Stagflation leading to Recession - The Kodiak Bear Thesis

[TheHouse]

Keeping an eye on ENPH - Enphase Energy this week. @macromicrodick had a great thread back in Sept on them (Thank you! Couldnt comment on that thread) I have been doing a little digging off and on over the weekend. Im not completely sold in either direction here but I do think we may have a play.

Enphase Energy plays in the solar/EV space primarily in residential applications. Power converters to charge your EV, solar equipment and software to monitor everything. From what I can tell it looks like a strong growing company in a strong growing sector, QoQ cash flow dipped a bit last quarter but overall the balance sheet looks fine, they do have a sizable amount of debt but also a strong cash position. The issue Im seeing may be their evaluation, even after their strong QoQ revenue and earnings growth forward P/E still sits at 64.

We would expect an elevated forward P/E in a company that has an optimistic long term growth outlook in a hot speculative sector but IMO this seems excessive.

We also have had a bit of insider selling recently.

Somewhere in between extreme euphoria and a great business with an optimistic future.

I dont think they will be immune from economic challenges but they do have material reasons to be bullish even if they are priced at a premium.

Im thinking for now Ill be watching this test of ATH’s currently happening and play it from there.

Im hoping we get a big move either way, either a big breakout over ATH’s or a strong rejection, possibly starting a sizable leg down. Keeping an eye on it, Im looking to play both directions but Im thinking upside will be limited to scalps only.

Thanks again @macromicrodick !

[TheHouse]

Hope everyone is ready for the main event tomorrow, daddy J Pow making his first appearance since FOMC meeting along with notable data drops starting pre market.

I am expecting tomorrow to be a big moving day one way or another.

Im really focusing on J Pow’s Brookings speech though. Brookings is where alot of the worlds elite in government and academia discuss global policy ideas. I posted a Brookings video of Ben Bernanke on this thread earlier in the year as he is an active member of the organization and I have always felt like this organization is a bit behind the curtains. I mention this as I believe its important to know his audience going into his speech tomorrow.

I dont have a great track record anticipating how hawkish or dovish J Pow will be, I do however believe he has been clear with his intentions around monetary policy consistently for the better part of 6 months or so. I mention this because market sentiment has had a tendancy to create a narrative that may or may not be in alignment with the Feds actions and future plans.

We have seen this play out multiple times this year already and it always leaves us with J Pow having to reiterate his intentions around policy descisions going forward, most memorable being Jackson Hole where he was speaking to a similar heavy hitting audience.

Im front running the speech with some VIX calls and some longer puts on select tickers and the broader market, keeping things light but I plan on taking positions in real time as he is speaking. Given recent fedtalk I think he leans on the hawkish side but Im not taking the risk of front running that opinion on shorter dated puts, if this opinion realizes there will be plenty of downside opportunity so might as well wait.

Technicals are not my strength buy it does appear the market currently needs direction, this is why I believe we see a big move tomorrow, J Pow Hawkish or Dovish should be the catalyst to make that move.

In the back of my mind Im also thinking of FOMC Dec. 13th, so expect speculation to shift towards that meeting immediately. Now remember, we get another J Pow speech then too so if J Pow punts tomorrow, you know why.

And finally, I cant say it enough but inflation narrative will eventually be a thing of the past.
Inflation will eventually cool off and then the main narrative will switch to a recession/contraction narrative, which IMO has always been the bigger story, so lets not lose sight on what is happening in the real economy, or (See data drops for what they are)

Good luck tomorrow friends, lets make it a great day

[TheHouse]

Nice video from The Maverick of Wallstreet tonight, worth a watch

Inflation Will Stay With Us For Years To Come!

[The_Ni]

Even though multiple talking heads at the Fed and Treasury’s Yellen have noted that there are “no signs” of a wage-price spiral, the data seems to me like it’s suggesting otherwise. We’d noted the possibility of a spiral in this thread in April, and revisited it a few times. Reproducing the key points from a pretty compelling synopsis from Bob Elliott below:

1. US incomes are growing pretty consistently at 5-6%. (Image 1)
2. Average hourly wages have increased by 5-6% also (Image 2)
3. Wage growth rate is the highest its been in 40 years (Image 3)
4. Labor market continues to be very tight (Image 4)
5. As folks spend down savings, increase in spending will match up with increase in income

I don’t think the recent chatter around HH survey vs other survey data really affects this reality much.

