I skipped the Thursday wrap-up as we got involved in a long discussion in yesterday's chat.
It was a nice flat day and fine for skipping anyway although, as I mentioned mid-day, we had 6 100-point reversals in just one day and I predicted that we will be seeing a 1,000-point day in the near future. We've been messing around with the QIDs and they are an absolute blast when you get them right and an absolute nightmare when you get them wrong but it sure breaks up the tedium of a down market!
Yesterday we got the action we expected, with the markets opening at the low of the day but, rather than stopping out of our index puts, we sold Feb puts as momentum play covers, which worked out to be an excellent strategy as the market went from 12,125 all the way back to 12,332 in the afternoon before falling back to 12,247, low enough for us to want our covers back!
You can always tell a flat day as the member chat tends to go off topic and yesterday we had a spirited (and educational) debate on trading styles (and Ilene found this great article on trading that's a must read) as we nudged our positions around, at this point hoping (against all odds) for a flatline into expiration so we can dump all our callers cheaply and set ourselves up for March. With China still closed for the holdiday and Europe digging out of a deep hole, we are very likely to just dribble into the weekend, lucky to hold 12,200 for the day.
The biggest market moving news of the morning so far (7am) is ALU totally blowing their quarter and WY had had an earnings beat and a revenue miss so 50/50 there, we may be interested in picking them up if we get a good dip. The only other biggie is FNM, which will be quite the market mover I think, especially if they come in BTE. I haven't actually counted but as I continue to review the week's earnings, I see beat after beat after beat AND, if you look at the symbol on the right on the Briefing.com chart, you'll notice guidance is predominantly in-line with (albeit low) expectations. SHOW ME THE MISSES!
The bears are having their way this week and the hyenas are attacking companies that show any kind of weakness, but (to paraphrase our leader) the state of the market is strong. When I say strong, I don't mean strong and robust obviously, I mean strong and wounded. If I had told you back in early 2006, when the Dow had just broken 11,000 after flatlining since early '04, that Trillions of dollars of mortgages were written at unsustainable levels and bank losses could reach $400Bn in '08, where would you have projected the market to be? 9,000 maybe, 10,000 if you were a brave investor but 11,000 would have meant you didn't believe it would have any effect and 12,000 would mean that you must think that other parts of the economy were so strong that even a massive misfire like this could not derail the market express.
Well here we are at 12,000, just 20% higher than we were in 2004, just 400 points higher than we were in October of 2000. Had you kept your money in a savings account, you would have done better than the markets have done in those 7.5 years – buy and hold is a BS strategy and don't let anyone tell you differently! Taking a longer view of the markets, you can see how buy and hold pays off during MOST 20-year periods but what a shame if you happen to miss one of the good ones!
In the past 100 years the Dow has gone from 75 to 12,000. You can make all sorts of impressive percentages out of it but the reality is that the Dow gains about 120 points a year on the average. Using a compound interest calculator and starting with $75, your rate of interest putting money in the Dow over 100 years works out to 5.2%. As long as you buy into the government's "core" inflation number, that keeps you about 3% ahead on the game!
5.2% at 12,000 is, of course 624 points, about how many total points we moved up and down yesterday alone! So next time we have a 300-point move, try to remember that it is actually a very big deal. We have blown the metric of normality out of the water, something I warned would happen last year when I said: "If our government pursues Asian-style Central Banking policies they will subject our markets to Asian-style market swings." And we have indeed been having a swingin' time with the Fed shocking the market up from 12,500 back over 14,000, then from 12,700 back to 13,700, but like a patient they keep "hitting with the paddles," at a certain point you just have to let it die in peace!
But it's not the market that's going to die, that's where the bears have it wrong, it's just the rally that's dying and that's a very big difference. On the bottom of the chart you can see that runaway p/e ratios were the cause of the last market crash and we are a LONG way from the kind of price excesses that doomed the market in 2000. You also can't expect our p/e's to fall all the way back to 15, the historic average, as that history includes times before electricity, yet alone the internet, the jet plane and the microchip.
