Phil on Bloomberg’s BNN’s MoneyTalk
In the first segment, Phil Davis speaks with Kim Parlee at BNN’s MoneyTalk about the state of the financial markets and why he believes they may be on their way to a more sustainable, broad-based rally. (Recorded on August 21, 24.)
Why a ‘crazy month of trading’ may lead to a more balanced market
Out with the old, in with the new
Strategies to manage risks
Lightly Edited Transcripts:
Why a ‘crazy month of trading’ may lead to a more balanced market
Kim Parlee: Let’s start with the fact that it was a crazy month of trading. We saw some pretty big sell-offs and some pretty big rebounds. Are we out of the volatility woods, so to speak?
Phil Davis: No, I don’t think so. The Magnificent 7, the tech stocks, the AI world – there are still a lot of huge overvaluations there. Not that they’re not going to make a lot of money, but the anticipation is ahead of the reality. We’re going to have that going on for a while. It’s going to take a long time to settle down. It’s like Google and Apple were great companies, they went up too much, came down, and now they’re 10 times where they were back then.
Kim: This always happens. It’s really easy to see when you look backwards in history, but sometimes harder when you’re in it. Let me ask you about sector rotation. We’ve seen some pretty interesting things. Some air came out of the AI world and AI-related stocks. We saw things like utilities and other things starting to pop up. Do you think the AI surge has run out of steam? Has it peaked?
Phil: It’s like the dot-com boom. There are going to be 90% busts and 10% that are going to make you a fortune. The trick is to figure out which are the ones that will make you a fortune over the long term. Mostly, this is a case of getting ahead of itself. The profits in AI are phenomenal. It’s the future, the same way the internet was the future, but it didn’t happen all at once. This rotation we’re seeing right now, where money’s coming out of the huge profits from the AI sector and the Magnificent 7 and going into other stocks, is very healthy. Money needs to go to other stocks to invest and build the economy so that we can support all this fantastic new stuff.
Kim: Let’s talk about the Fed. That’s coming up in September, and I know Jackson Hole is coming up ahead of that. We’ll talk about the US election after that. It’s pretty unusual to see a Fed move before a US election, but the markets are pricing in a move.
Phil: If you remember, Donald Trump threatened Jerry Powell that if he lowers rates before the election, he’s going to be fired because Trump sees it as helping the Democrats. If you take that out of the equation and say the Fed is data-driven, is the data consistent enough and pointing enough to give the Fed a reason to lower rates at the next meeting? I don’t think so. Most people, 80-90%, are saying “yes, they’re going to lower rates at least a quarter point at the next meeting.” I don’t think the data is there yet. That’s my take on it.
There’s a very big revision coming to non-farm payrolls in the US. They true up the non-farm payrolls for the past year, and the revision could be half a million or even more than half a million jobs, plus or minus, most likely minus. They don’t count immigrant labor in the annual report, and that makes a huge difference. That’s where you’re going to see a big revision, but I don’t think it’s going to be enough to move the Fed.
Kim: Let’s talk about the US election. For most people I’ve talked to over the past couple of months, there’s been a lot of focus on the Trump-Pence ticket. Up until Joe Biden resigned, people were kind of leaning more towards saying this is moving towards a coronation versus a race. Harris now is in the race with Tim Walz. It sounds like there is more of a race now. What happens if we see a President Harris come in and lead the way?
Phil: I think very much so that the conservative investors and conservative pundits are not accepting the fact that Trump has now lost his lead in the polls and is in big trouble. The implications for this are significant. You’ve got to look at factors like sector rotation. Harris is all for renewable energy, whereas Trump’s against it. Healthcare stocks – Trump is against universal healthcare, Harris is for it. Fiscal policy – Harris is going to want increased government spending, higher corporate taxes, higher personal taxes. These are big changes from where Trump is on these things. Trade relations with China – Harris is going to be a little bit more friendly and try to establish trade again, unlike Trump, who wants to put tariffs on everything and shut everything down. Regulations – Trump wants no regulations, and of course, Biden-Harris want to put more regulations on things, especially the financial sector and anything to do with global warming. Then you’ve got market volatility because as the race seesaws back and forth, people are going to change their bets in and out. It’s going to be like the Bugs Bunny audience that runs in and out of the theater – whatever the last poll is, everybody’s going to change their bets.
Out with the Old, In with the New
Kim: I got a little nervous when I heard about this bill saying that you’re going to shut the portfolio down, but it’s because you’re retiring it and starting a new one. Give us some history here.
Phil: We’re at the top of an epic run in the markets, and if you’re not going to cash out when you’ve made ridiculous amounts of money, when are you going to take the money off the table? It’s a good time, especially for a portfolio like this which is very low touch. We only adjust quarterly when we’re on the show. I don’t want to take a chance going into the winter, going into the elections, and everything else. We don’t know what’s going to happen, so it’s best to take the money off the table. We’re up 381% since November 2019, so that’s five years – about 76% per year on average. We’re not sure going forward enough to risk what is now a $400,000 portfolio.
This is true for anybody who has huge gains in the portfolio. Take it off the table once in a while, reduce your risk by simply putting the money into something steady and safe. We’re going to start with a brand new $100,000 portfolio and start populating it right away. It’s great for new traders also, so people who feel like they missed out on the first run can now start and we can demonstrate how to build a portfolio, how to select stocks, how to use options, that kind of stuff.