This suggests that inflation might be becoming structural, and not cyclical/supple-side driven/“transitory.” And will make the sticky parts of inflation even more sticky. If the Fed finally acknowledges this sometime in 2023, it’ll seal in “higher for longer” for a while, with corresponding major upheaval to the long end of the yield curve.

[juangomez053]

So, either companies keep compensating a diminishing labor force and wages keep up with inflation above 2% or companies see no need to compensate if productivity and output keep having the negative outlook they have right now. Lose lose situation for the Fed, either structural inflation above their goal or recession. I do not want to be Powell right now

[The_Ni]

Indeed. There is no good option for the Fed if a wage-price spiral martializes. Another one of those things the Fed is tasked to “fix” where the things breaking are not under their control - labor participation (image below), retirement, immigration, onshoring etc.

Seeing some chatter on industries relocating more to Mexico, now that China’s decided they’re too well off to be the world’s sweatshop, but that’ll take a few years to set up. There might be an opportunity to play Mexico after the recession, when the economy fires up again.

[jjcox82]

Wanted to take quick moment to post update here on Repo rates and auto credit bubbles. Because if can’t find a place to do it this is the place.

I’ve been steadily watching our monthly finance reserve statements for evidence of chargebacks in regards to repossession. For two reasons. This hurts the bottom line as well as to monitor the heartbeat of times.

When a loan we write is repossessed depending on the lender X amount of payments have to be made or we are charged back our portion of the cut of the finance charge. This is minuscule for the most part typically 1 percent of amount financed. However on the statements I receive from the accounting department it is always notated Repo. I am also notified if any charge backs in regards to aftermarket products extended warranties etc. for the most part it’s been pretty well par for the course. Not really seeing a repo rate burst currently.

However this could be delayed some with rates moving up and pricing elevated that means a 20k dollar car used to be a 350 payment can now be a 450 payment. I’d expect this number to increase in regards to repo numbers. But still pretty much below pre covid levels in my market at least.

[TheHouse]

Wanted to share this strategy I have been working on and currently battle testing. As we finally move past some of the inflation narrative to a recession narrative this is the strategy I will be using daily. It starts with selling short term premium on SPX ODTE calls on green or neutral days through Call credit spreads, very OTM with a 93-95% probability of profitability. Still scalping and swinging both directions per usual since that has been working well this year. Then from there funneling money into longer swings, long puts on HYG then eventually moving into CSP/CC’s. Im on the road so im going to add some depth to the thinking behind it, but I wanted to at least share a visual to get the conversation going. Ive also made a spreadsheet that tracks how this strategy progresses for anyone interested.

Disclaimer:
I am not telling anyone to trade this, or telling anyone how much money they will make or lose, just documenting and discussing trading strategies, this is not financial advice

[dibbles]

Jesus, $2.5k per day from 0DTE covered calls… Is that for real? What am I doing in life?

[kenbrellthompkins]

Sorry, am I understanding this properly…5-10% return on capital daily on ~95% probability wins…so .05 delta. Is this too good to be true?

I’m not very familiar with SPX contract prices admittedly but this seems insanely lucrative, no?

[TheHouse]

Yea, my first reaction too. I have been looking at this from as many angles as possible and it is definitely lucrative. Not to say these conditions last forever but SPX 0DTE is booming in popularity this year and you can look at the spreads daily, the premium is juicy. Sometimes unbelievably so. Still comes with risks however, how far otm is important and having a plan if the trade goes against you is important too, because if it does go against you losses look to be brutal.

I dont typically run SL’s because I like managing my trades live, ive always felt more comfortable that way but with CCS’s I like the idea of pre determined profit with pre determined exposure, so Im working on what that looks like. BUT, not having assignment risk sure makes things more straightforward.

I think there are two ways to look at risk with these. On the one hand 93-95% probability of profitability taking those far otm strikes means your the casino. But on the other hand you are technically risking a large amount of money to make a much smaller return. I like the idea of keeping these trades based on probabilities alone. As mentioned, If you Carve out potential bull catalysts (like fomc, cpi, j pow speech, etc) It gets really interesting. I ran and have at home a breakdown of how many days SPX actually moves 2%, 2.5%, 3% etc. Its minimal to say the least, especially when you look at pm moves with them.

Next time the market opens green, even a little, pull up a 5 wide Call Credit Spread and look at premiums, there are always poor fucks buying extremely OTM contracts. I haven’t executed alot of these yet (had some good bear days recently) but Im currently sitting at a 100% hit rate and all of them I have btc at .05 well before eod.

