Non-Farm Friday – The Sum of All Fears

Could this be the last straw?

We're getting the Non-Farm Payroll Report at 8:30 and it's usually a market-mover but more so this week as it will confirm or deny a worsening economy.  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.  Remember the good old days when you were disappointed that you only got a 5% raise?  You have to be pretty old at this point to remember inflation being your friend – when we could buy a car or a home we couldn't really afford because we fully expected our salaries to double over the next 5 or so years in almost any job.  

The first Bush Banking Crisis of 1986 was, in large part caused by a slowdown in wage growth (thanks to Reaganomics, now known as Trump's Tax Plan) and the models used by the banks for lending and the assumptions our workers made for buying a home were not adjusted fast enough to allow for flat wages and flat home prices and people found they were in far over their heads on 8-14% morgages without enough equity to refinance – even as rates ticked lower.  That led to the failure of about 1/3 of all Savings and Loan Associations, which led to the rise of the mega-banks which took their place – only to have their own crisis as Bush II repeated the sins of his father. 

Though Trump is repeating those same economic mistakes, at least he hasn't done anything to stop the increases in minimum wages that began under Obama and that is putting upward pressure on all wages and that is the best thing you can do for an economy – put money in the hands of people who actually use it every day.  Money given to people in the Bottom 80% has an economic multiplier of 3.1 while giving money to those in the Top 10% actually makes it disappear from the economy at a rate of 0.6% returned.  

The chart on the left illustrates tourism's multiplier effect (something else Trump is screwing up) but it gives you the idea of how money flows from the bottom to the top as money is spent in the economy.  Now, think of what happens if you give 1,000 poor people $1,000 vs giving me $1M.  What am I going to do with $1M?  I'm going to put most of it right in the bank!  You can test that theory by giving me $1M and I will report back to you on where it went if you don't believe me….

However, money given to people at the bottom of the ladder is spent at the bottom but it doesn't stop there as money spent on consumables is what creates the jobs up the food chain.  That's why tax cuts for the rich are so idiotic and that's why rising wages are so great for the economy.  What we have at the moment is a little of both and rising wages are a very slow-moving effect, so it will take time for the money to "trickle-up" and begin to affect Corporate Profits – which first become impacted by rising wages.  We'll see some of that in this earnings cycle but I think that "bad news" is baked in at this point – though you couldn't tell from the way Apple was treated yesterday.

8:30 Update: 312,000 jobs created in December!  Not only that but October and November have been revised up about 20,000 jobs each so that's + 352,000 jobs in this report – told you so!  This indicates the US economy is doing just fine though the initial reaction is likely to be muted as this many new jobs boosts the Dollar (need Dollars to pay wages), which puts a bit of short-term pressure on stocks and commodities but, on the whole, it's a very strong number for December, blowing away consensus expectations of under 200,000 formed by all the leading Economorons.

That, by the way, is 352,000 potential new IPhone customers as well!  The only negative here is that a jobs number that strong puts the Fed back on the table as they don't want rising wages to get out of control – as a tight labor market is wont to do.  

Once again we'll be picking up Nasdaq (/NQ) longs when they cross over the 6,200 line (with tight stops below) – that one has been good for several $1,000+ gains this week so there's no reason to stop going to that well.  That should line up with Dow (/YM) 22,800, S&P (/ES) 2,460 and Russell (/RTY) 1,340 so we can go long on any of them as long as they are holding those lines (and they should as it's only a Dollar correction taking them down at the moment).  

Yesterday's sell-off was silly and we'll be adjusting our Apple (AAPL) positions today as we've been giving a fantastic opportunity to improve our position.  For all of our Portfolios, our goal is to roll down our long calls, like the 2021 $160 calls, which are now $18.65, to calls that are $20 lower, as long as it costs less than $10 to make the roll.  The 2021 $140s are $26.60 so check but the 2021 $120s are $37, so right on the edge but the $130s are $31.50, just $5 more than the $140s so the $130s or $120s will be our goal to establish out lower AAPL calls in all our Member Portfolios*.*  

The 2021s have 2 years to mature so Apple has plenty of time to recover and spending $20 to drop from the $160s to the $120s puts us $25 in the money for $20 – a very good deal and it also widens our spread by $40, giving us a lot more upside potential and it also makes it more comfortable for us to sell short-term calls down the road – all good things!  

There still may be a few downgrades for Apple by lazy analysts who want to follow the herd but, as I said yesterday, Tim Cook just told us AAPL made $32Bn in Gross profits FOR THE QUARTER and, in fact, in Cook's letter to investors, he also said Operating Expenses were $8.7Bn so that's 32-8.7 = $23.3Bn and then taxes are 16.5% ($3.8Bn) so that's a Net Profit of $19.5Bn FOR THE QUARTER compared to $20,065,000,000 a year ago, when AAPL was priced at $170 on the way to $230 (and, by the way, they now have 5% less shares than last year) – so you'll forgive me for pounding the table on AAPL down here, right?

Our Members know exactly what I mean! 

Have a great weekend, 
- Phil