Kim: Let’s start with gold. Tell us why gold, and then we’ll talk about the specific trade.
Phil: We’re looking at Barrick Gold, which is the world’s largest gold miner. When you buy a gold miner, you’re buying gold, but instead of buying a lump of gold and putting it somewhere, you’re buying a company that already owns 76 million ounces of gold in the ground. That’s leverage. When the price of gold goes up, the gold gets more valuable, and the company makes more money mining and selling the gold. If gold doesn’t go up or down, you still own a business that mines, produces, and sells gold, which makes a profit on a regular basis.
Kim: Let’s talk about the actual play itself.
Phil: As we like to do with most stocks when we start off small, we like to sell some puts. We’re going to sell five of the $20 puts for $3.50, that puts $1,750 in our pocket. Then we’re going to use that money towards purchasing a bull call spread where we buy 20 of the December 2026 $17 calls and sell 20 of the December 2026 $22 calls. It’s a $5 spread that’s going to net us in at $2,550. It’s already $6,000 in the money, and it’s a $110,000 spread. If Barrick Gold goes up to $22 over the next 17 months, we’re going to make a profit of $7,450.
Kim: The risk in this one is that you’re going to own Barrick Gold, correct?
Phil: Correct. Selling the puts is an obligation that you take on saying you will buy Barrick Gold for $20 a share between now and January 2026. Obviously, if Barrick Gold goes down to $10, you still have to buy it for $20. You’ll take a $10 loss, which in this case would be about $5,000. We don’t think that’s likely, and it’s really no worse than if you own the stock and the stock goes down.
Kim: Let’s get to the next one, Barclays.
Phil: Barclays is down at $11-12. We’re going to sell 20 of the January 2026 $12 puts. That generates $3,500 for promising to buy it. We’re promising to buy 2,000 shares of Barclays at $12. They’re giving us $1.75, so our net entry is $10.25. We’re using that money to buy 40 of the 2026 $10-$12 spread. It’s an $8,000 spread that we’re buying for a net of $500 out of pocket.
Kim: And the last one we have time for, Invesco.
Phil: Invesco is an ETF marketer. We’re selling 10 of the $20 puts of the 2026s and buying the $15-$20 spreads. Invesco is around $16 right now, so it’s a little aggressive, but we think they’re tremendously undervalued. We’re spending net $1,750 on a $10,000 spread, so that’s $8,250 upside, which is 471% upside to the cash in 17 months. It’s aggressive, we think Invesco is very undervalued.
Kim: And again, I just want to remind people that you’ve got to be ready to pick up those shares if the obligation comes to you, and that’s just something that people have to be ready to do and do their own research.
Phil: Absolutely. Never sell a put on a stock that you don’t really want to buy for that price. If you don’t really want to buy for that price, what’s going to happen is if there’s a downturn, you’ll panic and try to get out at the wrong time, and you won’t hold your position. It ends up being a worst-case scenario.
Kim: We touched a little bit on this, Phil, but I just wanted to finish. I think it’s important. This is a pretty diverse portfolio you’ve put together. We are, though, in volatile times. I would say Fall’s coming, September’s coming, we’ve got an election, all sorts of good stuff. So how do you risk manage all this?
Phil: I think the key is diversity. You have to think about the macro environment and find ways to push your risk around so that it’s not all concentrated in one place. In this case, we’ve got gold, which is an inflation hedge. If inflation goes up, we’ve got gold. We’ve got Barclays, which is going to make more money if inflation goes down. We have Invesco, which makes money from speculation. We have Nokia, which is a very basic nuts and bolts telecom infrastructure company. IMAX – now that the writers’ strike is over, there’s a bubble of films that will be coming out that’ll boost their earnings in the future.
The trick is to hedge by diversity. Also, you see how we do a lot of bull call spreads. We sell a put, and the put only forces us to buy the stock if it gets cheaper, so we’re going to buy the stock at a lower price than it currently is. Our worst-case scenario is getting a stock at a discount.
The next section is we buy a bull call spread. The bull call spread’s short calls hedge the long call so that if the market moves quickly down, the short call that we sell is going to lose money faster than the long call that we own. Then we can take the long call that we own and adjust it to a longer strike, a lower strike, or whatever by investing more money.
That’s why scaling in is very important. We start with a small amount, and if something happens, we’re happy to put a little bit more money to work, assuming we still like the position. If it just went down because the market got dragged down like everything did last month, then of course I want to put more money into things that are perfectly good stocks that went down.
Kim: It’s like if you’ve got your eyes on some good stuff, when these things go on sale, it’s a pretty compelling time to start to look at these. Phil, I wish I had another hour. I do not. I’m just going to ask you though, quickly, how do you manage when people have to watch the crazy volatility that happens? Because there’s a lot of volatility going to happen with these markets.
Phil: In our mature portfolios like the Money Talk Portfolio we just closed – and people should really take a look at it and see what we had before – we had an SQ22 spread, which was for the NASDAQ. It’s a three times inverse NASDAQ spread, and we will add those on when we need to. But right now, I got to tell you, the biggest hedge we made is taking that money off the table and putting one quarter of it back to work at a time when we don’t know for sure if the market has calmed down or not.
So what did we do? We took our profit – 100% of our profits off the table – and now we’re back to work with a new $100,000. That is a hedge. All that sideline money, should we need it, we can put it back.
