They say you shouldn’t yell "fire" in a crowded theater but what happens when there actually is a fire?
We blew our IWM level yesterday but, fortunately, we didn’t wait that long as my call in member chat at 11:12, with the Dow at 8,750 was: "Rejection at 2.5% across the board. Great time to pick up a few of those DIA puts… 8,800 needs to be broken or we are going back down!" Of course we did some good bottom fishing ahead of the 400-point rally but we are firmly in the 70% bearish camp with speculative bets only to the upside. I’d love to say today is the day to change our mix but that’s going to be a tough call on a Friday, even if we do start to rebound.
Virtual Portfolio balance is a very important concept though because, if you are 70% bearish with our old reliable SKF or DXD calls or the usual DIA puts etc. and we have a day like today where you get a 30% bump in value on your downside plays, certainly you want to "roll" some of your successful puts down using our "mattress play" strategy to free up some cash – letting the momentum be your guide, rather than guessing a bottom. Of course we still want to nibble on the upside as we hit our significant downside levels (50% now) but the trick is to maintain that weighting so you don’t end up with more than 70% of your positions committed to the downside. It’s a nice, forced way to force yourself to take profits and not get caught up in "irrational exuberance" to the downside. There is always the threat (to the bears) of government action that can give us a sharp reversal back up, BS though it may be…
As I said to members earlier this morning: "This is not capitulation, this is panic and forced selling. The 10% loss on BSC assets in a month is triggering a massive unwinding globally and this could cascade lower but hopefully we’ll find some buyers coming off the sidelines above our 5% down levels from the above post (we’re now ignoring yesterday’s apparently ill-gotten gains). Futures are limit down here, that hasn’t happened since 9/11 – bad craziness but a good chance to get back into GOOG and AAPL and some of our other bottom fishing plays but upside is obviously still the speculative bet!" Those limits are, by the way 550 on the Dow, 60 on the S&P and 85 on the Nasdaq but those limits quickly double as they are merely short-term breaks. True capitulation is a climax to a selling cycle, we have no real evidence that we are there just yet…
It’s hard to say what’s going to happen as currencies are also going wild with the Euro trading at $1.25 (congrats DB!) while the dollar is going the other way against the Yen, now buying just 92 of them for each dollar and flying back to our August lows. What’s amazing, of course, is this chart of the Yen vs. the Euro since July and you can see why the Japanese exporters are freaking out as the Yen is up 37% against the Euro in 90 days. This is casuing carry traders who had money tied up in Euros to take massive losses and money that was tied up in EU banks, stocks or properties is truly a catastrophe for the Japanese investors.
Is this going to be the "short, sharp shock" we were looking for in yesterday’s post? That’s going to very much depend on if we can make new lows on big volume accompanied by a turn within the first 90 minutes of trading. That would be a nice, technical capitulation that may bring some money off the sides but I’m not sure that it’s going to be good enough if we don’t get down to our 50% off levels as the Asian markets are already down around 60% off. We were discussing Asia last night at 1:54 am (yes, we are addicts!) and I said, as we watched the open over there: "Wow, carnage in Asia! Very, very bad as both Europe (other than Germany) and the US pretty much pulled it out yesterday. This is with China announcing tax breaks and stuff to boost the housing market but they are mired in recession talk now as if they only just finally figured it out and as if the previous 60% drop in the markets had nothing to do with that – which is possible if you consider it a burst bubble back to "normal" levels and now the normal levels (60% off the high) are only now being reevaluated based on recession so perhaps 1/3 off that to go…"
Things, obviously, got much worse from there over the next 6 hours. As I said back on October 7th, when I questioned "What is value?" and I said: "At what point do we find "value"? What is the value of a share of IBM stock to a person who needs to make a mortgage payment on Wednesday?" That’s where we are at the moment, we have broken outside of program trading ranges and there is a global margin call that must be met. The banks will not lend, real estate assets aren’t considered good collateral and there are simply no buyers – not for equities and not for goods and services as there is no confidence in the global economy. You can thank our leadership (or lack thereof) for that including Alan Greenspan, who decided yesterday would be a good day to tell Congress that unbridled captialism may have been a mistake and that his ideology, the ideology of US policy for 2 decades, seems to be "flawed."
Gold bounced off the magic 33% off mark when priced in Yen yesterday and will be retesting it this morning. We’re also at 33% off $1,033 when priced in dollars but, in Euros, gold is off just 21% from it’s 10/10 high as the Euro is the weakest currency by far at the moment. Gold is being sold to raise cash by both speculators and governments and is presenting an excellent opportunity to hedge against inflation that may be triggered by additional Central Bank attempts to forestall a market collapse. Right now, gold is wrapped up in commodity funds and commodity indexes and may go lower (this is why we are doing long spreads) but the play for gold is the massive inflation that may trigger over time and the ability to take 2010 $70 calls for $11.85 (yesterday’s last sale) when you can sell the Nov $77 calls for $1.80 (15%) makes this a great hedge against surging inflation. If gold goes to $1,500, the GLD ETF would be at $150. Think about this from the perspective of European investors, whose currencies are falling 4% today alone against the dollar and more against the yen!
So Asia is collapsing because their currency is too strong and Europe is collapsing because their currency is too weak. You would think that would make the US Larry Kudlow’s "Goldilocks Economy" and, while we still are the least sucky place to put capital in 2008, we are only the best of a very bad situation. Asian markets are down roughly 10% today – a hell of a way to head into a weekend. "Investors are panicking now that the financial crisis is clearly affecting company earnings," said Shinichi Ichikawa, chief equity strategist for Credit Suisse in Tokyo. "The Japanese market has already fallen too far… but we’ve got a situation where fear is leading to more fear. Investors are selling anything and everything."
Just ahead of the US open, EU markets are down about 8% as the headline news there is the UK economy contracting rapidly as the outlook shifts to a prolonged global recession. We have discussed the default possibilities of Spain, Argentina and Hungary but Russia, Iran and Venezuala are also in serious trouble with oil tumbling below $65 as their monthly cash-flow is cut in half and OPEC’s 1.5Mbd production cut is almost certainly too little, too late to turn the tide of demand destruction they sowed so long ago (see my Sept, 2006 article "OPEC: Lemonade Cartel"). Back when I wrote that article, I said the fundamentals do not support $65 oil and it may have taken a while but here we are, back at $65 and heading down. To the extent that a lot of the market collapse is a commodity sell-off – that’s good, but the baby is being thrown out with the bathwater and there’s nothing we’re going to be able to do to fight this tide.
The best way to get short during a sell-off (assuming you must) is to simply grab whatever Dec DIA put is about $10 and about 1/2 premium. You can ride that down to the bottom and it should gain about .60 for each 100 point drop. The mattress play there is to add a layer of 1/2 the original number of puts at a lower strike for $10 when yours get to $12.50 (a 400 point drop) at which point you put a stop on your top layer at $12. You can run multiple layers like this and you can also sell whatever November puts are $2.50 when you think you have a bottom to cover a bounce. That’s the quick explanation but hopefully we’ll find buyers at the very low open that is predicted by the futures and things won’t go that far.
Let’s keep a sharp eye on yesterday’s chart levels and look for positive signs. It will be very tempting to buy and we have a huge list of things we like at this point, especially BA, which got away from us yesterday and AAPL, which has very real earnings no matter what the stock price says.
Be careful out there!