The world is globalized and more efficient with the US sub-prime debacle spread across the $50 Trillion annual global economy. $400Bn simply isn't enough to wreck it so let's cut the Dow 10,000 crap – it's gone and it's not coming back and anything below 12,000 represents a fantastic buying opportunity for the next 20 years.
So let's get back to work! There's companies to buy and short-term traders to sell calls to while we let our market rest. The market is a powerful entity that has sustained an injury but it is surrounded by people who love it and team physicians who will rush to it's assistance and will do whatever they can to get the star player back on the field. When a player goes down during a game the fans are, of course, stunned but think of the exuberance when he rises to his feet, even if only to limp off to the sidelines – think of the bears as that one jackass who seems to be at every game yelling "I hope you broke your neck." They can hope all they want, but 99 out of 100 times our stars are soon back on the field with long and glorious careers ahead of them.
We may be in for a bad season, and it's important that we bet realistically on our team as any fan can lose his shirt if they refuse to accept the fact that it just isn't going to be their year but on the whole, if we take the bigger view, you can throw out every point the market gained between 1998 (Dow 8,000) and 2000 (Dow 11,722) and ignore everything that's happened since and just apply 5.2% compounded from 1998 to 2008 and you would arrive at 13,281.51 at the end of 2008. 5.2% of that number is 690 points, double that to 1,380 and you can look for sings down to (not a coincidence) 11,901 without even coming close to violating the 100-year winning trend. The only way you can be sure your team will never win the Superbowl is to close the franchise – other than that, everyone has a chance as long as they suit up for the game.
We're going to play the market as needed but I thought today would be a good time to share my macro view as I see a lot of people getting frustrated, just as any "fan" would, by a string of losses. Unlike our favorite sports teams, what we need to understand is that it is not disloyal to "bet against" our stocks. Sometimes they are simply overmatched, learning to recognize that fact is the key to becoming a successful trader.
People often cite Warren Buffett as the ultimate "buy and hold" investor but nothing could be further from the truth. Mr. Buffett has sold hundreds of Billions of dollars worth of stocks and has bought hundreds of Billions of others – what he sticks with are the winners. Winners don't win every time and we don't have to win every time to do well in the market. In fact, if you are right 54 times and wrong 46 times – you are already beating the market by over 10%! If you learn good cash management techniques and can lose an average of 5% less on the losers than you win on the winners – we can have you doubling the market's performance in no time.
Whatever the markets may bring, we will adapt our strategies and survive the downtrends and we will come out of it hardened and ready, with battle-tested virtual portfolios that are ready to win. Our moves in the $10KP, $25KP and BBP all yielded positive results far in excess of an annualized 5%. Our Q4 $10,000 virtual portfolio rode out a 2,000 point drop in the market with very small gains until we hit one good 2-week run where it doubled. The only mistake you can really make at that point is greed. Even the greatest of champions knows that he might lose – if you don't fear losing, you get reckless and forget to do all the work that makes you a winner in the fist place.
In the January wrap-up, after such an amazing first month, I said it would be much smarter to pack it in and take a vacation for February. Those of you who stayed now know what I meant. Now that we're here let's not be defeatist though, we are playing this game to win and the market is full of opportunities and I'm excited about the future. We're not here to force the future, we're here to face it!
Japan was off 189 today, drifting down to 13,017 but much of Asia remains closed. Hong Kong will tell us the tale on Monday morning and Europe looks like they are going to flatline into the weekend unless we do something to cheer them up. Our Congress passed the dumbest $168Bn spending bill of all time (well, next to starting the war of course) as the Fed moans about inflation while backing a plan to send $600 to every taxpayer so they can go waste it on something (and not until May when it will be either too little or too late).
That's all, it's Friday – we're going to get some drinks and get ready for next week when Bernanke testifies before Congress so they can compare inflationary policies while pretending to combat inflation. It's always something!
Have a great weekend!
