to the pandemic. The clear majority (59%) of likely voters in the last CNN poll said Biden would better be able to handle the outbreak. Just 38% said Trump would do a better job than Biden.

I know, it's a tough choice isn't it? Who do we want leading our country? What kind of World do we want our children to grow up in? I was reminded of what kind of President I'd like to have watching this video this weekend:

That guy! Get that guy back!!!

Regardless, Biden is better than Trump – according to the polls, according to the markets, according to rational-thinking people around what's left of the planet that isn't on fire. But that brings us back to the markets. Will Biden actually be good for the market? Probably not. Trump has put the nation $8Tn in debt in 4 years and we need to spend another $4Tn next year fighting this virus and fixing the economic wreckage caused by Trump's 4 years. This is a little like the nightmare Obama and Biden inherited from Bush the 2nd, so Joe is probably the right man for the job, but that doesn't mean the job will be easy – this country is badly wounded and needs a lot of healing.

2019_Federal_Budget_Infographic

So far, President Trump and the market have been mostly ignoring the issues and ignoring the issues is how we ended up with the big crash of 2008. This is a propped-up economy and, at $27,040,979,063,829.00 in debt, adding 4.26Tn (this year's debt) next year will put our $20Tn GDP over $30Tn in debt. Federal Tax Revenues are $3.06Tn this year and just $174Bn of that is Corporate Tax Revenue as our Corporate Citizens have been enjoying a 4-year tax holiday under Trump – Biden has already said that's got to change.

But what kind of change will we need? To get debt under control we have to cut spending or raise revenues but, if we're spending $4Tn more than the $3Tn we take in, we either have to cut Government spending by 100% or raise taxes by 130% – neither of those are very appealing but both of those are the reality we'll have to face one day.

1024px-US_Federal_Budget_Deficits_as_of_Sep._2020

While the deficit Trump is running seems obscene – it's projected to be the new normal down the road as we're never going to put up with doubling our taxes, nor are we going to put up with 100% cuts to Government spending and the EXTREMELY low interest rates we're currently paying on $27Tn in debt are being kept artificially low by a Federal Reserve that is, one day, going to lose it's power and then we will be at the mercy of market rates – like Greece was 10 years ago. That is REALLY going to suck….

So enjoy these Golden Years – it may not get any better than we have it now!

Speaking of it not getting any better – earnings season has snuck up on us with plenty of companies about to report on Q3 this week and I'm very concerned that expectations are too far ahead of reality and the market has a big shock ahead. We won't see it from the early reporters, who are generally large companies that have gigantic accounting departments that are able to prepare annual reports 2 weeks after the quarter ends – they are not struggling and they are, in fact, benefitting from all the free money that's flying around. Later we'll hear from the mid-caps and small caps – that's when things will get interesting. For now we have these to kick things off:

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Today is kind of a holiday (Indigenous People's Day) and the calendar is a bit dull this week with CPI tomorrow, PPI on Wednesday, Atlanta, NY and Philly Fed Reports into Thursday and then Retail Sales, Industrial Production and Consumer Sentiment on Friday so we're just waiting for that data and, while we do, we'll chew on the earnings like hors d'oeuvres.

Speaking of feasting, just because we live in uncertain times doesn't mean we can't buy stocks we are certain of. IBM is spinning off their Managed Infrastructure Services Division to focus more on hybrid cloud growth and they've raised their guidance for Q3 and earnings have remained strong in a rough year so here's how we played it in our Live Member Chat Room:

IBM's CEO, Krishna, says the hybrid cloud opportunity is a $1Tn market:

"Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating … Now is the right time to create two market-leading companies focused on what they do best."

The company will spin off the Managed Infrastructure Services unit of its Global Technology Services operation into a new public company. The tax-free deal is expected to be completed by the end of next year.

The company sees Q3 adjusted EPS of $2.58 vs. consensus of $2.58, and revenue of $17.6B vs. $17.56 consensus.

So they've raised guidance ahead of the spin-off and they're not doing the spin-off to head lower, right? Last two Qs were $1.84 and $2.18 so these guys are pretty virus-proof so $2.58 and last year's Q4 was $4.71, which would put us at $11.31 though I doubt Q4 will be as strong as last year. So $12.30 in 2021 is not out of the question but the spin-off and transition could be a bit disruptive so I wouldn't go too crazy but I'm certainly comfortable with IBM at $125 for the long-haul as the same good value it was when we picked it at $110 in Nov 2018 as our Stock of the Year for 2019.

The Stock of the Year doesn't have to go up (we hit $150 in Jan 2020) but it does have to be one we are certain will make 300% with an options trade and just knowing we got a bargain was enough to be sure with IBM.

At the moment, I wouldn't make IBM the stock of the year because it COULD fall back to $100 if the market tanks. THEN I would love it but $127.79 is simply a good price at the moment.

IBM Oct 12 2020

Of course you can own IBM for $100 by selling the 2023 $100 puts for $11.50 so, if we consider that free money, then our trade for the Newsletter Portfolio can be:

  • Sell 5 IBM 2023 $100 puts for $11.50 ($5,750)
  • Buy 10 IBM 2023 $110 calls for $26 ($26,000)
  • Sell 10 IBM 2023 $125 calls for $19 ($19,000)

That's net $1,250 on a $15,000 spread so there's $13,750 (1,100%) upside potential if IBM stays over $125 and, if it doesn't, we should be thrilled to invest more money in rolling down the short calls to the $100s for $5 ($5,000) or less or the $90s for $10 or less ($10,000) and then we'd be in a $35,000 spread for net $11,250 with $23,750 upside potential if we make it back to $125 but our break-even would be $101.25 – that's a risk I could certainly live with!

That's what makes a great trade, the downside to this one is owning 500 shares of IBM for net $102.50. I'd LOVE to own 500 shares of IBM at $102.50 so there's nothing about this trade that worries me. I'll almost be disappointed if it goes straight up and all we make is 1,100%. Meanwhile, it's a nice, margin-efficient trade as the ordinary margin is just $4,028 as it's more than 20% out of the money on the short put side.

Be aware that they are spinning off so these options will get messy down the road but, like SPWR earlier this year, I'm not afraid of a good decision affecting our position. 

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