Working it Out Wednesday – Is the Trade Deal the Beginning or End of the Rally?
Today is the day!
Trump will sign a deal today (11:30) with China that puts off the new tariffs he threatened them with until "after the election" and China agrees to buy $200Bn in US Goods and Services over 2 years, which is double their normal pace so, in theory, it could add 0.5% ($100Bn) to our GDP, assuming we actually produce more Goods and Services and don't just end up selling China things we would have sold to someone else. Boeing (BA) has several hundred grounded 737s China can have – that's a good start!
It's onlly a start though as the deal does not address Cybersecurity or China’s tight controls over how companies handle data and Cloud Computing. China rejected American demands to include promises to refrain from hacking American firms in the text, insisting it was not a trade issue. The Chinese have also rebuffed requests for broader changes to the structure of their economy. That includes a pattern of subsidizing and supporting key industries, like solar and steel, that American firms say have allowed China to dump cheap products it makes into the United States.
In the interim, the remaining tariffs will continue to inflict financial pain on American businesses that rely on Chinese imports and the consumers who buy their products. Is that going to be good enough to continue to boost the market or will the reality of the trade deal's mediocrity begin to weigh on forward-looking sentiment. Pay close attention to Corporate Guidance, now that they are taking the signed deal into account.
Earnings have been going well so far but Goldman Sachs (GS) missed this morning by almost 20% – that was a surprise. BAC, BLK, PNC, USB and UNH all beat along with WAFD last night and only WFC screwed up yesterday so it's so good, so far in the Financial Sector but, of course, shouldn't it be with the market up about 30% in 2019 and up another 2% in the first two weeks of 2020?
The Producer Price Index came in weak this morning at 0.1%, half of what was expected and that indicates that, despite "strong" retail sales, the Consumers are unwilling to swallow price increases and that does not bode well for margin improvement down the road. For 2019, total PPI expansion was 1.3% so 0.1% is actually right in-line with all the other months of 2019 – I don't know why they were expecting 0.2% in the first place…
We still have our S&P (/ES) Futures shorts at 3,277 (4) and our Dow (/YM) Futures shorts at 28,915 (2) after cashing our our Nasdaq (/NQ) Futures shorts on yesterday's dip with a lovely profit. This morning I want to add 2 Natural Gas (/NG) Futures longs at $2.13 as that's a nice, low price for /NG in the winter. We're having a Live Trading Webinar this afternoon at 1pm, EST – we'll follow up on Futures trades than and also review our 6 Member Portfolios.
One portfolio we can review right here and now is our Money Talk Portfolio, since it's a public portfolio we keep forBloomberg's Money Talk showand we only make changes on the show and never touch them otherwise. We began the new portfolio back on November 13th and not much excitement so far as it's only up 2.7% but they are all solid picks with plenty of room to grow so let's look at the trades and their potential for future gains:
SPWR – Finally coming off the bottom and I do love these guys. We were being cautious but I'll probably be adding this trade to one of our other Member Portfolios, with an additional bull call spread as $8 is way too cheap for SPWR. We certainly expect to collect the remaining $2,810 on these short puts so good for a new trade.
GOLD – Our 2020 Trade of the Year is off to a great start as our net $675 entry is now net $2,662 for a quick $1,987 (294%) gain in just two months. While it sounds like it may have gotten away, it's actually a $12,000 potential trade if all goes well and GOLD holds $17 into 2022 so that's another $9,338 (350%) left to be gained – still not bad for a new entry!
IBM – Our Trade of the Year for 2019 is still going strong at $135 – up from our $110 entry in Nov, 2018 (we make our Trade of the Year decisions around Thanksgiving) so we didn't see any reason not to renew it as it's simply on the way to our $150 target for 2021. This spread has barely budged and still a net $80 credit on the $16,000 spread which is 200 times $80 so you can make 20,100% on the $80 credit if IBM is over $140 in Jan, 2022. The ordinary margin requirement on the 4 short puts is just $3,571 – so it's a very efficient trade as well – just the kind we like over at www.philstockworld.com!
There, only 5 more reviews to go and we're ready for Friday's options expirations.
Meanwhile, we'll see how things go after the trade signing. We have 2 Fed Speakers (Harker and Kaplan) sandwiching the signing ceremony so I imagine the fix is in and no one wants the markets to look disappointed on signing day. We also have a Beige Book to look at at 2pm and Oil Inventories at 10:30 should give us a boost – as it's very unlikely they'll be as bad as last week was. That makes Oil (/CL) a fun long at $58 but tight stops below that line.