Maybe some of the Theta gang can let me know what I may be missing here?

[TheHouse]

Dude, I cant tell you enough how much I appreciate this info, especially periodically. Thank you

[Brutus]

I’m intrigued, if I get some time over the holidays, I’ll dig into this.

I lost $3k one day when SPX dropped like 3.25%, playing similar strat, but it was already down 2% when I bought. Green day I could see much better probability.

My broker sold it at 4pm because it was close to ITM, never actually reached it, but they have the ability to auto sell if it’s anywhere close because the buyer can exercise up till I think 6pm. If the broker thinks after hours will be red, they may force sell like they did to me to manage their risk since it’s 100 shares per contract and you’d need potentially hundreds of thousands of dollars in the account to purchase the underlying.

I was not happy because it never actually got to my strike so I should have gained, but lost 3k instead.

[Brutus]

Throughout this year I’ve contemplated your original post’s comments about the negative effects of the lost workforce. The Reference was to the boomer generation who decided to stay home after COVID. I read the article below today which discusses the UK and their 18-65 year olds who are not returning to the workforce. Here is an excerpt.

“The number of “economically inactive” people — those neither working nor looking for a job — between the ages of 16 and 64 has risen by more than 630,000 since 2019. Unlike other major economies, recent U.K. data shows no sign that these lost workers are returning to the labor market, even as inflation and energy costs exert huge pressure on household finances.”

This is likely mirrored in the US as the number of open jobs exceeds those looking 2-1. This is concerning for the medium and long term for the overall economy. I’m not convinced any longer we get a sharp snap back to SPY 480 next year. Could be in a sustained bear market for years.

A long-term illness crisis is threatening the UK economy

[Bear_Chyllz]

“We’re looking for a volatility event potentially this month into next month.”
said Katie Stockton, who may have some fans here.

A 'volatility event' will plunge the stock market to new lows in the next 6...

[TheHouse]

No tradable info here, just keeping important macro data current.

Federal Reserve Board - Consumer Credit - G.19

Consumer credit up +7.1% in Nov with revolving accounts up +16.9%.

Consumers are still spending money they dont have, its the American way. As mentioned countless times, this will obviously need to be paid back. Current corporate profits and evaluations are not immune to this.

Also, this reality doesn’t change even if unemployment does.

[TheHouse]

Rahul (@rhemrajani9) on X

Phillips curve states unemployment rises when inflation declines.

The labor market is still very tight due to reasons outside of monetary policy (covid). The fed is currently making monetary policy descisions based on this same labor market. Pretty messy

J Pow, like most central bankers rely on the Phillips Curve economic model to make policy descisions. This is a tool they self admittedly use to decide how high to raise rates and at what duration, then eventually when to cut rates and how fast to cut them.

J pow needs a nod from the inflation side of the equation as well as from the labor market to feel confident his policy descisions are bringing the desired outcome. (A Soft Landing)

Inflation trending down and unemployment trending up should happen at the same time per this model.

We have seen inflation come off its peak while unemployment has remained relatively flat. We may see another decline in CPI on Thursday. So what does this mean?

If the Phillips Curve model is accurate then either inflation hasnt peaked or unemployment may be about to trend upwards quickly, assuming inflation continues its descent.

If the Phillips Curve model is wrong, it would be attributed to covid changing the labor market in a way that cant be captured accurately in economic models. (I gave examples of these labor market changes in my original thesis)

But why is it important? Why should we care?

Its important because if covid did change the labor market enough to throw us out of the Phillips Curve model then we have no idea where we start to over tighten. OR where we already started to over tighten. As mentioned previously, This wouldn’t be as big of an issue except for the fact that we have been looking primarily at the labor market to gauge the health of the economy.

You can have a job and cut back, you can also have a job and not pay your bills. I think this is what the data at large is telling us about our current economy. Demand is weaker than a year ago, we are obviously trending, but for how long will we trend? How many earning seasons will we need to get through before profits find a bottom? Just sharing some thoughts here, not talking trades.

[notmisa]

I believe the ladder statement regarding the accuracy of the model is true. We’ve seen by now that inflation is on its way down, but unemployment hasn’t responded in the expected amount (due to COVID like you said).

If the Fed doesn’t start adjusting for the disruption in the labor market, we can expect over tightening for sure. It’s like not fixing your car because the Check Engine light isn’t on, although there’s clear signs (smoke, tires, electrical) that something’s wrong.