Trade Alert: 3.1.18

March 1, 2018 Tobin Smith

Let's CASH IN our SPY 263 Put Options

Dear Subscriber,

The equities markets ARE obviously are repricing risk assets and volatility levels for new information on inflation and interest rate curve risk. The problem we now have two NEW Risks: One is our new investment banker-turned-Fed Chairman; he is NOT the uber-dove that we had in the ex-labor economist Yellen or ex-Great Depression economist Bernanke.

After being in or around Wall Street for 30+ years I can tell you this: Investment bankers of his generation are STILL in their minds "Masters of the Universe" with the ego and swagger that comes with that persona. You don't lose it--and his testimony was all swagger and his personal analysis of macroeconomics he is NOT prepared to opine on.

Ph.D. economists are the types who dwell on the stuff they do NOT know and why they don't know it---that is how they are wired. Ex-Goldman Investment Bankers know everything--just ask 'em! Powell came off as that banker with the pin-stripe blue custom-made Armani suit and instead of speaking for the FOMC committee it was all him...and his subjectively "feelings" on the economy. He also choked on Tuesday---rule #1 of the Humphrey Hawkings testimony (I am now so old they don't call it that anymore ...OY!) is SAY WHAT YOUR TESTIMONY TRANSCRIPT says you are going to say. When he left out the keyword "balanced" in describing macroeconomic conditions as per the testimony memo put out at 8:30 am....bond guys freaked...and then that freaked the equity algo traders who now play off the bond market.

He DID appear to get schooled by his staff and on Thursday...which was fine until the POTUS stepped in to add another risk element to equities: All OUT trade war with our biggest trading partners China, Canada and the Eurozone.

I am taking a few deep breaths. Of ALL the ignorant shit that came out his mouth in his made-for-TV kissing of the ring conference with the steel and aluminum CEOS...this one got me the most: “You know I remember a time when US Steel was a great company and we are going to make America’s steel and aluminum great again.”

REALITY: Whatever your politics are...there is one indisputable fact: in 1982 Japan’s steel industry created a new technology ('Mini-Mills" that use mostly scrap metal) that cut the input cost and labor cost of making steel by up to 76%. MOREOVER...when US Steel created $1 million of steel in 1982 it took 25 employees...today it takes the leading steelmakers just 5 employees to make the same $$ volume.

The indisputable economic fact is Japanese steel technology disrupted the ancient US Steel technology...US Steel got their clocks cleaned. Because the POTUS does not read or care about economic history, let me remind US Steel sought and got price protections later in the 80’s and still for 40 YEARS they did not match Japanese technology and lost market share. They were REPEALED because they were a DISASTER and cost American jobs.

Then the W Bush administration in their brilliance in 2002 imposed up to 30% steel tariffs...they failed and were repealed in Dec 2003. Why were they repealed? A) They did not work and B) they lost more downstream industrial jobs that lost sales because of the price of...ready...STEEL AND ALUMINUM. We actually lost more downstream jobs in steel-using manufacturing than the ENTIRE labor in ALL the American steel and aluminum industry at the time.

You make this shit up. But "I remember when U.S. Steel was a great company...and we are going to get their jobs back."
Since it takes only 5 line workers to make $1 million of steel vs. 25 in 1982...we would have to bring back 4X the steel and aluminum production. Don't tell the White House...nothing can penetrate the 1,000 yard deep invisible force field of 20th century delusional thinking.

Why is the Dow Jones off 450 points on the news that the USA has initiated a 1920’s like trade war? Because investors now realize the leader of the free world lives and thinks in a 20th-century mindset and lives in his own personal reality that is so far removed from the actual 21st Century it’s batshit insane.

IF you are little sketchy on the actual economic history of US trade wars...here is a very good primer. And I am not counting Smoot Hawley.

Key point: in 2002, steel stocks DID rise for 6 months...so since we are here to make money...I'm revisiting my steel company chops and we will buy a call option on 1-2 because this IS a short term transformational short-term event for U.S. steelmaking. Nucor is my favorite...they actually have 21st century steel-making skills as they stole the mini-mill technology from Japan Steel in the early 90's. Also Cleveland-Cliffs CLF...they are the primary iron ore player in the U.S. for the steel makers.

I was so stunned by atavisic statements this morning...but I should not be stunned by anything at this point.
Futures are up on a dead cat bounce...so IF you hold puts...I'd wait to sell after 10am...to see if the rally fades.

We are at key resistance in many indexes. We really have two markets...information technology is all above 50-day averages and no worries. The OVERALL market is very close to total break back to 100-day and 200-day.

Compare Tech to the ENTIRE NYSE listings...could NOT get above 50-day and failed...hard.

Same for the entire market Russell 3000....failed at the 50-day

These divergences NEVER turn out well...because the folks losing money in the NON-tech world usually start to sell their winning tech stocks to offset the money they are losing in the other 11 sectors. Telco&Tech in now 32% of the S&P 500 FYI.

Action to Take: I'd like to use bounce and fails to the 50-day to buy insurance for our portfolio: LONG VIX options and short DIA and SPY. Ironically the biggest steel and aluminum/titanium users Boening and Catapillar are also the best performing Dow stocks...wonder how the Organge Man will feel when he starts to get blamed for tanking the "stock market" that he has crowed about almost every day since February 2017.

Cheers!

Toby

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