Morning In America

This is our chance to answer that call. This is our moment. This is our time – to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American Dream and reaffirm that fundamental truth – that out of many, we are one; that while we breathe, we hope, and where we are met with cynicism, and doubt, and those who tell us that we can’t, we will respond with that timeless creed that sums up the spirit of a people: Yes We Can! – Obama’s Victory Speech

There is certainly something inspiring about seeing a guy who is just like me, with 2 young children, stand up and accept the mantle of the Presidency of the United States of America.  Certainly Barack Obama has his work cut out for him but there is something truly amazing about seeing his step-grandmother’s village in Kenya gathered around the village’s only television and celebrating his victory – it makes you realize what a truly connected world we now live in.  People around the world are celebrating America’s choice this morning.  Clearly this country has chosen to go in a very different direction in the future and, just a clearly, there is a long, hard road ahead but I’m certainly feeling better about our long-term prospects this morning.

That doesn’t mean we’re throwing caution to the wind.  In yesterday’s post I predicted Obama would win with 360 electoral votes – if he wins Missouri and loses North Carolina, he will have exactly 360.  Nonetheless, we expected a sell-off and we went with TWM (ultra-short Russell) in member chat at 11:51, which jumped from $91 to $97 before pulling back to $93.25 at the close, and I reminded members to keep balance with our usual ultra-shorts at 12:06 as we felt that was going to hold as the highs for the day.

We’re still very much in a day-trading environment but that’s just fine with us as we have been nailing those lately as well.  At 9:57 I said to members: "Wow, APWR going nuts this morning, forgot where I picked it yesterday but up more than 10% from the close so why be greedy?" and that was just under the high of the day (it’s a small stock, maybe we caused the drop…) and at 10:47 we went with GOOG Dec $400s at $10 with a target to sell at our target of $372 for the day and we hit that one right on the head with those calls topping out at $14.50 just 3 hours later and at 1:38 I reminded members not to be greedy and get out just ahead of the double-top test of $372. 

For the most part, we took the safe route on longer-term plays with covered calls and selling puts, the same very successful strategy we’ve been following for weeks as the VIX is still high and gives us many profit opportunities with that strategy.  Of course we shorted oil again, but just a speculative play on the USO $52 puts at $2 at 1:58 (right at the high of the day) as we are simply hoping for a nice build in crude or simply a sell-off that nets a quick 25% gain.  We are still fence sitting but bearish if we can’t stay over our target levels.  It won’t take much for us to have a sell-off this morning – 55M people voted for McCain and it won’t take many of the dissatisfied voters moving to more cash to bring the markets down a little – especially when you consider who the target McCain voters were…

Obviously there are sectors, like defense, that are thought to be harmed and it doesn’t take a lot of determined sellers to tank a market so between disgruntled top 1%’ers and people rotating out of things, we can certainly expect a dip.  Also, of course, the economy is in shambles and we’re going to be back to focusing on that reality now.  Other than Obama, the Front Page of the Journal has Economic Crisis in big letters below the fold and the top stories are Yield Curves are steepening, signaling long road to economic recovery; Businesses are bracing for tighter financial regulation and sweeping health-care changes; Online retailers expect holiday sales growth to slow, DHI losing almost $1Bn in Q4 — so plenty of good reasons to worry about the markets…

Asian markets did not seem to be worried and the Nikkei added another 4.5% (time to take profits on the EWJs from last week) while the Hang Seng and Shanghai put on more then 3% each as the dollar came back and boosted exporters while knocking oil and other commodities down a peg.  The Baltic Dry Index continued to fall and the Bombay Sensex fell to the 5% rule as Reliance Industries shut 5 of 7 polyester and petrochemical units, signaling a significant long-term slowdown in demand. 

Asian investors are somewhat confused and jumping the gun on the new administration as we are still a full quarter away from real changes.  There are also the usual rumors that China will be pumping money into infrastructure projects to boost the economy and everyone is expecting a big rate cut from the ECB and BOE tomorrow morning. "The markets were so oversold, and due for a rebound, after the tremendous losses we’ve seen," said Hugh Young, managing director of Aberdeen Asset Management.  "Mr. Obama’s projected victory is more an excuse for a rally than a reasoned reaction. The same concerns will continue to assail people, particularly the quality of balance sheets in the West and the outlook for corporate earnings."

Europe is giving up about half of yesterday’s gains and got off to a very poor start on a very poor outlook from MT, who are also cutting back production as they see no near-term recovery.  BNP was no help with a 56% drop in net and poor guidance and overall, like the US, the Europeans already had their rate-cut rally and now the question is: 
"What happens next?"  BMW warned yesterday and was ignored at the time but evidence is clearly mounting for the bears.

I have been pointing out to members for the past two days that my concern during the rally was the preponderance of evidence found in the number of downside guidance reports we have been seeing this week.  Sure, Q3 earnings are terrible and you can make a case for moving past that but the guidance reports are fully aware of the Trillions of stimulus dollars that have been pumped into the global markets and STILL, 45 companies issued negative guidance this week alone (so far) compared to 4 in a typcial week last earnings season – that’s BAD!  These are not analyst downgrades, these are CEOs and CFOs telling analysts their outlook is too optimistic…

Even companies that beat 3Q expectations like ADP, ANDE, BLT, CRAY, HPY, LF, LIOX, PWR, RBC, SLE, SPSS and THS had to say that they will be missing Q4 as things are clearly getting worse, not better in the economy.  I mentioned on Monday that SHLD is pushing appliances out the door with no payments and no interest for 12 months and they have simply tanked since then and rightly so as it isn’t really a sale if you are giving it away.

Jobs are being given away at an astounding clip according to the ADP report, which shows 157,000 jobs lost in October, much higher than the 100,000 loss expected and 20 times more than the 8,000 jobs that were lost in September.  These are serious numbers folks and the ADP report is generally much better looking than the Non-Farm Payrolls, which last month showed a 159,000 job loss vs. ADPs 8,000.  We get NFP at 8:30 on Friday so it’s going to be very hard to give up our hedges, no matter what happens today and tomorrow. 

Let’s be very careful out there!