Fabulous Friday – China Deal at Last!

Dow 30,000 or 10,000?

30,000 could happen now that we have our trade deal with China though, as you can see from the 1920s wedge (100 years ago next month!), it ain't over until the Great Gatsby sings.  Sure it's a stupid, pointless deal that has no teeth and is no better than what we had two years ago – before all the suffering – but, hey, it's a deal and, as President Trump noted in "The Art of the Deal":

"The final key to the way I promote is bravado. I play to people's fantasies. People may not always think big themselves, but they can still get very excited by those who do. That's why a little hyperbole never hurts. 

So we can expect to hear that this is "The best Trade Deal Ever."  We don't actually know what it is yet and nothing has, so far, been confirmed by China so it's possible the whole thing is nothing more than a way for Trump to distract us from today's Impeachment Vote – which he thought was going to happen late last night but was rolled over to this morning – infuriating the GOP – who worked so hard to drag yesterday's session long past bed time, so most Americans would miss it.

As to the "Trade Deal", although not fully announced, it seems that China is agreeing to purchase $50Bn worth of US Agricultural Products (they used to buy $40Bn anyway) in exchange for $50Bn worth of tariff reductions so, essentially – we are GIVING China $50Bn worth of Agricultural Products and the differenct to the Treasury will, of course, be paid by the American people – as usual.  What a deal!

As you can see from this IMF chart, clearly the damage has already been done and hopefully we're in time to undo it before things get worse – like 2008 worse…

I said a very long time ago the economy was suffering from "Self-Inflicted Wounds" and could easily recover if we simply stop this Trade War nonsense and Brexit nonsense and both look like they might end soon so now we'll see of my S&P 3,300 prediction comes true though – unfortunately – that was my prediction for the best case and it's all downhill – or at least flat – from there.  

Jan 4th, 2019:

At the moment, I've refrained from getting more bearish as I think the 20% correction is enough and that, though people are freaked out about Trade issues and Government Shutdowns – these are self-inflicted wounds that can be quickly reversed – so it doesn't play into our long-term investing outlook, which anticipated this 20% correction all summer long.  The only surprise was how long it took us to be right*.*  
Our long-term bullish premise is predicated on more jobs and higher wages driving forward a virtuous economic cycle that will bring about some inflation, but the good kind that is the result of rising wages, which makes fixed consumer debts like home and auto loans easier to pay down over time.

Aug 22nd, 2019:

That's why it's sometimes best to just wipe the slate and start again – a call I'm very, very close to making.
We do have some potential positives, mostly it would be rate cuts by the Fed – although they would be a mistake and a long-term negative, in the short run it's a rally we don't want to miss.  Then there's China.  It's possible we do finally get a trade deal and that would boost the market considerably, maybe 10% but still – If all we can do is rise 300 points to S&P 3,300 but we're worried about falling to 2,700 or lower – then really we're betting our portfolio on a 50/50 outcome and that's just not worth risking our gains over, is it?

https://www.finviz.com/fut_chart.ashx?t=ES&cot=138741,13874A&p=d1&rev=637118206780020782

We finally decied to close out our portfolios in Mid September and boy were we happy with that decision as we missed a 5% correction but we're up 10% since then and, though we did re-start several portfolio in early October – when we thought there was a playable bottom – we still have most of our CASH!!! safely on the sidelines.  Is that going to turn out to be a 1999-style mistake as the S&P blasts over 3,300?  No, because we can still buy PLENTY of stocks at good prices, like Macy's (M), which is still down at $15.71 with Chinese shoppers poised to flood back to the store just in time for Christmas:

So, if you have $1M sitting around doing nothing, you can buy 2,000 M Jan $14 calls for $2.05 ($410,000) and sell 2,000 M Jan $15 calls for $1.35 ($270,000) for net $140,000 and that will pay $200,000 if M is over $15 on Jan 20th for a $70,000 (50% gain) though I would also sell 500 March $15 puts for $1.35 ($67,500) which drops the net cost of the spread down to $2,500 on the $200,000 spread and then you can make up to $197,500 (7,900%) if M is over $15 into March 20th expirations.  

The worst case is M is below $15 and you get assigned 50,000 shares for $750,000 I'd stop out the short puts at $2 ($100,000) and take the $32,500 loss rather than risk the assignment but, hopefully, it goes well and we make the $197,500 in 100 days with no fuss.  

By the way, it occurs to me that M "only" does about $8.2Bn in sales in Q4 but it's the quarter in which they make all their money for the year so 10% one way or another would make a massive difference.  So, if we could get just 2 Million of our readers to shop at Macy's for Christmas and spend $500 or more - that would add over $1Bn to their top-line revenues and at least 10% to their bottom line – almost assuring us M would be over $16 in March (earnings are announced 2/25)!

That means, if we take the following spread:

  • Sell 10 M March 15 puts for $1.35 ($1,350)
  • Buy 20 M March $14 calls for $2.55 ($5,100) 
  • Sell 20 M March $16 calls for $1.45 ($2,900) 

That's net $850 on the $4,000 spread so, if this all works out, we'll make $3,150 so the $500+ we spend at Macy's would be free money – coming from our gains of betting on Macy's!  Is it foolproof or foolish?  That would all depend on whether or not we can get 2M people to participate in this stock manipulation experiment and, of course, I am just joking – in case the SEC is interested….

I don't even think that's illegal but I will disclose, right here, that we are already long on M in our Member Portfolios as well as our Hedge Fund as we feel it's a real bargain at $15.71, which is just $4.9Bn for the whole company – one that drops about $800M a year to the bottom line – for a p/e ratio of just 6.2!

Imagine what would happen if we all went out there (Macy's or Bloomingdales) and spent an extra $1Bn and dropped another $100M to the bottom line – that would be very cool!  

If this works, next we'll all get free GoPro (GPRO) cameras!  

Have a great weekend, 
- Phil

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