"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907." – Greenspan, yesterday!
"Those who cannot remember the past are condemned to repeat it." – George Satayana
"Look for housing sector to fall now including brokers, so our plan is still 80% cash, we should have some good buying opportunities when this bottoms but anything you don’t love should be sold." – Me, Wednesday 2:05 pm
Earlier Wednesday, I explained my rationale for being trigger happy on poorly performing positions in this market, saying: "I can always buy it back or roll down or do 100 other things with cash but the only thing I can do with a poor position if it bounces back is wait and pray – not my favorite strategy!" Well, it may not be MY favorite strategy but it sure does seem to be the #1 strategy among traders, judging from what I hear when I visit other popular chat rooms. Buy and hold is NOT a valid strategy for short-term options! You cannot "bluff" if you have a weak hand – if you can't "buy and fold" then, much like a poor poker player, YOU WILL LOSE YOUR CHIPS!
That's why both Happy Trading and I spend as much time talking about getting out of positions as we do about getting into them – you don't make any money until you cash in your chips! While my stops tend to be strategically driven, money-management oriented moves (due to the wide variety of positions we take on the member site), Happy sends out very specific buy and sell alerts on every trade he makes, and the results are stunning…
As I previously announced, Happy and I will be combining our styles and teaming up to make a new Happy 100 (for $100K) folder, which we are going ahead and launching for the members, even though the market stinks, as we figure now is the time people need it the most. We're going to run it through the end of the year and track it on the public site (although intra-day alerts will be for members only), more on this over the weekend.
As I noted last night, our DIA put/call ratio took a bearish turn yesterday – which is very significant as we only have (not counting the index calls) net 40 uncovered calls out of about 200 open positions across our 7 member virtual portfolios. Half of our open calls are Jan or longer and, if the curse of Greenspan holds up, we'll be covering (or dumping) those as well.
Speaking of dumping – how low can the dollar go as we play "Doomed Economy Limbo?" Come on, it's fun, everybody can play along! Just start printing some money while you borrow as much as you can from everybody you know – then turn around and lend it to your family for less interest than you're paying your lenders and tell the kids to "shop 'till they drop." Oh, and for good measure, try to leverage THAT spending with 18% credit card debt – Wheeeee!!! What's the exit strategy, you may ask? ROFL – There is NO exit strategy, you literally shop UNTIL you drop and you drop the dollar's value to entice others to shop at your store as well so you can throw more money at the kids to leverage into even more debt. Isn't economics great?!?
When you are in an inflationary environment and you know that things will cost more next year (in relative dollar terms) than they do this year, you are encouraged to buy. This is the same as commodity market contango. Unfortunately, when the consumer slows down enough to scare the sellers into discounting their wares and this continues long enough to form a pattern, the market (starting this quarter with Housing and Oil) slips into backwardation, where the anticipated future price of things is lower than the current price. This causes buyers to put off purchase decisions (especially in an uncertain jobs/economic environment) leading to lower prices, leading to layoffs, leading to more uncertainty… Do that for 2 consecutive quarters and it's called a recession!
Japan's been in a recession since 1990, when they were the bag holders in the last great US real estate bubble (this time we're holding our own bag thank you). You would think they'd have learned but, after 18 years of deflation, they still send their money over here to pump up our economy on the very strained theory that we are their #1 market and the American consumer is worth saving. Unfortunately, after 6 straight years (Happy 9/11 anniversary, by the way) of unnaturally attempting to resurrect the US consumer any way they can, the G7 have created quite a monster, a monster that is becoming a threat to the very economy that fathered it!
The Nikkei continued to pull back today on fears that a continued decline in the dollar will hurt their export-driven economy and the Hang Seng continued to drift lower as the Shanghai Central Bank RAISED the reserve requirement by 0.5% to curb "excessive money and credit growth." The Shanghai composite dropped 2.2%.
Europe was in a good mood before they saw our jobs data and then fell right off a cliff at 8:30 am (EST). This comes the day after the ECB poured $57.7Bn on their market bonfire.
The US jobs report was – 4,000 (vs. +112,000 expected). July jobs numbers were revised down from 92,000 to 68,000 (down 26%) and June Jobs were adjusted down from (and I kid you not) 126,000 to just 69,000 (down 45%). Unemployment held steady at 4.6% but average hourly earnings were UP 0.3% with no change in the 33.8-hour average work week. This is our first decline in jobs since 2003 and the inflationary component of wages still makes Fed action iffy!
This may be a good time to revisit my December 9th article, "Burn Dollars to Fight Gravity" where I pretty much laid out the course I predicted for the year saying "Starting with our space flight motif… As any rocket scientist will tell you (and I know some), physics are a real bitch if you ignore them. So cutting the boosters, or running out of fuel, when you still have .001% of the Earth’s gravity to fight off may feel good for a while and you will float – but you will also EVENTUALLY, INEVITABLY experience ORBITAL DECAY!"
I'm excited about all this because it gives us a chance to revisit my "Stock Market Physics" theories. Like any good market astronaut, it is time to do some major math calculation to determine the proper angle of descent. As you are probably away, miscalculations can be fatal on reentry but over at PSW we have plenty of fuel (cash) ready to go but we are certainly not going to rush into things. This is why we hedge out our positions, in a crisis, we have bought ourselves time to examine the data in a calm and organized fashion…
The Dow was at 13,050 just last Wednesday so don't be shocked if we see it again in this downturn. Of course we need to hold 13,000 but that's a long way down and I said to members this morning: "Don’t forget that a single word from Bernanke can reverse this market 250 points – as stupid as that would be…Greenspan, Unemployment revisions, sub-prime news, lots of recession talk in the media… Do not be fooled, this seems to me, timing-wise, like a massively coordinated attempt to force the fed to ease – it’s the only thing that will fund $70 oil through the end of the year and this is Bush/Cheney’s constituency’s last chance to cash in before they lose power so I doubt they give a damn about anything else."
For today, I would be pleased if we don't drop 200 points – those were some TERRIBLE jobs numbers but, on the other hand, rallying back in celebration of more gasoline being thrown on our fire is the kind of economic policy you would expect in "Lord of the Flies," not from the Leaders of the free World (oh wait, that's Europe now isn't it?).
I have little funny to say about today, let's watch the open and be ready to layer our mattress plays but we are not going to get careless (as I did Tuesday) and leave the upside uncovered into the close (or on a turn).
Be very, very careful out there!
