Today is the day the auto makers turn in their homework.
Last time they showed up in Congress they got an "unprepared" grade and were told to get their acts together and come back when they had a plan. I think perhaps Congress got the market message yesterday that, plan or no plan, they'd better be writing a check to the auto industry today. Sadly, a government checkbook is the only think that can move the market these days – they are the only ones brave (or foolish) enough to spend money in this environment and they are still the only plan we have. There is an old saying that goes: When all you have is a hammer, every problem looks like a nail." This administration has nothing but money to offer the markets and, right or wrong, they are applying that solution to every problem they see and it's gotten to the point where, as each new problem pops up, 10 Billion here and 20 Billion there starts to lose its meaning (have I mentioned lately how much I like gold?).
So we didn't get our stimulus yesterday and gravity took its toll. We didn't care as we were hedged for the drop and, if you ever wonder what you are missing by not being a member, I'll simply reprint my 12:51 comment, when the Dow was at 8,375: "Dow testing 5% – if you are needing more puts, the DXDs are already flying away but the DIA Jan $85 puts are reasonable at $7 and, if we break back over 8,500, you can sell the Dec $84 puts for $4 and turn it into a reasonable spread. Goal to downside should be to sell the $80 puts for $3.50+, now $2.85. The Dow is right at the 5% mark around 8,390 and if they can’t hold it here, we may slip another 2.5% on the other indexes and that will bring in some volume selling I would think. Still seems like no buyers more so than lots of sellers."
8 minutes later I commented: "If we fail to retake -5% across the board and -4% on at least a few indexes, then we should be playing for a 50% retrace of the gains off the lows. For the Dow, that’s 7,500 to 8,800 so 650 down points before we test a reverse. That does work out to 5% today and 2.5% tomorrow which is a texbook retest to just around 8,150. On the S&P, that would be 825 and 1,420 on the Nas. Since the Nas and the S&P are almost there today, we may get a test there today and a turn on what Bernanke says at about 1:45 or that may be the start of a very big down move so be careful!"
Needless to say, that's exactly what happened – although we didn't break down until 3pm. The Jan $85 puts finished up 20% in 3 hours and the Dec $80 puts finished the day at $3.92 for a cover, but we were ambivalent about a full cover as the finish was just so rotten but, on the whole, simply a retest of 8,200 we had been looking for since last Wednesday. In the Monday Wrap-Up, I listed 36 stocks we are looking to buy now, using our hedged entry system, and I urge members to keep that list handy as we'll be working it this week. Of course we expect a 20% bounce (135 Dow points) in the morning and that would be meaningless so let's pray we can do a little better or those 36 stocks are going to get a lot cheaper!
We would have felt better about the drop if it had been led more by commodities but the financial sector did their best to keep up as the XLF fell 10% on the day. That put us back in UYG calls, now 4.40 as that is simply too attractive to pass up and I'm now liking the XLFs at $10.55 as they pay a 5.45% dividend and we can sell the $10 puts and calls for a combined $2.15, which lowers the net basis to $8.40 if called away (19% profit) on Dec 19th or an average entry of $9.20 if it is put to you on that day (a 12.5% discount off today's price). If you do not feel that the US banking system will be shut down for eternity then holding a basket of JPM, WFC, BAC, C, USB, GS, AXP, BK, MER, MET and some others is a fun bet on the survival of the United States of America.
In addition to going wild and betting that the financial world is not coming to an end, we also bet that tech has bottomed by shorting the QIDs with $69 puts at $2.30, looking for $3+ with a stop at $1.85. We were not brave enough to get back into UWM but, at $15.30, I think they are worth a chance this morning and we'll hedge if we have to by selling the $15 puts and calls. Our other upside gamble for the day was BIDU Jan $120s at $18 as a more than a day speculation but we will have to cut an run if the US turns lower.
Asia turned lower this morning with the Nikkei falling below 8,000, all the way down to 7,863 (-6.4%) and the Hang Seng finished right at the 5% rule but the Shanghai held 200 (flat) on speculation that there is more stimulation right around the corner. Economists are catching up to my long-standing prediction that the country is in danger of a reverse migration back to the farms that will turn cities into ghost towns. Workers who struck out to make their fortune in the big city have no roots there and loss of jobs and a 70% drop in the market that wiped many young people's savings means the path of least resistance is back to the farm. It is important to understand the scope of Chinas problem, which is not much different that that faced by India to see why that government is likely to pull out all the stops to keep the economy going – the inertia of a 1.3Bn person economy grinding to a halt will make our problems seem very small by comparison.
European stocks reversed early declines and are now slightly up ahead of the US open. We are expecting 1.5% bounces after yesterday's losses so we've got a ways to go before we get all excited but I'll be happy to just see 8,200 hold as a floor. For the Dow we want to hold 8,200 and 8,400 would be nice to retake, S&P levels are 820/850, Nasdaq 1,400/1,475, NYSE 5,200/5,400 and Russell 420/440. We're still 50/50 after yesterdays adjustments but willing to go 60/40 bullish if we can hold those higher levels for the day but I'm dubious as there is no major stimulus today and, in this roller coaster market, lack of stimulus means gravity will pull us down.
Helping gravity along we have GS losses, which are rumored to be closer to $2Bn than $500M estimated and GE cut outlook and will be charging $1.4Bn to reorganize its finance arm but this does not change my call to buy them under $16 as these are good, positive moves for the company. Oil continues to put downward pressure on the energy sector as it hovers around $49 but we need the energy sector to stop dragging the markets down. Gold gave us yet another good entry yesterday with a 5% drop but let's see if $775 holds up and watch how copper behaves at $160 but you have to love FCX for $20.91 when you can sell Jan $17.50 puts and calls for $7.70, which is a net entry of $13.21/15.35 on a company that pays a $2 annual dividend (just paid .50 on 10/8).
So buy 10-year notes for 2.8% if you want to but I'll still take my chances with some dividend paying stocks that we can hedge! Delinquent morgages are projected to double next year so we are far, far from the end of this crisis but Jan 20th is just around the corner and change is in the air – let's just hope we can last long enough to see it happen. We are neither bullish nor bearish – just bottomish and watching our levels, which saved us yesterday as they kept us out of bad trades. We'd like to see some volume as well – yesterday's sell-off had little conviction so it couldn't be called capitulation by a long shot.
