The Investible Bottom TEST Now Waits for Fed's 50 Basis Point Rate Hike & Russia To Just Do Something

In the last correction update/pep talk last week I said "we will be brave as soon as the puke point bell is rung."

Well, we have now checked all the puke point boxes for reaching the FIRST PART of a tradeable correction bottom (correction because we do not forecast an economic recession in the US this year...not yet!) 

The next step in the cyclical bear market playbook is of course to TEST the durable bottom in the SP 500 and Nasdaq Indexes

KEY POINT: As mentioned last week, we are NOT calling it "the bottom" yet for the Nasdaq/Russell 2000 zero earnings stocks--that beat down has a ways to go and a bottom has to prove itself by holding the 30-60% down bottoms. 

The Good News? Our 60% allocation to Ultra Income positions & 20% cash (including dividends paid this year) is now UP about 22.5% for the first 45 days of 2022. As a managed account client of mine texted me this morning "Toby--all my golf buddies are crying in their beer about their stock portfolios...so I emailed them my Transformity Wealth Management portfolio/positions and told them I don't understand why they don't have their money with you!

With 75% of my money in Ultra Income and 25% in cash, my TWM portfolio is up roughly 28% for 2022."

Well, I don't want to burst his bubble, but our 2022 Ultra Income portfolio delivered about three years of average stock market returns in just 45 days (10% ish since 2009--but 7% back to 1989). If somebody gave us $1 million TODAY, I would say it would take 45-60 days to put it to work in the energy world because A) Russia invading Ukraine would throw the entire energy patch into a price explosion and 2) if Putin decides to not invade, a sizable bite will be taken out of the EP complex (which would be our NEXT opportunity!). 

Advice: In general all the energy and energy transportation plays have made giant positive moves as opposed to the rest of the market and the FOMO/YOLO mania stocks are down 55%-80% as I type this.

Advice: 1) Within the All-Access trading room, we are SELLING short-term Feb call options that expire THIS WEEK on all our energy positions to lower-cost basis/add free income here--most of these positions need a rest after outperforming the overall markets down 11%-35% depending on your index.

2) Don't chase these energy positions...wait for the 5-10% pullback that would be natural and healthy (we had a 3% pullback today as it appears the market has already priced in a Ukraine invasion for today!). 

But we are very proud of our results so far in the context of an overall SP 500 correction and tech stock bear market! 

$CHKR up 32% (with .7 more in dividend 3/2) 
$ET up 26.7% (with .17 cents per share dividend paid quarterly) 
$BPMP BP Midstream Partners LP up 25.5% (plus .35 dividend paid TODAY getting bought out by BP later this year.) 
$AMZA up 20.28% (with .44 cents per share dividend paid monthly) 
$GOGL up 22.2% (with the qtrly dividend declared this week) 
$SBLK up 18% (plus $1.25 qtrly dividend and another $1.25 declared around Fed 20th)
$XOP up 18.5% (with the qtrly dividend declared this week)
$DCP up 16.2% (plus .39 quarterly dividend--can't wait for it to go back to .78!) 
$MPLX up 15.4% (+ quarterly .76 dividend paid TODAY)
$GEL up 14.1% + January dividend (can't wait for $GEL to get back to $.55 quarterly dividend! ) 
$USOI up 11.4% (including two dividends) 
Oasis Midstream Partners (NOW $CEQP) up 14% from OMP cost basis BUY UNDER $28 
$FLNG up 8% (with qtr. dividend declared this week)  BUY UNDER $22.50 
$MMP Magellan Midstream Partners, L.P. up 4% BUY UNDER $47
$USAC up 3% with $2.05 dividend paid quarterly BUY UNDER $16 strong buy < $15.50 

Russian Invasion Prognostication: 50/50

This is a GREAT synopsis by my old colleague Anne Applebaum on why Western naïveté and failure to understand the Russian rules of engagement, personal financial interests, and religious/Russian pride motivations are failed by Western shuttle diplomacy and good faith negotiations.

My take on this reality is why I am bearish on Russian backing down on the Ukraine invasion.

NATO for some reason thinks Putin and Lazerov actually give a rats ass about how they look to the world and the conduction of civilized shuttle diplomacy. In addition, our most recent American Ambassador in Russia spoke on Sunday night about how Putin’s now deep religious beliefs have him believing it is his manifest destiny and the reason he is “on the earth” is to restore Russian lands lost from the end of the Cold War.

Great.

My point: Do NOT BE surprised if this potential shit show goes sideways—because that IS in the best interest of Putin and Lavrov. As Annie writes: "Tragically, the Western leaders and diplomats who are right now trying to stave off a Russian invasion of Ukraine still think they live in a world where rules matter, where a diplomatic protocol is useful, where polite speech is valued. All of them think that when they go to Russia, they are talking to people whose minds can be changed by argument or debate. They think the Russian elite cares about things like its “reputation.”

It does not. Here is her solution from a declaration of NATO at an imaginary press conference:

Good evening, ladies and gentlemen of the press. I am delighted to join you after meeting my Russian counterpart, Sergey Lavrov. This time, we have not bothered to discuss treaties he won’t respect and promises he won’t keep. We have told him, instead, that an invasion of Ukraine will carry very, very high costs—higher than he has ever imagined. We are now planning to cut off Russian gas exports completely—Europe will find its energy supplies somewhere else. We are now preparing to assist the Ukrainian resistance, for a decade if need be. We are quadrupling our support for the Russian opposition, and for Russian media too. We want to make sure that Russians will start hearing the truth about this invasion, and as loudly as possible. And if you want to do regime change in Ukraine, we’ll get to work on regime change in Russia.

Shee suggests to the speaker "wonder out loud just how it is that Lavrov’s official salary pays for the lavish properties that his family makes use of in London. She could have listed the names of the many other Russian public servants who send their children to schools in Paris or Lugano. She could have announced that these children are now, all of them, on their way home, along with their parents: No more American School in Switzerland! No more pied-à-terres in Knightsbridge! No more Mediterranean yachts!"

My advice:Hope for the best but build some cash while the Olympics are still going on...the odds are high Putin will not want to upset his Chinese friend Mr. Xi during the Olympics. The good news is during the invasion of Crimea in 2014, the US stock market wobbled 2-3% and then Googled "Crimea" which has the GDP of my hometown of Scottsdale AZ and cooler heads prevailed.

Hedge:The easiest hedge is to 1) build some cash here(as we advised last week SELL $FB and wash the loss against some of your 300-400% winners from 2020)2) buy an in-the-money put option on the SPY 500 index of your choice and 3) BUY an in-the-money CALL option on our $XOP because the energy complex with rocket higher.

https://www.theatlantic.com/ideas/archive/2022/02/lavrov-russia-diplomacy-ukraine/622075/

In short, just like we did in 2014, hope for the best/build some cash/hedge for the worst.

Happy Valentines Day!
Toby