The open is already looking grim (8 am).
The Hang Seng gave back 5% and the Shanghai dropped another point it can't afford but the Nikkei picked up a point. India was off 6% though and the Baltic Dry Index, an indication of global economic health, fell 10% on the day. Europe is trading off about 3% as fears of a global recession take hold with commodities leading the way down, other than gold, which is holding fast on inflation fears.
In last night's post, I identified some of the value opportunities we have been playing during member chat and Trading Goddess asked me if this means I am turning bullish. I answered her: "I'm not a bull per se but there are compelling values here in the market from the perspective of buying stocks that you intend to hold LONG-TERM and generate an income selling calls against. Playing the markets now is speculating that we won’t crash and the $21 share of VLO (for example) we buy today will allow us to sell $40 calls in the spring but thats it. There is no other major advantage to entering now – it’s easier to wait for things to calm down and do a normal leap + covers strategy later."
The big deal now is that when you can buy VLO (for example) for $21, there is no premium and no expiration date and, over the course of 24 months you WILL be able to sell $21 worth of calls and over the next 24 months you WILL be able to sell another $21 worth of calls and over the next 24 months, you will be able to sell another $21 worth of calls. This is a LONG-TERM vision for your virtual portfolio, it’s not about what happens this week, this month or this year, it’s about building something that can become an income producer for life. Of course you have to believe that VLO will not go bankrupt or drop so low that options won't be worth selling against them (say under $5) but as long as they hold a level that lets you generate even .50 per month in contract sales, then you can weather an additional 50% decline in the share price.
Look at it as spending $21 to get .50 per month in revenues. Since that's $6 per year return on $21 and you should be happy getting just $3 per year – it won't matter what happens to the underlying stock price as long as it remains a viable vehicle to sell options against (also keep in mind that the record-high VIX is inflating the premiums you can sell now and they will come down at some point). Of course, we prefer dividend payers when possible as they provide additional income but, these days, you can't count on the dividend either…
The covered option strategy had fallen out of favor in the "go-go" markets we've had for the past few years. Who wants to make 2 or 3% per month when there are people making doubles all over the place? After seeing the markets get whacked for 40% or more this year and seeing stocks fall so far they wipe out leap contracts, the idea of holding actual stocks and selling covered calls for relatively small profits is coming back in favor and that's what we're concentrating on in this market as well as, of course, our very nice, ultra-short hedges that allow us to ride out these little dips. As long as we can buy something that covers us for another test of 8,000, it's worth taking a look..
It appears this week's round of government handouts is over but tonight we can expect both John McCain and Barack Obama to promise Americans "a chicken in every pot and a car in every garage" – that was the campaign slogan of our beloved Herber Hoover in 1928 and it's just as inappropriate now as it was then. While it's hard to knock down the dollar as the world drifts into panic mode, these two guys are going to do their darndest to convince foreign viewers that they will spend this country into oblivion if elected as they compete to declare who is going to write the biggest checks when elected.
We have a lot of economic data today with the PPI down 0.4% (in-line) but the core PPI is up 0.4% (0.1% expected) as food and energy prices are now the ONLY things going down. The NY Empire State Manufacturing index is down a terrible 24 points (-8.5 expected) and that dropped the Dow an extra 100 points pre-market. We also get Retail Sales are no picnic either with a 1.2% overall drop in September (-0.5% expected) led down by Autos, which dropped 3.8%. Gas Stations and Health Care gave us the only gains with most other sectors coming in worse than August. Slight improvements (but still negative) were in Electronics, Building Materials and "Misc. Stores."
The Data hits just keep on coming today as we get Business Inventories at 10 am and it's hard to get an economy going when there is +$200Bn worth of inventory sitting around gathering dust (+$80Bn is 10-year average). There is, of course, normally a pre-holiday build but, if the consumers don't come, there's a whole new line of defaults on the horizon as that $200Bn falls victim to a different sort of "mark-to-market" accounting. We also get crude inventories at 10:30 and, speaking of things that are finally being marked to market, oil is already trading at $75 a barrel over in Europe, just $1 over a 50% discount off of July's open. At 2 pm today we get the Fed's Beige Book and that's not likely to be good given the other data we're seeing.
Our bright spot for today is earnings. ALTR, CSX, INTC, LLTC and RLI beat last night with misses from DNA, HCSG and USNA but this morning we have beats from ABT (and raised guidance), ASML, SCHW (surprising), KO (nice), DRH, HCBK, JPM (very low expectaions), LCRY, LUFK, MI, STT and WFC. Misses came from CBSH, DAL and PJC only this morning and we are waiting to hear from NITE. CX reports tonight and they are worth a gamble at $9 and they can be covered with the Nov $7.50 calls for $2.50, which is in for $6.50 and possibly called away on Nov 21st with a 15% profit. Earnings may not be good for CX but they are already 75% off their highs and one day people will probably want cement again.
Steve Jobs did not gain 40 pounds and Apple did not come out with a $800 laptop that has 90% margins so AAPL traded off yesterday but if they hold $100 they may finally be putting in a floor so we'll be watching them closely today. GOOG faces a similar challenge at $350 and we'd like to see RIMM back over $60 with AMZN at $55 to get back on the Nasdaq horsemen. We are laser-focused on the 40% levels; Dow 8,413, S&P 946, NYSE 6,232, Nasdaq 1,717 and Russell 514 – without those, there is no point in being positive on the markets and I'll do a full Big Chart review tonight.
It's still nasty out there and the upside continues to be our speculative plays but what fun speculation it is at these levels and we will continue to bottom fish on plays like CX, which give us a wide margin for error.
